prev

LUNACY: PREVIEWING TOMORROW'S EU STRESS TEST

Stress Test Results Tomorrow Will Dramatically Understate Risk

We don't think it's too great a stretch to call tomorrow's EU "Stress Tests" absurd. Why? Consider the following.  The stress test results to be released tomorrow.  are based on balance sheet data from the banks at December 31st, 2010. No changes in exposure since then are reflected.  Furthermore, the macro assumptions work off of a baseline of what the world looked like at year-end 2010.  This means that the current state of the world is actually much worse than the so-called "adverse" scenario in many cases.  

 

The charts below look at what the EU considered for its "adverse" scenario, namely the backup in sovereign bond spreads relative to German Bunds, compared with what has actually occurred in the market.

 

The starting point for the tests is YE2010. This is the date when the stress test scenario analysis begins. In the charts below we show the amount by which the stress tests assumed sovereign spreads would widen vs. the amount they have actually already widened by. Let's do a quick case study on Portuguese 15 year sovereign bonds, as these are the bonds the stress test assigns the biggest haircuts to under their adverse scenario. Looking at the 15 year bonds of Portugal, the EU stress test assumes the bonds widen by 251 bps against German bunds in an adverse scenario. In reality, however, Portuguese 15 year bond spreads have already widened by 612 bps since YE2010. Under the 251 bps scenario, the EU estimates that the haircut on those bonds would be 30.6%.  You can do the math on what a 612 bps scenario means for the haircut.

 

Performing the same analysis on the 2-year Portuguese bonds, the stress test assumes 201 bps of spread widening, when in reality 2-year spreads have widened by 1,860 bps. Under the EU stress test adverse scenario, their 201 bps assumption triggers a 5.5% haircut on those bonds. Given the actual widening is closer to 9x what they've assumed it seems reasonable to conclude that the stress tests will quite materially understate the real risk in the system.

 

This profound ignorance of reality repeats across durations and countries. As such, it will be hard to take seriously the EU's conclusions tomorrow when they announce which banks are adequately capitalized and which banks are not. Portugal, Greece & Ireland are all trading well in excess of the adverse scenarios. Italy is quite close to their adverse scenario assumption.

 

LUNACY: PREVIEWING TOMORROW'S EU STRESS TEST - 2 yr

 

LUNACY: PREVIEWING TOMORROW'S EU STRESS TEST - 15 yr

 

 

Assumptions of the 2011 Stress Tests

If the lead-in section of this note hasn't dissuaded you from the Stress Tests' relevance, here's some additional lunacy to consider. 

 

The "Adverse Scenario" in the stress tests makes assumptions around GDP growth, unemployment, home prices, exogenous shocks, and other macro variables.  Let's skip straight to the big question: What are the assumptions about sovereign default?

 

- No sovereign defaults.  (No, really.)  The adverse scenario does not contain a default of any sovereign issuance. Instead, sovereign "shock" is purely a function of higher interest rates on sovereign bonds and higher credit spreads.    

 

- No assumption of any change in ratings.  (Coincidentally, the EU is considering banning ratings agencies.)

 

- Valuation haircuts are only applied to held-for-trading bonds for each bank - that is, those that are already marked-to-market.  

 

 

GDP Assumptions

The chart below, from the European Banking Authority, shows the assumptions around GDP growth in the 2010 and 2011 stress tests.  

 

LUNACY: PREVIEWING TOMORROW'S EU STRESS TEST - GDP

 

 

For those interested in the overview of the stress tests, take a look at the following document, which describes in greater detail what we have summarized in this note.

 

http://www.eba.europa.eu/cebs/media/Publications/Other%20Publications/2011%20EU-wide%20stress%20test/Annex-4-Trading-book-stress-and-sovereign-haircuts.pdf 

 

 

Detailed Disclosures Will Be Forthcoming

One thing the stress tests will provide is a great deal of data for individual banks' exposures (or at least what those exposures were at December 2010).  Refer to a disclosure template at the following link:

 http://www.eba.europa.eu/cebs/media/Publications/Other%20Publications/2011%20EU-wide%20stress%20test/2011-EU-wide-stress-test-disclosure-templates-pdf_1.pdf

One side note is that the stress test data will not be comparable to the BIS data that many investors have used to get a handle on exposures.  According to the EBA, the data is aggregated in a way that makes reconciliation "impossible."

