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FL: Solid Update for Top Long

Takeaway: One of our top longs, FL’s sales are tracking ahead of plan and the setup is increasingly favorable into year-end

This note was originally published November 27, 2012 at 13:42 in Retail

As a follow up to FL’s recent 3Q results, we think a reacceleration in athletic footwear industry sales after a slow start to November and a favorable near-term setup suggest a strong finish into year-end. We are also positive on FINL and NKE, which is another top long idea.


Consider the following on a TRADE basis (3-weeks or Less):

  • Athletic footwear sales have come in up +5.3% over the last two weeks after coming in down -6% in the first two weeks of November accelerating sequentially each of the last 3-weeks.
  • As seen in the chart below, continued underperformance in the other channels cause weekly sales to significantly understate performance in the Athletic Specialty channel (i.e. FL, FINL, DKS, etc.).
  • Basketball continues to be a significant driver with trailing 3-week domestic sales accelerating sharply higher +27% from +15% over each of the prior four weeks.
  • With FL reporting comps up +MSD through the first half of November despite the industry down -6% and sales over the last two weeks running +5%, we believe FL comps are tracking well ahead of the “upper end of mid-single digit” comp plan.
  • With a favorable setup through year-end and shift towards basketball in Europe, we expect more opportunity for further upside in performance.
  • Retailer sales gains over the holiday weekend were heavily reliant on deep promotional activity. We think athletic footwear retailers (FL/FINL) were substantially less impacted and benefitted from more full-priced sell through with several new launches hitting over the holiday week. Moreover, while several apparel and home furnishing retailers offered free shipping on certain items for the first time, there was no incremental hit to footwear retailer margins as free shipping has become standard.

 

The longer-term TREND (3-Months or More) & TAIL (3-Year or Less) call:

  • Still in the early stages of its turnaround, FL is not solely reliant on the ‘footwear cycle’ for growth.
  • A return to new store growth for the first time in over 6-years will augment comps benefitting from higher growth and higher margin businesses (i.e. Women’s, Apparel, and Kids).
  • After a decade of inventories outpacing sales growth and contracting margins under Matt Serra, FL has posted positive sales/inventory growth and margins expansion over the last three years under Ken Hicks.
  • We’re see more opportunity for upside performance over the intermediate-term and are looking at $3 in earnings power next year approaching $3.50 in F14.


FL: Solid Update for Top Long - FW App Table

Source: NPD Weekly POS Data

 

FL: Solid Update for Top Long - FW 1YR

 

FL: Solid Update for Top Long - FW Cat

 

FL: Solid Update for Top Long - FW Channl

 






 


INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT

Takeaway: New Jersey remains in a shambles, while New York and Pennsylvania are renormalizing. Overall, the labor market appears to remain on track.

Getting Back to Normal

Hurricane Sandy's effects continued to fade in this latest jobs report, mirroring trends we saw after Hurricane Katrina. At this point, initial claims have retraced 64% of their increase from the storm. New Jersey initial jobless claims remain extremely high. For reference, in the latest round of state level data, NJ accounted for some 45,631 new jobless claims, which represented 11.3% of total claims (vs. NJ being 2.8% of the U.S. population). This was actually up from the previous week, in which NJ represented 9.6% of total claims. New York saw claims fall sharply, but still represented 8.1% of all claims vs. being 6.2% of the population. Similarly, Pennsylvania accounted for 6.0% of claims while being 4.0% of the population. If we tally those differences, we find that these three states represent an overstatement of claims on the order 12.4%. If we adjust the numbers for this, we find that the "normalized" claims level is closer to 370k, which is slightly above where claims were just prior to the storm (361k). 

 

The Numbers

Initial jobless claims fell 17k last week to 393k, but after incorporating the 6k upward revision to last week's data, claims were lower by 23k. Rolling claims, meanwhile, were higher by 7.5k to 405k. On a non-seasonally adjusted basis, claims fell 47k. 

 

Bottom Line

We think 370k is a reasonable approximation of where Sandy-adjusted claims are currently, but this estimation could be off by +/- 10k. The rolling claims number going into the storm was actually 371k (higher than the 361k single-week print cited in the chart below), suggesting that over the next few weeks we should expect claims to return to their pre-storm trendline. Obviously, there remains great uncertainty around the resolution of the Fiscal Cliff, which is the greatest near-term threat to the labor market, but, at least so far, it doesn't appear to be altering the trajectory. 

