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UA: Our Thoughts Headed Into The Print

Takeaway: Expectations aren't low into UA's print, but based on trends we're seeing, they shouldn't be. If we were forced to bet, it'd be positive.

CONCLUSION: UnderArmour footwear and apparel trends look solid headed into Thursday's print, especially in comparing wholesale sell-in versus retail sell-through. Retail inventory implications are bullish, and combined with a positive sales/inventory spread trend at UA, it's left with a particularly positive Gross Margin set-up. That's a big plus, because at 35x EPS it needs to beat, and expectations aren't low. If we had to make a bet one way or another (which we don't), we'd come out with an upwards bias.

 

DETAILS 

We think that UA's trends look quite positive headed into its print on Thursday.  Our analysis shows that a) sell-through of apparel continues to outstrip sell-in, b) footwear is doing so at even a greater rate (and the Speedform launch is gaining traction), and c) the Gross Margin set-up is bullish given easing product costs and a favorable sales/inventory spread.  All that said, we think that these trends are necessary to materially beat consensus estimates (a beat is critical for a 35x p/e growth stock). The good news is that our sentiment monitor suggests that this name remains extremely hated, which is a bullish stock setup.

 

One of the few risks we'd point to is if UA comes out and takes up SG&A requirements to grow the business as initiatives into Footwear and International markets become more important. This had been a concern of ours for a while, but after the company's analyst meeting last month we threw in the towel and altered our view (and our model) such that it could attain 20% top line growth without having to take the margin levels of the company sub-10%.  But if it nudges up spending rates again after just having the investment community in Baltimore to sell its strategy -- then there are going to be credibility issues. We'd be surprised if this turns out to be the case.

 

So when we put it all together, we think that this is one of times where the consensus has it about right,  but if we had to make a bet one way or another (which we don't), we'd have an upward bias. 

 

UNDERARMOUR'S APPAREL RETAIL SALES HAVE BEEN GROWING AT A RATE FASTER THAN ITS WHOLESALE SELL-IN

UA: Our Thoughts Headed Into The Print - ua app sellin

Source: SportscanINFO and Hedgeye

 

UNDERARMOUR'S FOOTWEAR BUSINESS HAS BEEN OUTSTANDING -- AGAIN, WITH RETAIL OUTSTRIPPING WHOLESALE

UA: Our Thoughts Headed Into The Print - fwsellin

Source: NPD and Hedgeye

 

SPEEDFORM HAS BEEN A RECENT DRIVER FOR THE FOOTWEAR BUSINESS. THIS IS THE MOST COMMERCIAL LAUNCH UA HAS HAD TO DATE

UA: Our Thoughts Headed Into The Print - uafast

Source: UnderArmour

 

THE GROSS MARGIN SET-UP IS SOLID THANKS TO AND EXTREMELY FAVORABLE SALES/INVENTORY SPREAD AND FAVORABLE PRODUCT COSTS

UA: Our Thoughts Headed Into The Print - uagmsis

Source: Company Reports and Hedgeye

 

OUR SENTIMENT MONITOR SHOWS THAT THIS STOCK REMAINS VERY HATED

UA: Our Thoughts Headed Into The Print - uasentiment

Source: Hedgeye

 


2013: It Ain't Rocket Science

The 2013 Global Macro playbook hasn't been rocket science. So far, anyway. From a US-centric investor’s perspective at least, all you’ve needed to do is:

 

A) Short Fear (Gold, Bonds, Volatility) and

B) Buy Growth (High Beta, Low Yield, Growth Stocks)

 

2013: It Ain't Rocket Science - Growth Equation

 

It really hasn’t been any more complicated than that.


KMB STRAINING TO MAINTAIN GUIDANCE

Kimberly-Clark reported 2Q EPS of $1.41 versus consensus $1.39 despite a miss on the top line. Management reaffirmed FY13 EPS guidance of $5.60-5.75. Per management, the impact of lower predicted sales growth is expected to be offset by higher cost savings and share repurchases. We remain bearish on the name.