 

 

Market Reaction to 2010 Stress Tests

The chart below shows the Euro STOXX Bank Index back to 2009.  The market was in an uptrend at the time of the stress test release, and in the 7 trading days immediately following the July 23rd, 2010 release, the index squeezed 9.2% higher. Today, the index is 24% lower than its level on the day of the release. We think this is probably a good way for thinking about how the stocks will trade again this go-around. Remember, it was clear to everyone last summer that last year's stress tests were also a complete joke. Somehow, this time around, the market seems to think that this round of stress tests is much more serious. While that is clearly wrong, the market may well use it as an excuse to move higher in the short-term.

 

LUNACY: PREVIEWING TOMORROW'S EU STRESS TEST - euro stocks

 

 

Conclusion

Based on the fact that it relies on assumptions that border on disbelief, we think clients should treat with extreme skepticism the likely bullish conclusions of tomorrow's EU Stress Tests (Round 2). While it served as a catalyst for the market to go higher in the short-term last summer, those gains proved short-lived as the market went on to retrace all that and more.

 

 

Joshua Steiner, CFA

 

Allison Kaptur

 

 

 

 


YUM – 3 OUT OF 4 AIN’T BAD

Yum! Brands reported strong EPS growth last night on the back of blockbuster China comps and a lower-than-usual tax rate. 

 

Depending on what you assume for a “normalized” tax rate, the 16.7% tax rate YUM reported for the second quarter helped EPS by $0.07-$0.08.  

 

Needless to say, such a tax impact calls into question the quality of the company’s earnings but the strong growth in China cannot be discounted.  That said, there are serious issues to be addressed in the U.S. and those issues took up a significant proportion of the discussion during the earnings call this morning. 

 

Earlier this year, management highlighted four goals as its “2011 Focus”:

  1. Build Leading Brands in China in Every Significant Category.
  2. Drive Aggressive International Expansion and Build Strong Brands Everywhere.
  3. Dramatically Improve U.S. Brand Positions, Consistency and Returns.
  4. Drive Industry-Leading Long-Term Shareholder and Franchisee Value.

 

On points 1 and 2, YUM is powering ahead as usual.  Point 3 is completely missing and the situation seems increasingly dire.  Point 4 is intact, for now, but they will need to show more solid operating profits (not lower tax rates) in the back half of the year to convince investors that long-term shareholder value is secure.  If the back half of the year produces better quality earnings, it would go a long way toward reassuring investors.  The stock is up today following incredible comps out of China, albeit with down margins.

 

Below we run through management’s commentary on each of the three business divisions and provide our own thoughts on how things are likely to transpire over the intermediate term.

 

 

YUM China

 

China remains the jewel in the crown for YUM, providing 18% same-store sales versus 4% growth in 2Q10 and 13% growth in the first quarter.  On a sequential basis, two-year average trends accelerated by 250 basis points in 2Q.  Management highlighted several key initiatives that are attracting traffic to its China stores.  24-hour operations, delivery service, and a growing breakfast business are all helping to increase AUVs. Breakfast is available in almost all of the KFCs in China (3,378 as of June 11, 2011) and accounted for 13% of transactions versus ~10% beforehand.  24-hour operations are now the norm for over 1,300 units and delivery service is available for 1,600 restaurants.  During the second quarter, KFC China continued to offer a 6 RMB Breakfast promotion and began offering a 15 RMB weekday lunch promotion also.  These promotions helped drive transactions, which gained +21% during 2Q.

 

While it is tough to imagine for U.S.-based investors, Pizza Hut is a very popular brand in China and continued to perform strongly in 2Q.  Continued expansion of Pizza Hut into new cities should provide strong returns for YUM China.

