UA: Exceeding Our Expectations

Takeaway: UA exceeded our expectations at its Analyst Meeting. We wouldn't chase it here. But to short it you need a rev miss. Increasingly unlikely.

This note was originally published June 06, 2013 at 08:20 in Retail


UA: Exceeding Our Expectations - ua


Conclusion: UA exceeded our expectations at its Analyst meeting in Baltimore. We had UA on our Best Ideas list on the short side due to our concern that increasing capital costs to facilitate growth would erode margins in 2H. For reasons discussed below, we don't think we'll see that. We were wrong on the research here, and are not going to sit idle and hope it turns in our favor -- especially with a company where we believe so strongly that it will be a long-term share gainer. There are plenty of other lower-risk places we can look on the short side. UA officially off our list.  We're taking up our EPS estimates by a dime this year, and $0.20 in 2014 to $1.46 and $1.72, respectively, due to lower SG&A spend and slightly higher gross margins. We definitely would not chase the stock here at 40x earnings. Even though some of our best ideas are expensive (and deserve to be), this valuation is stratospheric. But to be short UA here, you need either a revenue miss, which we don't think we'll see, or a pick-up in opex, which now seems increasingly less likely.




Anyone who cares about the story likely heard the headline already -- that UA endorsed a $4+bn top line forecast in 2016 (revenue CAGR of about 22%).  By and large, that's consistent with what we're seen in recent years -- so no real shocker there.  But it's not really the revenue story that we doubted. After all, this is one of the few 'power brands' in retail that has blue sky revenue growth opportunities.


Our concerns have been two-fold. First and foremost, it was the cost of the growth. We believed that UA would have to take up its level of SG&A and Capital Spending to support growth in areas (footwear and international) that have higher barriers to entry, more competitive pressure, and are  inherently lower margin. Nike and Adidas, for example, have 90% of the global soccer/football market locked up, and they won't roll over and play dead in this space (a critical sport needed to reach every country except US).  In other words, we thought that UA would succeed in growing, but would go the way of other brands that came before it like Reebok, which had to take down margins from 11% to a high-single-digit rate in order to achieve its lofty growth goals.


Secondly, we were concerned about the revolving door of talent that started with changes in the supply chain organization two years ago through the departure of Footwear SVP Gene McCarthy in January of this year. Rarely have we seen so many executive departures without some kind of adverse consequences.   


But at the meeting yesterday, a few things became clear to us:

1)  Finally The Right Team? The team Kevin Plank has in place to take the company to the next level is probably the right one. We were most surprised by what we saw coming out of the footwear team. The irony is that we're finally seeing the beginning of a sustainable business AFTER McCarthy departed, which is ironic because he is one of the most talented executives in the space (at least that's our opinion). But for whatever reason, those skills did not translate well to UA. Don't get us wrong, some of the footwear product on the display wall was downright ugly -- most notably on the basketball wall (think of a dozen unmatched colors poured into a blender and then molded into a shoe). But then again, I (McGough) am hardly the authority on what product is 'cool' vs not. I'm probably a good contra-indicator. Personal preference aside, what I can make an authoritative statement on is that I was impressed by the company's focus on new platforms of product.


2) Why do platforms matter? Think way back to Nike versus Reebok. What makes Nike so successful is that it invests R&D dollars to come up with new platforms which become new lines of business. This dates back to Nike Air, but also includes Shox, Free, Lunar and FlyKnit.  In the Case of Reebok, they'd make a lot of noise about producing a new Iverson shoe -- which simply replaced the same shoe they sold at a different price point a year ago, but would rarely add new platforms. That's not a growth mentality. Under Armour is tearing a page out of Nike's playbook. It started with its Spine technology in Footwear, and is also doing it with the new Speed Form, which will be released en masse over the next 12 months. In apparel, we're seeing this with the Alter Ego line (think compression apparel meets superhero unitards). Sounds crazy, I know. But it was the best selling product in all of 1Q13 despite the fact that it only sold in March. We're seeing the same 'platform' development in apparel with things like Storm, InfraRed, ColdBlack, Scent Control, ArmourBra and a new men's underwear line. Products flop all the time, but platforms rarely fail in this business unless the R&D or the Marketing is severely botched.


We're doing further analysis on the specific areas of revenue growth potential for UA based on new information given at the analyst meeting (including international, retail and a deeper dive in footwear), and will return with more depth thereafter.

June 7, 2013

June 7, 2013 - tradingranges


Bullish Trends

June 7, 2013 - 10yr

June 7, 2013 - dxy2


Bearish Trends

June 7, 2013 - VIX

June 7, 2013 - oil

June 7, 2013 - gold

June 7, 2013 - copper


TODAY’S S&P 500 SET-UP – June 7, 2013

As we look at today's setup for the S&P 500, the range is 62 points or 0.96% downside to 1607 and 2.86% upside to 1669.       











