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Consumer Staples Marginally Outperforms S&P 500

Takeaway: U.S. consumption growth is slowing as inflation rises.

Consumer Staples Marginally Outperforms S&P 500 - wallstreet

Consumer Staples (XLP) outperformed the broader market last week, falling -0.5% versus the S&P 500 at -2.6%. XLP is down -0.5% year-to-date vs the SPX at -1.8%.

 

For a sixth straight week, XLP is bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up. This is a material shift as the sector traded bearish TRADE and TREND for the majority of the year-to-date.

 

Consumer Staples Marginally Outperforms S&P 500 - 2

 

Despite the bullish quantitative set-up for the sector, we continue to believe that the group is facing numerous headwinds, including:

 

  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 2014 Q1 theme of #InflationAccelerating, and Q2 theme of #ConsumerSlowing.
     
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth.
     
  • The sector is loaded with a premium valuation (P/E of 18.8x).
     
  • Less sector Yield Chasing as Fed continues its tapering program.
     
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index has not seen any real improvement over the past 6 months, and declined to -31.9 versus -30.0 in the prior week.

Consumer Staples Marginally Outperforms S&P 500 - 4

Consumer Staples Marginally Outperforms S&P 500 - 5

Consumer Staples Marginally Outperforms S&P 500 - 6

 

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Editor's Note: This is an excerpt of a research note that was originally provided to subscribers on April 14, 2014 by Hedgeye Consumer Staples Analyst Matt Hedrick. Follow Hedgeye's Consumer Staples sector @HedgeyeStaples.

 

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CHARTED: A TALE OF TWO CONTINENTS

Aristocrat vs IGT

 

  • IGT’s problems are well documented and discounted in the stock
  • Some were out of the company’s control:  soft North American demand (replacements and new casino) and weak US gaming revenues
  • Meanwhile, Asian focused ALL’s business is much stronger combined with a little bit of a North American resurgence

CHARTED: A TALE OF TWO CONTINENTS - ya

 

Source: Yahoo Finance!


European Banking Monitor: Greek Credit Risk Tightens | $NBG

Editor's Note: This is a complimentary research note from Hedgeye Analyst Matt Hedrick originally provided to subscribers on April 14, 2014 at 11:20 a.m. 

Below are key European banking risk monitors, which are included as part of Hedgeye Financials team's Monday Morning Risk Monitor.  If you'd like to receive the work of the Financials team or request a trial please email sales@hedgeye.com. And, for more information on our services, click here.

 

European Banking Monitor: Greek Credit Risk Tightens | $NBG - greece

 

European Financial CDS –  Swaps across Europe's banking system were little changed (median change = 0 bps), but the Greek banks continue to tighten notably, dropping an average of 40 bps in the past week and 185 bps in the past month. The news that GS & MS will be leading a secondary offering for National Bank of Greece doesn't hurt either.

 

European Banking Monitor: Greek Credit Risk Tightens | $NBG - European Financials CDS  1

 

Sovereign CDS – Sovereign swaps mostly widened over last week. Irish sovereign swaps tightened by -2.7% (-2 bps to 71 ) and Spanish sovereign swaps widened by 7.1% (6 bps to 93).

 

European Banking Monitor: Greek Credit Risk Tightens | $NBG - Sovereign CDS  2

 

European Banking Monitor: Greek Credit Risk Tightens | $NBG - sovereign cds chart  3

 

European Banking Monitor: Greek Credit Risk Tightens | $NBG - sovereign cds chart  4

 

Euribor-OIS Spread – The Euribor-OIS spread was unchanged week-over-week at 13 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

European Banking Monitor: Greek Credit Risk Tightens | $NBG - euribor ois spread  5

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Retail Callouts (4/16): KORS, NKE & ADDY, BBY, GPS

Takeaway: KORS inks new eyewear deal with LUX. NKE & ADDY factory shutdown. BBY retail chief retires after 1yr on the job.

EVENTS TO WATCH

 

WEDNESDAY

  • GPS - Investor Meeting: Wednesday 4/16, 1:00 pm

 

THURSDAY

  • LULU - Analyst Day: Thursday 4/17, 12:00 pm

 

COMPANY NEWS

 

KORS, LUX - MICHAEL KORS ANNOUNCES EYEWEAR LICENSE WITH LUXOTTICA

(http://phx.corporate-ir.net/phoenix.zhtml?c=235654&p=irol-newsArticle&ID=1918813&highlight=)

 

  • "Michael Kors Holdings Limited and Luxottica Group  announced today that they have signed a new and exclusive eyewear license agreement for the Michael Kors Collection and MICHAEL Michael Kors eyewear. The first collection produced with Luxottica will launch in January 2015."
  • "The partnership with Luxottica...will last 10 years. It will allow Michael Kors...to continue the global expansion of the brand’s eyewear business. Luxottica will produce eyewear for both the Michael Kors Collection and MICHAEL Michael Kors lines, beginning with Spring 2015. The brand’s two luxury eyewear collections will be carried around the world in Michael Kors stores, department stores, select travel retail locations, independent optical locations and Luxottica’s retail stores."

 

Takeaway: The deal with LUX partners KORS with the dominant player in the eyewear segment and will give the company a much more prominent place inside Luxottica's retail network. Nice upgrade here for KORS with the Marchon deal set to expire.