 

Inflation is an issue in China and management is likely to take price as the company’s full-year inflation guidance is now +9% for commodities and mid-to-high teens for labor.  Despite this, management anticipates full-year margins to remain above 20%

 

Hedgeye:  YUM faces markedly easier margin compares over the next three quarters.  While same-store sales compares also increase in difficulty, I would expect momentum to continue (obviously not at the same rate at 2Q).  Management is guiding to double-digit same-store sales growth in the third quarter.

 

YUM – 3 OUT OF 4 AIN’T BAD - YUM CHINA

 

 

YRI


YRI continues to represent a bright spot for YUM as the company positions itself to grow in emerging markets.  YRI continues to see positive same-restaurant sales growth and margin expansion, despite the impact of inflation.  The company set out its stall regarding YRI at the Analyst Meeting in NYC earlier this year when management explained that the expected growth in “consuming class population” between 2010 and 2020 in “YRI Emerging Markets” is expected to far outstrip the impressive forecasted growth in China over the sale period.  Nevertheless, there are clearly opportunities in developed nations also.  France, for instance, was highlighted today by management as being a significant opportunity.  As of year-end 2010, YUM had 117 Pizza Hut restaurants and 117 KFC restaurants in France. McDonald’s, YUM management pointed out today, has almost 1,200 restaurants in France and makes more money from them than YUM does from the entire YRI division.  Clearly there is plenty of white space, even aside from the obvious emerging market targets, for YUM to grow. 

 

Hedgeye: YUM has shown itself to be an anomalous restaurant company in its ability to build the infrastructure necessary to manage multiple brands over multiple geographies.  We wouldn’t bet against the company succeeding in other international markets as well.  We were critical, after the Analyst Meeting, of claims by the company that Africa offers the next big source of growth for YUM, and will continue to monitor the returns the company sees on its investments, but for now the accelerating comps and expanding margins bode well for the division’s profitability.

 

YUM – 3 OUT OF 4 AIN’T BAD - yri

 

 

YUM U.S.


Last, and by almost every metric least, the U.S. division is a disaster and, as good a management team as YUM has, I’m not sure they are going to come up with the answers any time soon.  The company’s frustration came across during the earnings call and prior statements that 2011 would be a “transition” year for YUM U.S. are clearly euphemisms in retrospect.  Same-store sales for the U.S. division declined -4% and Operating Profit declined by 28% year-over-year.  During the conference calls, participants and listeners were informed of a relaunch of last year’s disastrous Kentucky Grilled Chicken product but it was clear that no real solution is forthcoming.  During the Analyst Meeting earlier this year, in NYC, management distributed materials that showed YUM’s path to becoming a truly global company.  In 1998, 78% of YUM’s profits were from the US and management stated that, by 2015, the goal was to reach a 25% U.S./75% international split in operating profit source.  It seems they have gotten there much faster than they had wished, due to the U.S. profit declining so much.  We expect the U.S. to become more and more insignificant as YUM’s international store count continues to grow.

 

Hedgeye:  One has to wonder if they would be better off taking drastic measures with their domestic business, KFC in particular.  Taco Bell may have been hurt by the bogus lawsuit and time will likely fix that issue, but KFC and Pizza Hut are two brands in indisputable decline and I believe something bold has to be done to change their fortunes.  Even with an infrastructure as vast as YUM’s, however, there are only so many tasks that a management team can execute on and the international markets are simply more important.

 

YUM – 3 OUT OF 4 AIN’T BAD - YUM US

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 

 


Short Italy and EUR-USD at Levels

Positions in Europe: Short EUR-USD (FXE); Short Italy (EWI); Long Germany (EWG); Sold Sweden (EWD) today

 

Yesterday we shorted Italy via the etf EWI in the Hedgeye Virtual Portfolio and wrote a note titled “Shorting Italy: Uncertainty Portends More Downside” in which we presented the fundamental and fiscal headwinds facing the southern European economy over the near to intermediate term.  

