The Economic Data calendar for the week of the 9th of December through the 13th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
Takeaway: Current Investing Ideas: BNNY, CCL, FDX, FXB, GHL, HCA, MD, NKE, RH, SBUX, TROW and WWW
Please see below the latest comments from our Sector Heads on their high-conviction stock ideas.
BNNY - Annie's took a leg down in mid November on a secondary stock announcement in addition to broader underperformance overall within the sector. That said, BNNY is still up a tidy +4.5% since November 20th.
Our intermediate-term to long-term bullish thesis on the company remains intact. Our conviction in the company remains based on the company’s advantaged organic portfolio, strong retail positioning for growth, and easier top line and gross margin comparisons going into the back half of its fiscal year.
CCL - On a slow bookings period over the Thanksgiving weekend, Carnival engaged in some aggressive promotional discounting with the Carnival brand in the Caribbean. It appears pricing recovered strongly after Cyber Monday, particularly for F2Q and F3Q. We look for bullish confirmation in our next pricing survey.
While F1Q 2014 will be CCL’s weakest quarter, we believe it is trending in-line with management expectations. CCL is an expectations story and we believe overall pricing trends are currently trending ahead of management saw in late September, ahead of the all important Wave Season starting mid-January.
FDX - In case you missed it on "60 Minutes," Amazon CEO Jeff Bezos held a successful publicity stunt this Christmas season, suggesting it was seriously looking at using drones for its package delivery. Amid this distraction, attention should continue to be directed at FedEx’s earnings release on December 18th. In other words, avoid the drone distraction. Key issues around the Express profit improvement program at FDX should continue to drive its shares in this multi-year restructuring process.
Incidentally, the S&P 500 is up 20% since we added FDX to Investing Ideas. Shares of FedEx are up 35%.
FXB - The British Pound remains the Hedgeye Q4 Macro Theme (#EuroBull) champ. The heart our call is a bullish position on the GBP and EUR versus the USD.
GHL- The mergers and acquisitions (M&A) market continues to under-earn with flat activity levels over the past 3 years, despite positive fundamentals. M&A activity is poised to increase with corporate cash balances continuing to build up globally and continued low funding costs to finance new deal activity.
Our research also shows that environments with low volatility have also been fortuitous for M&A and the current VIX levels in the U.S. have settled into a new low range, which should slowly break the corporate depression mentality to avoid deal making.
Greenhill, with a change in merger activity, would greatly benefit as solely an advisory firm with good balance across the globe. Also, recent M&A levels have shown some green shoots with distressed activity in Europe picking up slightly and also some renewed M&A activity in the U.S. with cash flush private equity firms that have investor money that needs to be invested.
HCA - Healthcare Sector Head Tom Tobin says we're fully baked on a really crappy ACA roll out, so as the site gets better, people sign up, it's all upside from here for hospitals and HCA. The bigger risk we see is the continued comments about getting subsidy payments from the government out to the insurers, who will surely be paying some hefty claims come January. If too much money is flowing out, and no money is coming in, then that could actually could spell the end of the program. Nothing like losing money on a massive scale to bring the ACA's problems into focus. In the meantime, employment is getting better, Medicare is comping out of a weak 2013, and there appears to be plenty of upside to surgical and outpatient volume in the coming year.
MD - We're presenting our research Monday following the sixth month of our monthly OB/GYN survey. For Mednax, maternity trends continue to look slow so far in Q413. With MD showing negative trends in NICU patients in Q313, it shouldn't be too much of a surprise this quarter. Fortunately, acquisitions and patient volume can drive revenue growth too, as well as the new payment parity rates MD has slowly been collecting more of in recent months.
Bottom line is we can model flat growth in 2014 for maternity and still come in ahead of consensus. If maternity finally reaccelerates after the worst decline in 40 years, then number, and the stock can get out of hand to the upside.
NKE - There were a few noteworthy product updates coming out of Nike this week. (Also - If you are interested in NKE’s Black Friday/Thanksgiving sales this year, please refer to the chart below in the WWW update.)
1) On Monday, Digitimes reported that Nike is on track to release a new smart watch sometime in the first half of 2014. You could have seen this coming from a mile away. The company channeled its digital accessory R&D into an updated Nike Fuelband, which came out on November 6th. But while it did this, Adidas came out and launched a new sports watch at $399. Nike's existing watch (a partnership with Tom Tom) retails for only $169. Surely, the product gurus in Beaverton can concoct a product to tap our wallets for $400. As with the new Fuelband, we'll be first in line with a pre-order to wear-test it. (Aside from the fact that the new band looks much better, the old Fuelband is better from a functionality standpoint, by the way -- better battery life, and easier to rack up Fuel points).
