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What's New Today in Retail (9/17)

Takeaway: As part of our morning routine, we scour the tape and trade rags for stories that we think might be relevant to our investment process.

As part of our morning routine, we scour the tape and trade rags for stories that we think might be relevant to our investment process. 

 


EVENTS TO WATCH OVER THE NEXT 24 HOURS

DKS - Wednesday 9/18/2013, 8:00am. At DKS HQ in Pittsburgh.

 

ECONOMIC DATA

The ICSC index, a compilation of 80 chain store retailers, came in weaker than expected this morning. While still relatively healthy at +3.2% ahead of last year, it turned down sequentially (as evidenced by the red line in the chart below). 

What's New Today in Retail (9/17) - icsc1

 

COMPANY NEWS

 

RH: Released its 10Q after the close last night. The biggest callout...

 

"Selling, general and administrative expenses for the three months ended August 3, 2013 included: (i) a $33.7 million non-cash compensation charge related to the one-time, fully vested option to Mr. Friedman upon his reappointment as Chairman and Co-Chief Executive Officer, (ii) a $26.1 million non-cash compensation charge related to the performance-based vesting of certain shares granted to Mr. Friedman in connection with the Reorganization and initial public offering, and (iii) $2.1 million of costs incurred in connection with our follow-on offerings in May 2013 and July 2013."

Translation = Good day for Gary Friedman

 

The Hut - The Hut prepares for IPO in early 201

The Hut Group, an online retailer selling apparel, beauty products and gifts, is considering an April or May 2014 IPO. The company is expected to be valued at 350m Pounds, about 25x EBITDA. First half 2013 profits reached 77m pounds a 30% increase YY.

 

JNY - More Bidders Emerge for The Jones Group
"The head of Sun Capital has joined the fray as a host of private-equity firms prepare bids for the New York-based shoe-and-apparel company, The Post has learned."
"It’s unclear which assets Sun is eyeing, but sources speculate the firm is interested in department-store staples such as Jones New York and Gloria Vanderbilt."
"As second-round bids for The Jones Group Inc. are expected to be forthcoming at the end of this month, more names of possible bidders have surfaced. According to dealReporter, Leonard Green & Partners and Golden Gate Capital are also interested in the assets of Jones Group."
"Last week, sources close to the process confirmed to WWD that KKR & Co. and Sycamore Partners are working together and had already submitted a first-round bid for Jones over the summer."

 

GPS -  Gap's TV Return
Gap Inc. returned to TV after a four year hiatus on Monday. The ad featured Billy Joel's daughter, Alexa Ray Joel, signing "Just the Way You Are," and George Harrison's son, Dhani Harrison, signing "For You Blue."
"Last year, Gap spent $653 million on advertising, a figure that should go up with television back in the retailer’s ad mix, although Gap has stressed its careful approach to the medium."
http://www.youtube.com/watch?v=KAPnSRqgpZE
http://www.youtube.com/watch?v=9kjC0N0P_v4

 

M - Bloomingdale’s Black Tags End Party for Next-Day Returns

"Instead of just tagging merchandise before it’s purchased to prevent theft, the Bloomingdale’s department-store chain is keeping some garments tagged after they’re sold, too. The three-inch black plastic devices are in visible places, like the front bottom hemline, so they’re hard to hide when the garment is worn. Once shoppers remove the tags, which can’t be reattached, they can’t return the item."

"Bloomingdale’s, owned by Macy’s Inc. (M), is using the tactic to combat a practice known as 'wardrobing' -- buying clothes and using them once -- a form of return fraud, which the National Retail Federation estimates cost the industry $8.8 billion last year."
"Nordstrom doesn’t use such tags, Colin Johnson, a spokesman for the Seattle-based company, said in an e-mail.

 

DKS - Dick's Revamps Jersey Report

"Dick's Sporting Goods announced an updated and upgraded 'Jersey Report,' with new advanced features to provide fans unparalleled insights into pro football jersey sales at Dick's Sporting Goods nationwide and online. Updated daily, the Jersey Report is the only destination offering fans a comprehensive breakdown of how the sales of their favorite players' jerseys are rising, falling and stacking up against the competition."

"In addition to football, this year's Jersey Report will also provide the same stats and analysis for hockey jersey popularity beginning in October."

What's New Today in Retail (9/17) - dks222

GIL - Gildan Named to Dow Jones Sustainability World Index 
Gildan Activewear Inc. has become one of only two North American companies to be included in the Dow Jones Sustainability World Index in the Textiles, Apparel and Luxury Goods sector, with effect from Sept. 23, 2013.
 

Pinterest Drives The 'Reverse Showrooming' Phenomenon, Where Shoppers Browse Online But Buy In-Store

"Recent data distributed by Vision Critical and highlighted in the Harvard Business Review found that 21% of Pinterest users had bought an item in a store after pinning, repinning, or liking the item on the site." 