 

Below are our levels on Italy’s equity index, the FTSE MIB. The market has move down -17% since the beginning of May and we think there’s more room to run, especially in the coming weeks as Italy’s debt maturity schedule ramps up (see second chart below).

 

Short Italy and EUR-USD at Levels - 1. ME

 

Short Italy and EUR-USD at Levels - 2. ME

 

Today we shorted the EUR-USD via the etf FXE with the pair moving towards our intermediate term TREND line of resistance at $1.43 (see chart below). 

 

Short Italy and EUR-USD at Levels - 3. ME

 

We sold our position in Sweden (EWD) today on concerns that its banks may see downside into and out of the release of the second round of European Stress Tests this Friday. Already today we saw a strong negative divergence from Swedbank, Skandinaviska Enskilda Banken, and Svenska Handelsbanken of -3 to -5% day-over-day that dragged down the broader Swedish OMX 30 index.

 

Matthew Hedrick

Analyst


GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

No QG3: SP500 Levels, Refreshed...

POSITION: No Position SPY

 

La Bernank just back-pedaled on QG3, so the market sells Euros and buys US Dollars on that. The rest of what we call The Correlation Trade also loses its bid. Get the US Dollar right; and you’ll get a lot of other things right.

 

From a TRADE, TREND, and TAIL perspective, here’s the risk management range:

  1. TRADE: support = 1306; resistance 1332
  2. TREND: support = 1319, continues to be challenged based on what the USD does
  3. TAIL: support = 1241; resistance = 1377

So that’s it. Be a Risk Ranger (our Q3 Macro Theme that we’ll launch at 11AM EST) and proactively manage risk around the range of price volatility that the Chairman of the Fiat Fools confuses as “price stability.”

KM

 

Keith R. McCullough
Chief Executive Officer

 

No QG3: SP500 Levels, Refreshed... - spx


MAR 2Q2011 CONF CALL NOTES

Not horrible but can't afford to miss big expectations. 

 

 

“We continue to generate substantial cash flow and repurchase stock, returning over $700 million to shareholders through share repurchases and dividends year-to-date. Clearly, we have plenty of reason for optimism.”

- J.W. Marriott, Jr., Marriott International chairman and chief executive officer

 

 

