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SSS Focus on Margins, Not Sales

Takeaway: A strong final week wasn’t enough to save the month as retailers had already turned to aggressive markdowns.

A strong final week wasn’t enough to save the month as the dwindling number of retailers that are still reporting sales results had already turned to aggressive markdowns elevating Q4 margin related earnings risk.

 

December Retail Sales coming in better than expected with 12 companies beating expectations compared to 6 misses was little consolation in light of recently lowered numbers. With tough January comps ahead, one of the key factors to year-end performance and start to 2013 will be inventory induced margin risk. On the whole, the industry was fairly lean headed into the holidays, but in the absence of early holiday demand that mattered little into month’s end as retailers accelerated markdown activity.


In the chart below, note how there was only one week in the final five weeks of the year where sales growth bested prior year levels. This chart is important because it is the ICSC index, which is a weighted index of 80 (non-food and non-auto) retailers across sub-categories that dwarfs the 18 that currently report same store sales numbers publicly. Note that starting in February, that sample will be down to 15. Our sense is that it will be closer to zero in a year, and we’ll close the chapter of information flow that has always been same store sales day.


ICSC Same Store Sales Index

 

SSS Focus on Margins, Not Sales - ICSC


Back to the call-outs...

For the second consecutive quarter, KSS takes home the prize for negative callout of the day. This hardly comes as a surprise with KSS the most over-inventoried department store retailer headed into the holidays (see charts below). As a result, KSS confirmed they turned to deeper than planned discounts in order to clear the decks headed into fiscal 2013 taking down 4Q estimates by more than 20% in the process. Retailers with more favorable sales/inventory levels (i.e. at less risk) include TJX, ROST, and TGT.


The biggest positive callouts were COST and JWN both of which came in nearly 2x expectations of ~4.5% comps. While more impressive for COST given its sheer size, the strength of JWN at the high-end is perhaps most notable given recent concerns regarding luxury retail. This is a positive read-through for handbag related names (FNP, KORS, COH) with the category highlighted as running above comp average.


Other Callouts:

  • Off-price strength with ROST and TJX only retailers to raise numbers into year-end. It’s little coincidence that both companies sport superior sales/inventory levels relative to peers.
  • GPS (+5% vs +3.9%E) Old Navy coming in VERY strong in December rebounding from three consecutive months of slowing growth – offset in part by deceleration in all other segments.
    • Lap JCP induced comp reacceleration starting February.
    • Back to the well approving $1Bn share Repo plan (replacing prior $1Bn plan)
  • M (+4.1% vs +4.1%E) in-line with online up +52%
    • Announced closing 6 stores to account for $2-$4mm in related costs (plan to open 9 in 2013)
    • Taking 4Q outlook down $1.91-$1.96 (was $1.94-$1.99)
  • TGT (flat vs +1.4%E) strong finish to Dec not enough to offset first 3-weeks
    • Inventory in “very good condition at month-end”
  • KSS (+3.4% vs +1.4%E) sales ‘came late in the holiday’- as a result at deeper discounts than planned
    • Taking ‘necessary markdowns in 4Q to manage inventory’ into Spring
    • Sharply reducing outlook to $1.60-$1.62 (was $2.00-$2.08E) in 4Q and $4.11-$4.13 (was $4.52-$4.60)

 

SSS Focus on Margins, Not Sales - MidTier wJCP SIGMAs

 

SSS Focus on Margins, Not Sales - MidTier SIGMAs

 

SSS Focus on Margins, Not Sales - GPS SSS by Seg

 

 




    Materials & Dial-in Information for The Affordable Care Act Expert Call

    Materials & Dial-in Information for The Affordable Care Act Expert Call - KenBur.dialin

     

        

    Please CLICK HERE to access the materials for this call and dial in 5-10 minutes prior to the 1:00pm EST start time using the number provided below. If you have any further questions email .

    • Toll Free Number:
    • Direct Dial Number:
    • Conference Code: 939528#

     

     

    The Hedgeye Healthcare Team, led by Tom Tobin, will be hosting an expert conference call today, at 1:00pm EST featuring industry expert Ken Burdick, former Senior Executive of United HealthGroup and Chief Executive Officer and President of Blue Cross Blue Shield of Minnesota.

    The call will analyze the impact of the Affordable Care Act across the healthcare industry, addressing the opportunities and risks associated with the implementation of the Patient Protection and Affordable Care Act. Ken Burdick has more than 25 years of experience in managed healthcare and his insight to the implementation of this act will be extremely insightful and constructive in managing risk across the managed care names. 


    KEY TOPICS WILL INCLUDE:

    • Will employers drop coverage? Penalties? Taxes?
    • Insurers versus exchanges
    • Consolidation among providers and payers  

    ABOUT KEN BURDICK:

    • Served as SVP of Medicaid Business at Coventry Health Care Inc. and managed its Medicaid and Behavioral Health (MHNet) businesses
    • Served as President and CEO of Blue Cross and Blue Shield of Minnesota
    • October 1995 to May 2009 employed by UnitedHealth Group
      • May 2008 to May 2009, served as the CEO of Secure Horizons, a Medicare business
      • November 2006 to May 2008, served as the CEO of United Healthcare's Commercial Business
      • April 2004 to November 2006, served as CEO of United Healthcare's Southwest Region and President of United Healthcare Public Sector
      • January 2000 to April 2004, served as the CEO of United Healthcare of Arizona
      • Prior to 2000, served as the head of the national underwriting organization for all lines of business and the general manager of the central Texas operation 
      • Served as the CEO and President of United HealthCare Services, Inc.
    • Director of United Biologics, LLC since October 2012
    • Serves as a Director of A.T. Still University of Health Sciences
    • Serves on the Board of Directors for Preferred Homecare and PASR, a non-profit Board advancing school readiness throughout Minnesota
    • Earned his bachelor's degree from Amherst College and a law degree from University of Connecticut School of Law  

    YUM: Plenty To Like

    Yum! Brands (YUM), owner of KFC, Taco Bell and Pizza Hut, is one of our best long ideas in Restaurants. We think Yum! is attractive on the long side for 2013 for several reasons: the company is better diversified than Starbucks (SBUX) and McDonald’s (MCD), the recent sell off in the stock makes for a compelling entry point for investors and the company’s improving US business complements strong international unit growth in 2013. Recent news related to a KFC China chicken supplier and its excessive use of antibiotics in its feed has pushed YUM shares lower but we see the most important fundamentals related to the stock as positive from here.