  • YIELD CURVE: 1.76 from 1.79
  • VIX closed at 16.63 1 day percent change of -4.97%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Change in Nonfarm Payrolls, May, est. 165k (prior 165k)
  • 8:30am: Change in Private Payrolls, May, est. 175k (prior 176k)
  • 8:30am: Chg in Manufacturing Payrolls, May, est. 4k (prior 0k)
  • 8:30am: Unemployment Rate, May, est. 7.5% (prior 7.5%)
  • 1pm: Baker Hughes rig count
  • 3pm: Consumer Credit, April, est. $13.3b (prior $7.966b)


    • House not in session; Senate schedule TBA
    • 8:30am: Mental Health America holds conf. on wellness breakthroughs, whole health
    • 10am: House Transportation and Infrastructure panel field hearing on improving the rail service in the northeast corridor
    • 11am: ABA, Economic Advisory Committee news conf. to present monetary policy predictions, consensus economic forecast, including consequences of sequester, spending cuts, housing recovery, whether banks are prepared to finance stronger consumer and business spending


  • Job gains probably restrained in May amid U.S. fiscal cutbacks
  • Aso says Japan won’t intervene in market after surge in yen
  • Apple, other tech cos., deny giving U.S. access to servers
  • Glaxo may get Avandia reprieve after FDA panel vote on risks
  • Fed seen reducing asset buying by smaller amount: survey
  • Microsoft unveils trade-in rights for games on Xbox One console
  • AT&T 2Q customer growth improves as margins shrink
  • German exports rose more than economists forecast in April
  • Bundesbank cuts German growth forecasts while signaling recovery
  • Pimco defends $8.5b BofA mortgage accord as “outstanding”
  • U.S. Retail Sales, BOJ, Iran, U.S. Open: Week Ahead June 8-15


  • Fewest Hedge Funds Invest in Gold Since ’10 as Assets Slump
  • Gold Traders Most Bullish Since Bear Market Began: Commodities
  • Urals Exports Plunge as Russia Refiners Keep Oil: Energy Markets
  • Tin Miners in Indonesia Stop Output on Raid Concern, Arsani Says
  • Gold Premiums in India Double as Imports Decline on Restrictions
  • Soybeans Head for Best Weekly Run in Four Years on Export Sales
  • EU Suspends Some Licenses to Import Sugar After Tender in May
  • Rubber Books Fourth Weekly Loss on Strong Yen, Demand Concerns
  • WTI Crude Heads for First Weekly Gain in Four Before Jobs Data
  • Low Dry Bulk Rates Boost Scrapping, Control Fleet Growth
  • Palm Oil Heads for Fifth Weekly Gain as Stockpiles Seen Dropping
  • LME Chief Abbott Plans to Leave After $2.2 Billion Takeover
  • Dalian Soymeal Gains Limited by Bollinger: Technical Analysis
  • Commodities Daybook: Gold Traders Most Bullish Since Bear Market
  • Gold Heads for Best Weekly Run Since March Before U.S. Jobs Data






















The Hedgeye Macro Team

Daily Trading Ranges

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Client Talking Points


There's been a big mean reversion blowout to my intermediate-term TREND line in USD/YEN. This level matters, big time. The intermediate-term TREND line is 95.66. This is a new risk to manage on a much more important duration than what I have been working on for the last 6 months (just risk managing the immediate-term TRADE range of #StrongDollar vs Burning Yen). Japanese Finance Minister Aso didn’t intervene overnight, so that’s what’s getting you this last push. If the Yen doesn’t stop going up from here, my model is going to be confused


TREND support for USD Index is 81.34. One thing that can get the dollar to bounce is a blowout jobs report this morning. It's not clear what consensus thinks about the report into the print, as that seems to change every 3 hours of trading. The last 3 hours yesterday gave us a nice rip. 1624 or higher in the SP500 puts the 2013 bears under siege again. I think both 10yr UST yields and USD will be going up at the same time if that happens.


2.02-2.22% is the immediate-term risk range for the 10yr. So at 2.05%, we’re testing the low end of that range into the jobs print. That suggests consensus expectations remain bearish on growth. A blast toward 2.22% in a day would be interesting, but not surprising. We have no edge on the jobs report, and never will. Weekly rolling NSA Jobless Claims is what matters in our model most.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.  


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow.


With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

Three for the Road


We don’t pretend to have an edge on the payroll number - anyone who does is paid to pretend #NFP



"The best thing one can do when it is raining is to let it rain."