2) On Thursday, Nike released the Kobe 9. Under regular circumstances we wouldn’t call this out, Nike releases new shoes all the time (and makes over 300 million pairs per year), but this one is notable for one key reason. The Kobe 9 is the first professional grade basketball sneaker to use Nike’s new FlyKnit technology, which assembles the upper part of the shoe on a machine similar to a cotton loom rather than thru traditional practices. This is important because of the new Nike ID customization product that will be rolled out to stores in the future. Nike has the technology and the product, while its competitors don’t. That is a serious differentiator.
3) On Friday, the WSJ ran an article on Lebron James. No, this one wasn’t about his return to Cleveland or his love of designers watches, but instead focused on what he’s been wearing on his feet. It turns out that Lebron has being wearing the Lebron X’s during the majority of games this season. Apparently the big man doesn’t like the way his newest shoe the Lebron 11 fits. While it’s a black eye for a company that prides itself on innovating for its top end athletes, we’ve got to think that Nike is laughing all the way to the bank. Consumers don’t seem to care that the shoe, which retails at a +$200 price point, hurts LeBron’s feet because it’s been flying off the shelves.
RH - Restoration Hardware will report 3rd Quarter 2013 earnings on Thursday, December 12th. Here are a few of our expectations going into the print.
Some key factors we’re looking out for…
1) Retail comp – We expect the retail comp to improve sequentially. 26% last quarter would have been great for any retailer not named Restoration Hardware. We expect that number to come up this quarter well into the 30s, as RH should finally have ample inventory to fulfill consumer demand.
2) Real estate update – The company has announced plans for 5 design galleries in the following cities: Greenwich, Los Angeles, NYC, and Atlanta. We expect management to provide progress reports on these 5 existing projects and announce 2-3 more. These things take time, and we don’t expect to see that initial big ramp in new doors until 2015. But once we see stores open more aggressively, we should see square footage growth go from -5% to +33%.
3) RH Direct – RH Direct consists of e-commerce and catalog, with a heavy skew towards e-commerce. We expect more of the same from this channel of the business. Growth rate in the mid to high 30’s, which means direct makes up about 45-50% of total company revenue. To put that into context, WSM has 595 total company doors, and WSM Direct makes up 49% of total company revenue. That’s at the very top of retailers, in terms of e-commerce penetration. We don’t expect RH to have that same sales mix once the company’s real estate portfolio catches up to consumer demand. The key point here is that there is concern this quarter that the company will take a hit on RH Direct sales because RH eliminated the colossal Fall source book. We take the other side of that argument. We think that RH Direct won’t miss a beat – showing investors that sending a 5 pound 900-page catalog simply does not drive business. We estimate that the company saved about $35mm by eliminating the 900 page catalog; the cost savings far outweigh any sales loss risk because of one key reason, the Inter-webs.
SBUX - Starbucks just announced it's bring back its $450 metallic gift card for the holiday season. The laser-etched card includes $400 in credit and automatic enrollment in "My Starbucks Rewards Gold-level status." Only 1,000 cards will reportedly be sold, making it a very exclusive offering. Of course, this won’t exactly drive meaningful, incremental sales, but it is a newsworthy item and yet another example of Starbucks staying relevant and in-touch with consumers.
SBUX has taken a breather lately, underperforming the S&P 500 by -3.1% over the past month. However, Managing Director Howard Penney maintains that the fundamental story is intact and the coffee tailwind remains a key driver of margin expansion. Coffee prices are down -3.7% over the past week and down -36.2% on a year over year basis. this obviously continues to provide the company with commodity cost relief.
For those interested in owning the name, the stock’s recent pullback has made it more attractive from a valuation perspective. Trading at a P/E of 30.2x and 15.7x EV/EBITDA on a NTM basis, Yes, like its $450 Holiday card, Starbucks continues to be an expensive stock. We believe its premium valuation is warranted.
