HedgeyeRetail Visual: NKE: The KING

Lebron James branded Footwear sales growth accelerated through the NBA playoffs and is reaccelerating NKE's share gain in the basketball category (chart 1). Although Lebron branded sales have grown as a percent of the overall Nike basketball portfolio (Nike, Brand Jordan, Converse), NKE appears to be recapturing some of the 400bps of share lost in the category over the past year (chart 2). Share gain in basketball suggests that Lebron branded footwear is adding incremental sales to Nike’s dominant portfolio as opposed to cannibalizing other brands.


Interestingly, after scoring 26 of Miami’s 121 points in game 5,  James became only the 5th player in NBA history to register a triple-double (double-digit total in 3 of the 5 basketball stats, i.e. points, rebounds, assists) in a title-clinching game… Good for business.


Ultimately, NKE is a $20bn+ Global enterprise and although a single athlete in a single category won’t make or break the company, Lebron James appears to be moving the needle in a category that we estimate accounts for ~36% of footwear sales (note: FW accounts for ~55% of NKE sales globally). 


HedgeyeRetail Visual: NKE: The KING - NKE Lebron chart


HedgeyeRetail Visual: NKE: The KING - NKE basketball share

Japan is off the hook…for now

Over the past thirty years, Japan has gone through tremendous economic headwinds beginning with the asset price bubble of the early 1990s to the financial crisis of 2008 and into the 2011 tsunami and earthquakes. The lack of growth in the country has been a bitter pill to swallow for investors and the Japanese government as the country struggles to get itself back on its feet and out of stagflation.


Japan is off the hook…for now  - JAP3 large


Despite cautious overtones related to the Japanese economy, we think there are four reasons as to why Japan is on the rebound and will not encounter a government bond-related crisis over the next few years.


1)      We see a diminished threat of future rating agency downgrades beyond critical levels. On May 22, Fitch was the first of the “Big 3” rating companies to downgrade Japan’s long-term local currency issuer rating to single-A status…


2)      On June 17, the Democratic Party of Japan agreed to double the nation’s 5% VAT tax in a two-step process ending on October 2015. While we demonstrated in our April 3 research note titled “DIGGING DEEPER INTO JAPANESE SOVEREIGN DEBT RISK” that hiking the VAT tax will do little for long term fiscal consolidation and debt reduction, positive headline risk associated with the passing of the VAT hike bill will likely buy the government a meaningful amount of time.


3)      On June 16, Prime Minister Noda agreed to restart the first two of Japan’s 50 idled nuclear reactors, implying that all political hurdles had been cleared. As a result, Japan should see a reduced need to import fossil fuels. A lack of support from Japanese voters in poll suggests that the decision was politically motivated. Noda’s decision illustrates a new confidence and willingness on the part of the Japanese government to go against popular sentiment – just last month, Japan issued projections for mandated rolling blackouts, which amount to cuts in consumer and corporate energy consumption.


4)      The slope of Japan’s 5yr breakeven inflation rate has now inflected after a long period of increasing inflation. This inflection coincides with the Bank of Japan’s unwillingness to give in to political and market pressure to ease monetary policy in pursuit of its +1% inflation target. In conjunction with a predictable compression in global interest rates differentials, this leads us to anticipate a bout of strength for the Japanese Yen in the near future.


Japan is off the hook…for now  - JAP2 large


Whether Japan will be able to shed its long-term low rates policy remains to be seen. But it’s making progress on many economic fronts that are important to keep in mind over the next one to three years. Japan also has committed a large amount of money to the International Monetary Fund ($60 billion currently) , making it one of the largest contributors to the fund. Should the European debt crisis rapidly accelerate at an unexpected rate, those commitments and associated collateral calls could prove to be costly. Japan’s economy is a lot like a game of chess. Dealing with it requires a great amount of patience and fortitude.



  • While the Macau stocks have been on a steady downward decline since late April over fears of a hard landing of Macau GGR, Junket VIP volume growth has been decelerating since September 2011
  • Using just historical seasonality trends to project future growth, the chart below illustrates projected Junket VIP volume growth for FY2012 based on the prior two months of actual data.  Using the actual results of July and August 2011, without adjusting for economic slowdown, our seasonality model would have projected a 47% increase in Junket RC volumes in 2012.  However, in each subsequent month as data came in weaker than pure seasonality factors would have implied, the forecast for 2012 continued to calibrate lower to 15% based on May results.
  • Layering in a continuation of decelerating macro factors onto our seasonality model, we are currently projecting that Junket RC volumes will come in at +10% YoY for 2012 and total GGR growth of 14% in 2012.


