What's New Today in Retail (1/29)

Takeaway: WMT grocery curbside pickup - traffic killer. Google Shopping Xpress makes a splash. Marc Jacobs accepts social media, no $. Alibaba FNP ANF



HBI - Earnings Call: Wednesday 1/29 4:30pm

HM.B - Earnings Call: Thursday 1/30 8:00am

UA - Earnings Call: Thursday 1/30 8:00 am




WMT - Walmart Begins Testing Online Grocery Shopping With Local Store Pickup Option In Denver



  • "Walmart To Go, the retailer’s on-demand shopping service offering home delivery of general merchandise, including in some cases, groceries, is expanding its test in the Denver market today to also include a local pick-up option. Denver area customers will now be able to order their groceries online, then pick up at a nearby store – without having to set foot inside the store."
  • "However, Walmart believes many customers will still park and come into the store, even after placing the order online. This is because, in surveys the retail giant has conducted, 55 percent of shoppers said the idea of grocery pick-up (as opposed to home delivery) appealed to them because it would give them a chance to grab the items they forgot when placing the original online order. While in store, they may also come across other things to buy that weren’t on their list, Walmart hopes."
  • "For now, Walmart’s home delivery service is significantly cheaper than competitor Amazon Fresh, which is available in L.A., San Francisco, and Seattle, and costs customers $299 annually. Walmart charges only $5-$7 per order. Both services have minimum orders (Walmart’s is $30; Amazon is $35)."


What's New Today in Retail (1/29) - chart1 1 29


Takeaway: For Walmart, food is a traffic driver. Allowing customers to pick-up curbside hurts traffic and with that other categories. It’s a no win situation - either lose share or lose traffic. Walmart has made it clear it will attempt to do what it takes to not lose share in their push to catch up to Amazon.


Alibaba - Alibaba Quarterly Profit Rises Ahead of Potential IPO



  • "Alibaba Group Holding Ltd...posted its fourth straight quarterly profit gain on surging sales ahead of a potential initial public offering."
  • "Net income attributable to ordinary shareholders was $792 million in the three months ended September, a 12 percent increase from the June quarter, according to a presentation from Yahoo! Inc., which owns a 24 percent stake in China's largest e-commerce company. Revenue rose 51 percent to $1.78 billion."


Takeaway: 51% revenue growth aside, Alibaba's Profit Margin is 65%. Revenue is collected through commissions and ad sales from users who use Alibaba's marketplace limiting cost and exposure. Because of its maturity and reach, it will be tough for anyone to compete with Alibaba in China, i.e. as e-commerce grows in China so does Alibaba's dominance.


HBI - HanesBrands Announces 50% Increase in Regular Quarterly Cash Dividend



  • " announced that its Board of Directors is raising the company’s dividend by 50 percent, declaring a regular cash dividend of $0.30 per share to be paid March 11, 2014, for stockholders of record at the close of business Feb. 18, 2014."
  • "Hanes has increased its payout ratio target for returning cash to shareholders via dividends to 25 percent to 30 percent of earnings per share."


Takeaway: Gotta hand it to HBI -- it continues to surprise on the upside with cash deployment. We thought that initiating a dividend in the wake of paying down debt and repurchasing stock was the final element of surprise for HBI investors. We were wrong. We're still bullish on the MFB acquisition and think that management is low-balling on accretion.


ANF - Engaged Capital Responds to Announcement from Abercrombie & Fitch Appointing New Directors and Elimination of Shareholder Rights Plan



  • "Engaged Capital today responded to an announcement from Abercrombie that it has added three new directors to its board of directors, eliminated its shareholder rights plan, and separated the roles of Chairman and CEO."
  • "Glenn W. Welling, CIO & Managing Member of Engaged Capital said: 'We are pleased to see the Board respond to our stated concerns at Abercrombie by enacting the earlier announced governance changes. While a good first step, we believe these reactive changes alone will not be sufficient to put the company back on a course towards creating shareholder value. It is imperative that the board, independent of management, objectively evaluate value-maximizing strategic and organizational changes at all times, and not just when convenient to placate shareholders.'"


Takeaway: Translation = Thanks for the token governance moves, but please Fire Jeffries.