- Henry Wadsworth Longfellow


According to Forbes, the 400 wealthiest Americans have more wealth than the bottom 150 million Americans combined.

CHART OF THE DAY: The Paradox of Weather


CHART OF THE DAY: The Paradox of Weather - Chart of the Day

The Paradox of Weather

“And when it rains on your parade, look up rather than down.  Without the rain, there would be no rainbow.”

-Gilbert K. Chesterton


It is a rainy day in the Northeast.  And rain can be depressing if we let it get to us.  The point that Chesterton makes above though is spot on.  Without the disruption of rain, there would ultimately be no rainbow and subsequently the hope of a pot of gold. 


The idea that we have to suffer through bad times to get to good times is of course a bit of a paradox.  To Chesterton, who is often referred to as the “prince of paradox” this was fine.  After all, he was an orthodox Christian who had friendly enemies.   (He was also 6’4, wore a cape, and carried around a swordstick in his hand.)


In mathematical terms, we would probably characterize this concept of bad weather becoming good as reversion to the mean.  Due to mathematical impossibilities, no price goes up forever and no price goes down forever.  In the same vein, rain doesn’t last forever and when it stops the weather is typically very nice.  Unfortunately for those hoping for good weather, the forecast is for showers through Tuesday of next week.  But as Longfellow said:


“The best thing one can do when it’s raining is to let it rain.”


For the last week or so, the U.S. equity market has been raining on our growth is accelerating parade.  So is this a temporary rainy spell and will the sunshine of a positive economic growth return shortly? Well, we certainly still believe this to be the case.


We had a good email discussion with one of our subscribers yesterday who asked us about an assertion Keith made that employment is continuing to improve.  The distinction between our view and the view of much of consensus is that we believe that seasonally adjusting the employment number distorts the data series.   Unfortunately for us, the market continues to cue off the seasonally adjusted number and those appear to be stagnating.


The impact over the last four years is that the seasonal adjustments have created a tailwind from September to February and a headwind from March through August. This is highlighted in the first chart below.  This “seasonally adjusted” slowdown in employment has also been a headwind for the equity market for the last few years. Nonetheless, even on a seasonally adjusted basis, as highlighted by the purple line in the first chart, employment is decelerating at a slower pace than in the prior four years.


More instructive though is the second chart below, which highlights rolling initial unemployment claims that are non-seasonally adjusted.  The trend here is clear, which is that employment is improving and somewhat decisively so.  To the extent that the market continues to focus on the seasonally adjusted series, though, we are likely to have a few more months of employment rain.  On that front, the May employment report is at 830am, so be wary as we are in the season of employment rain!


We would be remiss if we didn’t touch on Asia this morning where the storm clouds are creating a down pour on the global macro markets.  For those that chased Japan into its Abenomic highs, they are now quite literally having a mother of a time.  Specifically, the MOTHERS index closed down -11.5% over night and is now down -38% from its highs.  (This index holds smaller companies so is naturally more volatile.)


The driver of this mother of a correction in Japan was the strength in the Yen versus the dollar. From our purview, the break through the 99 barrier seemingly triggered a massive stop loss program and, as they say, when it rains, it pours.   As a result, the Yen / Dollar went from 99 to 96 in a straight line yesterday.  (Some have speculated that one catalyst may have been a leaking of today’s jobs number, but who are we to distrust the government . . .!)


As it relates to the Yen, which remains one of our Best Ideas on the short side, we still think that relative monetary policy will inform the direction of the currency.   As my colleague Darius Dale emphasized yesterday in a note to subscribers, the BOJ is already committed to monetizing ¥132 trillion through EOY ’14 (27.7% of 2012 nominal GDP) vs. the Fed’s $2.04 trillion (13% of 2012 nominal GDP) over the same time period – assuming the Fed continues at the current pace of $85 billion per month through EOY ’14 (an unlikely scenario in our opinion).  So despite yesterday’s correction in the Yen, we think the structural bear case remains.


One important highlight in the recent action in U.S. equities is that our risk range on the SP500 has widened to 1,607 – 1,669.  This isn’t terribly surprising given that volatility, as measured by the VIX, is up about 30% in the last month.  For those that actively hedge or trade their portfolio, all this really means is that you need a bigger umbrella in the short term!  Or as the popular band Blind Melon sings, “No Rain.”


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $100.58-104.73, $81.34-82.46, 95.66-103.34, 2.02-2.22%, 13.37-17.91, and 1, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Economic Weatherman


The Paradox of Weather - Chart of the Day


The Paradox of Weather - Virtual Portfolio

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