Giving, Thanks

"As we express our gratitude, we must never forget that the highest appreciation is not to utter words, but to live by them."
- Anonymous

On this Black Friday 2023, who better than Team Retail to write the Hedgeye morning note (spoiler alert, this Black Friday is going to disappoint given that retailers started promotions 8-weeks ago).  And instead of the usual missives, we’re taking the old Thanksgiving dinner table tradition, “What are you thankful for” to the Early Look.

The Hedgeye Team Retail as a whole is Thankful for Hedgeye Nation, and our subscribers, whether Institutional or Retail Pro subs.  As individuals here are the top 3 things we are each thankful for.

Brian is thankful for: 

Ok...I make a gratitude list almost every day. It's part of my routine. My Faith, My wife Regina, my amazing children, and our collective health always top the list, and they top this one as well. But some less obvious things I'm thankful for..

1. My Sobriety. Yes, McGough doesn't drink. Everything I do, I do to the extreme. That's probably why I've excelled in my career, and in life. But try having a six pack with a tequila chaser, and waking up at 4am to do the grind. Not fun. The grind is a privilege. I won't let the sauce -- or any vice -- slow me down. I first made the lifestyle change when we founded Hedgeye 16 years ago. I'm a better Analyst, Partner, Leader, Father, Husband, and Friend because of my Physical Sobriety, and Spiritual and Mental clarity. There...I said it, and it's part of who I am.
2. My Team. One day when I'm out of gas (note...I still think I'm 30) I'll transition the franchise to my Partner Jeremy, and will be honored to do so. He deserves it, and is the best Partner I've ever had. Watching Arianna and Ryan develop is flat-out exciting. They're all #grinders with amazing work ethic and standards of excellence. And they not only make my life better, but I learn from the team every day. To me, we're the best and most collaborative and cohesive team at Hedgeye, and I'll hang up my cleats the day I say otherwise. 
3. My Ability to Shred. Yes, McGough has 'guitar issues'. The vintage collection count is over 30 at this point (note my 'extremist' point from earlier). But I play them all (Regina thinks I only need 1 -- lol!). Grateful for my skill (honed over 40 years of playing), and my five dogs that listen to me play each night. They're my groupies. They seriously think I'm as good as Eddie Van Halen. As if....    

Jeremy is thankful for:

1. My wonderful wife Julia and our three happy, healthy boys Maximus, Scottie, and Logan (the dog).
2. My teammates.  The Retail team is growing and it’s nice to have more talent around as keeping up the research operation is much smoother with them around, especially now having a couple kids to eat up my time. I learn from the whole Hedgeye team and their insights improve my research and process daily.
3. Fire. More specifically a fire in the fireplace or wood stove.  This time of year, pretty much every day when I get home (if not before I leave) I light up a fire in our fire place insert.  Good day or bad, the warm glow and dancing flame is always a calming force.

Arianna is thankful for:

1. My family and friends. The older I get the more I value the quality relationships I have in my life. Surrounding yourself with a good group of people is so important, and I truly believe I have the best group. I am eternally grateful for the help, support, laughter, and joy they all give me every day.  
2. My job. I get to do something I enjoy every day and to work with people I get along with and have fun with while simultaneously being able to learn and grow is something I consider myself lucky for. The bonus is it helps me test product for research purposes. And if you know me, you know I love “testing” new products… i.e. shopping.
3. My dog. There were other contenders for the 3^rd spot, but really my dog just makes sense. Dogs are called man’s best friend for a reason. I love getting home and having him run to me and jump like a little jumping bean; he always puts a smile on my face.

Ryan is thankful for:  Of course, my family, friends, health, and job are at the top of the list… but for fun

1. Bag Skates - From youth hockey in San Diego, to junior hockey in Canada, and then college hockey in Mass., nothing prepares you for adult life like skating lines till you can’t see. Head down, skate through the line, legs feed the wolf.
2. Modern Optometry - I got glasses for the first time a few weeks ago. The technology in those two lenses is incredible… I did not know what I was missing.
3. NFL Redzone - 7 hours of commercial free football every Sunday. What else is there to say? In all seriousness, Scott Hanson can bring a room together like no other.

Back to the Retail Macro Grind ... 

We recognize that with where we are in lives and careers, we are fortunate for what we have and grateful for the opportunity still in front of us. Despite the prevailing #OldWall narrative that the ‘consumer is in good shape’, there are a rising number of recent data points to suggest the opposite.  Here’s a quick rundown of the latest measures of consumer health keeping us decidedly bearish on the direction of the consumer.

Sentiment:

• Percentage of consumers having difficulty paying usual household expenses spike to cycle highs of 41.2% in October from 37.3% in September
• Consumers able to come up with 2000 in an emergency fell to cycle lows of 64.4% last month.