GOOG, AMZN, EBAY, WMT - Google expands test of its same-day delivery service to Southland



  • "Google Inc. is wading into the morass of same-day delivery pilots and programs rapidly collecting in the Southland, competing with e-commerce giants such as Inc."
  • "In the first expansion of a test it launched in the Bay Area in the spring, Google is inviting its employees in the Santa Monica area to try out its Google Shopping Express service."
  • "More than 15 retailers are involved in the Bay Area test, including Office Depot, Target, Toys R Us, Walgreens, L'Occitane and Whole Foods Market. Google did not disclose which merchants are on board for the Southern California test."
  • "On the Google Shopping Express website, shoppers can compare products from participating brands before placing items into a single online 'basket.' Users can pay shipping costs of $4.95 for each retailer from which they make a purchase. Or they can sign up for a membership that offers unlimited same-day deliveries."
  • "For now, Google is offering six months of free membership. The company has yet to determine how to price the membership once the trial run concludes."


Takeaway: For brands that are too big for eBay but are looking to control their e-commerce operation - Google Shopping Express is the only alternative for same day delivery. It is far too costly for retailers to establish the infrastructure to compete with Amazon, but by pooling resources with Google it could gain some footing.


LVMH - Marc Jacobs pop-up will accept social media, but not cash



  • "The fragrance division of Marc Jacobs will open a pop-up in New York City’s SoHo neighborhood that will trade in social currency instead of money. The Daisy Marc Jacobs Tweet Shop will be open during New York Fashion Week, from Feb. 7 to 9."
  • "According to reports, all transactions at the pop-up will be carried out based on customers’ use of the hashtag #MJDaisyChain across Twitter and other social media platforms. Shoppers will be able to exchange each tweet, Instagram post, or Facebook update for a single item."


Takeaway: Trading sales for advertising isn't a bad idea - especially for a brand who is trying to gain exposure as it heads towards an IPO. But quite frankly, we'd rather see them accept BitCoin.


WMT - Wal-Mart Upgrades Compliance in China



  • "...Wal-Mart Stores Inc. is upgrading its compliance systems and requirements for vendors in China, the company said Wednesday."
  • "In a follow-up statement to its initial response about a critical report on state-run television last week, Wal-Mart said it intends to make better use of existing systems and implement new programs to help vendors through the product compliance process."


Takeaway: Looks like WMT realized that fighting the Chinese government is a bad idea, and is now going on a global PR blitz.


FNP - Arthur Martinez steps down from FNP's BoD to join ANF's BoD (8K)


  • "Arthur Martinez has advised the Registrant that he will not seek re-election to the Board of Directors of the Registrant upon conclusion of his current term, which term expires at the Registrant’s 2014 Annual Meeting. Mr. Martinez’ decision is not due to any disagreement with the Registrant."




Luxe Spending to Grow to $1.2 Trillion



"The luxury sector will mainly grow organically in the next decade, boosted by 440 million consumers that will spend a total of 880 billion euros, or $1.2 trillion, in 2020, according to the first True Luxury Global Consumer Insight study presented here Tuesday by Fondazione Altagamma and Boston Consulting Group. Today, 380 million consumers of luxury goods spend around 730 billion euros, or $998.5 billion, on personal luxury goods."

"The study focuses on a target of around 380 million consumers and an elite of 32 million core luxury consumers, with average yearly spending of 300,000 euros, or $410,352."



Takeaway: In our opinion, the new Farm Bill suggests dairy prices are likely to remain elevated in 2014.

We added CAKE to the Hedgeye Best Ideas list as a SHORT on 1/16/2014 at $47.51 per share.





Today, the House passed and sent to the Senate a new five-year Farm Bill that included an overhaul of dairy policy that is, on the margin, bullish for dairy prices.  The bill did not, however, include the proposed stabilization program which was intended to mandatorily curb production in periods of oversupply.  While this stabilization program would have been wildly bullish for dairy prices and our short thesis on CAKE, our 2014 estimates correctly assumed it would not pass.


The measures introduced are intended to limit how much future milk production can be insured and is expected to disincentive dairy farmers from producing excess milk.  Despite falling short of the most aggressive expectations, The National Milk Producers Federation is pleased with the bill and the benefit it will provide to dairy farmers.  This is largely supportive of our call for higher dairy prices in 2014.  Highlighted by the two charts below, milk and cheese prices continued to climb over the past week and are now up 16.4% and 41.0% on a year-over-year basis.









The last time dairy prices were up this much on a year-over-year basis was in the middle of 2011, when CAKE’s cost of sales growth increased substantially.  Currently, consensus estimates are for cost of sales growth of +0.15% and +0.27% in 1Q14 and 2Q14, respectively.  In our opinion, these estimates are too low and fail to take into account a sustainable rise in dairy prices.


