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UA: The Biggest Quarter That Never Mattered.

Takeaway: UA may face a tough margin stretch ahead. Great company, but we can find other stocks with better growth at a lower price.

UA might have a couple tough margin qtrs ahead of it.  The good news is that its finally making progress outside the US.

 

UA is a great company that is coming into its own, but it may face a couple of tough margin quarters ahead. UA is one of the most expensive names in consumer, and we can find other stocks with higher quality growth at a lower price.

 

Given how hated UA's stock is (see our sentiment monitor in Exhibit 1) we suspected that material revenue beat followed by a better print on the EPS line would be enough to give this stock a shot in the arm.

 

UA: The Biggest Quarter That Never Mattered. - UAsentinmentmonitor

 

But then we flipped over to the balance sheet and a 59% boost in inventories (despite only a 25.7% boost in sales), and juxtaposed that against the -33bp erosion in Gross Margins in the quarter. Any way we slice the onion, bloated inventories and weakening gross margins hardly inspires confidence in any financial model.  In fact it is almost always a precursor to additional gross margin weakness.

 

WHEN A BRANDS LINE SWINGS DOWN AND FLIRTS WITH THE LOWER RIGHT QUADRANT, IT'S NEVER GOOD

UA: The Biggest Quarter That Never Mattered. - UAsigma

Also, footwear sales were up 28% in the quarter. Don't get us wrong -- that's a great number for most brands. This isn't most brands -- it's UnderArmour. A few years ago when the footwear product used to -- well…stink -- we'd expect sub par growth. But the brand has finally figured out its identity and has put out product that consumers actually want to wear -- -both men and women. But does this add up to 28% growth? We'd think something greater -- perhaps even 2x (at least if it wants to maintain a 48x forward multiple.)

 

UA: The Biggest Quarter That Never Mattered. - UAPE

Let's put that multiple into perspective for a minute… UA is expensive -- period. But some of the best stocks in the market are expensive (and some of the worst stocks are cheap). We're not a fan of PE/Growth multiples. But when looked at alongside other high growth peers it certainly puts things into perspective we can get a good sense as to relative value.  SO let's do that…lets compare UA against a who's who of high-flying consumer growth names. We're talking everything from TSLA, CMG, AMZN, UA, NFLX, KORS, NKE, WWW, RL, FNP, FNP and RH.  Unfortunately for UA, it tips the scale along with TSLA, AMZN and NFLIX at 2.0x PEG.  As an aside, our favorite name is RH -- the cheapest name on the page.

 

 

There were definitely some things we liked this quarter, and those focused on the areas where UA has been damaged goods in the past -- The biggest of those is International where It just opened up a huge Brands experience store in Shanghai, which is a great idea no matter how you slice it.  For the first time in…well, ever…it looks like UA can get 10% of its sales outside of these United States. That would be a big valuation kicker for US, because there's a fair sized contingent that thinks UA is forever rooted in the US. We disagree, by the way. Secondly, womens continues to outpace the company's overall growth rate, and now accounts for about 30% of total revenues. To put that into perspective, Nike announced last week that it's targeting its women's business to account for 24% of revenues by 2018. UA, already has a well established women's product, and if womens were to account for nearly half of the business in the years to come as company management indicated that could be a serious growth opportunity.


Q&A: CLIENTS ASK, WE ANSWER

Takeaway: In the note below, we respond to a collection of our most thoughtful client inquiries regarding asset allocation of late.

This note was originally published October 23, 2013 at 16:06 in Macro

Q&A: CLIENTS ASK, WE ANSWER - q2

QUESTIONS:


  1. It feels like what has been working on an intermediate-term TREND basis is now starting to break down and/or underperform, while the things that haven’t been working on that duration are starting to break out and/or outperform. Is this something you guys are seeing as well? How do we take advantage of this shift?
  2. What does “Down Dollar, Down Rates” mean to the US economy? Aren’t lower interest rates good for the consumer?
  3. If the dollar and rates break down, would that make you bullish on emerging markets?
  4. So what do I do with all of this as it relates to my gross and net exposures?

 

It’s no secret that US monetary and fiscal policy is generating a fair amount of consternation, confusion and contempt among global financial market participants.

 

As one of the few non-buyside teams that possess a consistent and repeatable process for interpreting and risk-managing the never-ending stream of market signals and economic data, we have been humbled by a large number of thoughtful questions over the past couple of days. As such, we thought we’d pull together a quick synopsis of said client interactions with the intent of supplementing your respective internal debates.

