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UA: IDEA ALERT

 

We added UA back into the Hedgeye Virtual Portfolio with the stock back down to its TRADE line of support on a downgrade this morning.


Here’s how we’re thinking about it on different durations...


With the stock up 100% since last August, we hardly think that getting into UA now is a ‘big call’. But in this market – one where our Macro team went to 100% cash and is thinking that the chances of a market crash are going up – we’ll look to be tactical around great growth stories like UA where the near-term qualitative framework marries up with the quant set-up.


Here Are Some Considerations on UA:



TAIL (3-years or Less): We think that UA will put up $3bn in revenue by 2014 – an impressive run given that it is coming off of a print of just under $1.5bn in 2011. That incremental top line breaks out as follows. a) $500mm in core apparel growth, b) $300mm in incremental footwear, c) $300mm in international apparel, d) $250mm in women’s apparel, e) $125mm in accessories (having brought hats and bags licenses in house). Our confidence here is greater than it is with most other companies given that UA clearly has invested (and will continue to invest) the capital in the right places to get the job done. One of the key points we look at is that it’s sitting at an EBIT margin of only 11% -- when it could be printing a margin number with a  2 if it wanted (but would otherwise jeopardize forward growth potential).  It’s tough for us to find any name out there in retail -- -sans LULU – where we can build a consistent annual EBIT growth model in the 25-30% range.


TREND (3 Months or More): A key consideration is that we’re now anniversarying a period last year where inventories were up an average of 70% as UA battled through problems with it’s supply chain. Even with growth humming in the 30-40% range, 70% inventory growth was not exactly a confidence builder for anyone building a financial model. Since these problems, UA has made many changes in its management ranks, created new positions, and made key external hires to get its fulfillment to where it needs to be. The reality is that this happens to just about every company going  through different stages of maturation. UA is no different. Where it is different is the speed at which it appears to be fixing the problems. The Punchline is that this is gross margin bullish for UA in the coming 3 quarters. Lastly, one interesting angle here is that UA has less than 5% of sales coming from outside the US. With a strengthening dollar, this creates a situation where its failure has actually turned into a near-term benefit relative to competitors that operate globally and need to translate profits to US$. That ‘benefit’ should wane in 2013 when we start to see the benefit of the new organization UA has put in place in Europe.


TRADE (3-Weeks or Less): There are some mixed message here.

  • On one hand, business appears stable, with the year/year change in apparel market share continuing on the uptrend. In addition, the Hedgeye Sentiment Monitor is sitting near the lowest levels in a year, and the company is about  to execute a stock split. While we all know that this should not matter, the reality is that there are some people that will always think that a $50 stock is half as expensive as a $100 stock.
  • On the flipside, footwear continues to do a whole lot of nothing. That supports the ‘where could we be wrong’ part of our longer-term call, is the potential for a capital infusion needed (hence lower margins) to amp up the footwear business to attain our revenue numbers. The marketing spend to support UA’s new Spine technology launch starting in July is expected to be its greatest yet after which the company then introduces its new basketball silhouette in time for back-to-school.
  • The bottom line is that the stock is back down to the low-end of the trading range with our TRADE factors lending clear support at $98.78.

Just a quick point on valuation – something we think needs a bit of context with UA. By most metrics – pe, EBITDA, EV/Sales, UA is just flat out expensive. But if you went by those metrics over the past 3-years, you’d pretty much have been wrong on both the long and short side almost every time. We think the better metric is EV/Total Addressable Market. For UA, that equates to about 0.15x based on our math. That makes it the cheapest name around. LULU is 0.33x, RL 0.45x, NKE 0.60x.  Will that matter on a day where the consensus freaks out because apparel sales miss by 2%? No. But that’s when we think we’ll be able to step in and make the most money on one of the best names in the space.


UA’s Apparel Market Share Continues to Rebound…Footwear Not So Much

 

UA: IDEA ALERT - UA Mkt Sh

 

 

HEDGEYE RISK MANAGEMENT LEVELS:

 

UA: IDEA ALERT - UA Levels

 

HEDGEYE SENTIMENT MONITOR HAS A BULLISH SETUP:

 

UA: IDEA ALERT - UA sentiment

 










H&M: GROWTH IN EUROPE

While Europe is busy bailing itself out of a mounting pile of sovereign debt, it appears its citizens are flocking to stores for the latest fashions. Trend line sales at fashion retailer H&M are trending down in the U.S., but throughout nearly all of Europe, there’s significant improvement. Europeans want to give H&M their hard-earned money and the company will gladly allow them to do so. This chart put together by the Hedgeye Retail team that we’ve illustrated here provides insight into the growth that lies ahead in Europe.