HIGHLIGHTS FROM THE RELEASE

  • REVPAR for worldwide comparable systemwide properties: 6.8% (7.7% actual dollars)
  • International comparable systemwide REVPAR: 7.3% (11.9% actual dollars)
    • "Excluding the Middle East and Japan markets, international comparable systemwide constant dollar REVPAR rose 12.4 percent (a 17.5 percent increase using actual dollars)."
  • "North America, comparable systemwide REVPAR increased 6.6 percent"
    • "While hotels in Washington, D.C. continued to reflect weaker demand associated with a shorter Congressional calendar and concerns regarding government budgets, most North American markets reflected both strong demand increases and modest supply growth. Excluding the Washington, D.C. market, North American comparable systemwide REVPAR rose 7.1 percent in the quarter."
  • "Marriott added 32 new properties (4,512 rooms) to its... portfolio in the 2011 second quarter. Ten properties (1,603 rooms) exited the system during the quarter"
  • "Pipeline of hotels under construction, awaiting conversion or approved for development increased to 635 properties with over 100,000 rooms at quarter-end."
  • "While incentive fees rose in most markets around the world, growth was constrained by lower incentive fees in the Middle East and slightly lower incentive fees in the Greater Washington, D.C. market."
    • 25% of company-managed hotels earned incentive management fees
  • NA comparable company-operated house profit margins: +100bps
  • International "house profit margins for comparable company-operated properties ....increased 10 basis points and
    were challenged by lower REVPAR in the Middle East and Japan. Excluding the Middle East and Japan markets, international house profit margins in the 2011 second quarter increased approximately 160 basis points."
  • $4MM of lower termination fees negatively impacted owned, leased, corporate housing and other revenue, net of direct expenses
  • "Contract sales to existing owners represented more than 61% of sales in the quarter compared to 48% in the year-ago quarter. While sales to existing customers were strong, with fewer sales to new customers year-over-year and a lower average contract price, second quarter timeshare contract sales were flat compared to the year-ago quarter. Fractional and residential contract sales declined by $4 million due to continued weak demand for luxury products."
  • "Timeshare sales and services revenue, net of expenses, declined...largely due to lower interest income on a smaller mortgage portfolio and, to a lesser extent, higher product costs....reflected greater than expected deferred revenue"
  • "The increase in [G&A] expenses reflected several non-routine items including $7 million of higher legal expenses, a $5 million payment related to the performance of one hotel, $3 million of transaction-related expenses associated with the spin-off of the timeshare business, as well as higher costs associated with growth in international markets and routine compensation increases."
  • "The company repurchased 10.6 million shares of common stock in the second quarter of 2011 at a cost of $375 million."
  • 3Q Guidance:
    • NA comp systemwide RevPAR: +5-7% "reflecting strong demand in most markets, but continued weak
      demand in Washington, D.C."
    • International comp systemwide RevPAR: +6-8% (constant dollars) excluding ME & Japan. ME & Japan could drag down RevPAR by 200bps
    • WW comp systemwide RevPAR: +6-8% (constant dollars) excluding ME & Japan or 100bps lower including ME & Japan
    • Timeshare:
      • Contract sales: $165-175MM
      • Sales and service revenue, net of direct expenses: $40-45MM
      • Segment results: $25-30MM
    • G&A: $165-170MM "reflecting higher year-over-year workout costs, as well as higher costs in
      international growth markets"
  • FY Guidance (excludes timeshare spin-off impact):
    • RevPAR guidance remained unchanged from last quarter
      • NA comp systemwide RevPAR: +6-8% (unchanged)
      • International comp systemwide RevPAR: +7-9% (constant dollars) excluding ME & Japan. ME & Japan could drag down RevPAR by 200bps
      • WW comp systemwide RevPAR: +6-8% (constant dollars) excluding ME & Japan or 50-75bps lower including ME & Japan
    • 35,000 room additions in 2011
    • Fees: $1,305-1,325MM (took down top end by $10MM)
    • Owned, leased, corporate housing and other revenue, net of direct expenses: $120-125MM (took up the bottom end)
    • Timeshare:
      • Contract sales: "slightly below 2010 levels"
      • Sales and service revenue, net of direct expenses: $205-215MM
        • "$10 million lower than prior guidance largely due to lower reportability and higher
          rental expenses"
      • Segment results: $140-150MM
    • G&A: $710-720MM "reflecting several non-routine items including higher workout costs and year-to-date
      transaction-related expenses associated with the planned spin-off of the timeshare business, as
      well as higher costs associated with growth in international markets"
      • $5MM higher than prior guidance
    • House profit margins in NA +100-125bps and 150bps internationally ex ME & Japan
    • EBITDA: $1,135 to $1,180MM (lowered by $20-35MM)
    • EPS: $1.35 to $1.43 (took down top end by 2 cents)

 