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - Sandy v Katrina

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - weekly claims state level  2

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - Seasonality

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - NSA Rolling YoY by year

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - Raw

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - rolling

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - NSA

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - rolling NSA

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - S P

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - Fed

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - NSA YoY

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - recession

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - claims linear

 

Yield Spreads

The 2-10 spread fell 5 bps WoW to 136 bps. 4QTD, the 2-10 spread is averaging 1.42%, which is up 5 bps relative to 3Q12.   

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - 2 10 QoQ

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - 2 10 spread

 

Financial Subsector Performance

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

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - Scoreboard

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - Companies

 

Joshua Steiner, CFA

 

Robert Belsky


European Problems

Client Talking Points

Greek Tragedy

Greece just can't get its act together. It really is one big tragedy full of bailouts, misconceptions, deception, and cheating investors. Every time Greece needs a bailout, it gets one. What if we just yanked the money away this time around and let them deal with their debt problems head on. I'm sure taxpayers in Europe wouldn't have any issues keeping their money.

Asset Allocation

CASH 55% US EQUITIES 6%
INTL EQUITIES 0% COMMODITIES 6%
FIXED INCOME 18% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
TCB

After a long downward slide, TCB has finally turned the corner. The margin has stabilized after the balance sheet restructuring. Loans are growing thanks to the equipment finance business. Non-interest income is more likely to go up than down going forward, a reversal from the past 18 months. Credit quality has a tailwind from a distressed housing recovery in TCB’s core markets: Minneapolis, Detroit and Chicago. On top of this, the CEO, Bill Cooper, is one of the oldest regional bank CEOs, which raises the probability that the bank will be sold. Expectations are bombed out at this point, so we think it’s time to move from bearish to bullish on TCB.

IGT

There is improving visibility on 20%+ EPS growth with P/E of only 11x with better content leading to market share gains. New orders from Canada and IL should be a catalyst. Additionally, many people in the investment community are out in Las Vegas at the annual slot show (G2E) and should hear upbeat presentations by management.

HCA

While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

Three for the Road

TWEET OF THE DAY

“New Jersey had one of the weakest U.S. housing markets--high foreclosures, soft prices--and that was before Sandy hit http://on.wsj.com/RjNGJy" -@NickTimiraos

QUOTE OF THE DAY

“There are two ways to pass a hurdle: leaping over or plowing through... There needs to be a monster truck option.” -Jeph Jacques

STAT OF THE DAY

Q3 GDP Growth Revised To 2.7%


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YUM CALL TODAY

This afternoon, at 1:30pm, we are hosting a call outlining our view on Yum! Brands.  As we head into 2013, of the Big Three global restaurant companies (MCD, SBUX, YUM), we think investors should be long Yum! Brands. We have prepared a slide deck that outlines our thesis that clients can follow during the call.  Topics discussed in the presentation materials include:

 

  • Yum! Brands has a strong growth outlook, even in China where it has done business for 25+ years
  • 2013 top-line outlook more positive for YUM than SBUX and MCD
  • Consensus too bearish on new unit openings in China over next couple of years
  • In an uncertain macro environment, YUM's diversification (units and operating income) appeals to us
  • YUM China will likely be a 20% operating margin business in 2013
  • High Returns on Incremental Invested Capital will continue for YUM in 2013
  • We believe the stock is worth 20% more than what it is trading at today

Please contact sales@hedgeye.com for access to the call.

 

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 



Europe’s Shell Game

“You want a prediction about the weather? You’re asking the wrong Phil. I’ll give you a winter prediction: It’s gonna be cold, it’s gonna be grey, and it’s gonna last you for the rest of your life.”

-From the film Groundhog Day

 

I used the quote from Groundhog Day because as an analyst covering Europe the political and economic developments of the region continue to repeat and there appears no simple solution to solving its ails – headline risk is here to stay.

 

If Greece headlined the film by taking its first bailout in May of 2010, it was quickly joined by the peripheral actors of Portugal, Spain, Italy, and Ireland – and each and every time the scene repeated: a crisis deepened, Eurocrats (European politicians) responded by calling a summit, announced a solution, the solution did not have “teeth” or didn’t work, and risk expectations shifted as the movie played on.