 

 

Conclusion

 

We believe the stock traded off today, despite the earnings beat, because of soft volumes in the U.S. and a looming miss or guide down in the back half of 2013. Management’s reiterated FY13 EPS guidance seems much, much less stable than it was three months ago; higher cost savings and share repurchases are set to fill the void being left by slower-than expected sales growth. With inflation sequentially accelerating and FX rates acting as a top-line headwind, we see downside risk to the company’s FY13 EPS estimates and would advise clients to continue to look elsewhere for exposure to consumer staples on the short side. We do not expect the market to pay 17x for earnings increasingly driven by cost savings and share repurchases. Below are the positives and negatives we took away from the quarter.

 

 

What we liked:

  • Emerging markets have sustained strong volume growth
  • The company is finding incremental cost savings (raised annual target by $50m to $250-350m) to drive EBIT growth
  • Operating margin expanded by 90 bps to year-over-year to 15.5% despite no sales growth and commodity inflation
  • KCI produced broad-based top line growth and operating margin expansion

 

 

What we didn’t like:

  • Organic sales growth was dragged lower by negative volume growth in developed markets, particularly the U.S., Australia, South Korea
  • U.S. personal care volumes declined despite negative product mix
  • Management highlighted increasingly volatile macroeconomic environment, FX, and oil prices
  • Big K-C I markets like Australia and South Korea experienced a slowdown in 2Q
  • Negative 2Q FCF growth (-2.1%) with EBIT growth slowing to 5.8% from 15.6% in 1Q13 and 8.1% in 2Q12 (mgmt says cash flow to improve in 2H13)
  • Valuation is rich – now important with increasing risk to the downside (or limited upside, at least) in earnings estimates
  • Oil prices holding above $100 per barrel could push cost inflation above mid-point of company expectations ($150-250 million)
  • FX rates holding current levels will likely result in EPS below mid-point of guided range

 

 

Rory Green

Senior Analyst

 


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 80.64%
  • SHORT SIGNALS 78.57%

RISK MANAGING “ABENOMICS” AND “XI-LI-NOMICS”

Takeaway: We remain bearish on the Japanese yen and Chinese financials stocks with respect to the intermediate-term TREND and long-term TAIL.

SUMMARY BULLETS:

 

  • To quickly get up to speed on our bearish bias on the Japanese yen, please review the following two research notes: “THINKING THROUGH A POTENTIAL CURRENCY CRISIS IN JAPAN” (NOV ’12) and “REMEMBER, WE’RE IN THE VERY EARLY INNINGS OF ABENOMICS” (JUN ’13).
  • To be clear, Japan has already experienced a currency crisis (as defined by a peak-to-trough decline of -20% vis-à-vis the USD). And, as the title of the latter note would suggest, we think the there is more downside to come with respect to the intermediate-term TREND and long-term TAIL. Sell-side consensus is at 110 on the USD/JPY cross for EOY ’14; we expect them to once again be dragged up by last price towards the ~125 range over the intermediate term as monetary policy at the Fed and BoJ continue to diverge at the margins.
  • A dwindling current account surplus and a compressing real interest rate differential will also put pressure on Japan’s currency from an FX flows perspective. Consensus expects Japanese real 2Y rates to average -1.8% in 2014 (down from 0.1% in 2013E), which compares to -1.1% the for the US (flat vs. 2013E). Our bearish bias on China’s fixed assets investment bubble keeps our expectations for a rebound in Japan’s export earnings rather muted.
  • To review our bearish bias on Chinese financials stocks, please review the following two pieces of research: “ARE YOU SHORT CHINA [AND OTHER EMERGING MARKETS] YET?” (deep-dive presentation) and “EARLY LOOK: UNCERTAIN CHINA” (cliff-notes version).
  • We think the outlook for Chinese credit growth is structurally impaired as the rate of incremental liquidity slows as a result of declining inflows of foreign exchange and/or declining corporate profit growth. Moreover, we anticipate that growth in non-performing loans will accelerate sustainably over the long term – regardless if they are reported or not. In fact, delaying the natural charge-off cycle will only slow Chinese growth even further, as incremental credit is diverted away from marginal economic activity towards servicing existing debt. Lastly, we believe that net interest margins across the Chinese banking industry face immense regulatory headwinds that may ultimately have dire consequences for China’s fixed assets investment bubble. The confluence of these three factors should perpetuate a reflexive cycle of slower earnings growth and depressed valuations for Chinese banks.
  • Contrary to the title of the latter note, we think the outlook for Chinese growth is rather certain – sustainably slower.China’s 10Y GDP growth targets are set in stone and policymakers across the fiscal and monetary policy spectrum continue to talk down market expectations for economic growth over the intermediate term. Regarding the aforementioned 10Y growth targets, it’s interesting to us to see the Politburo stick to their “doubling of 2010 GDP by 2020” as the baseline target amid their economic rebalancing agenda. That means China’s nominal GDP only has to compound at +6.4% per annum from here in order to reach the CNY80.3 trillion target by 2020. Either the target is going to be revised meaningfully higher in the coming years, or consensus needs to dramatically rein in its structural outlook for Chinese economic growth.

