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THE WEEK AHEAD

The Economic Data calendar for the week of the 14th of April through the 18th of April 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.

 

THE WEEK AHEAD - week


Poll of the Day Recap: Timber! For the Stock Market?

Takeaway: At the time of this post, the majority went to 53% saying TIMBER! and 47% voting HICCUP.

Poll of the Day Recap: Timber! For the Stock Market? - 4

 

The “You-Know-What” hit the fan again today as continuing weakness in the tech sector spread to the broader market. The Nasdaq was clearly the biggest loser this week falling roughly 1% and on track to end the week basically 3% lower.

 

We are still banging the non-consensus bubble warning drum here at Hedgeye. But we wanted to hear your thoughts in today’s poll: Has the stock market correction arrived OR is this just a hiccup?

 

While the voting was virtually neck-and-neck in the morning, the tide began to turn more bearish as the market resumed its fall later in the day. At the time of this post, the majority went to 53% saying TIMBER! and 47% voting HICCUP.

 

While it was indeed a close poll, voters who think the stock market correction has arrived (TIMBER!) had the most to say:

 

  •  “I voted Timber because S&P 500 revenues are pretty flat year over year. Not much organic growth other than the Social Media bubble. The Fed continues to devalue the dollar and Russia and China are stocking up on gold. NASDAQ has only [gone] from about 1300 to over 4000 since 2009. Take a look at a chart of the 2000 internet bubble.”
     
  • “SPX breaks key support at open; PPI finally confirms (for g-men) some inflation; earnings this qtr will spread fear; perfect time of year for a welcome drop.”
     
  • “I call Timber, but with a long, slow ride to the bottom, wherever that may be. Other trees will hinder the fall. Market conservationists will tie ropes and chains to the tree and declare that no damage has been done. The loggers and the tree huggers will all claim Exceptionalism as their cause. Still, the real, genuine unavoidable truth is that ALL asset classes are mispriced (whether high or low) because there is no genuine market price for money, and no genuine market function for capital allocation. Maybe these things have never truly existed...but in today's planned (and grossly mismanaged) macro environment those fundamental capitalist functions are non-existent. Never fear, however; Mr. Market always has the last word...until the next round of madness.”
     
  • “The market is overdosing on Keynesian drugs prescribed by global central planners.  Japan didn't add more stimuli as beggars hoped for and Yellen and company have the market confused. The technicals are deteriorating.  Also, Kass went long the QQQ this AM. Anyone know if Gartman bought the dip yet?”

Those who believe this is a HICCUP admitted that time will tell; it depends on what the Fed does. And one voter strongly stated, “This is, without question, a hiccup.  Spring and summer acquisition activity in the tech sector will give the market confidence, at least through the summer.”

 

Another HICCUP voter was more cautious, “People will get optimistic, probably within the next week or two, though towards the end of the year, it might turn into a timber scenario.”

 

Ultimately, Hedgeye CEO Keith McCullough put it this way: “Already an 8% ‘correction’ in the Nasdaq that basically no one on #OldWall called for. Give it time, she'll go lower - and consensus will capitulate.”

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Cartoon of the Day: Home to Roost | $QQQ

Takeaway: It's been a rough ride recently for Bubble Chasers.

Cartoon of the Day: Home to Roost | $QQQ - Home to roost sm04.11.2014

 

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Nike Gets Creative, Raises Stakes In SanFran | $NKE

Takeaway: This should help Nike+ reach a wider audience.

Nike Gets Creative, Raises Stakes In SanFran | $NKE  - 3

 

FIRST LOOK AT THE NIKE+ FUEL LAB IN SAN FRANCISCO

  • "Today, Nike opens its Nike+ Fuel Lab in San Francisco, a collaborative work and testing space in the city's SOMA neighborhood designed for selected partner companies to develop products that integrate the NikeFuel system for tracking and measuring activity."
     
  • "The Fuel Lab grew out of last year's Nike+ Accelerator, in which 10 startups were given $20,000 and the opportunity to work in Portland for three months to develop apps and products connected to the Nike+ platform...The inaugural partners include running app RunKeeper, cycling and running tracking platform Strava, and weight loss app MyFitnessPal."

Nike Gets Creative, Raises Stakes In SanFran | $NKE  - chart24 11 large

Takeaway From McGough: 

Nike has only about 10% market share in the fitness tracker segment. Part of the problem is that fuel points, the key metric for the FuelBand, are meaningless outside of the Nike+ platform. In order to make the device more applicable to the general public, Nike is partnering with established fitness platforms in other core competencies to develop a broader based product. This should help Nike+ reach a wider audience and allow Nike to gain better consumer insight from the + data mine.

 

Editor's Note: This is a complimentary research excerpt from Hedgeye Retail Sector Head Brian McGough. Follow McGough on Twitter @HedgeyeRetail

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WWAV: LONG WHITEWAVE

Yesterday, the stock traded down sharply on news that Walmart plans to sell more organic products.  WWAV is down -10% over the past month, but is still the best performing food stock YTD (+17.8%).  All told, we don’t view the WMT announcement as being disruptive to the overall WWAV story.