TROW - T Rowe Price continues to be squarely in the center of surging equity mutual fund flow with 2013 year-to-date weekly stock inflow averaging over $3.1 billion per week. This is a complete reversal from the $3.0 billion in outflow per week averaged in 2012. In the most recent 5 day period, investor funds continue to pour out of the bond market with another $4.7 billion being redeemed in fixed income funds, now the 22nd negative week out of 26 for taxable bonds, and the 26th consecutive week of outflows for tax-free or municipal bond products. With this drastic redemption ongoing in bonds, leading equity managers including T Rowe Price stand to benefit handsomely with continued incremental demand for stocks at the expense of fixed income.
WWW - Below is a chart that breaks out the Athletic Footwear point-of-sale data for the all-important Black Friday week from 11/24 through 11/30 and compares those numbers to the similar time period in 2012. By Black Friday we now mean Thanksgiving Day, Black Friday, and Thanksgiving Weekend.
As you probably heard, sales during the four-day period were down 3% for the entire retail sector compared to last year. Athletic footwear, on the other hand was up 2.4%. This data has similar limitations to the athletic apparel data we showed you two weeks ago, but it does offer a pretty large snapshot of the market in total. It’s interesting to note that while the entire retail sector was classified as highly promotional during the Black Friday Week/Weekend athletic footwear held steady with average sale prices falling just 0.6%
Wolverine World Wide was paced by strong growth in Merrell and Wolverine. Sperry is irrelevant in this discussion because no one goes running in boat shoes (less than 5% of Sperry’s sales are represented by this data). Overall, the growth in Merrell continues to be promising. While sales at Saucony look disappointing, one thing to keep in mind is that we are working off a pretty small base. Brands like Saucony are at their peak selling season during the later parts of July and early parts of August. We’d always like to see a positive year/year change number in the sales column, but this isn’t Saucony’s season as much as it is for brands like Merrell and Wolverine whose assortments feature more seasonal items.
Please see below two timely, topical and potentially profitable investment ideas that we sent out recently to our institutional clients. Click on the title to unlock the content.
The heart of Hedgeye's #EuroBulls call is a bullish position on the GBP and EUR versus the USD and a bullish position on UK and German equities, built on a few central factors.
We're surprised at how many people are hanging on to the stale bear case on JCP. Seriously, at least acknowledge that things are improving.
Takeaway: Buying-the-damn-bubble #BTDB may not be chicken soup for your soul, but it has certainly paid the bills this year.
Editor's note: This is an excerpt from Hedgeye CEO Keith McCullough's "Morning Newsletter" from yesterday morning. If you would like more information on how to subscribe click here.
Buying-the-damn-bubble #BTDB may not be chicken soup for your soul, but it has certainly paid the bills in 2013. From a behavioral market practitioner’s perspective, I have developed an affinity for doing precisely the opposite of how I think this ultimately ends. Weird, but it works.
To review, the multi-disciplinary triad of our Global Macro Research Process, there are 3 big parts:
History provides us context (economic/market patterns, mean reversion risk, etc.); math (fractal dimensions and risk ranges) signals timing; and behavioral, well, that’s a learning process.
How else would you define what it is that you do? Other than Embracing Uncertainty and constantly re-evaluating your position relative to the information surprise (price, volume, volatility) of the day, is there an alternative to mental flexibility? There isn’t for me. I’m not smarter than the market. And it took me a good long while to accept that.
In terms of our current strategy, quite simply put in our Q413 Macro Theme of #GetActive, it’s to do just that. Unaccountable and un-elected @FederalReserve policy making means we need to engage in unconventional market strategies.
In practice, in our Hedgeye Asset Allocation Model, what does that mean?
Don’t lose the message of mental flexibility in the absolute numbers. If you want to be in 90% cash or 10% cash makes no difference to the point I am trying to make. It’s how you move on the margin that counts. I call it Fading Beta.
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Takeaway: Reminder - 2nd installment of the Hedgeye Retail Consumer Survey on JCP & the Department stores. Monday 12/9 at 1pm ET ***DIAL-IN INCLUDED
As a reminder, the first iteration of this 1,000 consumer survey was a critical component of our call to be long JCP over the past three months, and to be short KSS into 3Q earnings (which it missed). We already know JCP's 10% November comp, but the purpose of this survey is to go much deeper in order to flush out key fundamental issues around the JCP story and store experience.
EXPECT TO HEAR UPDATES ON THE FOLLOWING TOPICS:
SUMMARY: Employment growth was solid in November and seasonality will continue to build as a positive support through 1Q14. The preponderance of under-the-hood dynamics in today's payroll report were positive as well.