 

H&M: GROWTH IN EUROPE - HM chart1

 

 

H&M: GROWTH IN EUROPE - HM chart2


JOBLESS CLAIMS HIT THEIR HIGHEST LEVEL YEAR TO DATE

Claims Are Steadily, Predictably Moving Higher

Initial Claims rose by 1k to 387k, As usual, the prior weeks print was upwardly revised by 3k. Incorporating this 3k upward revision to the prior week's data, claims were lower by 2k. Rolling claims also increased, rising 3.5k to 386k, a new YTD high. For reference, the last time rolling claims were higher was December 10, 2011 at 388k. On a non-seasonally adjusted basis, claims fell 17k to 360k.

 

Fundamental Deterioration on Top of Seasonal Distortion

Rolling NSA claims, our way of cutting through the seasonal distortions taking place in the data, were better this week by 8% YoY, which is less good than the 10% and 9% YoY rates of improvement we've seen over the last few months, suggesting that beyond the seasonal distortions there is some fundamental softening taking place as well.   

 

JOBLESS CLAIMS HIT THEIR HIGHEST LEVEL YEAR TO DATE - Raw

 

JOBLESS CLAIMS HIT THEIR HIGHEST LEVEL YEAR TO DATE - rolling

 

JOBLESS CLAIMS HIT THEIR HIGHEST LEVEL YEAR TO DATE - NSA

 

JOBLESS CLAIMS HIT THEIR HIGHEST LEVEL YEAR TO DATE - Rolling NSA

 

JOBLESS CLAIMS HIT THEIR HIGHEST LEVEL YEAR TO DATE - S P

 

JOBLESS CLAIMS HIT THEIR HIGHEST LEVEL YEAR TO DATE - Fed

 

JOBLESS CLAIMS HIT THEIR HIGHEST LEVEL YEAR TO DATE - NSA YoY

 

Operation Twist Extended

The 2-10 spread widened 5 bps versus last week to 134 bps as of yesterday.  The ten-year bond yield increased 6 bps to 165 bps. While there was some relief this week, if spreads continue to sit a these low levels, the 3Q12 sequential change will rival what we saw in 3Q11 when banks across the board saw their margins flatten. The extension of Operation Twist yesterday will continue to put pressure on the long end of the curve.

 

JOBLESS CLAIMS HIT THEIR HIGHEST LEVEL YEAR TO DATE - 2 10

 

JOBLESS CLAIMS HIT THEIR HIGHEST LEVEL YEAR TO DATE - 2 10 QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

JOBLESS CLAIMS HIT THEIR HIGHEST LEVEL YEAR TO DATE - Subsector performance

 

JOBLESS CLAIMS HIT THEIR HIGHEST LEVEL YEAR TO DATE - Companies

 

Joshua Steiner, CFA

 

Robert Belsky

 

Having trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser. 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%

CCL YOUTUBE

In preparation for CCL's 2Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary

 