 

Monday’s Greek aid deal is part of the same film. The main tenants of the “deal” include a payment of its next bailout tranches (€43.7B); approval to reduce its debt as a percentage of GDP to 124% by 2020 (versus estimates of 190% in 2013); both a reduction in interest rates on loans and extension in loan maturities and interest payments (by as much as 15 years!); a pass-along of €7B from profits on ECB Greek debt holdings to Greece; and a potential (undetermined) debt-buyback scheme.

 

Yet what’s most unsettling is that market participants recognize this deal for what it is: a shell game. After all there’s no prospect of this being the last bailout or concession thrown Greece’s way.

 

But can Eurocrats get away with playing the game? And where is the region politically and economically going now that it officially slipped into recession, with Eurozone GDP declining -0.1% in Q3 quarter-over-quarter following a -0.2% contraction in Q2?  Here are some assumptions we’re working under:  

  • Eurocrats will do everything in their power to maintain their own job security and therefore will continue to support the region monetarily
  • There’s nothing in the main constitutional treaties to allow a member state to exit the Eurozone or be expelled. Therefore we do not expect Greece et al to leave or be forced out over the next 1-3 years
  • When it comes to ‘hard’ decisions or impasses, Eurocrats will chose the path of least resistance (a strong argument for keeping the region together remains the fear of a breakup), which should prolong a return to growth
  • Fiscal consolidation (austerity) is needed across much of the periphery; governments have recently taken the flawed stance that they need to take their foot of the gas. Instead what’s needed is more manageable consolidation expectations and strategy to reform labor markets to improve growth prospects  
  •  A Eurozone governed only by monetary policy is not feasible for long-term sustainability
  • The path to a Fiscal Union is littered with challenges given the inability of states to relinquish their sovereignty to a European commission
  • Fellow member states represent the largest trading partners for most states, therefore no one state will see a major inflection in growth until the region collectively improves
  • France, the second largest economy in the Eurozone, and once a close political ally to Germany via Merkozy, has inflected alongside the election of the Socialist President Hollande. His 75% tax policy on the rich, among others, will be a headwind as the country’s sovereign debt tips past 90% of GDP and France loses its AAA status. All this bodes poorly for Eurozone bailout structures built around the credit rating of the larger economies and given that France is the second largest contributor behind Germany.

 

Draghi’s Unlimited


Despite the region’s challenges, one cannot forget ECB President Mario Draghi’s September announcement that “the ECB is ready to do whatever it takes to preserve the euro” via the Outright Monetary Transactions (OMT) program to buy sovereign bonds.

 

To date the facility has not been triggered, however sadly market operators are left to manage risk around the bubble of Big Government and Central Bank Intervention. It’s this market reality that solidifies our thinking that Eurocrats will do all that is necessary to maintain the Union; has kept the EUR/USD trading in a relatively tight band and eliminated the euro parity crowd; and caused sovereign bond yields to moderate in recent months and new issuance to be priced at lower yields versus previous auctions.

 

Europe’s Shell Game - 66. yields

 

This is all positive but hinges on Draghi suspending economic reality over the long term, and is a mismatch with Eurozone fundamental indicators that continue to move in the wrong direction: PMI Services and Manufacturing figures remain grounded below 50 representing contraction; economic, business, and consumer confidence figures have been down for 7-8 straight months; Retail Sales and Industrial Production remain challenged in the core and bombed out in much of the periphery; and inflation is sticky and above the ECB’s target.

 

Europe’s Shell Game - 66. sentiment

 

 

Tipping Points


On the downside we’d caution that there is measurable risk still imbedded in Spain (the sovereign) needing a bailout, which could accompany a need for assistance in Italy. Further, a rise in foot power, namely strikes and riots, especially given outsized unemployment rates across the periphery, and push back on austerity could turn both the political and economic tide in the Eurozone. 

 

Remember, just two weeks ago there was the first ever coordinated strike against austerity of 40 unions across 23 countries.  In addition, a recent Greek popular poll showed that the anti-bailout Syriza party leading,  and regional elections in Catalonia, Spain over the weekend voted in a majority of secessionist parties, all suggesting that there’s risk in reaching a tipping point should we see more concentrated popular push back on government policy and Eurozone membership.

 

While we don’t expect to see borders shifting in the Eurozone anytime soon, citizens have a way of viewing shell games for what they are: deception.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $107.94-111.49, $3.45-3.58, $79.95-80.61, $1.28-1.30, 1.56-1.68%, and 1, respectively.

 

 

Matthew Hedrick

Senior Analyst

 

Europe’s Shell Game - 66. porto


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