 

This is primarily because WWAV continues to offer significant growth opportunities in an industry where they are hard to come by.  In fact, we'd say that WhiteWave is one of the best-positioned companies we have seen in quite some time.  WWAV’s on-trend category, volume growth and earnings growth potential are best in class.  We believe they will be able to deliver high single-digit sales and low double-digit earnings growth for the next few years.

 

As a reminder, WWAV owns six key brands: Silk, Alpro, International Delight, Land O’ Lakes, Horizon Organic and the recently acquired Earthbound Farm.  Through these brands, WhiteWave participates in the health and wellness space and is active in growing categories such as organic milk, plant-based beverages, packaged organic salad and other produce, creamers and liquid coffee.

 

The WWAV business model can produce sustainable high single-digit top line growth (management has guided to sales growth of 7-8% longer-term) and 20% EPS growth for the foreseeable future.  We believe margin expansion will continue, as the company benefits from fixed cost leverage, favorable product mix and increased internal manufacturing capabilities.  As with every company we follow, higher commodity costs could present a headwind but we believe it will be less severe for WWAV than others with a lesser growth profile.

MAC & CHEESE – FROM A RIPPLE TO A BIG WAVE

WWAV is going after Annie's market and is not afraid to talk about it, which is among the reasons we are bearish on BNNY.  WWAV is pushing its Horizon brand into the center of the store, similar to what BNNY is doing with Annie’s brand through its mainline initiative.  To be fair, we don’t know exactly how the Mac & Cheese battle will play out.  What we do know, however, is that WWAV said it aspires to be “maybe bigger than Annie’s” in shelf stable products at some point and will be “fairly aggressive” in pursuing this over the next few years.

GOT SILK?

One of the biggest opportunities for WWAV is to drive Silk usage among new consumers in the category.  We believe household penetration remains low compared its longer-term potential.  Another significant opportunity lies within its U.S. soy yogurt products.  The Silk brand has underperformed the plant-based yogurt category due to an underwhelming consumer proposition.  Later in FY14, WWAV will likely bring its successful soy yogurt technology from Europe over to the U.S.  Concurrently, we expect the company to begin marketing soy yogurt much more heavily later this year and beyond.

ORGANIC MILK

The biggest tailwind to organic milk trends is higher conventional milk prices.  Industry observers believe that higher conventional milk prices will help drive consumers to organic and/or plant based alternatives.  Right now, the conventional milk market is being affected by structural issues, as increased global demand and decreased production continue to push prices higher.  We’d suggest that the conventional milk market must adjust to this “new normal” of higher prices.  This is in stark contrast to organic milk in emerging markets, as demand and, subsequently, price remains muted in comparison.  Structurally higher conventional milk prices could create a situation where consumers shift to organic milk and/or plant-based alternatives, which could become increasingly attractive on a price basis.

EARTHBOUND FARM

The recent Earthbound Farm acquisition is an extremely attractive opportunity for WWAV.  While packaged salad carries a higher risk profile relative to other segments of the company, its growth profile is profound.  Over the last five years, organic packaged salads has posted a +15% CAGR due to very high market penetration.  Nearly every grocer carries an organic packaged salad brand on its shelves, where Earthbound holds a dominant market share that is greater than 50%.

CURRENT GUIDANCE

Given that WWAV is guiding to 7-8% top line growth in organic sales, we view the current EPS guidance of $0.90-0.94 (before a $0.05 headwind from the recently announced JV with China Megniu) as conservative.  WWAV will report 1Q14 earnings on May 9th.

 

 

WWAV: LONG WHITEWAVE - WWAV   EEG

WWAV: LONG WHITEWAVE - WWAV   EV EBITDA

WWAV: LONG WHITEWAVE - WWAV   PE

WWAV: LONG WHITEWAVE - WWAV   ANR

 

 

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst


Retail Callouts (4/11): NKE, GPS, Uniqlo, VFC

Takeaway: Nike taking Nike+ to SFO. Easter doesn't explain GPS comp #'s. Uniqlo set to open in Germany.

COMPANY NEWS

 

NKE - FIRST LOOK AT THE NIKE+ FUEL LAB IN SAN FRANCISCO

(http://www.fastcompany.com/3028932/most-innovative-companies-2014/first-look-at-the-nike-fuel-lab-in-san-francisco)

 

  • "Today, Nike opens its Nike+ Fuel Lab in San Francisco, a collaborative work and testing space in the city's SOMA neighborhood designed for selected partner companies to develop products that integrate the NikeFuel system for tracking and measuring activity."
  • "The Fuel Lab grew out of last year's Nike+ Accelerator, in which 10 startups were given $20,000 and the opportunity to work in Portland for three months to develop apps and products connected to the Nike+ platform...The inaugural partners include running app RunKeeper, cycling and running tracking platform Strava, and weight loss app MyFitnessPal."