 

Q: It feels like what has been working on an intermediate-term TREND basis is now starting to break down and/or underperform, while the things that haven’t been working on that duration are starting to break out and/or outperform. Is this something you guys are seeing as well? How do we take advantage of this shift?

Between the politically compromised FOMC and the highly politicized, dysfunctional mockery of government on Capitol Hill, it’s becoming increasingly clear to us that both market participants and economic agents are interpreting recent policy deltas as supportive of a return to the pre-2013 Global Macro playbook of being addicted to the drug that is QE. At least that’s precisely what the math suggests.

 

The TREND-duration directional relationship between the USD and US equities/US equity market volatility has completely reversed in recent weeks. Additionally, the positive correlation between the USD and US interest rates is picking up steam amid what appears to be the start of a #WeakDollar + #RatesFalling regime. The things that are typically inversely correlated to the USD are becoming dramatically more so as investors respond to the US dollar’s accelerated breakdown.

 

Q&A: CLIENTS ASK, WE ANSWER - dale1

 

The US Dollar’s long-term TAIL line of support is under attack – as is the UST 10Y Yield’s intermediate-term TREND line of support. Is this a head-fake or will these new regimes hold in spite of a positive seasonal tailwind in labor market data from now through MAR? At the bare minimum, preliminary analysis of Janet Yellen’s recent contributions to the FOMC suggests that an #IndefinitelyDovish Fed is NOT a low-probability event. If you have yet to review our SEP 23 note titled, “THINKING LIKE A FED HEAD”, we strongly encourage you to do so; its conclusions are looking increasingly prescient by the minute.

 

Q&A: CLIENTS ASK, WE ANSWER - DXY

 

Q&A: CLIENTS ASK, WE ANSWER - UST 10Y

 

After underperforming all year, higher-yielding equities are starting to outperform. While it’s too early to emphatically proclaim a reversal of the existing trend,  the developing quantitative signals highlighted above might lend some expediency to the development of a new one.

 

Q&A: CLIENTS ASK, WE ANSWER - 7

 

Commodities are the lone holdout from an asset class perspective, with both Gold and the CRB Index continuing to make lower-highs amid a bearish TREND and TAIL setup.

 

Q&A: CLIENTS ASK, WE ANSWER - GOLD

 

Q&A: CLIENTS ASK, WE ANSWER - CRB Index

 

We continue to have a zero percent asset allocation to commodities (and fixed income). Make no mistake, however, we’d be buyers of Bernanke’s commodity and bond bubbles if the quantitative signals support that. Like most consistently effective asset allocators, we have no qualms about going both ways and changing our minds on a particular market when the quantitative and fundamental signals support making the switch.

 

Q&A: CLIENTS ASK, WE ANSWER - 6

 

As the chart above highlights, our dynamic asset allocation model is heavily invested in international equities and foreign currencies. We remain the #EuroBulls as the Germans and Brits looks to increasingly take share from the US in the global capital allocation pie chart. Remember, capital chases yield and currency appreciation – with the latter being another way to state that capital tends to flee from domestic currency debasement by seeking out inflation hedge assets, including other currencies.

 

Q&A: CLIENTS ASK, WE ANSWER - EUR

 

 

Q: What does “Down Dollar, Down Rates” mean to the US economy? Aren’t lower interest rates good for the consumer?

Regarding the first part of the question, the confluence of #WeakDollar and #RatesFalling has historically been associated with economic environments that are characterized by slowing growth and accelerating inflation. Conversely, the polar opposite economic setup (growth accelerating as inflation decelerates) has historically been associated with a #StrongDollar + #RatesRising regime.

 

Q&A: CLIENTS ASK, WE ANSWER - 2

 

In our 4Q13 Macro Themes deck, we purposefully led off with two potential economic scenarios for the US here in the fourth quarter. As of now, it appears increasingly likely that a trip to Quad #3 (growth slowing as inflation accelerates) is in the cards. If our historical back-tests provide any insight, that setup should apply downward pressure upon the domestic equity market and upward pressure upon domestic credit spreads.

 

Q&A: CLIENTS ASK, WE ANSWER - 3

 

Regarding the latter part of the question, Keith had this to say in response to the client’s inquiry:

 

“Lower rates have been capitalized on by anyone w/ half a brain. That’s not to say you don’t get the brainless to refi this next go-round, but the pools of people affected get smaller with each higher-lows in rates, and the real upside to rates rising is in real-incomes rising alongside the savings rate.”