Our Macro Team is represented via three positions within our firm-wide Best Ideas product: SHORT Japanese Yen (FXY), SHORT Chinese Financials Stocks (CHIX) and SHORT Emerging Market Equities (EEM). We obviously have a number of other fundamental biases – such as LONG US Dollar (UUP), LONG US  Financials Stocks (XLF) and SHORT Emerging Market USD Debt (EMB) – that were outlined most recently on our 3Q13 Macro Themes call (see slide 11 for the full list).

 

RISK MANAGING “ABENOMICS” AND “XI-LI-NOMICS” - 1

 

Having just published a detailed research note updating clients on our EEM short bias this past Friday, we’ll focus this note on our views on the Japanese yen and Chinese financials stocks (specifically banks and property developers) from here.

 

QUANTITATIVE SETUP

From a quantitative perspective, both the JPY and Chinese financials stocks remain broken across all three of core risk management durations. In Hedgeye speak, that essentially means day-traders, trend-followers and long-term investors are all being forced to react to the same [bearish] PRICE/VOLUME/VOLATILITY signals.

 

In addition to perpetuating a negative feedback loop in the marketplace, a Bearish Formation in any security or asset class essentially means that there is no real support to the prior closing lows. From a mean reversion perspective, that’s roughly +10-25% higher on the USD/JPY cross and roughly -30% lower for Chinese financials stocks (using the CHIX ETF as a proxy).

 

RISK MANAGING “ABENOMICS” AND “XI-LI-NOMICS” - 2

 

RISK MANAGING “ABENOMICS” AND “XI-LI-NOMICS” - 3

 

A REVIEW OF RECENT FUNDAMENTAL CATALYSTS

In Japan:

 

  • The LDP took the Upper House in a firestorm (the LDP-NKP coalition is projected to claim a total of 135 of 242 seats), as expected. Now it’s on to the next series of catalysts for the LDP and its Abenomics agenda. Specifically, a slew of economic and fiscal reforms – including reducing the corporate tax rate, delaying the 2014 VAT hike, broader fiscal consolidation, labor market liberalization, etc. – will be debated by Japanese policymakers over the intermediate term.
  • This is  as good as an opportunity for meaningful reform as Japan has had in many years, so we have very high expectations that something grand will be introduced. We expect that to be positive for sentiment across Japanese financial markets, as well as for economic growth expectations throughout the Japanese economy. In this scenario, we expect Japan’s household sector to allocate financial assets to equities (currently 6.8% of the total), at the margins, in lieu of cash and bank deposits (currently 55.2% of the total, which are traditionally then intermediated into JGBs). All that being said, a failure for the Nikkei and USD/JPY to make new YTD highs pre/post any major announcements on the reform front(s) would be an ominous sign as it relates to investor, corporate and consumer enthusiasm for Abenomics.
  • With a likely improved consensus outlook for growth among global investors and Japanese corporates, we expect Japanese inflation expectations (via 5Y breakevens, which peaked at 1.84% in MAY and are now trading at 1.13%) to resume their upward trend after making a higher-low in recent weeks; that should drag the dollar-yen rate up with it in the process.

