The Economic Data calendar for the week of the 11th of July through the15th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
POSITION: No Position
What a train wreck that employment number was – and, at the end of the day, when markets pin their hopes on Keynesian economic resolve, that’s what you get – disappointments versus fleeting expectations.
I was too net long going into today’s market open, so I took the changed facts and tightened up my net exposure to 11 LONGS and 9 SHORTS.
Keith R. McCullough
Chief Executive Officer
SKX jumped on the endorsement bandwagon (again) and shifted more capital away from fashion and towards performance. Bad move -- as they shift from their core and towards a much more competitive space. The stock is getting cheap, and sentiment is poor. But next near's numbers are way too high.
Just days after we see Nike re-sign Michael Vick, and UnderArmour endorse Kemba Walker, Skechers jumps in and endorses the Patriots’ Danny Woodhead. This is yet another reason why we’re going to wait for SKX to get cheaper before even considering getting involved. We’re not knocking the company for spending endorsement dollars, but we’re definitely concerned about who they’re endorsing. In the past, they’ve endorsed Carrie Underwood, Britney Spears, Kim Kardashian, Christina Aguilera, David Cooke, Rob Lowe, and Ashlee Simpson. The closest this got to being athletic-inspired was that Kardashian’s mother is married to Bruce Jenner.
Do we have a problem with this? Absolutely not. It works for Skechers. They’re all about being on trend with the right styles. That’s all and nothing else. That’s what they’re very good at.
But now with endorsements like Danny Walker, Karl Malone, Rick Fox, Broadway Joe, and (gulp!) Wayne Gretzky??? Sorry to notify the boys in Manhattan Beach – but when you start going this route, you have to innovate new product, not copy it.
In the fashion space they’re the 900lb gorilla -- competing with the Steve Madden’s of the world, as well as hundreds of smaller players in a non-consolidated space.
But on the performance side of the biz, it gets more gnarly… First of all, Nike Inc (which has about 45% of the market) could care less about fashion. But when Skechers tries to compete in Nike’s backyard (athletics), it should probably tread lightly. It’s not just Nike – as there’s another 4 players (Adidas, Reebok, Asics, New Balance) who each account for about 6-8% share of the industry. Under Armour has only 1%, but is on its way to 10%, and the fledgling Chinese brands (Li-Ning and Anta) have extremely deep pockets and a strong desire to export content to the US. For SKX, there’s not as much room to grow.
We don’t want to come across as perennial cynics here. The reality is that SKX has offered tremendous opportunities in the past to catch 5-baggers in otherwise tepid markets. In addition, the brand has been around for a while, it has a relatively sound infrastructure, and when focused, it succeeds more often than not.
It’s not that we doubt they can keep pressing the performance category. Our point is very simply that it’s going to take significantly greater capital ADDED to the model in order to do this rather than reallocating capital from their extremely successful core fashion business. SG&A has been trending up, which is good in this case, but it has been entirely due to marketing dollars, not internal talent. This actually smells a lot like Reebok from about a decade ago. They meaningfully changed up their marketing budget towards sports performance, but abandoned their core. Pulling design, merchandising and sales talent from your cash cow to grow a new business is simply a bad idea. No one we’ve ever seen has done this successfully.
As for the stock, clearly expectations have come down. The stock is off 80% from its recent peak of $40, and is squarely in the ‘buy zone’ of the Hedgeye Sentiment Monitor. In addition, the consensus number of $0.45 this year is probably doable. But the problem is that next year, the Street is back up $1.32 – that’s very optimistic. If you believe those numbers, then by all means, stomach the near-term risk, be a hero and buy the stock. But our level of confidence that the company won’t earn over $1.00 is better than 75%. Management is selling on the way down. We'd follow their lead and resist the temptation to jump in too early here.
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Positions in Europe: Long Germany (EWG)
In the European Chart of the Day below we highlight all-time wides in the spread between 10YR German Bund yields and Italy’s 10YR bond. The factors weighing on this spread include:
To the last point, it’s been reported that Berlusconi called a closed-door meeting with Tremonti today to discuss allegations that Marco Milanese, a lawmaker accused of corruption who until nine days ago was Tremonti’s political advisor, had been paying €8,500 a month on rent for an apartment used by Tremonti in Rome. According to The Economist, Marco Milanese is wanted on suspicion of having supplied confidential official information to a businessman in return for “significant cash payments and other gifts such as expensive watches, jewels, luxury cars (Ferrari and Bentley) and holidays abroad”.
While Tremonti publically stated he’d change his arrangements as of this evening, the news compounds recent negative Italian headlines.
Employment data a mixed bag for restaurants.
The overall jobs picture this morning was unambiguously awful and the unemployment rate has ticked up to 9.2%. The level of growth in employment among the 20-24 years of age cohort accelerated in June, which is a positive data point for QSR. May employment growth among this age cohort came in at a meager +1.1%. June’s employment level for 20-24 year olds grew 1.5%.
Overall, the jobs report was clearly worse-than-expected. The other four age cohorts we show in our chart, below, all show sequential deterioration in employment growth. As a reminder, much of the positive sentiment from management teams over the past number of quarters as been based upon an improving employment landscape. Equally, much of the improvement in consumer confidence surveys that has occurred has been driven by improving expectations, rather than current situation perceptions, and the slide in employment levels will likely weigh on expectations.
As the second chart, below shows, employment growth in the food service industry continues to be robust but there was an interesting slowdown in Full Service employment growth in May. This data lags the employment by age data by one month. The May Full Service slowdown may prove to be immaterial but, since late 2010, Full Service employment growth has lagged Limited Service employment growth. If this divergence were to become more pronounced, we would take it as being suggestive of slowing trends in casual dining versus quick service. The employment by age data for June, additionally, would corroborate this idea. The space has been on fire and we would need further confirmation from this and other factors to become more bearish, but these two data points are noteworthy this morning.
Probably won’t be a surprise that we think that it will be MPEL.
Now that we have the property detail for June, our models have been updated. The table below shows our EBITDA estimates versus the Street. The largest divergence is, of course, MPEL. Our new EBITDA estimate is $180 million, up from $172 million, 18% above the Street. We wouldn’t be shocked if they managed to beat even our number.
JPM just raised their MPEL estimate $49 million to $168 million. That’s a whopping 41% increase and he’s still too low! Such a monstrous revision must’ve been accompanied by a rating upgrade right? Wrong. JPM is a dollar short and a day late on this one. Or should I say 10 months late on an upgrade (but not too late) and at least $12 million short on the quarter.
Wynn Macau also had a strong quarter. We are projecting EBITDA at the property of $317 million, 10% above consensus. MGM and LVS may only come in-line with consensus. We don’t have estimates for Galaxy but we are not optimistic about Galaxy Macau to post EBITDA anywhere close to what the Street is expecting.
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