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Hedgeye Retail: Adidas Can’t Afford to Sell Everything but Shoes | $ADDYY

Takeaway: Adidas Chief Executive Herbert Hainer makes a pretty damning admission.

 Hedgeye Retail: Adidas Can’t Afford to Sell Everything but Shoes | $ADDYY - alansmith 2755508c

 

Adidas sees boost to sales from World Cup

 

• "German sportswear company Adidas has given a more precise sales growth target for 2014, amounting to a rise of up to 8 percent, as it gets a lift from the soccer World Cup that starts in Brazil next month."

 

• "'This year we will add 1-1.2 billion euros ($1.4-1.6 billion) to operational revenue, with the World Cup playing an important role,' Chief Executive Herbert Hainer told journalists at a briefing in Munich in remarks released for publication on Thursday."

 

• "That increase represents a rise of 7-8 percent from the 14.492 billion euros of sales Adidas recorded in 2013. Previously, Adidas had guided for a 'high single-digit' increase in currency-neutral sales in 2014."

 

• "'Football is the DNA of our company. We want to clearly show that we are number one in football,' Hainer said, adding Adidas expected to sell significantly more balls than at the last World Cup in South Africa four years ago and about as many shirts."

 

• "Hainer acknowledged, however, that Adidas faced a 'head-to-head' race with Nike in the business for football boots, including in Germany, predicting Adidas would sell 2 million pairs of special boots designed for the World Cup."

Takeaway From Hedgeye’s Brian McGough:

Pretty damning admission by Hainer. Adidas is 'head-to-head' with Nike in the football boots arms race? We would have guessed as much, but Nike is just starting to gain traction in the soccer market. Add Under Armour to the mix and it’s a pretty bleak outlook for Adidas. When soccer balls and t-shirts are the key pillar of growth for a footwear company, we get concerned.

 

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

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Cartoon of the Day: Crushing Inflation

Takeaway: While lies about inflation in Washington can most definitely live, they can’t live forever.

Cartoon of the Day: Crushing Inflation - Inflation.AvgAmerian5.22.2014

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GLD: Adding Gold to Investing Ideas

Takeaway: We are adding GLD to Investing Ideas.

Hedgeye's Macro team is adding Gold to Investing Ideas. 

 

We will send out a full report shortly detailing our bullish case.

 

GLD: Adding Gold to Investing Ideas - gold


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Sticking With Long LO on Fundamentals and Rumor Takeout Winds

Once again rumors swirl that LO is going to get taken out. Late into yesterday’s close Reuters reported that RAI remains the interested party, caught in a 3-way with BAT that owns 42% of RAI.  LO ripped +10% higher on the unconfirmed source (rumors began in March of this year), however the stock has given up some of its move intraday (down ~ -4%); we think the market is getting over its ski tips on an imminent timetable for a deal given acquisition challenges.

 

We maintain our Best Idea Long Call Lorillard (presented on March 4 of this year). We think investors are best served to ride out the rumor mill pushing the stock higher as we don’t expect an imminent deal, and maintain that LO is fairly valued as a stand-alone or takeout target at $80/share (more below).

 

We view a hypothetical deal (especially an imminent one) between RAI and LO as challenged on three main factors:

  • Our main flag is that a combined RAI + LO would own ~ 67% of U.S. menthol market, which we believe should trigger anti-trust flags.
  • Big tobacco is already a highly concentrated industry in the U.S. across the big three – MO has a leading ~51% of market share; a combined RAI + LO would equate to ~ 42% share.   
  • BAT may look to maintain or increase its ownership in RAI (for the remaining 58%), however it cannot act until July of this year when a 10-year standstill agreement between it and RAI expires.

A scenario suggests that RAI could look to divest such menthol brands as Kool, Winston and Salem (~5% total market share), which could serve to change the consideration of the FTC/DOJ, however all of this shopping would take time.

 

As part of the Best Idea’s thesis we did not consider a RAI + LO deal. We think the decision to replace CEO Daan Delen with Susan Cameron, who held the CEO seat for 7 years ending in 2011, is contributing fuel to the speculation that she wants to come out of the box “strong” with this deal. 