"Vision Critical describes this as part of a wider phenomenon it calls 'reverse showrooming,' in which consumers search or browse products online and then enter the physical shop to make a final purchase."

What's New Today in Retail (9/17) - pinterest

 

INDUSTRY NEWS

US Government Looks to Boost Textile, Apparel Exports

"President Obama launched the National Export Initiative in 2010—the first government initiative of its kind—with the goal of doing more to support US companies by creating export opportunities, working to remove trade barriers and settling new trade agreements...As part of the initiative, the President plans to double US exports by the end of 2014. In the first half of 2013, US exports totaled a record-high $1.12 trillion while imports decreased by $13.1 billion over the same time, reducing the trade deficit by $36.1 billion over the last half year."
The Commerce Department’s Office of Textiles and Apparel (OTEXA) has also been working to increase domestic production and imports. 'The focus of our office has been two-pronged this year — the Made in USA database, as well as our [Trans-Pacific Partnership] and now European Union trade negotiations to help facilitate opening those markets,' Kim Glas, deputy assistant secretary for textiles and apparel at the Commerce Department told WWD."
 
Calendar Complicates Holiday Selling

"In its preliminary forecast for the season, Chicago-based retail traffic counter ShopperTrak projected that sales during November and December would increase 2.4 percent over 2012 levels, lower than the 3 percent increase registered during holiday 2012."
"Apparel and accessories sales are expected to come in slightly stronger for the season, rising 2.8 percent."
"ShopperTrak expects traffic to dip 1.4 percent from 2012 levels, which rose 2.5 percent from the prior year. For apparel and accessories, the traffic decrease is expected to come in at 1 percent. "
"Much of the pressure on retailers will come from an unforgiving calendar. Last year, the window between Black Friday and Christmas Day was a full 32 days, the maximum possible, and this year will swing in the opposite direction, shrinking to 25."

 

Turkish Industry Out to Boost U.S. Profile
The Istanbul Textile and Apparel Exporters Association, or ITKIB, is to hold its first trade mission to the U.S. on Sept. 24 and 25 at New York City’s Gotham Hall with the aim of bringing together Turkish apparel and textile manufacturers with U.S. sourcing and distribution executives.
Turkish ready-to-wear companies now operate some 3,000 stores internationally, compared with just 300 five years ago. By 2023, the goal is to have 20,000 — and the U.S. is a new priority.
Clothing and textiles are among Turkey’s biggest businesses, accounting for 6.8 percent of gross domestic product and $24 billion in exports last year. It is the world’s sixth largest apparel supplier and the second largest to the European Union after China.
According to the ITKIB chairman, the New York trade mission is but a first step. The goal is to enable Turkish firms to meet with top-tier executives in production and global sourcing of all major American brands, licensing groups and department stores. 




Beijing, Brent & Bonds

Client Talking Points

CHINA

The Shanghai Composite is down -2.1% for very good reason. The FDI (foreign direct investment) print for August was a nasty 0.6% versus +24% in July. Now that's just nasty. Look, the Chinese don’t like the Down Dollar move inasmuch as I don’t. Asian Emerging Market currencies that float freely? They do.

OIL

Without question, the most bullish economic development of the last week is removing the Syrian Oil tax. After snapping our immediate-term TRADE line of $114.97 support, Brent is in a good spot to remain under pressure now. Don’t forget that only two weeks ago, we saw the highest net long (futures/options contracts) position ever in crude. Yup... ever is a long time.

UST 10YR

Just 24 hours ago, bond bulls were hoping, begging and wishing for Janet Yellen to bring back the easy money Fed love. Instead, all the 10-year yield registered was yet another higher-low within our Bullish Formation. Don't look now, but it is holding all lines of TRADE, TREND, TAIL support. Repeat: All lines. The immediate term risk range now is 2.80-2.98%. The Queen Mary has turned ladies and gentlemen. There's no going back now.

Asset Allocation

CASH 30% US EQUITIES 24%
INTL EQUITIES 22% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
WWW

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. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

HCA

Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

In the @Hedgeye S&P Sector Risk Model 7 of 9 Sectors remain bullish TRADE & TREND. 2 of 9 are bearish: Utilities $XLU & Consumer Staples $XLP

@KeithMcCullough

QUOTE OF THE DAY

"I'm so fast that last night I turned off the light switch in my hotel room and was in bed before the room was dark." -Muhammad Ali

STAT OF THE DAY

Got #RatesRising yet? 10-year Treasury yields climbed as high as 2.999% Sept. 5 from 1.93 percent on May 21, the day before Ben Bernanke said that the central bank could “take a step down in our pace of purchases” in the “next few meetings.”


investing ideas

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FDX: ‘Solid but Challenged’ Or An FY1Q Beat?