Credit:

• The percentage of credit card accounts rolling debt became greater than the percentage fully paying it off for the first time ever.
• Consumer loan rejection rates hitting new highs.
• Involuntary credit account closures rising to new highs.
• Credit card delinquency rates have eclipsed 2019 levels, are continuing to rise rapidly YY and accelerated in October.
• Bankruptcies and foreclosures are ripping +18% YY, accelerating to rate of change levels not seen since the GFC.
• Subprime auto loans 60+ delinquency rates from Fitch ratings hit all time highs in September at 6.1%. *Note subprime lending hasn’t seen an inflation upcycle.

Retail Data:

• Discretionary Retail (ex food, gas, auto) slowed to +2.8% in October, the lowest since the March banking scare.
• Total retail traffic trends from placer slowed about 600bps from June to October with last.

Some consumers are doing fine, many aren’t. 

As for the read on Retail Stocks…

Yes, the stocks look cheap, but we think that they'll look more expensive at lower prices. Simply put, the 'e' part of the equation for 2024 is flat-out wrong.

The consensus is underwriting an average of 35% earnings growth for the year. We kid you not. When 2024 is in the books, earnings growth will likely come in negative. There's a fierce negative revision cycle to come. Be prepared.

We're often asked "why are your numbers so far off of the consensus." The answer is simple, and it comes down to management teams. They're delusional. They spin these bullish narratives to their bosses (The C-Suite and subsequently the Board) without having a macro process to make heads or tails of the macro and sector-specific cross currents that will hit the consumer, sales and margins. They're throwing up their stretch plans, the 'everything goes right' plans.

And then CEOs spoon-feed them to #OldWall. I swear #OldWall doesn't know how to put a negative sign in front of a growth or margin forecast in an earnings model. Analyst estimates are within one standard deviation off what management says. And when you look at management forecast accuracy in Retail it is downright pathetic. Sleep Number (SNBR -- which we went short in summer 2021) went into 2023 with guidance over $7ps, and by the end of the year will be lucky to lose only $1ps.

#OldWall puts management teams on a pedestal. Yes, there are some brilliant minds and visionaries out there running these companies, but their process, for the most part, is severely lacking. If they were smart, they'd subscribe to Hedgeye for a cold dose of reality and a real-time read on the cycle.

We're not perma bears...we're not perma-anything. Our sense is that we'll be bullish in 2H24, and our list of 80 shorts (in retail alone) will get cut at least in half. But don't be early going long my friends, except for the select few stocks with asymmetric drivers that we think are multi-baggers over a TAIL duration and have a washed out TREND. For the other 90% of Retail, things will get worse before they get better.

'Retail Pro' subscribers get our new and re-ordered (based on conviction) Longs and Shorts every Sunday night after a long day of the team #grind as we prep for each week ahead, our daily playbook of what's actionable, as well as the Cliffs Notes video wrap-up from our Black Book deep dives (every 2-3 weeks), and live access to The Retail Show every Monday. We have the privilege at Hedgeye of covering stocks like our Buy Side counterparts do...not married to a narrow #OldWall universe of 15-20 stocks, but rather going broad across the entire waterfront of 300+ tickers to find the most outsized longs and shorts where we can have estimates three standard deviations from management and the Street. Contact for access to our complex collection of research.   

Lastly, and most importantly, giving thanks around the holidays often also includes giving. With Fed and fiscal policy of the last couple decades or so helping to perpetuate the wealth gap and accelerated inflation, 1 in 4 Americans last year reported food insecurity (not being able to afford food always putting a meal on the table). That alongside a shocking number of GLP-1 investment narratives being tossed around for those that are clearly not in that 25%.  The inflation trends of the last few years are something we haven’t seen in this country in nearly a lifetime, and it’s hard to know how many people are struggling to afford basic necessities.  If you are able, we’d encourage you to donate something, of any size, to your local food bank.

Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets

UST 30yr Yield 4.48-4.79% (bearish)
UST 10yr Yield 4.31-4.67% (neutral)
UST 2yr Yield 4.75-5.06% (bearish)
High Yield (HYG) 73.76-75.27 (bearish)  
SPX 4 (bearish)
NASDAQ 13,516-14,432 (bullish)
RUT 1 (bearish)
Tech (XLK) 177-187 (bullish)
Energy (XLE) 82.79-85.66 (bearish)
Utilities (XLU) 59.65-63.75 (bullish)                               
Shanghai Comp 3009-3077 (bearish)
VIX 12.75-16.90 (neutral)
USD 103.11-105.76 (bullish)
Gold 1 (bullish)
Copper 3.56-3.81 (bearish)
MSFT 362-381 (bullish)
AAPL 183-193 (bullish)
AMZN 140-148 (bullish)
TSLA 211-250 (bearish)
NVDA 471-508 (bullish)
Bitcoin 35,450-38,338 (bullish)

Make it a great day.

-Team Retail