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COF: FILE A COMPLAINT

The Consumer Financial Protection Bureau (CFPB) has released detailed customer complaint data from June 1, 2012 through June 12, 2012 since it began accepting complaints back in July of 2011. Interestingly enough, Capital One Financial (COF) has the most complaints with 22% of the total complaints filed with the CFPB. Regardless of COF’s business practices, this small amount of data makes it clear that consumers are butting heads with the company.

 

Discover Financial Services (DFS) reported Q2 earnings this week and as Hedgeye Financials Sector Head Josh Steiner pointed out, the company put aside a $90 million legal reserve. “It should make investors question whether large hits could be in store for more complaint-heavy companies, like Capital One,” Steiner has noted.

 

The regulatory landscape for credit card companies will become increasingly difficult over the next year or two. That’s food for thought. Like many provisions within the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB’s ultimate endgame and purpose is nebulous and vague. Time will tell the how the CFPB will exert power onto companies like COF and DFS.

 

COF: FILE A COMPLAINT - DFS CFPB

 

 


CHART DU JOUR: US REVPAR COMPS

  • Since Q1 2011, IHG and HOT have been leading the pack in North America REVPAR.  IHG may have benefited from a reverse FX impact.
  • Hyatt is looking like they are finally seeing the fruits of their renovation programs
  • Marriott is a laggard due to the higher concentration of group business which lags transient – they also have bigger boxes and an out-sized exposure to D.C. 
  • The standard deviation among the lodgers' performance in North America has narrowed considerably

CHART DU JOUR:  US REVPAR COMPS - hh


WEEKLY COMMODITY CHARTBOOK

Dollar weakness helped push the prices of many of the commodities we track higher over the past week.  Protein and dairy prices declined as gasoline and diesel fuel costs continue to fall amid economic weakness.  Overall, commodity costs are trending favorably for the restaurant industry.

 

WEEKLY COMMODITY CHARTBOOK - commod

 

 

Gasoline Prices

 

Gasoline prices declined -1.2% over the last week and we view this as a marginal positive for the restaurant industry.  Below are some quotes from management teams over the past six months on the topic of gasoline prices. 

 

Cracker Barrel Old Country Store (6/5/12):  And the impact of gasoline prices on the Cracker Barrel customer really shows itself in a couple of ways. One, as Sandy mentioned, 40% of the Cracker Barrel customers are non-local travelers. There's a fairly strong correlation in between miles driven, changes in miles driven and changes in our same-store traffic. There's a less strong correlation in between changes in gasoline prices and changes in miles.

 

Then, secondly, there's the availability of discretionary income. If the consumer is spending $50 more on gasoline in a month, that's $50 less that they may have available for restaurant purchases and for retail purchases.  One of the things that we and most restaurateurs have seen is, I refer to it as the parable of the boiling frog. If there is a spike in gasoline prices, it's the frog leaping into boiling water and being shocked. If they are rising at a fairly gradual rate, the consumer has time to make adjustments and they tend to stay in the water.

 

Cracker Barrel Old Country Store (2/21/12): We think that given our susceptibility particularly to – in the summer travel season to potential increases in gasoline prices that it is appropriate to be suitably cautious about our third and fourth quarter traffic outlook.

 

HEDGEYE: Given the change in tone from Cracker Barrel’s management team between February and June, we expect the continuing decline in gas prices to prompt management to be more positive in its guidance for traffic trends over the next couple of quarters.

 

Darden Restaurants (3/23/12)And so we think because all of those things could change, the jobs picture could get worse, the spikes in food and gasoline could abate, that it's appropriate to have a broad range as we look out to the fourth quarter and think about what the comps ought to be.

 

WEEKLY COMMODITY CHARTBOOK - gasoline

 

 

Commodities News

 

Corn prices moved higher last week as reports of dry soil and stressed crops throughout the Cornbelt turned traders bullish as the realization hits that with weaker-than-expected yields, the 14.7 billion bushel projection corn crop may not be met, despite large acreage estimates.  This is a positive for beef prices going forward and a negative for Sanderson Farms.

 

Beef prices may find support this summer from the dry conditions on many pastures and ranches across the country.  Lower corn crop expectations and poor grazing prospects will likely dissuade farmers from attempting to rebuild cattle herds that were dramatically cut by the drought last summer.  The dry conditions are already forcing cattle producers as far north as Colorado to auction cattle earlier than planned.

 

Chicken supply is contracting by roughly 3% year-over-year, per USDA egg set data for the week ended June 16th.  It seems that the peak in wing price inflation may be in but, as positive as that sounds for BWLD, it may be a slow grind lower; wing prices are stubbornly hanging in north of $1.80 and management at food processing companies that we talk to are suggesting that rebalancing the relationship between chicken wing supply and demand may take some time. 

 

WEEKLY COMMODITY CHARTBOOK - chicken wings egg sets

 

Correlation Table

WEEKLY COMMODITY CHARTBOOK - correl

 

Charts

WEEKLY COMMODITY CHARTBOOK - coffee

 

WEEKLY COMMODITY CHARTBOOK - corn

 

WEEKLY COMMODITY CHARTBOOK - wheat

 

WEEKLY COMMODITY CHARTBOOK - soy beans

 

WEEKLY COMMODITY CHARTBOOK - live cattle

 

WEEKLY COMMODITY CHARTBOOK - chicken whole breast

 

WEEKLY COMMODITY CHARTBOOK - chicken wings

 

WEEKLY COMMODITY CHARTBOOK - cheese

 

WEEKLY COMMODITY CHARTBOOK - milk

 

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


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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

 

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