prev

RH: Our Take On The Market's Bearishness

Takeaway: We still think RH is on its way to $175. The quarters will ebb and flow. But despite the bearish sentiment we like it into the 3Q print.

We've never seen the Street more bearish on RH -- especially headed into a print.  We find that interesting, if not perplexing, given that there should be such a positive change in fundamentals with the upcoming quarter. We still think RH is on its way to $175. The quarters will ebb and flow. But despite the bearish sentiment we like it into the 3Q print.

 

Consider the following

Last quarter -- when RH was flirting with $80...

  1. RH missed the comp -- coming in at 'only' 26% versus expectations of something well into the 30s.
  2. RH continued its string on new business announcements -- but instead of announcing businesses that are actually commercially viable, it came out and announced that it would  start RH Music and RH Hotels (whereby it would outfit a small number of niche hotels with RH garb). The company made a mistake in announcing these -- even though it only cost them about $5mm annually out of the $35mm they saved by not producing the Fall sourcebook -- it was really more of a marketing initiative than a new business initiative.  All they succeeded in doing is scaring the lights out of Wall Street about their strategic direction.
  3. Gross Margins were off by 253bps, the biggest decline RH experienced since 2009 -- when it was in the tank.
  4.  They announced the elimination of the Fall sourcebook -- which caused a not-so-minor freak out by investors who were concerned that the company's Direct (non-store) business -- which is about 47% of total -- would start to evaporate.
  5. Shortly after the print, the three 'founding shareholders' who took it private and subsequently public all sold out simultaneously (the structure of the deal required that they all move in tandem).
  6. Then as a kicker there was one extremely bearish sell-side initiation with a Sell rating due to structural reasons -- arguments that we think are weak at best (we'll debate them anytime). Then earlier this week, another firm was out talking about how weaker ComScore data suggested that dot.com sales were falling.

 

Package that all together, and it's easy to see why sentiment is so poor.

 

But here why we're more optimistic…

  1. We think comp will accelerate meaningfully this quarter -- from 26% to something well north of 30%. The company did not articulate as well as it should have that comps were weak because it simply did not have enough inventory. Part of that was that product was on the water for 2-4 weeks longer than expected, and as such they could not recognize revenue. That revenue will show up in 3Q. Is the supply chain issue fixed? No. That will take the better part of a year. But we're convinced that the problem has not gotten worse, and in fact has started to improve.
  2. Gross Margins should improve dramatically this quarter -- from -253bps last quarter to better than -100bp this quarter. We would not be surprised to see it closer to flat.
  3. As it relates to dot.com, we're simply not as concerned as everyone else seems to be.  We think that the following chart flies in the face of those who think that the elimination of the sourcebook hurt revenue. Specifically, it shows the traffic trend at RH over the past six months. To be clear, you want to have a declining traffic rank (Facebook is #1,  Nike is 972, and Saucony is 77,500). The point here is that RH.com's traffic rank improved consistently from 15,000 down to 10,000 over the time period that people are worried that RH's web business dried up. 

 

RH: Our Take On The Market's Bearishness - 1

 

THIS IS THE CORRELATION BETWEEN SOURCEBOOK MAILINGS AND REVENUE -- NADA

RH: Our Take On The Market's Bearishness - sourcebook

 

HERE'S WHAT 1,000 PEOPLE TOLD US ABOUT WHAT WHAT THEY DO WITH CATALOGS. THEY DON'T DO MUCH.

RH: Our Take On The Market's Bearishness - whatpeople do with catalogues

 

 

Sentiment for RH is just about as low as it's ever been  -- despite the fact that fundamenals are getting better on the margin, and we’re inching closer to the period (in 12 months) when square footage should start to accelerate.

 

RH: Our Take On The Market's Bearishness - 11

RH: Our Take On The Market's Bearishness - rhsqftge


$USD Debauchery: Repercussions

Takeaway: Dollar debauchery has consequences.

