TODAY’S S&P 500 SET-UP – February 25, 2014
As we look at today's setup for the S&P 500, the range is 35 points or 1.47% downside to 1818 and 0.43% upside to 1853.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
This note was originally published at 8am on February 12, 2014 for Hedgeye subscribers.
“We don’t see things as they are, we see them as we are.”
We are short the consumption growth components of the US stock market. And that means we were wrong yesterday. It’s ok to say it that way – we see the real-time score for what it is, not what we want it to be.
Ellen Langer uses the aforementioned quote in a #behavioral psych book I just finished called Counterclockwise. Her concept of “mindfulness” fits how I see things in macro (on the margin). “Noticing differences is the essence of mindfulness. Don’t imagine, however, that all this needs to be exhausting… mindfulness is actually energizing, not enervating.” (pg 52)
Being wrong for a few days is a little different than being wrong for a few months (or years). When I was younger and wrong, I’d get mad. Now that I am less young, being wrong energizes me – especially when I notice something that isn’t consensus.
Back to the Global Macro Grind…
To be clear, I’m not the only one who has noticed that Janet Yellen is re-opening Pandora’s real-world inflation box with another Federal Reserve ideological “innovation” (the #untapering). Mr. Macro Market has been front-running her for 6 weeks:
That, of course, is fantastic for slow-growth-yield-chasing asset prices like:
Not to be confused with US #GrowthAccelerating asset prices like:
Alongside Boehner waiving the debt limit last night (without conditions!), what we have here is another Big Government policy investing-style shift towards #InflationAccelerating. This isn’t new. It’s what happened to the Dollar in both Q1 of 2008 and 2011. Inflation is a tax.
The inflationary concept that zero isn’t zero is what the Fed calls “policy innovation.” Happy #Darwin Day! #1806
In Q1 of 2008, Bernanke whispered to his boys that he was going to do the “shock and awe” thing and cut to zero; so, while demand was slowing, Oil prices ripped humanity a new one by the summer time ($150/barrel), perpetuating US #GrowthSlowing.
In Q1 of 2011, Bernanke continued to send sweet nothings down his communication pipes that zero really wasn’t zero – it was zero minus whatever # of QE’s he damn well wanted. The CRB Commodities Index, Gold, etc. ripped to all-time highs, US consumption growth slowed, and Utilities (XLU) closed the year +14.8%.
In Q1 of now, zero still really isn’t zero because you have to:
Or something like that.
The Fed, of course, doesn’t see it this way. But no matter how they want to see their theoretical world, market expectations and prices see them the way the real-world is.
While I am sure this will all end well, can the US stock market continue higher? Obviously the answer to that is yes. But what parts of the market will lead? Will they be food/energy inflations, real-estate inflations, and/or some of those beauty MLPs?
I don’t know anything about nothing, but I am certain that everything that you eat, put in your car, and pay for from a housing perspective has nothing to do with inflation or your cost of living.
In other news, as both the British Pound and Euro gain strength versus Yellen’s Burning Buck, both the UK and German governments are taking up their GDP growth estimates for 2014 (British Pound remains our favorite currency vs USD).
How that #StrongCurrency correlation to growth thing works is cool. It’s too bad that un-elected and unaccountable US central planners aren’t paid to see the history of currency appreciation, real-purchasing power, and consumption growth for what it is.
Our immediate-term Macro Risk Ranges are now (all 12 macro ranges are in our Daily Trading Range product):
Nat Gas 4.57-5.34
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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Takeaway: McComb might be moving on, but this story remains a rarity in retail. We liked it at $4 and like it at $34. Price targets are way too low.
Conclusion: KATE remains one of our top ideas. We continue to believe that earnings power will rise from just $(0.15) in this (investment) year, to better than $3 per share over 3-5 years as the Kate Spade brand fills out its footprint, grows productivity, and takes up margins. We think that this story is unique in that it’s not just about a company that’s adding a bunch of stores, or a brand that found a niche and is growing it accordingly. This is brand that built a strategy around selling product across multiple categories (handbags, accessories and apparel, etc…), to multiple affluent consumers (Kate Spade, KS Saturday, and Jack Spade) in several channels of distribution (wholesale, retail, dot.com, and concessions) in several regions of the world. These characteristics might be expected from a multi-billion dollar company. But keep in mind that KATE is less than $800mm in sales. Never in 20 years have we seen a consumer brand be so broad in its reach and yet so concentrated in its focus. We’ve been fans of KATE/FNP/LIZ since it was at $4. We’re often asked when we’re going to get off the story. The simple answer is…not yet. Not until the financial model ceases to work for us. Based on everything we see, this will be a name to stick with for some time to come. Revenue streams that go from $800mm to $3bn are tough to find.
