prev

Dumb & Dumber: Consensus Economic Commentariat Cheers Jobs Report In Unison!

Takeaway: Take the other side of consensus.

By Keith McCullough

 

So, I was stuck in traffic on the Merritt Parkway earlier this morning, watching my Twitter feed during the April jobs report release.

 

It was sad funny to read my stream and observe just how uniform the frenetic, positive commentary from consensus was. Wolf pack mentality.

 

Dumb & Dumber: Consensus Economic Commentariat Cheers Jobs Report In Unison! - d1

 

So what did stock, currency, and bond markets think? They basically shrugged it off. They're not seeing much to get excited about.

 

Newsflash: The unemployment report (and rate) is what we call a lagging economic indicator.

 

Newsflash: 10-year yield at 2.65% is down -38 basis points YTD. What’s that telling you about growth?             

 

During my recent conversation on HedgeyeTV, former Goldman Sachs prop trader Buddy Carter basically told me that, "passive editorial trend following is useless" and how the Twitter contra stream can help identify opportunities. Indeed.



Victoria’s Secret Not Looking as Sexy at the Gym as They’d Hoped | $LB

Takeaway: Victoria’s Secret should leave the performance activewear to those who do it best.

Victoria’s Secret Not Looking as Sexy at the Gym as They’d Hoped | $LB  - vs3

 

Victoria’s Secret Sports-Bra Push Gets Off to Slow Start

 

• "The lingerie chain, part of L Brands Inc., last year rolled out a new line of sports bras, including push-up varieties that let women show off their cleavage at the gym. The move was part of an increasing focus on activewear clothes, such as figure-enhancing workout pants and training shorts."

 

• "So far, though, sales haven’t met the company’s initial ambitions. Victoria’s Secret ordered too many sports bras in the summer and fall of 2013 than it could sell, leaving it with excess inventory, Chief Financial Officer Stuart Burgdoerfer said this week at an event in New York. Even so, the retailer expects to sell the bras without marking them down, he said."

 

• “'We bought enough to hit a home run, but we hit about a double or a triple,' Burgdoerfer said at the Barclays Retail and Consumer Discretionary Conference. 'We have grown that business very nicely, but we bought a lot of sports bras.'”

 

Victoria’s Secret Not Looking as Sexy at the Gym as They’d Hoped | $LB  - chart1 5 2

Takeaway From McGough:

No surprise that Victoria’s Secret has a tough time executing on activewear that is actually intended for activity. We were surprised by the brand's scores in our two consumer surveys looking at Lululemon specifically and the female activewear market more generally - the one caveat is that VS/Pink shoppers predominately wear the brand's activewear offerings for everyday wear. Higher than Gap, Old Navy, Calvin Klein, and H&M. Vicky should focus on the fashion aspect of this trend and leave the performance aspect to those who do it best.

 

*   *   *   *   *   *   *

 

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

Subscribe to Hedgeye.


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

WTW: Not Out of the Woods Yet

Takeaway: 1Q14 was so weak that the impact will carry forward into 2015. Consensus doesn't get that, so we'll remain short untill they do

SUMMARY BULLETS

  1. 1Q14 RECAP: Declines in revenue and attendance were at its worse level dating back to at least 2007, but largely expected.  WTW raised guidance, but that was driven more by new cost assumptions than anything else.
  2. CAN'T RECOVER FROM 1Q14: Consensus is assuming 2015 growth will be virtually flat in 2015.  That will require one of its best winter selling seasons on record in 1Q15.  We doubt that will happen.
  3. PUSHING OUT THE HEALTHCARE OPPORTUNITY: We don't believe the B2B business will be much of a contributor in the long-run, but management commentary suggests the contribution will be immaterial near-term. 

1Q14 RECAP 

The quarter was particularly weak, but WTW did beat consensus estimates for the quarter.  WTW Attendance declined in -16% in 1Q14; its worst level dating back to at least 2007.  Same can be said for total revenue growth (-16%).  Much of that was already expected after its 2014 Guidance release.

 

WTW did increase its 2014 guidance to $1.45-$1.70 vs. $1.30-$1.60 ($0.12 at the midpoint), most of that seems to be driven by new cost assumptions.  WTW didn't provide much of anything on its call to suggest the business in turning.  In fact, the CFO stated that, "the fundamental situation of the business hasn't changed" when discussing guidance.

 

That said, the move in the stock yesterday suggests the shorts are getting nervous and getting out of the way.  We're not, details below.

 

WTW: Not Out of the Woods Yet - WTW   Total Rev   NA Meeting

WTW: Not Out of the Woods Yet - WTW   Attendence   Online 1Q14

CAN'T RECOVER FROM 1Q14

The first quarter is everything for WTW given seasonal membership patterns.  WTW membership peaks in 1Q, then seasonally declines through the year and troughs in 4Q.  So the strength of 1Q14 sets the tone for all of 2014.