$USD Debauchery: Repercussions - doll1

Shhh. Don’t tell the Fed, but that Down Dollar (The one that’s down five weeks in a row), well it's kick-starting that ‘ole 2011-2012 style inverse correlation to Commodity Inflation again.

 

Lovely.

$USD Debauchery: Repercussions - C mon man

Right now, Brent Oil vs. US Dollar has an inverse correlation of -0.66  on a 6-week duration. Both Brent and WTIC are up about 1% this morning after Brent held our Hedgeye TAIL risk support of $109.07/barrel. We covered our Oil short yesterday.

 

Great news for America as we head into the thick of winter with heating bills and all. Right?

 

If you would like to join the Hedgeye Revolution click here


AVIATING CHINA: CRASH LANDING?

Takeaway: The key to a safe “landing of the [growth] plane” is an expedited, well-implemented deregulation of FDI and portfolio flows.

This note was originally published December 04, 2013 at 14:44 in Macro.

Thinking about subscribing to Hedgeye research? Click here to learn more.

AVIATING CHINA: CRASH LANDING? - china1

 

CONCLUSIONS:

  • Conflicting signals from Chinese officials have made it difficult to handicap China’s TREND & TAIL GIP outlook(s) in recent months. We offer our latest thoughts in the note below.
  • We are decidedly back to analyzing China with a sanguine lens and are increasingly of the view that it probably warrants playing China alone (i.e. not via consensus ancillary “China plays”) on the long side with respect to the intermediate-term TREND.
  • With respect to the long-term TAIL, we still would like to see concrete implementation of capital account and FX reforms, as well as more safeguards put in place to limit the risk of a broadly destructive transition to a fully liberalized financial system (email us if you’d like to receive a walk-though of the specifics and a recent collection of confirming evidence).
  • It could be over a year before we have meaningful clarity on the latter, so our best solution for clients at the current juncture is to overweight “new China” (i.e. consumption and deregulation) while underweighting (or shorting) “old China” (i.e. the concomitant bubbles in credit and fixed assets investment), as highlighted in the chart below.

At the bare minimum, 2013 has been a weird year to be involved in China – either directly through Chinese equity exposure or indirectly through consensus ancillary plays like EM assets, commodities, and the currencies of commodity-producing nations.

 

While we consider it a huge victory for our team to have kept our clients out of or on the short side of those ancillary plays all year (and prior), that is certainly not to say we’ve nailed China or anything to that nature.

 

In the following table, we highlight the absolute bloodbath that has occurred across the commodity complex since we first introduced our structurally negative view on commodities back in APR ’11 as part of our Deflating the Inflation quarterly macro theme. We’ve obviously followed that up with numerous notes and presentations over the past couple of years, so please email us if you’re not yet familiar with our long-held bearish bias on the commodity complex and we’ll be happy to forward you the relevant materials.

 

AVIATING CHINA: CRASH LANDING? - dale1

 

Going back to not nailing China, we’ve been keen to change our stance on China multiple times in the YTD (% changes reflect the performance of the Shanghai Composite Index over the respective duration):

 

 

The predominant reason we’ve changed our tune on China so many times this year has been due to policy inflections that have materially altered (or complicated) our rolling-thee-to-six-month forward expectations for the Chinese economy. Amid this ~3M long period of admittedly-unattractive neutrality, we’ve analyzed China in both a positive and negative light, highlighting both the key opportunities and risks to China’s long-term GIP outlook along the way:

 

Sanguine tone:

 

Pessimistic tone:

 

We are decidedly back to analyzing China with a sanguine lens and are increasingly of the view that it probably warrants playing China alone (i.e. not via consensus ancillary “China plays”) on the long side with respect to the intermediate-term TREND.

 

With respect to the long-term TAIL, we still would like to see concrete implementation of capital account and FX reforms, as well as more safeguards put in place to limit the risk of a broadly destructive transition to a fully liberalized financial system (email us if you’d like to receive a walk-though of the specifics and a recent collection of confirming evidence).