“Overall, we expect earnings growth for Q1 2014 to be solid but challenged as we expect headwinds year-over-year from fuel surcharge timing lag, one less operating day and continued pressure on international yields and Freight volumes. Also the benefits of the voluntary buyout program will ramp out throughout the year with the majority of those expense reductions occurring after the first quarter. Our businesses are cyclical in nature and seasonal fluctuations will affect volumes, revenues and earnings.” - Alan Graf, June 19 2013 FY4Q 2013 Earning Call

 

 

 

Summary


Last quarter, FDX changed its guidance practices and ceased providing quarterly guidance.  We think consensus is a bit off for FY 1Q as a result.  We again expect the market to focus heavily on the Express division adjusted margin.  This will be only the second quarter in which we should “see” some benefit from Express restructuring and we would settle for a repeat of the YoY improvement shown last quarter.  We continue to think that FDX will prove a rewarding long-term position, as FedEx Express focuses on profitability instead of market share.  FedEx is also well positioned to benefit from signs of stronger economic growth.   

 

 

Key Items


 

Consensus May Be Too Pessimistic: We hate to make quarterly earnings forecasts, but it is difficult for us to get to the $1.50 consensus estimate for this quarter.  Quarterly earnings can be volatile, but we get an adjusted EPS number north of $1.58.  Forecasting may be more difficult in the absence of management guidance details.  Current consensus for the quarter is below the full year earnings growth rate guidance of 7%-13%.

 

Positives in Quarter:  FedEx gets the benefit of a lower pension expense in FY1Q without the headwind of the new USPS contract.  The Express margin should also benefit from additional capacity actions, continued refleeting, and the first tranche of headcount reductions.  There is little reason to expect Express to give up the benefit of shifting low yielding volume out of high cost channels, which helped the FY4Q Express margin.  There are offsets, like a higher depreciation expense and one less operating day, but they net out favorably in our scenarios.

 

Economic Data:  The operating environment should have been less challenging for FDX than FY4Q 2013.  For instance, IATA FTKs grew in June in July amid improving economic indicators, although certain key regions still showed weakness. ISM new orders, industrial production in Europe and Chinese export data also point to improving conditions.  Excess airfreight capacity appears likely to have kept pricing restrained, but likely less so sequentially.

 

Fuel Prices:  FedEx highlighted the risk of higher fuel prices, but YoY average jet fuel prices for the quarter look fairly flat.  The lag in fuel surcharge may have a relatively modest negative impact.  We do not expect FedEx Express to trot out a Syria excuse, since jet fuel costs should not be a particularly meaningful headwind.

 

Express Margin:  FedEx reported a 6.6% adjusted operating margin for its express division in FY4Q 2013, up 50 basis points from the FY4Q 2012 result.  Sequentially, that was a significant improvement - FY3Q 2013 margins were down 130 basis points from the year ago quarter. Continuing those gains into FY1Q, which may be be too pessimistic, gives an adjusted express margin of 3.6%.  An adjusted express margin exceeding 4% would likely be viewed as exceptionally good progress.

 

Capital Spending & Capacity:  Growth capital spending for FY14 is to be directed at FedEx Ground, with FedEx Express spending targeted at lowering costs (not expanding capacity).  Returns for both of those initiatives should be higher than the capacity additions to Express in recent years.  We will look for more details around the Ground spending initiatives.

 

Trade Down:  While there is a lot of focus on the trade down, much of FedEx Expresses recent improvements have come from ‘self-help’: adjusting capacity to meet the quantity and yield of volume.  UPS said in its more recent earnings release that trade down was still a headwind.  However, we will focus on FedEx’s adjustment to the mix shift, which should keep margins moving back toward those of competitors.  As long as margins expand on the Express division’s huge revenue base in coming quarters, we do not expect trade down to be the share price driver.

 

About $8.00: We still expect FDX to generate FY2014 adjusted earnings just shy of $8.00.  After all, current consensus barely secures management’s deferred compensation packages according to the recent proxy.  Fortunately, if we are wrong, FedEx senior managers will probably be able to get by without it.  


Innovation's Hand

This note was originally published at 8am on September 03, 2013 for Hedgeye subscribers.

Economists everywhere have counseled governments to attend to everything except what matters most: innovation.”

-George Gilder

 

When Adam Smith published Wealth of Nations (1776), he wasn’t thinking about the American Revolution or Twitter – neither was he considering real-time streaming information in the palm of your hand as a birth child of Silicon Valley-style free market capitalism.

 

“The Wealth of Nations depicts macroeconomics as a “Great Machine” in which every cog of every gear, governed by an “invisible hand,” functions perfectly in its time and place, as smoothly and reliably as Newton’s gravity.” (Knowledge & Power, pg 28)

 

While that might make for an tidy intro to an economics textbook at Yale, it doesn’t reflect the new reality of what we’ve learned about economies and markets. They are non-linear. And they observe large doses of surprise (entropy), whose “opposites are predictability, order, equilibrium, and tyranny” (pg 34 - Gilder absolutely nails our framework in chapter 4, “Entropy Economics”).