 

Q: If the dollar and rates break down, would that make you bullish on emerging markets?

Absolutely. We were wise to suspend our street-leading bearish thesis on emerging markets by covering our EEM short on SEP 9; we followed that up with an extremely detailed report on SEP 19 with how to play emerging markets across countries and asset classes from here – the conclusions of which remain relevant today.

 

To recap our views on emerging markets, the iShares MSCI Emerging Markets ETF declined a cumulative -2.4% from its APR 23 addition to our Best Ideas list – which came in conjunction with our 100+ slide Black Book titled, “EMERGING MARKET CRISES: IDENTIFYING, CONTEXTUALIZING AND NAVIGATING KEY RISKS IN THE NEXT CYCLE” – to our SEP 9 cover. The aforementioned delta is well shy of the +5.9% gain for the S&P 500 over that time frame and was inclusive of a maximum drawdown of -12.8% during the ~2M period from APR 23 to JUN 24. The EEM ETF is up +4.3% since we covered our short on SEP 9 and is now bullish TREND.

 

Q&A: CLIENTS ASK, WE ANSWER - EEM

 

What’s outperforming? To a large degree, the bombed-out markets which became dramatically oversold during the prolonged EM rout which took place earlier this year.

 

Q&A: CLIENTS ASK, WE ANSWER - 4

 

While it would be analytically reckless for us to tell you to go out and speculate in the most risky of markets at the current juncture, we do feel confident in saying that in the absence of a clear uptrend in both the USD and US interest rates, investors should resort to trading emerging markets on idiosyncratic country fundamentals – something we highlighted earlier this week in a deep dive on India’s evolving political landscape.

 

Q: So what do I do with all of this as it relates to my gross and net exposures?

In a word, #GetActive. That means lower your gross exposure, tighten your net exposure and trade the ranges. Don’t make it any more complicated than that amid all of this policy uncertainty – especially if you’ve also had a good year and don’t want to give back any YTD gains.

 

Q&A: CLIENTS ASK, WE ANSWER - 5

 

Many thanks for your time and please keep the questions coming; we are always in the market for thought-provoking discourse.

 

Have a wonderful evening,

 

Darius Dale

Associate – Macro Team


RCL 3Q REPORT CARD

In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance

 

 

OVERALL:  

  • BETTER:  Quarter was in-line with our estimate but Q4 guidance was better.  2014 outlook for Europe and Alaska was surprisingly strong.  Guidance for the Caribbean market was less positive and management concedes visibility remains low.  We prefer CCL given its outsized exposure to a European recovery.

RCL 3Q REPORT CARD - rcl  revised

 

<chart2>

 

EUROPE

  • BETTER:  Europe is trending well and will see yield improvement in 2014.  Mgmt sees a comeback in Southern Europe (Germany), particularly from the affluent cruisers.
    • PREVIOUSLY:  "Europe is developing about as we anticipated and we are expecting net yield increases in the mid-single digits for the year."

CARIBBEAN

  • WORSE:  2014 net yields are forecasted to be flat to slightly down.  The positive commentary heard in Q2 has shifted to a more cautious tone. 
  • PREVIOUSLY:  "The Caribbean, which represents about a quarter of our deployment in Q3 and almost half in Q4, is holding up pretty well. We are aware there has been a lot of focus in the investment community on the overall health of the Caribbean in light of some of the competitive pressures. And we would be naive to say that this has not affected us to some degree. But at a macro level, consumers seem to be recognizing the value of our brands and our pricing in the region continues to show improvement for the year."

ASIA

  • BETTER:  The continued territorial dispute between China and Japan has prevented RCL from making calls to Japan.  However, Asian bookings are up considerably in 2014.
  • PREVIOUSLY:   
    • "Asia is the only product in our portfolio that we are forecasting to have lower yields for the year."
    • "The territorial island dispute between China and Japan has forced us to drop Japanese ports-of-call from our itineraries, and in total we have had to modify 30 sailings. These modifications have resulted in some churn in our book-of-business as well as some volatility in the booking behaviors in the region."

PULLMANTUR

  • WORSE:  The tone was somber and the outlook dark.  Tough road ahead.
  • PREVIOUSLY:  "Our Pullmantur brand is one exception here (positive growth) and as Richard noticed, the brand will be putting much more emphasis on developing its business in Latin America."