 

In China:

 

  • One by one, Chinese policymakers continue to guide the market towards its structurally slower economic growth targets. As highlighted by our previous work, China’s GDP growth potential is structurally impaired relative to the previous cycle due to a confluence of slowing credit growth that itself is a function of declining marginal liquidity and rising NPL’s – which continue to go largely unreported (1% recorded for 1H13).
  • Scrapping the interest rate floor will structurally compress NIMs as SOE borrowers demand a lower cost of capital, while the PBoC’s explicit admission of the risks associated with scrapping the deposit rate ceiling all but confirms our view that the Chinese economy is essentially one grand experiment with levered financial repression. A potentially higher cost of bank capital – in real terms – will put pressure on the ponzi scheme nature of China’s on-and-off-balance-sheet investment vehicles (LGFV debt and WMPs in particular) that tend to be rife with maturity mismatches.
  • Interestingly, the PBoC’s recent decision to heighten statistical scrutiny of China’s banking industry will make it harder for banks to raise cheap equity capital to extent they have to raise capital to maintain current CARs (as much as $50-100B is required over the next 2Y, per ChinaScope Financial estimates).

 

STRUCTURAL OUTLOOKS

Abenomics:

 

  • To quickly get up to speed on our bearish bias on the Japanese yen, please review the following two research notes: “THINKING THROUGH A POTENTIAL CURRENCY CRISIS IN JAPAN” (NOV ’12) and “REMEMBER, WE’RE IN THE VERY EARLY INNINGS OF ABENOMICS” (JUN ’13).
  • To be clear, Japan has already experienced a currency crisis (as defined by a peak-to-trough decline of -20% vis-à-vis the USD). And, as the title of the latter note would suggest, we think the there is more downside to come with respect to the intermediate-term TREND and long-term TAIL. Sell-side consensus is at 110 on the USD/JPY cross for EOY ’14; we expect them to once again be dragged up by last price towards the ~125 range over the intermediate term as monetary policy at the Fed and BoJ continue to diverge at the margins.
  • A dwindling current account surplus and a compressing real interest rate differential will also put pressure on Japan’s currency from an FX flows perspective. Consensus expects Japanese real 2Y rates to average -1.8% in 2014 (down from 0.1% in 2013E), which compares to -1.1% the for the US (flat vs. 2013E). Our bearish bias on China’s fixed assets investment bubble keeps our expectations for a rebound in Japan’s export earnings rather muted.

 

RISK MANAGING “ABENOMICS” AND “XI-LI-NOMICS” - 4

 

RISK MANAGING “ABENOMICS” AND “XI-LI-NOMICS” - 5

 

Xi-Li-Nomics:

 