Meanwhile, Core PCE inflation remains at half of target and October Personal Income data was soft (although it carries the government shutdown asterisk) with personal income, disposable personal income and private sector salaries & wages all decelerating to start 4Q. The rise in payrolls and average earnings in the more real-time employment report, however, are all supportive of forward income growth.
So, from a macro fundamental perspective, the policy adjustment debate is/remains basically this: Strong GDP, Strong Manufacturing Activity, a Strong Labor Market (that will, optically at least, continue to strengthen) and recovering Confidence vs. below target Inflation, middling Income Growth, depressed Labor Participation, a recent Deceleration in Household Consumption and ongoing Fiscal Policy uncertainty.
We don't think the Fed begins tapering in December but we don't have any particular conviction in that. From a portfolio management perspective, we've continued to Buy the Bubble on pullbacks, managing our gross and net exposure within the immediate term risk range.
A summary review of this morning’s employment and personal Income and spending data below:
EMPLOYMENT: Summary Takeaways
PERSONAL INCOME & SPENDING: OCTOBER COUNTER-TREND DECELERATION
October saw a reversal of September’s income and spending dynamics where incomes grew at a positive spread to spending and the savings rate hit a YTD high.
Personal income declined -0.1% MoM and real disposable personal income declined -0.2% in October while spending increased 0.3% MoM and the savings rate dropped to 4.8% from 5.2%. Impacts from the government shutdown, however, complicate gleaning a clean read on the Trend.
While private sector salaries a wages decelerated in the latest month, the drag from government sourced income (federal/state/local) continues to ebb. As we’ve highlighted, if negative growth in government employment bases and government sourced personal income growth turns positive alongside a spending friendly, sequestration alternative budget deal, consumption growth could see some meaningful upside in 2014.
In the more immediate term, and from a GDP accounting perspective, a consumer still constrained by middling income growth will have some heavy lifting to do to expeditiously draw down rising private inventory levels.
Christian B. Drake
November’s jobs report was strong as employers added 203,000 jobs during the month, well above the 180,000 that economists expected. Following suit, the narrower data sets released were, across the board, bullish for the restaurant industry. Employment growth across all cohorts improved on a sequential basis, suggesting that sales at QSR, fast casual and casual dining companies could pick up in the coming months.
Below, we discuss employment by age and restaurant industry employment. These serve as proxies for demand and operator confidence, respectively, in our models.
Employment by Age (demand)
Employment growth by age skewed positively across the board in November as the 20-24 YOA cohort saw growth accelerate to +85 bps from +77 bps in October, the 25-34 YOA cohort saw growth accelerate to +140 bps from +78 bps in October, the 35-44 YOA cohort saw growth accelerate to +58 bps from -40 bps in October, the 45-54 YOA cohort saw growth slowing decelerate to -49 bps from -167 bps in October, and the 55-64 YOA cohort saw growth accelerate to +115 bps from +95 bps in October.
Employment by age is an important metric for the restaurant industry. Given the discretionary nature of casual dining expenditure, and the highly competitive nature of the industry, we infer that sustained employment growth in core demographics is necessary for continued comp growth in the absence of new unit growth or income per capita growth. The sequential deceleration in growth slowing in the 45-54 YOA cohort and the acceleration in the 55-64 YOA cohort reflect positively upon casual dining companies, indicating that we could begin to see demand pick up within the sector.
Within the QSR segment, we continue to find that the majority of management teams we track consistently highlight the importance of employment growth to the success of their business. The sequential acceleration in the 20-24, 25-34, and 35-44 YOA cohorts, suggests that demand for quick-service and fast casual restaurants could also pick up.
Restaurant Industry Employment (confidence)
The Leisure & Hospitality employment data, which leads the narrower food service by one month, suggests that employment growth in the food service industry decelerated sequentially in November. That being said, the Leisure & Hospitality data registered a month-over-month increase of +17k (second chart below), a deceleration from October’s +49k month-over-month gain.
The more narrow restaurant-focused data sets are positive for their respective categories. Both limited-service employment growth and full-service employment growth accelerated sequentially in October.
Leisure & Hospitality: Y/Y employment growth at +3.04% in November, down -3 bps versus October
Limited-Service: Y/Y employment growth at +4.47% in October, up +1 bps versus September
Full-Service: Y/Y employment growth at +2.68%, up +11 bps versus September
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