  • "We have...recently seen some positive trends in our European business so we are hopeful that booking patterns will return to normal levels sooner than we might have originally expected."
  • FY 2012
    • Mid-point EPS guidance: $1.55
    • NCC (excluding fuel) per ALBD: flat versus the prior year
    • "As to the current status of bookings, on a fleet wide basis –  excluding Costa – occupancies for the remaining three quarters are lower than a year ago at slightly higher prices."
      • "For North American brands, occupancies were slightly lower at slightly higher prices and for EAA brands occupancies are lower at higher prices again."
    • "Costa is forecasting a loss for the year of approximately $100 million or a swing of $500 million from its previous earnings forecast."
  • Higher airfares between North America and Europe have been a challenge
  • "Our U.K. brands are holding up relatively well as compared to our Continental European brands. We have recently seen ...improving trends in Germany so we're hopeful that we have finally turned the corner there."
  • 2Q 2012 (ex-Costa)
    • "Fleet-wide capacity for the second quarter is up 2.7%, 2.9% for North America brands and 2.2% for EAA brands."
    • "On a fleet wide basis, pricing is slightly higher than a year ago at slightly lower occupancy versus last year."
    • "North American brand fleet wide pricing is higher than a year ago at flat occupancies. North American brands are 56% in the Caribbean, approximately the same as last year with the balance in various other itineraries. Caribbean pricing is nicely higher than a year ago at approximately the same occupancy levels as last year. Pricing for all other itineraries taken together is higher than a year ago at slightly lower occupancy." 
    • "EAA brand fleet wide pricing is slightly lower than a year ago on lower occupancy. EAA brands are 50% in Europe, slightly up from 47% last year with the balance in various other itineraries. EAA brand European pricing is up slightly versus a year ago on lower occupancies. EAA pricing on all other itineraries taken together is lower than last year also with lower occupancies."
    • "On an overall basis, we are currently forecasting that constant dollar revenue yields will be flat to down slightly for the second quarter, slightly higher in North America, slightly lower for EAA."
    • 2Q midpoint EPS: $0.07
  • 3Q 2012 (ex-Costa)
    • "Capacity is expected to be up in the 2.9% range, 3.4% in North America, 2.2% in EAA. On a fleet wide basis, third quarter pricing is higher than a year ago on lower occupancies. North American brand pricing is slightly higher than a year ago at lower occupancies."
    • "North American brand capacity in the third quarter is 38% in the Caribbean, slightly higher than a year ago, 24% in Alaska, the same, slightly higher and 25% in Europe, which is about the same as last year. Pricing for Caribbean itineraries is higher than a year ago with pricing for Alaska and Europe cruises flat with last year. Occupancies for the Caribbean and Alaska cruises are slightly lower versus last year and occupancies for Europe cruises are lower than last year."
    • "For EAA brands pricing is nicely higher than a year ago at lower occupancy. EAA brand capacity is 85% in Europe itineraries, which is slightly up from 82% in the prior year. EAA brand constant dollar pricing for European and all other itineraries is higher than a year ago on lower occupancies."
  • 4Q 2012 (ex-Costa)
    • "Fleet wide capacity in the fourth quarter is expected to be 2.9% higher than last year, 3.7% for North American brands, 1.7% for EAA brands.  Fleet wide pricing is slightly higher than a year ago at lower occupancies."
    • "North American brand pricing in the fourth quarter is flat versus last year at lower occupancies. North American brands are 43% in the Caribbean slightly higher than a year ago, 13% in Europe, which is about the same as the past year with the balance in various other itineraries. Caribbean pricing is higher than a year ago at higher occupancies. Europe pricing is also higher versus last year at lower occupancies and pricing for all other itineraries taken together is higher than a year ago on lower occupancies." 
    • "EAA pricing, where EAA brands are 61% in European itineraries is nicely higher versus the year ago at lower occupancies."
  • "The close-in patterns are good, which is not necessarily always good for us, we like to see further out booking patterns. And I think that's going to start to happen. As business gets stronger closer in, then bookings get pushed out and pricing becomes more sustainable."
  • "For Holland America, Princess and even Seaborne, they're doing fine except for these European cruises and they are doing all they can to try to shore that up right now. But Alaska seems to be okay, their Caribbean programs are fine, all their other long-term programs are fine."
  • "The major markets for Costa will be Germany, Italy..., France and Spain. We're seeing evidence in France and Spain, actually of their business coming back already, less so in Italy and Germany. But we need Italy and Germany – Italy for sure."
  • "I think 2013 should – obviously show an improvement over 2012. But it may take a year or two to get back to the kind of profitability that we expected to have in 2012."
  • [Including Costa] "Total capacity we're up 3.7% in the first quarter, 2.7% second, 2.9% third, 2.9% fourth, and 3.0% for the full-year."
  • [AIDA] "I think they're starting to see business come back. But there will be some level of hit because... in order to fill close-in, they've had to take pricing down a little bit."
  • "Excluding Costa, we probably had about 1.5 point of yield increase on the onboard side in the December guidance. First quarter came in much more than we had anticipated and so we did build in a little bit of an increase in those numbers for the remainder of the year. So we are seeing some good onboard spend increases. All of the categories are up, all the major categories including casino in the first quarter."
  • "I think Alaska has been pretty consistent and solid. I mean people doing more Alaska cruises than Europe cruises because of the cost of the Europe cruises going up, but Alaska seems to be doing okay."