COMPETITIVE PRICING/PROMOTIONAL ACTIVITY

  • SAME:  It seems that the heighted promotional activity is centered mostly around short excursions in the Caribbean.  Pricing in the Caribbean remains very competitive. 
  • PREVIOUSLY:  
    • "In recent weeks competitive pricing has gotten more intense.
    • "Throughout recent months, there has been a lot of promotional activity. We've discussed in the past that you can basically expect to see promotional activity throughout the revenue cycle."

2013/2014 BOOKINGS

  • SAME:  RCL's booked load factors are currently ahead of the same time last year in all four quarters of 2014.  Booked prices for the first quarter are in-line, while up in 2Q, 3Q and 4Q.
  • PREVIOUSLY:  "Bookings for both 2013 and 2014 are ahead of where we were at the same time last year, both in terms of load factor and pricing."

2014 NCC EX FUEL

  • BETTER:  Although mgmt acknowledges it will be an aggressive target, they believe 2014 NCC ex fuel will be better than flat.
  • PREVIOUSLY:  "Our objective for next year is to at least achieve flat net cruise costs excluding fuel. And while we don't forecast what the price of oil will do, we do work aggressively to reduce our energy consumption."

ONBOARD YIELD

  • BETTER:  3Q onboard yields were up 7% YoY.  Strength was seen among US customers in beverages, gaming, retail, shore excursions, specialty dining sectors.  For 2014, mgmt sees package shore excursions as having the most upside opportunity.
  • PREVIOUSLY:  "Onboard spending was much stronger. Onboard revenues increased 8.2% for APCD in the quarter and generated about $0.04 per share of favorability to our April's expectations.  Overall, we are generally seeing better spending behaviors out of the North American guests, but we are also enjoying very favorable results from our revitalization project. Gaming, beverage, specialty restaurants and shore excursions all out-performed."

ALASKA

  • BETTER:  mgmt is seeing modest yield growth in this region
  • PREVIOUSLY:  "I think we anticipated that Alaska had a terrific beginning of the year and it was unlikely to continue at that trajectory."

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[video] Keith's Macro Notebook 10/24: China, Gold & UST10YR


RCL 3Q CONF CALL NOTES

Great Q and Q4 guidance. We have reservations surrounding 2014 guidance (management conceded low visibility) based on results from our pricing survey. We prefer CCL.


 

CONF CALL

  • 2014 will be 5th consecutive of further yield improvements
  • Guest surveys doing well
  • Caribbean a particularly concern; but premium (Oasis/Solstice class) continue to enjoy great pricing
  • Look forward for Caribbean to improve
  • NCC ex fuel per berth in 2013 has been lower than that in 2008
  • Average price of crude is 8% higher than that in 2008
    • Fuel consumption per berth has declined 14% since 2008
  • Pullmantur: struggling, biggest challenge; Spain economy continues to be big headwind. Pullmantur will open new Latin America office later this year.  Actively seeking to divest Pullmantur non-cruise businesses.
  • Must get double-digit ROIs
  • Restructing/consolidating charges: $12.2MM in 3Q, $13.9MM YTD;  global restructuring charges in the future -($10MM in 4Q, $16MM in 2014) 
  • 9 cent Celebrity Millennium impact
  • Ex Celebrity Millennium, net yields would have been up 0.4% bps or 3.0%
  • 25% Caribbean capacity in 3Q - performance in-line with expectations
  • Onboard very strong:  further spend from US customers in beverages, gaming, retail, shore excursions, specialty dining
  • Ex Millennium impact, NCC would have been 2.8%
  • $2.8BN in liquidity
  • 4Q
    • Competitive pricing pressuring Caribbean
    • Australia/Asia products are up
    • overall, shaping up better than expected
  • Encouraged by 2014 sailings - booked ahead last year on loaded 
  • Average booking window has been widened slightly
  • Caribbean yields:  flat to slightly down; currently booked ahead on 1Q and behind for rest of 2014
    • Expect more positive consumer cruising by end of Q1
    • +13% Caribbean capacity growth (most of the market capacity growth is in South Florida but RCL capacity growth will be in Glaveston)
  • Europe yields:  solid gains in pricing; demand from US, UK, and Ireland has been strong.  TTM Booking were up 25%.  Oasis of the Seas doing well.  Load factors ahead on mid-single digits.  Europe 20% of global portfolio.
  • Asia yields:  still cannot open up calls in Japan.  Most of 2014 itineraries will be based in Korea.  2014 capacity increase in Asia will be 20% (Mariner of the Seas moving to where Legend of the Seas was).
  • Expect to add 75 stateroom to each of the Voyager class ships over the next few years
  • Alaska:  10% of overall capacity; bookings/pricing 2014 ahead of last year and further yield growth.  Early 2014 performance is shaping up nicely. 
  • NCC ex fuel:  better than flat in 2014, aggressive target but achievable

