Higher And Higher

Stocks have had an impressive run over the last three months with some equity indices (Russell 2000) hitting new highs after the post-fiscal cliff rally. Interestingly enough, we’re back at the same levels that were seen during the Bernanke Top (mid-September). With the current bullish sentiment in the market, making higher-highs and returning to 2007 pre-crisis levels is a reality that could soon be upon us.


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FINL: Credibility Does Not Care About Valuation

Takeaway: The last thing that FINL needed was another knock to its credibility. That's what it got, and we can't identify near term redemption.

Our view on FINL following this morning’s results and call remain unchanged. We think management has a credibility issue and in the absence of any substantive catalysts believe the stock will be range-bound over the near term.


A few thoughts to consider:


  • Tarnished Management Credibility: In addition to a poorly timed (and tested) e-commerce platform transition just before the holiday selling season, management has also been slow to respond to the industry mix shift in footwear from running to basketball resulting in more aggressive promotional activity, which is expected to continue through 4Q. FINL is in “show-me-mode” for the time being. Recall that they initially lost credibility after jumping head first into ‘2012 as an investment year’ back in the spring of 2012. The latest debacle does not help.
  • The Play Here is Long FL: The clear call out of the FINL quarter is confirmation of category divergence between running (decelerating) and basketball (reaccelerating). With FINL over-indexed to running and the trend running away from them (pun intended), we think FL is the clear play here.


FL is not immune by any means as it also carries running product, but we expect over-indexing to basketball to drive meaningful outperformance relative to FINL and industry. During the quarter, basketball was up mid-teens while running was down –MSD at FINL. While FL has underperformed in sympathy with the group recently, we expect a near-term rebound reflecting a more robust product mix and underlying business performance. Our biggest concern with Foot Locker is that FINL gets to the point of irrationality with its promotional cadence for a protracted time period. We think that the vendors would have little patience for this, but such pressure from the brands will last only so long.

  • NKE Considerations: NKE is also one of our top long ideas. With much of the basketball success attributed to Nike product lines, we expect continued success for the brand in 2013 in a case of the tail wagging the dog.


It was highlighted that consumers are becoming more sensitive to price at the higher-end such as NKE’s Air Force Max. As expected given the timing of increases last year, ASPs came in up +7.8% for the quarter and growth is expected to decelerate to up +MSD in 4Q. While we expect this trend to weigh on the rate of growth in athletic footwear over the coming year, it will have a greater impact on the footwear retailers (FINL and FL) who will be forced to pass it forward more than on the brands themselves. Our sense is that FINL was not talking to the investment community when it made the comment about consumer price sensitivity – it was talking to Nike. They are attempting to negotiate price via the quarterly conference call.

  • Macy’s Deal: Despite the e-commerce interruption, there appears to be little changed regarding the timing or structure of deal as a result. While most likely unrelated, the Macy’s pilot stores will be rolled out in Feb-Mar versus earlier plans to rollout in Dec-Jan. The rest of the store rollouts will start in April as originally planned.



All in, despite FINL trading at an attractive valuation, the absence of positive catalysts over the near-term suggests a meaningful move higher near term is unlikely given the that the name is in a ‘show me’ mode. Instead, we think NKE and FL are considerably more attractive both on a relative and absolute basis over the coming year. NKE remains our top pick.



TJX: Idea Alert -- Short

Takeaway: Adding TJX as a #RealTimeAlerts short position. The market isn't respecting competitive factors at play and how they'll unfold in 2013

Today we added TJX as a #RealTimeAlerts Position on the short side.


The longer term story here is reasonably attractive predicated largely on the int’l store growth opportunity, rebound in European margins, and ~5%+ annual share repurchase booster, but we don’t think that the stock is appropriately discounting the risks from a more competitive department store climate on top of dwindling inventories and peak gross margins.


The near-term setup is likely to provide an opportunity to get involved lower.  Most notably, the company is coming off an investment year, which should be a positive, but it is likely to incur additional spend as it pushes more aggressively into Europe. That should be heaviest as it goes up against its toughest compare of the year (1Q).