Evidenced by our earnings sensitivity analysis, any upside surprise to these numbers would have a notably negative gross impact on earnings in 2014.  We expect management will be rather limited in their ability to offset rising dairy costs with price, due to the declining traffic trends the company is facing.  To this extent, we believe management will have to lower their FY14 earnings guidance and, subsequently, street estimates will be revised down.




CAKE: DAIRY PRICES RISING - 1 29 2014 11 26 23 AM



Feel free to call with questions.



Howard Penney

Managing Director




Bearish Enough? Nope.

Takeaway: Careful out there.

With U.S. #GrowthSlowing sequentially, sentiment is reversing some. Some.


But is consensus bearish enough right now? Nope.


This morning’s II Bull/Bear Survey is still +3780 basis points wide to the Bull Side (53.1% Bulls, 15.3% Bears). Meanwhile, the VIX has broken out over 14.91.

Bearish Enough? Nope. - VIX

Bottom line: People aren't bearish enough, particularly if growth continues to slow. 


Editor's Note: This is an excerpt from Hedgeye CEO Keith McCullough's pre-market morning research. For more information on how Hedgeye can help you prosper and learn click here.

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[video] Keith's Macro Notebook 1/29: DAX YEN SENTIMENT

EHTH: New Short Idea

Takeaway: There are too many headwinds to member retention to assume EHTH's preannounced IFP growth metrics are organic. Net growth will disappoint


  1. EHTH Preannouncement Lays Out Best Case Scenario: Individual & Family plan (IFP) application metrics are inflated from a concentrated seasonality shift.  Health Insurance demand now appears to be waning into January, suggesting the 170K in 4Q13 IFP applications may be peak the over the NTM. More importantly, it does not include existing plan cancellations. 
  2. 2014 Consensus Estimates Appear Overly Ambitious: The headwinds to membership attrition are just as significant as the tailwinds to membership growth, and we expect Commission ARPU and EHTH’s Other revenue segment will remain challenged.  We’re optimistically modeling 17% membership growth y/y (largely driven by Medicare and Ancillary), and revenue growth of 13% vs. consensus of 21%. 
  3. Longer-term Outlook Remains Murky: Over time, more uninsured people are likely to seek plans as the individual mandate penalties increase over the next few years.  However, improving website functionality on the government HIX and the employer mandate will be sources of increased competition and attrition risk.  
  4. Sub $45 Stock?: EHTH's stock surged 20% on the 4Q13 preannoucement.  After another brief surge, the stock is now trading at $55.92, which is 4.7x NTM Consensus Sales Estimates.  We believe the stock could trade into the $44 range (22% downside) assuming multiple compression on 0.5x turns on our 2014 revenue estimate of $205 million.  Stock could push higher near term, but we expect that will be short-lived





At face value, EHTH’s 4Q13 preannouncement appeared extremely bullish.  Individual & Family Plan (IFP) applications increased 50% y/y (170K applications) vs. 7% growth YTD, while total Medicare product applications increased over 65% y/y.  While encouraging, it also raises some red flags, particularly on the IFP side


The 50% increase is likely inflated since it measures the surge of ACA Open Enrollment against what is more seasonally-dispersed application volume for the company.  Additionally, the deadline for Open Enrollment is at the end of 1Q14, so enrollment growth is likely to subside thereafter, if not decline on a y/y basis 2Q13-3Q13 if application volume has indeed been pulled forward.  Our Google trackers suggest health insurance demand is already waning into 1Q14, so it’s highly possible that the 170K may be the peak in IFP applications over the NTM.


The bigger thing to consider is IFP cancellations/terminations, which generally represent the majority of all applications/membership growth.  We estimate existing members represent over over 85% of all EHTH's reported IFP membership growth on a quarterly basis (1Q08-3Q13) .  EHTH hasn’t provided any color on cancellations, but we suspect the cancellation rate may be higher than normal in 4Q13, which we will delve into below in more detail.  In short, the surge in 4Q13 application growth may have been driven more by existing members than by new ones.    


EHTH: New Short Idea - EHTH   health insurance search volume monthly 1 27 13

EHTH: New Short Idea - EHTH   IFP new vs. existing




The headwinds to membership attrition are just as significant as the tailwinds to membership growth, and we expect Commission ARPU and EHTH’s Other revenue segment will remain challenged.  We estimate that membership needs to grow 27%-32% y/y in order to hit consensus estimates (variance based our commission ARPU estimate range).  We’re optimistically modeling 17% membership growth y/y (largely driven by Medicare and Ancillary), and revenue growth of 13% vs. consensus of 21%.  In the table below, we're flexing EHTH's revenue growth by Memberhship and ARPU.  In short, we believe EHTH is more likely to miss than beat 2014 consensus revenue estimates.  Below we provide more detail.  