 

It could be over a year before we have meaningful clarity on the latter, so our best solution for clients at the current juncture is to overweight “new China” (i.e. consumption and deregulation) while underweighting (or shorting) “old China” (i.e. the concomitant bubbles in credit and fixed assets investment), as highlighted in the chart below:

 

AVIATING CHINA: CRASH LANDING? - 2

 

Going back to the intermediate-term TREND outlook, we think China has the opportunity to surprise consensus growth expectations to the upside into and potentially through 2014, after what is likely to be a brief dip into Quad #3 here in 4Q13:

 

AVIATING CHINA: CRASH LANDING? - CHINA

 

AVIATING CHINA: CRASH LANDING? - 4

 

AVIATING CHINA: CRASH LANDING? - 5

 

Moreover, we think China has the potential to continue distancing itself from the carnage that has become the emerging markets space. It will seek to accomplish this by enticing international capital flows (both FDI and portfolio) away from beleaguered EM economies, at the margins, through a combination of strengthening the CNY and promoting its use internationally, as well as through incremental deregulation and investor-friendly incentives.

 

AVIATING CHINA: CRASH LANDING? - 6

 

Below is a compendium of data points we’ve come across in the past couple of weeks that support this view:

 

  • Reuters noted that the PBoC said China will begin rolling out financial liberalization reforms in the Shanghai free-trade zone within three months. PBoC Shanghai chief Zhang Xin said the reforms would be launched within three months, evaluated after six months and formal policies would be fully implemented by the end of a year. He added the policies will serve as models for other regions as they move to create their own FTZs. (StreetAccount)
  • Xinhuanet noted that Zhang Xiaoqiang, deputy head of the National Development and Reform Commission, said China will simplify its foreign investment approval process in order to introduce a registration-based system for foreign investment projects. Zhang said that the government will further enhance the role of foreign investment in its market-oriented economic development. (StreetAccount)
  • Reuters reported that the yuan overtook the euro in October to become the second-most used currency in trade finance. SWIFT said the market share of yuan usage in trade finance grew to 8.66% in Oct, up from 1.89% in January 2012. The yuan now ranks second behind the US dollar, which has a share of 81.1%. (StreetAccount)
  • Dim Sum bond issuance has accelerated to the fastest pace since June 2012 as China’s pledge to move toward yuan convertibility boosts demand for the currency. Sales reached 27 billion yuan ($4.4 billion) in November, almost five times as much as October’s 5.8 billion yuan, according to data compiled by Bloomberg. Yuan savings in Hong Kong rose the most since April 2011 to a record 782 billion yuan in October. (Bloomberg)
  • The WSJ noted that foreign real estate developers eager to capitalize on rising consumption in China are increasingly raising funds to invest in warehouses and shopping malls. Data from PERE showed developers and their subsidiaries have raised $3.5B for China projects so far this year, eclipsing the $2.2B raised in all of 2012 and just shy of the $4B raised by private-equity and other fund managers. (StreetAccount)
  • Xinhuanet noted that Zhou Xiaochuan said China should increase the qualification and quota of QDII and QFII investors to help them with their activities. He added that administrative approval procedures for QDII and QFII qualification and quotas shall be eliminated "when conditions are ripe". (StreetAccount)

All told, we still think China has a lot of credit bubble-related skeletons in its closet that will increasingly become a headwind to Chinese economic growth over the long-term TAIL. For the time being, however, we think Chinese officials are putting the right policies in place to offset those headwinds, at the margins.

 

Please feel free to email us with any follow-up questions.

 

DD

 

Darius Dale

Associate: Macro Team

 

Like what you see here? Click here to learn more about subscribing to Hedgeye research.


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

From Chicago to France: E-Cig Regulatory Winds Are Blowing

As we inch ever closer into year-end, there remains an industry wide expectation that the FDA is set to announce regulatory restrictions on electronic cigarettes. The exact timing? It’s anyone’s guess.