 

Q & A

  • Oasis/Allure of the Seas:  leaders in Caribbean 
  • Caribbean:  last few weeks- nothing new worth noting
  • Promotional activity bottomed in Caribbean?  No answer.
  • 2014 guidance assumes environment stays consistent and promotional environment in Caribbean is status quo.
  • Mid-February will have lapped negative press
  • Europe:  surprisingly positive demand from US market.  
  • Onboard:  investments will continue to pay dividends into revenue growth into 2014 and beyond; 
  • 2014 net yield:  ticket yield will be up YoY; onboard yield will be up but not as much as 2013
  • Celebrity Millennium outage 
  • Repeat cruisers are contributing to the strong business performance
  • Shorter cruise itineraries in Caribbean (3-4 days) are struggling - where there are most 1st time cruisers 
  • Long cruiser itineraries in Caribbean are seeing some pricing gains
  • Absorbing Caribbean capacity well
  • 2013 3% net yield guidance breakout:  ticket +2-3%, onboard: +7%
  • Have expanded casino offerings, revitalised shore excursions
  • 2014 onboard low hanging fruit:  package shore excursions
  • Spa - healthy revenue, looking for opportunity to push pricing
  • Europe (Celebrity) - relatively optimistic over demand
    • Some comeback in Southern Europe (Germany) - particularly from affluent population
  • TUI Cruises have been extremely successful in Germany
  • 1Q 2014 booked in Caribbean:  2/3 booked
  • Asia onboard component has been attractive
  • No comment on possible additional capacity to Asia

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY

Takeaway: The PBoC’s recent tightening of monetary policy is in-line with our call for China to take a brief trip to Quad #3 on our GIP model in 4Q13.

SUMMARY BULLETS:

 

  • By refusing to auction new reverse repo contracts, the PBoC is tightening monetary policy, on the margin, by allowing liquidity to drain from the financial system on a net basis (-102B CNY over the past 2W vs. a trailing 13W average of +29.7B CNY and +150B 3W ago).
  • Aside from increased confidence stemming from the fact that the Chinese economy is on sounder footing, there are three primary reasons why the PBoC is implementing this strategy at the current juncture:
    1. Hawkish trends in the property market;
    2. Continued excesses in credit expansion; and
    3. A hawkish outlook for CPI over the intermediate term (unlike the politically compromised Fed, which uses lagging indicators to set monetary policy, the PBoC proactively adjusts monetary policy according to its growth and inflation outlooks).
  • As such, money market rates are increasingly reflecting this shift by the PBoC. To the extent this continues, our call for Chinese growth to slow in 4Q13 is strengthened. Leading indicators for Chinese growth are starting to signal this even in the face of this morning’s solid HSBC Flash Manufacturing PMI print (50.9 for OCT vs. 50.2 for SEP).
  • The insider-dominated Shanghai Composite Index (another one of our preferred leading indicators for Chinese growth along with the 10Y-2Y spread on MoF paper) is now bearish from an immediate-term TRADE perspective. The index is also failing to recapture its late-MAY highs – something we need to see before we think it’s safe to sign off on a buy-and-hold mean reversion strategy for Chinese equities.

 

Please note: If you have yet to review our SEP 25 note titled, “THE DEVELOPING BULL CASE FOR CHINA: PROGRESSING”, we encourage you to do so. The latter half of the report wraps some numbers around why we have yet to adopt an explicitly bullish fundamental bias on China after officially dropping what had been an overtly bearish bias back on SEP 6.

 

JUST CHARTS:

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - China PBoC OMO

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - China Real Estate Climate Index

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - China Total Social Financing

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - CHINA

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - China Money Market   Rates Monitor

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - China Iron Ore  Rebar and Coal YoY

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - China SHCOMP

 

Feel free to ping us with any follow-up questions.

 

Darius Dale

Associate: Macro Team


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