EHTH: New Short Idea - EHTH   2014 Revenue Scenario Analysis


Attrition Will Cap Upside: The street seems to be overly focused on the tailwinds to membership growth, but the headwinds to retention are just as significant.  The three main headwinds to member retention are detailed below.  In short, we suspect there may be more forces pulling existing EHTH members away from its platform than there are drawing new members in

  1. Plan Terminations (ACA-Non Compliance): Starting in 2014, Individual and Family plans (IFP) must provide a certain set of Essential Health Benefits, while limiting a consumer’s out of pocket costs.  The Obama Administration issued a temporary waiver on this rule for existing plans, but at both the Managed Care Organization’s (MCO) and state’s discretion.  16 states have chosen not allow the waiver, and we estimate that roughly 34% of IFP policy holders reside in those states. Not all of those plans are non-compliant, but a study from HealthPocket (EHTH competitor) suggests the overwhelming majority is (link).  In fact, the Commonwealth Fund Affordable Care Act Tracking Survey (link) suggests that 22% of US IFP members received cancellation letters.  We suspect this is one of the major reasons why EHTH’s 4Q13 applications accelerated so sharply. 
  2. Newly-Eligible Medicaid Recipients: The 2014 Medicaid Expansion increases the income threshold to qualify for Medicaid to up to 138% of the FPL.  Not all states have opted to expand Medicaid; in fact, we estimate that only 60% of the potential Medicaid expansion population resides in states that are expanding Medicaid.  While the bulk of potentially-eligible Medicaid recipients do not have insurance, there is a sizable percentage that does; meaning that Medicaid expansion is actually a headwind to IFP retention.  Using Census insurance data, we estimate that roughly 18% of IFP plans in the US are purchased by those with incomes below 138% of the FPL.  We’re not suggesting that all these members will enroll in Medicaid, but the process to do so is now easier since the government HIXs help streamline the process if they are eligible.  The recently released HHS January Enrollment Report (link) suggests 21% of applying members were determined eligible for Medicaid/CHIP.  We suspect at least some percentage of those applicants was previously insured in the IFP market.
  3. Subsidy-Eligible Members: While CMS did grant EHTH permission to sell subsidized plans to members living in states run by FFEs, EHTH has stated that it hasn’t sold many plans to-date due to technical difficulties with interfacing with  More importantly, EHTH is not allowed to sell subsidized plans in any of the 14 states that are running their own HIX.  So if any of EHTH’s existing members in those states wanted a subsidized plan, they were forced on to that state's HIX.  We estimate that 34% of those currently insured in the US IFP market live in states running their own HIX.  Regarding subsidy eligibility, we estimate that at least 40% of existing US IFP members may qualify for a subsidized plan on the HIX, but we suspect this is conservative since we are calculating subsidy qualification based on individual income.  The threshold for family plans is considerably higher since it factors in household size.  We estimate that family plans represent 50% of the US IFP market (31% couples/19% couples with children) 

One final thought on membership attrition.  There is considerable state overlap in all three of the above mentioned risks, which adds an extra level of vulnerability to EHTH member attrition.  We estimate that 29% of the US IFP market lives in states that meet all three of the above criteria:  Note that we haven’t discussed other attrition risks including forced plan termination by MCOs or potential attrition to the federal HIX.  The Commonwealth Fund survey mentioned above suggests that roughly 20% of visitors to government HIXs already had insurance.  A Mckinsey & Co survey suggests that as high as 89% of enrollees already had insurance (link).  So while EHTH’s IFP applications have surged in 4Q13, member attrition has likely surged as well.  


EHTH: New Short Idea - EHTH   IFP Market ACA Attirtion Risks


EHTH: New Short Idea - EHTH   Family Subsidy Qualification 


Commission Rates to Remain Under Pressure: There are a lot of moving parts to EHTH’s commission rates.  Rates are generally higher in the first year of a plan and vary by the type of plan offered (IFP, Medicare, Ancillary). 


MCOs are facing considerable legislative pressures in 2014 that are expected to increase overall costs and/or reduce premium reimbursement.  We expect MCOs to push back on commission rates in 2014 as they did in 2011 with the introduction of the MLR mandate on IFP (Individual & Family plans).  However EHTH has suggested that it is not expecting any material changes to commission rates in 2014.   We’re approaching their outlook cautiously. 