     

    YUM: Plenty To Like - yum levels large

     

    The chart posted above highlights our macro team's quantitative view of the stocks. Currently, YUM is in a bearish formation with near-term TRADE and intermediate-term TREND resistance at $67.45 and $68.81, respectively.

     

    YUM: Plenty To Like - yum index vs cd large


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    JOBS DATA: Tailwinds Ahoy

    This morning’s jobless claims numbers rose 12k to 372k from 360k, which was better than expected. It reflects two weeks of data and after the last report, in which 19 states worth of data was omitted, this is a real positive for the economy. With Hurricane Sandy no longer affecting the data, we’re seeing a continuing trend of improvement in the labor market that we believe will continue through February despite the seasonality distortion (i.e. holiday hiring), which does play into the numbers.

     

    JOBS DATA: Tailwinds Ahoy  - jobs1

     

    JOBS DATA: Tailwinds Ahoy  - jobs2

     

    JOBS DATA: Tailwinds Ahoy  - jobs3


    December Snow - Modest Help for Drought Conditions

    December was a useful month in terms of snowfall across the Midwest – 68.4% covered by snow with an average depth of 3.2 inches (National Weather Service).   There was no snow cover in November (not a particularly constructive month in terms of remedying drought conditions) and very little in December 2011 as well (2.3% covered by snow), so snow season is better begun than it was last year.

     

    While constructive, the December snowfall only represents the equivalent of about ½ inch of rain – snowfall in January and February will have to be measured in feet in order to provide substantial relief to the drought conditions that still linger across much of the United States.

     

    We remain bearish on corn fundamentally, and the commodity remains bearish trade and trend on our model. However, the persistent drought conditions bear watching as we progress through the winter.

     

    December Snow - Modest Help for Drought Conditions - Drought January1

     

     

    Robert  Campagnino

    Managing Director

    HEDGEYE RISK MANAGEMENT, LLC

    E:

    P:


    JOSHUA STEINER: INITIAL JOBLESS CLAIMS: LABOR IMPROVEMENT ACCELERATES

    Takeaway: The labor market continues to improve, and at a slightly accelerated pace as of this latest week. Expect ongoing tailwinds through February.

    Back on Track

    This morning's initial jobless claims number is meaningful in that it reflects two weeks of data. The previous week's numbers were estimated due to the omission of 19 states, including California and Texas, due to the holidays. 

     

    Importantly, the data is reasonably strong, continuing a trend we've seen since September, adjusting for the one-time effects of Hurricane Sandy. As a reminder, we expect claims will continue to improve through February and should decline to a level in the 340-350k range on a 4-week rolling basis. Then, we would expect tailwinds to reverse to headwinds in March, as has been the case for the last three years. See the first chart below for an illustration of the trend.

     

    Recall that to ferret out the noise of seasonality distortions, we look at the annual change in rolling NSA claims. Last week the NSA YOY change was -6%, which compared with -5.9% in the previous week. A larger negative number represents accelerating improvement. 

     

    The Numbers

    Initial jobless claims rose 12k to 372k from 360k. The prior week's number was revised up by 12k to 362k from 350k. Normally we look at the unrevised vs. unrevised for apples to apples comparisons, but this week, due to the missing states, we're comparing unrevised to revised. Rolling claims rose 0.25k WoW to 360k. 

     

    JOSHUA STEINER: INITIAL JOBLESS CLAIMS: LABOR IMPROVEMENT ACCELERATES - 1

     

    JOSHUA STEINER: INITIAL JOBLESS CLAIMS: LABOR IMPROVEMENT ACCELERATES - 2

     

    JOSHUA STEINER: INITIAL JOBLESS CLAIMS: LABOR IMPROVEMENT ACCELERATES - 3

     

    JOSHUA STEINER: INITIAL JOBLESS CLAIMS: LABOR IMPROVEMENT ACCELERATES - 4

     

    JOSHUA STEINER: INITIAL JOBLESS CLAIMS: LABOR IMPROVEMENT ACCELERATES - 5

     

    JOSHUA STEINER: INITIAL JOBLESS CLAIMS: LABOR IMPROVEMENT ACCELERATES - 6

     

    JOSHUA STEINER: INITIAL JOBLESS CLAIMS: LABOR IMPROVEMENT ACCELERATES - 7

     

    JOSHUA STEINER: INITIAL JOBLESS CLAIMS: LABOR IMPROVEMENT ACCELERATES - 8
     

    JOSHUA STEINER: INITIAL JOBLESS CLAIMS: LABOR IMPROVEMENT ACCELERATES - 9

     

    JOSHUA STEINER: INITIAL JOBLESS CLAIMS: LABOR IMPROVEMENT ACCELERATES - 10

     

    JOSHUA STEINER: INITIAL JOBLESS CLAIMS: LABOR IMPROVEMENT ACCELERATES - 11

     

     

    Joshua Steiner, CFA

     

    Robert Belsky


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