CONF CALL NOTES

  • Remains very bullish about the long term prospects for the industry and Marriott in particular
  • Transient business is back in a big way - occupancy increased 3.5%, reaching peak levels this quarter
  • Later this year, they plan to introduce a new Courtyard prototype for China
  • Fee revenue was a penny shy of expectations due to weaker Greater DC market.  Deferred revenue in timeshare hurt them by 2 cents. This was offset by 1 penny benefit of share buyback, 2 cent benefit of lower G&A due to a reversal of a charge
  • Washington DC RevPAR only rose 1% - approx 5% of their systemwide rooms are located in this market.  In 2010 - 6% of their WW fee revenues and 13% of incentive fees came from this market
  • Group RevPAR at MAR brand increased 2%. Group bookings made in the Q for later in 2011 increased 18%.  Booked business for 2012 in the quarter was 19% higher than last year. 
  • Timeshare results were hurt by higher sales and marketing costs and higher deferred revenues
  • $5MM reversal of loan loss provision and lower expected workout costs benefited G&A in the quarter
  • RevPAR growth in Europe is expected to moderate in 2H11 and Shanghai Expo comps are difficult for China
  • With more leisure in the 3rd Q, they expect 3Q NA RevPAR to be weaker than 1H levels but 4Q to be better than 3Q
  • Expect that there could be material costs from the timeshare spin off in the 2H11 which aren't included in guidance
  • Expect to remain aggressive in their share repurchase activity
  • Timeshare spin-off details:
    • Think that there is still a lot of upside from the points program
    • Modest non-securitized debt
    • Near term cash needs are modest given their existing inventory. Expect to generate meaningful amounts of FCF in the future.
    • Plan on selling off some land as well - have lots of beach front property
    • Will seek out opportunities with 3rd parties

Q&A

  • Cash tax benefit from the spin-off will be several hundred million - with half recognized immediately and the balance over the next few years
  • Back half guidance for NA implies a large ramp in the 4Q
    • Around 7%
    • Sounds like they will be at the low end of their 6-8% guidance
  • Have incurred $6-8MM of transaction related expenses so far - but some of those will be capitalized.
  • D.C. distribution for them is about 2x industry average. Expect that D.C. to bump along at flat RevPAR levels for the balance of the year. Expect that 2012 could be weak as well with the Presidential election and budget crisis
  • Japan is suffering from less inbound travel and less domestic activity... seeing some signs of comeback - like in the F&B business. Still expect 4Q to be down 20-30% YoY.
  • Middle East:
    • Egypt: believe that it will come back but driven by wholesale European business but it's unlikely that that business will come back until there is real stability - so it's likely a 12-18 month recovery story
    • Jordan is more stable than Egypt but not great
    • Their guidance assumes that ME remains weak
  • Bought back $25MM in stock after the quarter close -They were not in a blackout period last month.
  • When Arnie said that it would take longer to get back to peak profits - its was relative to RevPAR which is already back at peak... not signaling a change in their long term guidance that they presented at their analyst day.
  • Despite leisure travel being more price elastic than business, they have been pleased with leisure demand since their customer is relatively affluent.
  • Seeing a broad recovery - steady as she goes - with business transient being the most robust, seeing group bookings build steadily, and good leisure performance
  • Why was 2Q group business RevPAR - paid and stayed - only up 2%?
    • Because it's a lagging metric indicative of bookings 2 years ago.  However, business booked more recently is much better - it does take a while to build that book of business though
  • Impact of last terror event in Mumbai was not material on India's RevPAR results. Do not expect that yesterday's terror event to have a significant impact.
  • ME accounted for $30-35MM of fee income in 2010.
  • Special corporate negotiations are not underway yet for 2012. Special corporate rates are still down double digit from peak and expect to see healthy growth next year if economic recovery continues
  • Sales force one?
    • Still very early in the process to evaluate the success of that rollout
  • Group RevPAR growth for STR was 8% - why was their growth so much worse?
    • Think that their hotels are larger and do larger events which have longer lead times and that can explain why their numbers are weaker than those reported by STR. Some of that could also be geographic mix.
    • Not sure where this analyst got his numbers from but industry RevPAR for group was up 3-4% not 8%
  • What % of their group business is on the books for 4Q?
    • 90% or so. Think that their RevPAR is probably up low single digits.  Maybe revenue growth will be up close to mid-single digits
  • Deferred revenue in timeshare relates to financed sales.  They ran higher first day incentives and as a result some of their sales didn't meet the 10% recognition criteria to recognize the sales. So those sales will likely be deferred until early next year.
  • They are not losing share to their competitors according to their competitive set data. Their under performance due to the reported STR data for UUP data is due to their larger group business and geographic distribution.
    • Have more suburban hotels
    • Detroit, Atlanta and D.C are outsized for them vs. comp set
  • Timeshare sales in 2Q will likely be reported in 2H2011 - however, if the promotions continue 2011, sales are likely to spill into 2012. They have deliberately focused on their existing owners in the first year of the points program introduction. Over time they expect that the ratio of sales goes back to the historical averages of 50/50.
  • Why did they need to roll out the extra promotional activity in the Q?
    • In 2009/2010 they made a concerted effort to reduce their financing offers. Now financing is around 40%.  Instead of doing more discounting like they did in the last 2 years, they are raising prices but offering more financing and incentives.