On the IFP side, we’re not sure exactly how IFP Commission ARPU will trend in 2014; there are too many moving parts in terms of plan mix.  EHTH has suggested commission ARPU will be flat to slightly higher in 2014.  However, it is making this assertion using a sampling of its plans against 2014 rate schedules from only 60% of its MCOs (in terms of commission revenue volumes).  Additionally, it’s also basing this on current plan pricing, yet premiums have increased considerably for 2014.  


On the Medicare side, EHTH states they are seeing “stable commission rates”.  We’re not sure what that means exactly, but we know that Medicare reimbursement rates are going down in 2014, so unless those rates are increasing, Medicare commission ARPU will be on the decline. 


But one thing is certain, as long as membership growth continues to favor considerably lower-priced Ancillary plans (Dental, Vision, Accident), with premiums that are at least 85% lower than IFP and Medicare Advantage Plans, commission ARPU will continue to decline




The uninsured population could be a major organic growth driver for the company.  Over time, more of the uninsured population is likely to seek coverage as the individual mandate penalties increase over the next few years. 


However, it’s equally as likely that functionality on the government exchanges improve over time as well.  Since the bulk of the uninsured will qualify for subsidies (~70% earn less than 50K annually), EHTH will be at a competitive disadvantage vs. the government exchanges (particularly the state-based HIX).  Additionally, there is only a one-year waiver on the employer mandate to provide health insurance coverage; meaning employees with existing Individual & Family plans (IFP) could get potentially cheaper coverage through their employer; serving as another source of potential attrition risk. 


EHTH is planning on entering the Private HIX market, which is widely viewed as secular growth opportunity for the industry (we agree).  However, this is still a nascent opportunity with more established competitors; there’s no telling how much EHTH can penetrate this market and/or how lucrative this opportunity will be.  




EHTH's stock surged 20% on the 4Q13 preannoucement.  After another brief surge, the stock is now trading at $55.92, which is 4.7x NTM Consensus Sales Estimates.  We believe the stock could trade into the $44 range (21% downside) assuming P/S multiple compression of 0.5x turns on our 2014 revenue estimate of $201 million.   


EHTH: New Short Idea - EHTH   P S Bands 1 27 13


Management suggested at a recent sell-side meeting that 2014 guidance will include “caveats”, which we suspect means guidance will be issued in a wide range.  If so, it could perpetuate the ACA growth narrative, potentially pushing the stock higher near-term.   However, we expect the fog to clear by its 1Q13 earnings release after Open Enrollment ends and EHTH receives more monthly commission reports from its MCOs.  By then, EHTH will have a better idea of how membership will trend in 2014.



Please let us know if you have any questions, or would like to discuss in more detail.



Hesham Shaaban, CFA


Is Consensus Bearish Enough?

Client Talking Points


The slope of economic growth data in Europe continues to improve relative to the United States. That is why European stocks continue to outperform U.S. stocks. Over in Germany, the DAX is up +0.8% this morning after holding both TRADE and TREND supports. This is what we call #GrowthDivergences here at Hedgeye. Yes, it's real and yes it matters.


I issued an overbought signal in #RealTimeAlerts Friday, but the year-to-date corrections in the Yen versus the U.S. Dollar continue to be slim pickings. Meanwhile, the risk range for USD/YEN has tightened (that’s marginally Yen bullish) to 102.04-103.70 (lower-highs). Currencies matter.


So with U.S. #GrowthSlowing sequentially, market sentiment is reversing some. But is consensus Bearish Enough? Nope. This morning’s II Bull/Bear Survey is still +3780 basis points wide to the Bull Side (53.1% Bulls, 15.3% Bears) and the VIX is under 14.91. Bottom line is people aren't bearish enough, particularly if growth continues to slow. Careful out there, keep your head up.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

JPMorgan shares are currently trading with the most implied upside to fair value in our fair value model for money-center, super-regional and regional bank stocks. By our estimates, JPM shares have upside of 33% based on our regression of EVA (economic value added) – which looks at the spread between return on capital and cost of capital – and the current multiple to tangible book value. Over time, we have found that sizeable discounts and premiums mean revert toward fair value giving JPMorgan an embedded tailwind in 2014.


We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road


The bull case for $KMI rests upon financial engineering of some sort. The fundamental case is shot to hell @HedgeyeENERGY


"Somebody may beat me, but they are going to have to bleed to do it." -Steve Prefontaine 


If humans had the same mortality rate now as in 1900, more than half the people in the world today would not be alive.

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