  • To review our bearish bias on Chinese financials stocks, please review the following two pieces of research: “ARE YOU SHORT CHINA [AND OTHER EMERGING MARKETS] YET?” (deep-dive presentation) and “EARLY LOOK: UNCERTAIN CHINA” (cliff-notes version).
  • We think the outlook for Chinese credit growth is structurally impaired as the rate of incremental liquidity slows as a result of declining inflows of foreign exchange and/or declining corporate profit growth. Moreover, we anticipate that growth in non-performing loans will accelerate sustainably over the long term – regardless if they are reported or not. In fact, delaying the natural charge-off cycle will only slow Chinese growth even further, as incremental credit is diverted away from marginal economic activity towards servicing existing debt. Lastly, we believe that net interest margins across the Chinese banking industry face immense regulatory headwinds that may ultimately have dire consequences for China’s fixed assets investment bubble. The confluence of these three factors should perpetuate a reflexive cycle of slower earnings growth and depressed valuations for Chinese banks.
  • Contrary to the title of the latter note, we think the outlook for Chinese growth is rather certain – sustainably slower. China’s 10Y GDP growth targets are set in stone and policymakers across the fiscal and monetary policy spectrum continue to talk down market expectations for economic growth over the intermediate term. Regarding the aforementioned 10Y growth targets, it’s interesting to us to see the Politburo stick to their “doubling of 2010 GDP by 2020” as the baseline target amid their economic rebalancing agenda. That means China’s nominal GDP only has to compound at +6.4% per annum from here in order to reach the CNY80.3 trillion target by 2020. Either the target is going to be revised meaningfully higher in the coming years, or consensus needs to dramatically rein in its structural outlook for Chinese economic growth.

 

RISK MANAGING “ABENOMICS” AND “XI-LI-NOMICS” - 6

 

THE OTHER SIDE(S) OF THE TRADE(S)

Below we outline the three most probable counter-catalysts we’d need to see occur prior to closing either of these positions.

 

USD/JPY (up +28.2% since we introduced our bearish bias back in SEP ’12):

 

  1. TREND support on the USD/JPY cross is violated to the downside and is subsequently confirmed.
  2. A Japanese bureaucrat (either at the Cabinet Office or BoJ) extends the duration in which the LDP’s +5% “monetary math” targets are to be met, thus effectively narrowing the scope for aggressive easing out of the BoJ with respect to the intermediate term.
  3. The rolling 3M trend in US economic growth needs to inflect to the downside, which is becoming increasingly probable now that crude oil is back in a Bullish Formation. We’d likely see commensurate weakness in domestic interest rates as expectations for Fed tapering are reigned in. A violation of TREND support for the US Dollar Index and the 10Y Treasury Yield would likely front-run and confirm such expectations.

 

Chinese financials stocks (CHIX is down -8.3% since we introduced our bearish bias on JUN 7):

 

  1. TREND resistance for the CHIX is violated to the upside and is subsequently confirmed.
  2. In the event of a marked acceleration to the downside with respect to Chinese economic growth, either the Politburo introduces a meaningful stimulus package or the PBoC lowers its benchmark policy rates and/or RRRs in a meaningful-enough fashion to reinvigorate liquidity across the Chinese banking system.
  3. Either Central Huijin or the MoF introduces a policy to protect bank share prices ahead of what is a likely to be another dramatic round(s) of capital raises.

 

Obviously, we don’t view either of these counter-catalysts as being more probable than the aforementioned structural outlooks we laid out above, so we’re still going strong in both positions. As always we’ll let know you if that changes in real-time.

 

That’s about as much certainty as you’ll ever get from us. In fact, recent experience has hardened our view that consistently outperforming the field in Global Macro risk management requires a daily embracing of said uncertainty.

 

It’s not sexy, but neither is not getting blown up!

 

Darius Dale

Senior Analyst


END OF THE WORLD? NOT SO FAST

END OF THE WORLD? NOT SO FAST - eowcartoon

 

“End of the World” (EOW) Redux?

 

In case you hadn’t noticed, Short Gold isn't working so well today. Gold is up over 3%, north of $1,300 for the first time in five weeks. The VIX is up about 1.5% at 12.74, while the US 10-Year yield is around 2.48%.

 

Barron's, Zero Hedge, and Twitter contra stream all go bullish on Gold after one up week.

 

But lest the EOW folks soon forget, despite its uptick today and 1.1% move last week, the plague which is gold is still down over 20% year-to-date. Meanwhile, EOW Fear (VIX) was crushed again last week, down -9.4% to around -30% YTD. That’s right. Down 30%.