 

We believe the industry is bracing for regulation that could include:  

 

1) A ban of online commerce

2) Age verification standards at retail

3) Flavor limitations (beyond tobacco and menthol)

4) Health/safety certifications

5) Labeling and marketing requirements

 

(For a more comprehensive overview of the industry and regulation please see our recent report: “E-Cigs at the Thanksgiving Table”)

 

As the inevitable FDA announcement draws near, we want to highlight some notable, recent regulatory winds blowing against e-cigs in Chicago and New York City, as well as in France. While we continue to maintain a very bullish outlook overall on e-cigs, especially with Big Tobacco’s participation in the category, these regulatory initiatives, if legally enacted, would represent headwinds to the category.

 

Chicago and NYC

  • In late November, Chicago’s City Council held preliminary meetings to consider regulating e-cigs as traditional tobacco, and include them under the Indoor Clean Air Act. This could include such measures as increasing the age of purchase to 21 from 18, moving them to the back counter at retail, as well as banning use in parks, restaurants and bars.
  • Last week, the NYC City Council held similar meetings to those held in Chicago. That said, NYC has already voted to raise the age to buy traditional tobacco and e-cigs to 21 from 18, and raise the minimum price per pack of traditional cigs to $10.50 (set to take effect in APR/MAY 2014).
  • Both Chicago and New York are expected to put their respective measures to final votes this month. If passed, they would go into effect sometime in January of next year.
  • Currently, New Jersey, North Dakota, Utah and Arkansas and have “lumped in” e-cig products in with tobacco under their indoor smoking bans. Meanwhile, Minnesota has changed its definition of tobacco products to include e-cigs and subjected them to tobacco-like taxes.

France

  • A French court in Toulouse ruled yesterday that tobacconists should have exclusive rights to sell e-cigs; France's 27,000 tobacconists already have a monopoly on selling traditional cigs in the country.
  • If legislation were to follow the court’s reasoning, it would force e-cig stores to close.
  • Right now, there are an estimated 300 shops selling e-cigarettes in France.
  • E-cig sales in France are expected to more than double to around 100MM EUR this year.
  • France's Health Minister Marisol Touraine is on record saying she wants to ban e-cigs from public spaces and ban advertising on them.

Stateside, depending on the eventual FDA ruling on e-cigs (on the Federal level), we could very well see a number of states being called to action to define and/or redefine e-cigs and tax rules around them. 

 

Bottom line: Despite increasing regulatory headwinds in the U.S and abroad, we remain very bullish on e-cigs.

 

 

Matthew Hedrick

Associate


[podcast] McCullough: Keep Moving Out There

Hedgeye CEO Keith McCullough discusses his latest take on the market and says it doesn't matter whether you think the Fed should have tapered in September. That ship has sailed. What matters is what decisions you make next.

 


Extended (Again): SP500 Levels, Refreshed

Takeaway: There’s mean reversion risk down to 1734 TREND (-4.1% downside) versus +0.4% upside from the all-time closing high of 1808.

POSITION: 5 LONGS, 5 SHORTS @Hedgeye

 

During the 5-day correction in the SP500 (which ended Thursday) I went to 11 LONGS, 3 SHORTS. So all I am doing here is aggressively managing the immediate-term risk of this market’s range. #GetActive remains one of our Top 3 Global Macro Themes for Q413.

 

Unconventional markets call for unconventionally active risk management.

 

Across our core risk management durations, here are the levels that matter to me most:

 

  1. Immediate-term TRADE overbought = 1815
  2. Immediate-term TRADE support = 1785
  3. Intermediate-term TREND support = 1734

 

In other words, the immediate-term risk range = 1 and, from an intermediate-term TREND perspective, there’s mean reversion risk down to 1734 TREND (-4.1% downside) versus +0.4% upside from the all-time closing high of 1808.

 

The less I try to over-think this, the better. The math works more than it doesn’t.

KM 

 

Keith McCullough

Chief Executive Officer

 

Extended (Again): SP500 Levels, Refreshed - SPX


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

next