TODAY’S S&P 500 SET-UP – October 25, 2013
As we look at today's setup for the S&P 500, the range is 21 points or 1.09% downside to 1733 and 0.11% upside to 1754.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
I’d like to have some of what Steve Wynn was eating during the conference call last night.
WYNN served up a tasty quarter and whet our appetites with hints of an impactful upcoming Board meeting. A smorgasbord of issues will likely be discussed at the meeting including a special dividend, whether to pull out of the MA and PA bidding, and potentially moving corporate headquarters to Asia (just our guess).
WYNN’s long-term prospects in Asia are delicious: Potential new menus in Japan, Taiwan, and South Korea, and the Cotai project that could open before Chinese New Year in 2016. Moreover, WYNN also announced a Phase II in Cotai. Over the near-term, Wynn Macau is finally hungry for potential market share gains in the Mass market. While the overall continued strength of Macau was discussed, management’s recent aggressive push into the Mass business was not.
We think Wynn Macau will be more aggressive promoting its Mass business, something it really hasn’t done. Macau management was enhanced recently with some Mass focused personnel. Consistent market share losses have been a key tenant of the WYNN bear thesis. Any reversal will likely be rewarded by investors. As can be seen in the following chart, September produced a Mass revival for Wynn Macau. Our sources indicate that the property should show further gains in October and likely for the rest of the year.
The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.
Strong quarter and outlook
CONF CALL / Q&A
Takeaway: There's a lot of warning signs right now with CRI. The company has been executing, but PLEASE, don't build a position here.
We didn't like this CRI quarter one bit. In fact, with the exception of good growth in e-commerce, there wasn't a single thing we liked. To be clear, we were negative on this name last year, and though we were mostly right on the model, we couldn’t have been more wrong on the stock. Though we continued to have a serious bias against the sustainability of the business model, we kept our discipline and (painfully) threw in the towel on our short. Congratulations to all of you that rode this horse from $50 to $75 over the past year. Lesson learned for HedgeyeRetail.
All of that said, there's no shortage of reasons for selling your position today. Consider the following…
1. Here's the elephant in the room: CRI borrowed an extra $400mm in debt to repo $454mm stock (thus far). We ordinarily would give a company credit for such a buyback, but to execute on such a big program when Margins are at peak, your stores are comping down, inventory is building, and your stock is at an all-time high??? We're sure it went through an exhaustive corporate governance process, but quite frankly, we're surprised that any board let it get past the goalie.
2. At face value, the growth algorithm looks good -- until you get to SG&A. On a GAAP basis, earnings were down for the second quarter in a row. We know no one cares about GAAP anymore, but hey, it's the REAL earnings of the company. Even excluding all special charges, earnings only grewby 9.5% -- well below the rate of revenue.
3. Wholesale Carters was the star. Kinda.
4. Carter's Retail put up slammin' revenue numbers as well -- up 16% in aggregate, but 8.9% when we exclude e-commerce. The comp was up only 0.5%. But get this…they're on track to open 66 new stores for the year. Can someone explain to me why a company is growing 14.5% square footage while its stores are not comping. This is a little reminiscent of Coach (but not as pathetic).
5. As good as a 15% retail top line number is, it's hard to get excited about it when EBIT grows 500bp slower.
6. Dot com looked really good for CRI, but keep in mind that its still only 7% of brand sales. Other premium brands are 2x that rate. The good news for CRI is that the new DC in Atlanta will help keep this growth rate in gear.
7. In wholesale Carters, the Brand printed 6.4% EBIT growth on a whopping 15.6% top line performance. Clearly it did not play the promotional game wisely this quarter. The company noted an ad shift into the quarter, as well as some air freight expense. If we assume that all of this a) actually happened, and b) was about $7mm, then margins were about flat versus last year.
8. Osh Kosh Wholesale: Down double digits for the fourth quarter in a row, with operating profit clocking in at a whopping $2mm. In fact, if you add up all the EBIT generated by Osh Kosh Wholesale over the past five ears, you come up with an embarrassingly low number -- $15mm. It's not getting better.
9. Retail Osh Kosh put a better foot forward by NOT shrinking its revenue base for the first time in 8 quarters. That said, it was entirely due to e-commerce, as the base stores comped down by 4.3%.
10. Here's a comment we don't get...
Management: "We continue to see strong demand for our brands in international markets. Our growth in the quarter was largely driven by our business in Canada. The decline in earnings reflects the start-up costs in Japan."
Hedgeye: Why don't we get it! Comps were -3.6% in Canada, -6.4% for Bonnie Togs, and -1.3% in the co-branded stores (the latter is billed as CRI's saving grace in Canada).
We remain positive on CL as it remains one of the few companies in HPPC delivering robust organic sales growth, globally. FX headwinds are impacting results and sentiment but, over the longer-term, we expect the stock to outperform.
Colgate reported another slight top-line miss, the second in a row, but managed earnings to $0.73, which was in line with consensus estimates.
In our view, the most substantial positive, which bodes well for the longer-term potential of the company, was the ongoing top-line resilience in emerging markets. The negatives included a stronger-than-expected FX headwind and sequential volume deceleration in the United States.
Even with expectations pinned at the high end of the company’s (reiterated) EPS guidance range of 4.5-5.5%, we believe long-term upside in earnings potential will attract investors over the next three years. The company offered initial EPS guidance for 2014 of positive double digit growth, which should continue to justify its premium multiple.
Over the long term, we continue to see CL as one of the best stocks in personal care on the long side. On a relative basis, versus its peers, we believe the stock is less vulnerable to a rising rates environment, given its growth profile and future prospects. Additionally, there is plenty of room for sentiment to improve, particularly on the sell-side (3rd least-liked stock in HPPC on the sell-side).
What we liked from the CL 3Q13 release
What we didn’t like from the CL 3Q13 release