 

Retail Callouts (4/11): NKE, GPS, Uniqlo, VFC - chart24 11

 

Takeaway: NKE has only about 10% market share in the fitness tracker segment. Part of the problem is that fuel points, the key metric for the FuelBand, are meaningless outside of the Nike+ platform. In order to make the device more applicable to the general public, Nike is partnering with established fitness platforms in other core competencies to develop a more broad based product. This should help Nike+ reach a wider audience and allow Nike to gain better consumer insight from the + data mine.

 

GPS - Gap Inc. Reports March Sales Results

(http://www.gapinc.com/content/gapinc/html/media/pressrelease/2014/med_pr_GPS_Reports_March_Sales_041014.html)

 

  • "Gap Inc. today reported net sales of $1.51 billion for the five-week period ended April 5, 2014. Gap Inc.’s comparable sales for March 2014 were down 6 percent versus a 1 percent decrease last year."
  • "As the company noted last month, the Easter holiday is in April this year versus March last year. Given this shift in peak spring selling weeks, the company expected March to be negatively impacted."
  • "The company expects gross margins for the first quarter of fiscal year 2014 to be below the prior year by more than the year-over-year decline in the fourth quarter of fiscal year 2013. In addition, given ongoing expense management, the company expects first quarter fiscal year 2014 operating expenses to be flat to last year."
  • "The company reaffirmed its previous full-year earnings per share guidance range of $2.90 to $2.95 for fiscal 2014."
  • March Comparable Sales Results 
    • Gap Global: negative 7 percent versus flat last year
    • Banana Republic Global: negative 4 percent versus positive 1 percent last year
    • Old Navy Global: negative 7 percent versus negative 2 percent last year

 

Takeaway: We'd give a little more credence to the Easter shift explanation if the company was facing a +7% compare. When in reality the company was up against a +1% comp and just posted a -6% number. Easter played a part, but numbers aren't quite as good as the company's spin would otherwise suggest.

 

9983 - Uniqlo Bows in Berlin

(http://www.wwd.com/retail-news/specialty-stores/uniqlo-bows-in-berlin-7637566)

 

  • "With its first door in Germany and the largest European store to date, Uniqlo is playing it big in Berlin."
  • "Fast Retailing Co. Ltd.’s Uniqlo chain took over the corner of Tauentzien and Nurembergerstrasse on the city’s well-trafficked west side for its three-floor, 29,000-square-foot Berlin flagship. Set to open at noon on Friday, the store houses the entire Uniqlo assortment for men, women and children. Indeed, the kids’ department in Berlin is the chain’s most extensive in Europe."

 

Retail Callouts (4/11): NKE, GPS, Uniqlo, VFC - chart1 4 11

 

Takeaway: Global is the growth driver for Uniqlo. These investments in new markets are proving to be a bigger drag on the bottom line than the company expected. But, the company has been able to grow its top line and upped revenue guidance proving the viability of the concepts in its new markets.

 

OTHER NEWS

 

VFC - VF Announces the Dedication of Its New Central Distribution Center in Kunshan, China

(http://phx.corporate-ir.net/phoenix.zhtml?c=61559&p=irol-newsArticle&ID=1917576&highlight=)

 

  • "VF Corporation today announced the dedication of its new Central Distribution Center at an event held at the facility in Kunshan, China."
  • “'With the expectation that our business in China will nearly double during the next four years, this represents a significant milestone in our ability to manage long-term costs and inventories, while providing measurable increases in speed-to-market for both our customers and consumers.'”
  • "Representing an investment of more than $60 million...the Kunshan distribution center is VF’s largest infrastructure investment in China. When operating at capacity, the 85,000-square-meter facility is expected to handle 30 million units of product each year…"

 

0494 - Li & Fung Said to Work With Citigroup on Brands Unit Spinoff

(http://www.bloomberg.com/news/2014-04-11/li-fung-said-to-work-with-citigroup-on-brands-unit-spinoff-1-.html)

 

  • "Li & Fung Ltd. is working with Citigroup Inc. to spin off its brands business, valued at about $2 billion, people with knowledge of the matter said."
  • "The world’s biggest supplier of clothes and toys to retailers such as Wal-Mart Stores Inc. and Kohl’s Corp. plans to list the division on Hong Kong’s stock exchange and would also consider selling the unit, named Global Brands Group, if it gets an attractive offer, said the people. They asked not to be identified because the deliberations are private."

 

OSTK - Overstock.com Makes Management Changes

(http://investors.overstock.com/phoenix.zhtml?c=131091&p=irol-newsArticle&ID=1917592&highlight=)

 

  • "Overstock.com, Inc. announced changes in its board and management teams.  Stormy Simon will move from being co-president to president of Overstock.com, and will continue in her role as a board member. Jonathan Johnson will move from being executive vice chairman to chairman of the board of directors, replacing Patrick M. Byrne in that role. Byrne will continue in his role as CEO."

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