 

In this case, it sets the tone for 2015 as well.  As we mentioned above, 1Q14 was its weakest quarter on record for membership growth dating back to 2007, and WTW will progressively cede membership through the year.

 

To recover in 2015 (to the essentially flat growth consensus is assuming) would require WTW to have one of its largest winter selling seasons on record in 1Q15.  We estimate WTW need to generate roughly 36%-50% sequential growth in membership in 1Q15 in order reach consensus revenue estimates in 2015 (range based on ARPU). Below you can see WTW's historical success on this front; we believe the odds are stacked against them.  

 

WTW: Not Out of the Woods Yet - WTW   1Q 4Q Attrition 2 

<chart4>

 

PUSHING OUT THE HEALTHCARE OPPORTUNITY

“The strength of our B2B business and our healthcare business over time is rooted in the strength of our B2C Business…I think healthcare is an important growth contributor for us overall. We said we can grow it to a $300 million plus business by 2018. But the key to us returning to growth is the first and foremost the B2C reinvention”

 

WTW “re-imagining” and re-engineering” essentially pushes out the opportunity they outlined so positively for the B2B Healthcare offering back at JPM Conference and their Analyst Day.  Instead of offering an offset to declines in the consumer business in the near term, it seems B2B contribution will emerge all at once in a compressed time frame between fixing the B2C engine and 2018.   

 

We’d make the following points regarding the B2B opportunity

  1. Their B2B plan sounds like Disease Management: a mature, low-multiple business with deeply entrenched incumbents and capabilities.
  2. Meaningful visibility on their 2018 targets are over a year away, or more.

CONCLUSION

We're going to remain short until the Street realizes WTW's weakness is more than just a short-term episode with no easy fix.  If you have any questions, or would like to discuss in more detail, let us know.

 

 

Hesham Shaaban, CFA

@HedgeyeInternet

 

Thomas Tobin

@HedgeyeHC

 


Retail Callouts (5/2): LB, JCrew, GRPN, WMT, COST, AMZN

Takeaway: Vicky should stick to fashion-leave performance activewear to the rest. GRPN new bulk concept. JCrew going lower price with Mercantile.

COMPANY NEWS

 

LB - Victoria’s Secret Sports-Bra Push Gets Off to Slow Start

(http://www.bloomberg.com/news/2014-05-01/victoria-s-secret-sports-bras-selling-more-slowly-than-expected.html)

 

  • "The lingerie chain, part of L Brands Inc., last year rolled out a new line of sports bras, including push-up varieties that let women show off their cleavage at the gym. The move was part of an increasing focus on activewear clothes, such as figure-enhancing workout pants and training shorts."
  • "So far, though, sales haven’t met the company’s initial ambitions. Victoria’s Secret ordered too many sports bras in the summer and fall of 2013 than it could sell, leaving it with excess inventory, Chief Financial Officer Stuart Burgdoerfer said this week at an event in New York. Even so, the retailer expects to sell the bras without marking them down, he said."
  • “'We bought enough to hit a home run, but we hit about a double or a triple,' Burgdoerfer said at the Barclays Retail and Consumer Discretionary Conference. 'We have grown that business very nicely, but we bought a lot of sports bras.'”

 

Retail Callouts (5/2): LB, JCrew, GRPN, WMT, COST, AMZN - chart1 5 2

 

Takeaway: No surprise that Vicky has a tough time executing on activewear that is actually intended for activity. We were surprised by the brand's scores in our two consumer surveys looking at LULU specifically and the female activewear market more generally - the one caveat is that VS/Pink shoppers predominately wear the brand's activewear offerings for everyday wear. Higher than Gap, Old Navy, CK, and H&M. Victoria Secret should focus on the fashion aspect of this trend and leave the performance aspect to those who do it best.

 

JCrew - J. Crew to Open Chain for Budget-Conscious Shoppers -- Update

(http://online.wsj.com/article/BT-CO-2014012.html)

 

  • "J. Crew is developing a new format aimed at budget-conscious shoppers...The new format is called J. Crew Mercantile, the people said. It will feature merchandise and prices closer to what shoppers would find at J. Crew Factory, the retailer's outlet stores, than what is available in its full-line stores, one of the people said. A spokeswoman confirmed that the retailer owned the J. Crew Mercantile name."
  • "The retailer has been scouting locations for the new chain, two of the people said. A few leases have been signed, but no stores have been opened, one of those people said."

 

Takeaway: Drexler's dusting off the old GPS playbook, and sticking to the nautical theme for his newest off-price concept. J. Crew now has 3 concepts including Madewell. It's an interesting time for mall retailers with ANF and ARO pulling the plug on brand extensions, but if anybody can execute a new banner rollout in this environment its Drexler.