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 80.52%
  • SHORT SIGNALS 78.68%

Leading The Pack On JACK


Howard Penney, Managing Director of Restaurants (@HedgeyeHWP)



In early May, we put out a note indicating that the time was right to get bullish on Jack in the Box (JACK). We went contrarian to the Street consensus that current sales trends would not strengthen quarter-over-quarter. Jack’s core business along with its fast growing Qdoba brand is something we found attractive at the time and still do. The company will soon wrap up its remodeling and rebranding phase which will relieve pressure on capital expenditures. This, combined with better comps going forward bodes well for top line growth. Over our long-term TAIL duration, we see as much as 50% upside in the stock.


Leading The Pack On JACK - JACK packonbull


Here is our original thesis from May 5th highlighting our durations for JACK:


TRADE (Duration = 3 weeks or less)

2QFY12 earnings are expected to be released on the 15th of May. Our view is that the Street is overly bearish on the company’s top-line trends, currently expecting a slowdown in two-year average trends.  We believe that the current sales trends at Jack in the Box strengthened quarter-over-quarter.


TREND (Duration = 3 months or more)

With the benefits of the remodel program only impacting the company’s financials now and the costs (capex) fading, we are positive on the company’s cash generation prospects.  Easier comps going forward should also help bring the top line higher.


TAIL (Duration = 3 years or less)

JACK trades at a discount to SONC (7.3x EV/EBITDA) and WEN (8.2x). We believe that JACK should trade at a premium to SONC and in line with WEN.  Over the next three years, we see as much as $8 in upside to JACK. 


So when we got bullish on May 5, 2012, the stock was trading at $23 a share. As of yesterday, the stock was at $27. That’s something to get excited about. The Street (Old Wall) is now following our lead and getting bullish as well. This company’s got legs and plenty of room (and time) to grow. 

ENERGY: Under Pressure

In case you haven’t noticed, energy is under quite a bit of pressure lately and we are not referring to fracking here. Crude has been crashing since the $108 a barrel level in late April and continues to fall as the US dollar puts up strength and the inflation-induced commodity bubbles begin to burst.



ENERGY: Under Pressure - FTK TakeMeLower2



One of our best calls has been shorting Flotek Industries (FTK). We went short at $11 a share on June 7 with the thesis that as big name players like Baker Hughes (BHI) and Haliburton (HAL) get squeezed on costs and falling margins, they will need to cut costs somewhere and the suppliers of raw materials to the drillers are a perfect fit. It breaks down to three key factors, essentially:

  1. Top line growth slowing as drilling activity slows (strong dollar = lower oil)
  2. Margin compression due to lower chemical pricing and higher input costs
  3. Relative outperformance reversal and relative valuation call (FTK not cheap vs group)


We see FTK going lower if past performance is any indication of what the future holds (it’s not), it could happen much sooner rather than later.


The key takeaway here is that FTK isn’t the only company who stands to get squeezed from falling energy prices. Companies like CARBO Ceramics (CRR) will also capitulate to the major players as pricing agreements take to the wind and are renegotiated. Take note of CRR and as we believe it has the potential to become the next FTK as we become increasingly bearish on it.


The past week Macau GGR growth decelerated to just +2.1% YoY, generating average daily table revenues of HK$678MM. It’s unclear whether the deceleration was due to hold fluctuation or volume growth slowing.  Our full month June forecast is now for GGR of HK$22.5-23.5 billion or 12-16.5%.  While an improvement over May growth, we believe that this level of YoY growth could disappoint investors when coupled with the reduction in the UnionPay withdrawal limits and rumors of the lengthening of the IVS visa process.


Yesterday the Macau Daily News reported that UnionPay reduced its maximum daily transaction limit to on their debit cards to RMB$1MM from a prior limit of RMB$3-5MM. There is some speculation that this actually occurred back in April 2011, in which event, the tightening is likely having no impact on the recent decelerating trends we’ve been seeing. If the reduction limits are a more recent event then they are more likely to impact premium Mass business, as high rolling VIPs wager off of Junket and direct credit lines.  However, we have also heard that pawn shop business has dropped by 30% in Macau this month, which is having a negative impact on the VIP business.   


There was also an article in the Macau Daily News about rumored lengthening of the visa process for those on the IVS, which is speculated to be negatively impacting mainland visitation to Macau. We generally believe that as in the past, reaction to visa restrictions are usually overblown.




In terms of market share on a week-over-week basis, MPEL share saw a big move up from 9.5% last week to 16.1% this week while Galaxy saw the inverse move, losing 6.4% share week over week to 20.3%.  LVS’s share fell to 17.7% from 19.5% in the prior week, while Wynn gained 90bps getting its share to 12.1%.  The MTD share table is below:



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