Athletic Apparel/FW Notable Divergence

 

Last week, we saw the biggest diversion between weekly athletic apparel vs footwear sales in six weeks, as ASPs in apparel turned down sequentially by 7.4%, and both footwear units and apparel units and ASPs turned up. We’ll stick with the cliché that one week does not make a trend. But it’s definitely worth noting this especially given that the ICSC index turned positive as well, and the yy comparision for apparel is getting easier on the margin.

 

 

Weekly athletic apparel and footwear sales maintain positive underlying momentum following the conclusion of a strong June that was consistent with the rest of retail. While apparel sales reflect a sharp sequential deceleration in both sales and ASPs this week due to challenging one week compares, underlying two-year trends remain steady. Most noteworthy is the continued strength in ASP trends following a more promotional April/May period in footwear at a time when most of retail accelerates discounting ahead of back-to-school. This suggests that margins have likely improved at footwear and sporting goods retailers since May – good for DKS and HIBB, even more favorable for FL and FINL. Here are a few key callouts from the week:

  • Following a consistent stretch whereby athletic specialty retailers have outperformed the other channels, the discount/mass channel was the top performing last week. We expect strong yy sales growth in the athletic specialty channel to resume next week.
  • For reference, in order to keep underlying 2-year trends in apparel constant with results since May, yy sales growth would have to return to HSD – LDD and ASP to LSD growth levels. With compares getting even more favorable in July after this week, we could see an acceleration of sales into quarter end.
  • In apparel, Running (+35%) and All-Performance T-shirt (+24%) categories continue to substantially outperform Compression product (-3%) due in large part to Under Armour diversifying their apparel mix to include non-compression charged cotton product.
  • Interestingly, while regional performance data has been temporarily discontinued by SportScan as they integrate new participants into the apparel sample, retailers commonly mentioned particularly strong sales in the Northeast during June. This is in stark contrast to the underperformance in the NE as reported by SportScan in through May – a notable improvement particularly for DKS, which is over-indexed to the region.
  • Share gains at Nike in both footwear and apparel in recent weeks is the most notable brand callout. In apparel, these gains are coming largely at the expense of UA as sales of charged cotton moderate and Adidas. In footwear, Skechers, Puma, and New Balance continue to lose share to leading brands. As noted, sales growth of Under Armour apparel has decelerated to mid-to-high single-digits in each of the last three weeks following a run of double-digit growth over the past 3+ months since the introduction of its new charged cotton line.
  • As a reminder, monthly footwear data will be out in next week providing additional clarity into sales trends within the athletic specialty channel through the first two months of the 2Q at which time we’ll highlight any changes to our view of expectations.

Athletic Apparel/FW Notable Divergence  - FW App Agg Table 7 14 11

 

Athletic Apparel/FW Notable Divergence  - FW App ASPs 7 14 11

 

Athletic Apparel/FW Notable Divergence  - FW App ASPs T3W 7 14 11

 

Athletic Apparel/FW Notable Divergence  - FW App FW Table1 7 14 11

 

Athletic Apparel/FW Notable Divergence  - FW App FW Mkt Sh 7 14 11

 

Athletic Apparel/FW Notable Divergence  - FW App App Table 7 14 11

 

Athletic Apparel/FW Notable Divergence  - FW App App 1Yr 7 14 11

 

Athletic Apparel/FW Notable Divergence  - FW App App 2Yr 7 14 11

 

Casey Flavin

Director

 

 

 


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

next