Stand Ready?

This note was originally published at 8am on June 07, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

"We must also stand ready to do even more if needed to best achieve our statutory goals of maximum employment and price stability."

–John Williams

 

Who is John Williams?

 

That’s a question that would most definitely make Atlas shrug. Not to be confused with all-American pianist and composer John Towner Williams (Star Wars, ET, Sunday Night Football, etc.), this is the lackey Williams who runs the San Francisco Fed alongside his Vice Chair of American Economic Central Planning and Economic Cycle Smoothing, Janet Yellen.

 

Both of these charlatans were out in full force yesterday ramping up expectations for more of what has not worked – Policies To Inflate commodity and asset prices (Qe). So, thanks to who I am sure your Founding Fathers foresaw as being the leaders of your centrally planned market life, today’s risk management question is will he (Bernanke) or will he not deliver the drugs?

 

Back to the Global Macro Grind..

 

So far, my real-time market signals are actually telling me the answer to the question is no. That doesn’t mean the market has it right this morning. But someone always knows something – and, sadly, that’s actually the game that both Bush and Obama have signed off on in this country for the last 12 years – the game within the game.

 

I work on the inside of the game. But I don’t have the inside information itself. I deal with some of the most sophisticated and accomplished investors in the game. I don’t deal with Washington’s academic elite and/or those with political power. My job is to boil it down to the truth and be right. In the end, from a market pricing perspective, truth trumps storytelling.

 

The truth is that Janet Yellen might be even worse than Ben Bernanke from a forecasting perspective. That’s saying something. She’s been on the Fed’s Board of Governors since 1994! That makes her very special. Never mind the Housing bubble, she’s overseen a hat trick of Fed sponsored bubbles: Tech, Housing, and now Commodities.

 

Back to what Bernanke will or will not do today…  

 

Bernanke, of course, is not politicized, but today’s Joint Economic Committee meeting has been completely politicized. He is supposed to be delivering an accountable explanation as to why his economic forecasts are wrong at least 2/3 of the time. Instead, Yellen is pressuring him to whisper sweet nothings about Quantitative Easing.

 

To review, the Fed’s Congressional mandate is twofold:

  1. Full Employment
  2. Price Stability

Instead, their perpetual Big Government Interventions in our markets are delivering:

  1. Shortened Economic Cycles
  2. Amplified Market Volatilities

Boom, bust. Boooom, bust. Then, kaboooom!

 

That last part is what we have been making a call on since launching our Q2 Macro Themes of Fed Fighting (The Last War) and Bernanke’s Bubbles (Commodities). Janet Yellen 3 for 3, baby – Tech, bust; Housing, bust; Commodities ka-booom!

 

I “stand ready” to present 35 slides today in Dallas, Texas (at The Money Show) on why Commodity Bubbles in oil and food in particular are going to continue to pop as the Fed’s broken promises continue to fail.

 

There is a massive movement in this country towards arresting doing more of what has not worked. And, if you all need a Canadian and his American family to stand on the front lines of this policy making war, get me a red-white-and-blue jersey (and helmet) – I’m already there.

 

Before I go, I’ll leave you with the real-time signals that are suggesting Bernanke may not deliver on hope today:

  1. Chinese Equities closed down -0.7% (ahead of their rate cut, which implies growth is really slowing)
  2. European Equities are up but failing at their most immediate-term TRADE lines of resistance (DAX, CAC, and IBEX)
  3. Oil prices are down
  4. Gold is down
  5. Copper is down
  6. US Dollar is barely down

The only thing that’s complicated about analyzing all of this at this point is how Bernanke is going to attempt to explain it.

 

Stand Ready for another Qe. This man is fighting for his political life (Romney says he will fire him). If Bernanke goes there, he’ll put his short-term political career risk ahead of the country’s long-term risk management position. Qe3 will cause Dollar Debauchery. Oil will rise again, and real (inflation adjusted) US, Chinese, and European growth will slow further.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1596-1646, $95.77-102.97, $82.11-82.65, $1.22-1.25, and 1283-1335, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Stand Ready? - Chart of the Day

 

Stand Ready? - Virtual Portfolio



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