 

NKE, ADDYY - China Shoe Plant Strike Disrupts Output at Nike, Adidas Supplier

(http://www.bloomberg.com/news/2014-04-15/nike-shoemaker-yue-yuen-says-over-1-000-china-workers-on-strike.html)

 

  • "Workers at Nike Inc. and Adidas AG shoe supplier Yue Yuen Industrial Holdings Ltd. in Dongguan, China struck for a third day seeking a 30 percent pay increase and better benefits, disrupting output."
  • "The number of striking workers increased today, a spokesman for Hong Kong-based Yue Yuen said, without estimating the number of strikers or affect on production. He asked not to be identified because of company policy. New York-based China Labor Watch estimated strikers at 30,000."
  • "Adidas is 'closely monitoring the situation' at the factory, Katja Schreiber, spokeswoman for the company, said by e-mail today."
  • "Nike 'is concerned by the events' and is monitoring production and the dialog between factory management and workers, Greg Rossiter, a spokesman for the Beaverton, Oregon-based sporting goods company, said in an e-mail."

 

Takeaway: Regardless of the outcome here, its clear that input costs, both material and labor, are headed higher. With Gross Margin turning from a tailwind to a headwind and an incremental $400mm in SG&A we're looking at 9% decline in EPS with the top line growing at 10%. If NKE can't grow EPS at a Nike-esque 20% rate when futures are six months into a DD growth rate, then when will it happen?

 

OTHER NEWS

 

BBY - Best Buy's top U.S. store executive departs

(http://www.startribune.com/business/255243381.html)

 

  • "Seven months after getting a new title, Best Buy Inc.’s president of U.S. retail stores retired and is being succeeded by the retailer’s chief human resources officer."
  • "Shawn Score, a 29-year veteran of the Richfield-based company, was put in charge of its 1,400 U.S. stores in January 2013. He was named president of the unit, the biggest in the company, last October. Best Buy on Monday confirmed the departure of Score, 48, but declined further comment."
  • "Shari Ballard, the human resources chief, will take on Score’s duties. ­Ballard, a 21-year employee, will retain the human resources job, which she got last August after leading Best Buy’s approximately 450-store international unit. She previously was executive vice president of retail channel management. Best Buy said Ballard is a permanent replacement for Score, rather than an interim choice."

 

GPS - Gap Inc. Announces Marissa Webb as Creative Director and Executive Vice President of Design for Banana Republic

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

 

  • "Gap Inc. today announced that Banana Republic has named Marissa Webb as Creative Director and Executive Vice President of Design, effective April 28. She will be responsible for guiding the brand’s overall creative direction, as well as leading global product design for Banana Republic Women’s, Men’s, and Accessories.  Marissa will report to Global President of Banana Republic, Jack Calhoun."
  • "...Marissa Webb is most recently known for her eponymous upper contemporary label. Prior to branching out on her own during 2011, she spent time at Polo, Club Monaco and over a decade at J. Crew Group Inc., where she served in various design roles, including Head of Womenswear and Accessories Design.  Webb will retain her role as President and Creative Director at Marissa Webb, in addition to her newly appointed role at Banana Republic. Webb’s first collection for Banana Republic is expected in the summer of 2015."

 

ANN, DXL, DEST - Private equity and retailers court each other

(http://www.thedeal.com/content/consumer-retail/private-equity-and-retailers-court-each-other.php)

 

  • "One of the easier deals, at least on paper, likely to get done this year is a leveraged buyout of Ann Taylor parent Ann Inc., according to industry sources. Leading the line of potential buyers would be San Francisco's Golden Gate Capital, which already took a 9.5% stake in the women's apparel retailer in March. Ann is already working with a financial adviser, a source said."
  • "Two other retailers available for tie-ups with private equity are Destination Maternity Corp. and Destination XL Group Inc., according to industry sources. Those sources said the retailers are often on bankers' lists and have been circulated as potential acquisition targets over the past few years. Either could be targeted…"

 

ADDYY - Adidas Links With Mary Katrantzou

(http://www.wwd.com/markets-news/intimates-activewear/adidas-links-with-mary-katrantzou-7645297)

 

  • "Come November, London-based designer Mary Katrantzou will collaborate with Adidas Originals on a long-term partnership that will consist of a women’s-focused apparel and footwear line."
  • "The designer follows in the footsteps of names like Yohji Yamamoto, Raf Simons and Rick Owens, among others, and will be the first women’s-focused collaboration line since Stella McCartney’s."

 



REGIONALS: APRIL FLOWERS

April and Q2 gaming revenues should be better than bad following an awful Q1.  BYD and PENN probably guided low enough for Q1.

 

 

Call to Action:

Catalysts are lining up positive for PENN and BYD with potential in-line to slightly better Q1 earnings and sequentially better Q2 gaming revenues.  PNK Q1 looks at risk.

 

Summary:

Investors have been waiting a long time for regional gaming revenues to improve.  On the heels of a disastrous December performance, we had many winter storms and brutally cold weather plus a March that surprised many folks (not us) to the downside.  With Louisiana and Mississippi still to report, SS revenues are tracking right in-line with our projection of -7% for March (see our note: ANOTHER REGIONAL REVERSAL?, 4/2/2014).  We expect Louisiana and Mississippi to report mid single digit declines in revenues for March.

 

The good news is that analysts have already lowered Q1 estimates for PENN and BYD.  While there should be a few more stragglers, we think current estimates reflect reality – BYD provided its last guidance update on March 1st and PENN was necessarily conservative when it reported Q4.  PNK seems to be the company most at risk for Q1.  We’ll see when Louisiana releases estimates but consensus Q1 estimates of $0.42 looks $0.05-0.10 too high.  For PENN and BYD, we wouldn’t be surprised with an in-line to slight beat.

 

This may not be the most compelling investment thesis ever, but going forward, regional gaming revenues look better than bad – still negative but decidedly less so as seen in the following chart.

 

REGIONALS: APRIL FLOWERS - REGIONALS 4 16 2014 9 01 18 AM


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