A FITTING CURTAIN CALL
This was a solid quarter – though the market is already making that point clear. We think it was a fitting curtain call for outgoing CEO Bill McComb. Let’s face it, the guy was arguably one of the least popular CEOs in retail 2-3 years ago. The Street couldn’t stand the guy. But the reality is that behind the scenes, he was doing all the heavy lifting that ultimately created so much value for some of the very people who criticized him. He sold Mexx – easily the worst Paul Charron (former CEO) acquisition we’ve seen – and there were many. He punted the stodgy department store Brands, got rid of Juicy, and finished off with a sale of Lucky. Maybe not the best economic terms for all of the deals, but he got it done. Period. And all while growing the crown jewel. Congrats Bill. We wish there were more like you.
TRANSITION IS BIGGEST RISK, BUT NOT REALLY
All that said, we put back on our analyst hat and wonder what could go wrong now that McComb is gone. Regardless of our high opinion of the ‘new’ management team, we need to respect the reality that whenever there’s change in a complex organization, things can go wrong. We can’t point to any obvious stress points right now, however. The reality is that Craig Leavitt was being groomed to be the next CEO for the past 18 months. They kept it quiet, but it’s the truth. Any major business planning meetings (even for non Kate brands) – Craig was there. CEO-level customer calls – Bill and Craig. Organizational decisions – you guessed it…he was part of them. On top of that, the fact that George Carerra – who has always been a very operational-focused CFO – was elevated to COO makes perfect sense. George will prove to be a big crutch for Craig in key areas where Craig quite frankly should not be focusing his time. The punchline is that this whole management transition started long before anyone thought it did, and we think that the company covered most of its bases.
SOME THINGS THAT STOOD OUT FOR US ON THE CALL
The reality is that there’s really no change to our thesis. This quarter gave us further ammo supporting our bull thesis. But there were a few things that stood out…
BLMN remains on the Hedgeye Best Ideas list as a SHORT.
SOLID 4Q13 RESULTS
BLMN reported 4Q13 results mostly in-line with expectations before the open. Total revenues of $1.051 billion and adjusted EPS of $0.27 slightly beat expectations by $3m and $0.01, respectively. Total revenues increased 5.2% YoY, driven by revenues from new restaurants, an increase in comparable sales and the consolidation of one-month of sales generated by Brazil operations. EPS growth was driven by marginally stronger restaurant level margins, due to higher AUVs and productivity savings, and lower corporate and compensation expenses.
Comparable store sales at BLMN’s two biggest brands fell short of street estimates. System-wide, Outback and Carrabba’s comps missed expectations in 4Q13 by 10 bps, 50 bps and 50 bps, respectively. Outback and Carrabba’s disappointed despite growing their lunch business by a large margin in 4Q. At the end of the quarter, weekday lunch was being offered at approximately 35% of Outback locations and 40% of Carrabba’s locations. This is up significantly from the third quarter, when only 26% of Outback locations and 28% of Carrabba’s locations offered weekday lunch. With this degree of daypart expansion, these two concepts should be expected to grow traffic and outperform the industry. Outback only managed to grow traffic 0.5% and management didn’t reveal traffic trends at the Carrabba’s brand. Bonefish and Fleming’s comps beat expectations in 4Q13 by 80 bps and 70 bps, respectively.
Although 4Q13 was a difficult quarter for many casual dining operators, BLMN managed to outperform the Black Box Index by 150 bps. The 1.4% system-wide comp growth was driven by increases in price and traffic, partially offset by a lower mix due to lunch expansion. This number also benefitted 40 bps from a calendar shift in the quarter. Traffic grew by 0.3% in the quarter, consistent with what is to be expected of a company rolling out lunch across multiple brands.
Two-year sales trends remain weak across all four concepts.
GUIDING DOWN FY14
Street estimates for FY14 proved too aggressive as management reigned in guidance and expectations across the board.
FY14 Financial Outlook
*Guidance indicates the low-end of management’s range
There were clearly some positives in the quarter, but there are also several signs that the underlying trends are not as strong as management is portraying. That being said, we will revisit our short case and provide an updated outlook in the coming days.
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