 

GRPN, COST, WMT, AMZN - Groupon launches a bulk-shopping service

(http://www.internetretailer.com/2014/05/01/groupon-launches-bulk-shopping-service?bro_mid=47757062&bro_rid=0bc103e8000000000000000000000875a07c)

 

  • "The retailer best known for selling discount vouchers launched today a Costco Wholesale Corp.-like bulk-shopping service called Groupon Basics. The service will compete with Costco, Wal-Mart Stores Inc.’s Sam Club, as well as Amazon.com Inc., which sells a wide array of products in warehouse-size packages."
  • "Groupon says Basics distinguishes itself from Costco and Sam’s Club because it does not require a paid membership. And it has a lower free shipping threshold—items ship free when shoppers spend at least $25—than Amazon, which offers free shipping when shoppers spend at least $35."
  • "Groupon Basics sells far fewer products; at launch Groupon Basics has about 100 household, personal care and health and wellness items for sale. For example, it sells a 12-pack of Axe deodorant for $46.49; Unilever sells the same item on Amazon’s marketplace for $55.80 plus $3.90 for shipping. A Groupon spokesman says the retailer plans to build out its inventory, as well as add new categories such as canned and packaged groceries."

 

Takeaway: Not sure how GRPN is beating AMZN, COST and WMT on price without charging a subscription fee, but we don't imagine that will last long.

 

OTHER NEWS

 

LUX - Oakley Design on Display in Manhattan

(http://www.wwd.com/accessories-news/eyewear/oakley-design-on-display-in-manhattan-7664414)

 

  • "Erik Searles, vice president of retail for Oakley...Searles commenced a preview of the company’s Fifth Avenue flagship in Manhattan, which opened Thursday…"
  • "With 2,100 square feet for selling, the space has separate areas for the eyewear — custom, performance, prescription and lifestyle — representing the core of the offering."

 

Retail Callouts (5/2): LB, JCrew, GRPN, WMT, COST, AMZN - chart2 5 2

 

FINL - Running Specialty Group Adds Another Chain

(http://www.wwd.com/footwear-news/retail/running-specialty-group-adds-another-chain-7664125)

 

  • "The Denver-based organization — a joint venture between Finish Line Inc. and Gart Capital Partners — has acquired the eight-store Running Fit chain, which has locations in Detroit, Ann Arbor, Mich., and Traverse City, Mich. This brings RSG’s total number of stores to 57."
  • "According to a statement, Running Fit founders Randy Step and Steve Angerman will remain with the business, as will Trevor Step, Randy Step’s son and GM of the retail team."

 

LE - LANDS' END ANNOUNCES NEW SENIOR VICE PRESIDENT, CHIEF MARKETING OFFICER

(http://investors.landsend.com/releasedetail.cfm?ReleaseID=844547)

 

  • "Lands' End today announced it has named Steven Rado as Senior Vice President, Chief Marketing Officer. Rado will lead all aspects of marketing for the brand, including the oversight of strategic development, direction, and implementation of all marketing activities. His leadership will guide a team of 50 professionals across marketing operations including consumer insights, forecasting and analytics, catalog, digital marketing, customer acquisition, e-commerce, public relations and advertising."
  • "Rado comes to Lands' End as an experienced marketer with a strong background in retail and banking. Most recently, he was Senior Vice President of Marketing and Customer Strategy for Office Depot, and prior to that he was Vice President of Marketing for Victoria's Secret Direct."

 

Alec Richards

Analyst

 


Slow Growth Yield Chasing

Client Talking Points

RUSSIA

Will Putin retaliate to sanctions? Both Brent and WTI say probably this morning (both up +0.5%) after testing (and holding) their intermediate-term TREND lines of support. Russia’s stock market continues to crash -1% to -20.7% year-to-date.

COMMODITIES

The CRB Index finally corrected this week (-1.6% from its year-to-date highs), but there is nothing getting me off this #InflationAccelerating theme. It’s a good spot to buy basically anything here (Oil, Corn, Cows, etc).

RATES

Wow has consensus been crushed – a 10-year yield of 2.63% looks primed to test A) its year-to-date low and B) our TAIL risk line of 2.59%. Stay tuned – the slow-growth-yield-chasing asset allocation that has worked all year cares on this. Big time.

Asset Allocation

CASH 30% US EQUITIES 0%
INTL EQUITIES 10% COMMODITIES 24%
FIXED INCOME 18% INTL CURRENCIES 18%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds.  Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

OC

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.

DRI

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

TWEET OF THE DAY

Being long the long bond $TLT vs US growth (the Russell $IWM) has been fantastic #GrowthSlowing @KeithMcCullough

QUOTE OF THE DAY

"Any fool can fight a winning battle, but it needs character to fight a losing one, and that should inspire us." - W.B. Yeats

STAT OF THE DAY

Job creation accelerated in April as the U.S. economy added 288,000 new positions, while the unemployment rate plummeted to 6.3%. (CNBC)


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

next