 

END OF THE WORLD? NOT SO FAST -  EOW

 

Who knows? Maybe this EOW uptick had something to do with the most conflicted and self-serving headline of the week so far—Pimco's Bill Gross saying the Fed won’t tighten until 2016 at the earliest. Shame on you Bill Gross.

 

Speaking of bonds, these current levels are creating another attractive short-selling opportunity in 10-Year Treasuries.

 

Finally, US stocks are in the green again today. The S&P 500 is at a new all time high and is up around 19% YTD. The Russell 2000 was up +1.3% last week and is up over 24% YTD also notching a new all-time high.  (Yes,  All-time is a long time.)

 

While our Fundamental Research and Quantitative Risk Management signals remain aligned, We’ll continue taking the other side of EOW. The End of the World trade is still getting smoked.


PM – Getting Smoked

This note was originally published July 18, 2013 at 12:43 in Consumer Staples

Philip Morris International reported Q2 2013 results this morning and as we expected volumes were heavily impacted, down -3.9% Y/Y, contributing to top and bottom line misses versus consensus. FY 2013 EPS guidance was revised down to $5.43-5.53 versus prior guidance of $5.55-5.65, and FX was a $0.07 headwind to earnings.

 

PM – Getting Smoked - marl

 

CFO Jacek Olczak described today’s results as a “surprise”, despite being foreseen as a challenged quarter. Volumes were down across all four of its regions (EU, EEMA, Asia, and LA), with only Asia outperforming expectations with a result of -3.5%.

 

We think PM will be challenged to meet its full-year guidance, given a weak macro environment, dampened consumer spending across many of its regions, a persistent FX headwind with our #StrongDollar call, and the company’s only main lever against volume declines: taking up price.  

 

Our quantitative levels are flashing bearish across the immediate and intermediate term TRADE and TREND durations.

 

PM – Getting Smoked - hedrick

 

 

What we liked:

  • CFO’s belief that Russia’s excise tax increase will be passed on to consumer and outlook for a reasonable tax environment in 2H
  • Japan - expected FY 2013 volume down only  2% 
  • In the EU, PM cited slight optimism in the reduction of government austerity measures throughout the region as a tailwind for discretionary spending and was optimistic that the region’s volume results, at -5.9% Y/Y this quarter (versus -10.1% last quarter), would improve in 2H

What we didn’t like:

  • Q2 adjusted EPS $1.30 vs consensus $1.41
  • Revenue $7.92B vs consensus $8.17B, and down -4.4% Y/Y
  • Devaluation of the Australian Dollar, Indonesian Rupiah, Mexican Peso, Russian Ruble, and Turkish Lira cost 7 cents to the bottom line
  • EU volume -7% for FY 2013 vs 6.5% previously
  • Russia - impacted by higher excise taxes (9-22%) implemented in the beginning of the year, expect FY 2013 volumes down 6-7%
  • The CFO cited the impact of higher excise taxes in Russia and macro headwinds on discretionary income: Lower wage dynamic, as utilities prices up 10% this quarter (vs 5% last year), with broader inflation running at 7%
  • Turkey - resurgence of illicit trade. Expect FY 2013 volumes down by 7-9%
  • Philippines weak on tax increases

 

Other: On E-cigs


On the Q&A there were a couple questions on E-cigs. CFO Olczak kept his words brief but said that the market is difficult to estimate, and he doesn’t think it is more than 1% of the industry, which itself might be a high estimate. He believes demand and interest overall is much stronger in the U.S. than in Europe and that what’s distinguishing the category is its lower price points versus traditional cigs, and that the taste profiles don’t compare. He cannot size up if the category will be one with staying power, or one that is a fad. Finally, he hinted that PM could get involved in the market in 2016/7.  

 

Matthew Hedrick

Senior Analyst


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