 

Back to the Global Macro Grind

 

After the lowest volume week of 2013, the SP500 holds @Hedgeye TREND support of 1631 and #RatesRising looks just about right again this morning. We like growth stocks. We don’t like Gold or Bonds. Welcome to September.

 

“The most important feature of an information economy, in which information is defined as surprise, is the overthrow, not the attainment of equilibrium.” (Knowledge & Power, pg 30)

 

I make lots of little mistakes, but the baseline process behind not making the really big macro mistakes adheres to the 2nd law of thermodynamics (entropy). Assuming Bernanke’s Fed (and the entire bond market) wouldn’t be surprised by bullish economic surprises has rendered itself the biggest macro mistake you could have made in 2013.

 

Why did the SP500 hold TREND support last week?

  1. JOBS: US weekly jobless claims hit another fresh YTD low last week (NSA rolling avg = -10.6% y/y, YTD lows)
  2. GROWTH: New Orders component of the August PMI accelerated to 57.2 versus 53.9 in July (fresh YTD highs)
  3. CONFIDENCE: US Consumer Confidence (U of Michigan Survey) bumped back up to 82.1 AUG vs 80.0 last

Well, maybe that’s not why the US stocks held support – maybe it’s just coincidence. But in our model all economic surprises matter to the extent that the market says they do. Against the heavy-hands of your big government gods, US interest #RatesRising  (see 10yr US Treasury Yield in our Chart of The Day) has fit US #GrowthAccelerating data since last November like a glove.

 

And, sorry Krugman fans – this simple real-time market model fits almost perfectly in the birthing zones of John Maynard Keynes and Adam Smith themselves. Check out the direness of it all, born out of UK style austerity:

  1. United Kingdom Producer Manufacturing Index (PMI) for AUG = 57.2 versus 54.6 in JUL = new highs
  2. United Kingdom Construction PMI for AUG = 59.1! (versus 57 in JUL) = new highs
  3. UK 10yr Gilts (Bonds) up to 2.84% this morning = +44bps (+18%) month-over-month (+121bps y/y)

Maybe that’s why the UK stock market (FTSE) held its intermediate-term TREND support line of 6378 too. Maybe not – maybe it’s just coincidence. Regardless, if the world is really ending, I don’t mind living in it while it lasts.

 

I know it’s crazy, but I have to say I’m loving life and Innovation’s Hand altogether this morning. Information empowers the average person like me to take on the tyranny of perceived wisdoms. Summer time is over, and it’s time to create!

 

Are you crazy? I can be; especially when I get bullish. June got me more bullish on buying growth (and shorting slow-growth assets like Bonds, MLPs, etc.). So did August. This time I could be dead wrong. But if I’m wrong that will mean consensus finally has it right.

 

Here’s my real-time sanity (consensus sentiment) check:

  1. Front-month fear (US Equity VIX) just ripped a +23% w/w move to another lower-high (TREND = 18.98 resistance)
  2. II Bull/Bear Survey just registered the least amount of Bulls in 2013 at 38.1%
  3. II Bull/Bear Spread (Bulls minus Bears) just dropped from +3310 in the 1st wk of AUG to +1460

In other words, since the US stock market registered all-time highs (1st week of August 2013):

  1. VIX = +44%
  2. II Bull/Bear Spread = -56%

And that’s ahead of the seasonal headwind in the most important leading indicator for US employment #GrowthAccelerating (NSA rolling Jobless Claims) turning into a tailwind (until February 2014) in September.

 

#cool

 

And so are the entrepreneurs and innovators who have been getting it done while a bunch of politically-partisan and compensation-conflicted folks in this country have spent the last 9 months whining.

 

We’ve always been the backbone of American Free-Market Capitalism, and unless you let some government dude take that liberty away from us, we’ll be cranking out the change you all want to see in this country while Krugman is sleeping.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield = 2.71-2.93%

SPX 1631-1661

DAX 8180-8292

Nikkei 13,362-13,998

VIX 15.74-17.81

USD 81.83-82.29

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Innovation's Hand - Claims vs 10Y 082913

 

Innovation's Hand - Virtual Portfolio


September 17, 2013

September 17, 2013 - dtr

 

BULLISH TRENDS

September 17, 2013 - 10yr

September 17, 2013 - spx

September 17, 2013 - dax

September 17, 2013 - nik

September 17, 2013 - dxy

September 17, 2013 - euro

September 17, 2013 - oil

September 17, 2013 - natgas

 

BEARISH TRENDS

September 17, 2013 - VIX

September 17, 2013 - yen
September 17, 2013 - gold

September 17, 2013 - copper


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