But our biggest concern is the impact of a more competitive department store space as JC Penney shows some signs of life and ceases to hemorrhage the kind of market share it ceded in 2012. Remember, a bear scenario doesn't need JCP to GAIN share in 2013, but rather simply NOT LOSE share to the extent it did last year. By a country mile, the off price retailers made out the best when JCP was incapacitated, with TJX leading the way.  Where we could be wrong on the negative side is if JCP has another year of comping down solid double digits, creating an easy environment for TJX to quickly replenish its dwindling inventory levels (either directly from brands, or indirectly through department stores). We think that this opportunity would need to come by way of career risk for JCP’s Ron Johnson – something we don’t think he will let happen.


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At this precise time, TJX had a noticeable (positive) boost in its sales/inventory spread – even relative to Ross Stores. The sales/inventory spread is peaking today, and while we think this has positive implications for Gross Margin, we think that it’s top line that investors will pay for – and that top line growth rate should decelerate throughout 2013.


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One booster to the sales line should be TJX’s recent acquisition of Sierra Trading Post positive, but we caution that since the deal, sales estimates have picked up by just over 100bp – which is the amount of revenue Sierra will add to the parent.  TJX paid ~$200mm for the business. The e-commerce infrastructure will be valuable to TJX as it looks to build out its own branded sites more aggressively.


With four discount stores out West associated with the deal, there is the possibility that TJX looks to apply their discount prowess more meaningfully to the outdoor/sporting goods space as a standalone concept. This could prove to be add an nice kicker to the value of this deal 3-5 years down the line. But that is hardly enough to get excited about today.


Valuation and Sentiment

At 8x EBITDA, 15.5x earnings and 1.2 EV/Sales, TJX is trading near peak multiples on all accounts. Sentiment is also near peak, as measured by the Hedgeye Sentiment Monitor (which blends buy side, sell side and insider trading activity). We get the whole ‘good management, good long term story, good liquidity’ argument. But the reality is that there are some headwinds in 2013 that can’t be overlooked.


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TJX: Idea Alert -- Short - 4



Hedgeye SIGMA Analysis

TJX: Idea Alert -- Short - 5


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Gold Short - Staying With It

Takeaway: Gold is now confirming that it is in a quantitative Bearish Formation.

POSITIONS: Short Gold (GLD) and Gold Miners (GDX)


The bear case for gold just got a lot better this week.


Gold (and Bonds) do not like it when the slope of growth moves from slowing to stabilizing. Why would they? That’s the end-of-the-world type stuff.


From a long-term perspective, we think Gold is a bubble that’s already popping. We only make that claim when something is making a series of lower long-term highs (see the chart below).


Across our core risk management durations in Gold, here are the lines that matter to me most:


  1. Intermediate-term TREND resistance = 1699
  2. Long-term TAIL resistance = 1671
  3. Immediate-term TRADE resistance = 1665


In other words, Gold is now confirming that it is in a quantitative Bearish Formation (bearish TRADE, TREND, and TAIL).


Since it’s way over-owned by Institutional Money Managers who had never owned if before (ostensibly because they were bullish on growth and other productive assets at the time), and the fundamentals (Global Growth and US Employment Growth stabilizing) are confirming our quantitative signal, we are staying with it.


If you’d like our longer form bearish research notes on Gold that we published in Q412 under our Q4 Global Macro Theme “Bubble #3”, let us know.




Keith R. McCullough
Chief Executive Officer


Gold Short - Staying With It - GOLD

PODCAST: Feds and Funds


On this morning’s investment call held for Hedgeye subscribers, our Question & Answer session focused on retail investors, shifting capital from traditional fund managers to ETFs and how the Federal Reserve affects growth in the United States. You can listen to the full Q&A session in the audio posted above.

Resolving The Drought

The drought that has plagued the Midwestern United States for some time now was fixed in part by December snowfall accumulation. The Midwest saw 68.4% of the region covered by snow with an average depth of 3.2 inches according to the National Weather Service.


With no snowfall in November and very little in December of 2011, this snow season has started off on a positive note. Unfortunately, that amount of snowfall equates to approximately a half-inch of rainfall. January and February will need several feet of snow in order to provide meaningful relief to areas affected by the drought. We remain bearish on corn fundamentally and on commodities in general from a macro perspective.


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