 

Our thesis is built on the superior fundamentals of the Lorillard portfolio:

  • We do not see Menthol Regulation Risk from the FDA over the medium term (1-2 years) and assign less than a 20% probability over the long term.
  • We expect blu e-cigs to benefit from first mover advantage and maintain leading market share despite competitive pressures from Big Tobacco’s entry into the category. Looking out 5 years to 2018, we model blu’s earnings contributing 31% to total LO, and accelerating earnings growth in the combined company.
  • We expect strong and stable menthol fundamentals driven by lasting consumer and demographic trends that differ from traditional tobacco.

 

Below we’ve outlined the earnings power of a combined base business plus the blu e-cigarette business and a scenario table on EPS estimates five years out, as outlined in our original presentation. A fair value $80/share target would equate to a price 30% higher than today’s, so we think it pays to hold on to LO amidst the rumor winds!

 

Sticking With Long LO on Fundamentals and Rumor Takeout Winds  - zz. risk reward LO

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst


INITIAL CLAIMS: STRONG ENOUGH

Takeaway: Initial Claims suggest the tapering will continue. The bond and currency markets, meanwhile, are still signaling slower growth.

Headline claims rose +28K WoW to +326K while the rate of improvement in non-seasonally adjusted initial claims, our preferred read on the underlying trend in the labor market, decelerated to -5.5% YoY vs. -15.8% last week.  The 4-wk rolling average in YoY NSA claims decelerated -80bps sequentially to -5.3% YoY.  

 

In short, another week of decent (not outstanding) improvement as we continue to steadily track towards the frictional lower bound at ~300K in seasonally adjusted initial claims.

 

Josh Steiner, our head of financials research, characterized this morning’s claims data like this:

 

This morning's claims data isn't as bad as it looks, but it's not great either. The previous week was anomalous in its strength, whereas this week is more or less in line with the steady trendline rate of improvement we've been seeing for a while now. The important takeaway is this. The labor market remains strong enough for the Fed to push forward with its taper.

 

Source: Hedgeye Financials 

INITIAL CLAIMS: STRONG ENOUGH - 1

 

INITIAL CLAIMS: STRONG ENOUGH - 2

 

The “strong enough” initial claims characterization sits as a sufficient microcosm for the broader domestic macro data as well. 

 

Sequentially, the data is generally better but the reported March-May data certainly doesn’t reflect significant deferred 1Q (weather) demand or signal a return to the slope of growth observed over 1Q-3Q13 period last year. 

 

Still, sequential improvement supports the wait-&-see/steady-as-she-goes policy approach promulgated by the fed again yesterday– at least over the nearer term.   

 

With the 10Y and $USD both in bearish formation, the bond and currency markets continue to price in slowing growth.  On the fundamental side, housing continues (& will continue) to slow (see today’s note: Biggest MoM Growth in Inventory...Ever) and the conflation of decelerating wage growth, a troughed savings rate and rising inflation continue to constrain any upside for  “non-core” consumption growth.  And from a comp perspective, growth comparisons get harder while inflation comps ease through the third quarter of this year. 

 

INITIAL CLAIMS: STRONG ENOUGH - Eco Summary 052214 

 

 

More broadly, looking at growth and inflation expectations across our Global Macro dashboard (click on it for an expanded view) developed market growth estimates continue to rise while EM growth revisions remain negative.  Interesting, funds continue to flow in the opposite direction of revision trends (ie. into EM markets & away from domestic/DM markets) – a phenomenon largely linked to persistent weakness in the dollar, in our view. 

 

On the inflation side, expectations for ongoing disinflation remain the prevailing trend.  Notably, the U.S. sits as one of the only developed market economies (alongside Canada) where inflation expectations have been rising. 

 

Absent technical factors driving a material supply/demand imbalance for credit, rising inflation expectations + falling (nominal) bond yields = lower real growth expectations.  We think that remains the right call for the immediate/intermediate term.  

 

INITIAL CLAIMS: STRONG ENOUGH - GM P L 052214

 

Christian B. Drake

@HedgeyeUSA


10 More Signs of #InflationAccelerating

Takeaway: It’s going to be an entirely different thing when the 80% of people in this country getting jammed by the Fed’s Policy To Inflate revolt.

US rents (34% of Americans have to rent, and like it) and the cost of living hit all-time highs this week, so alongside #RentRipping, here’s more year-to-date #InflationAcclerating data:

CRB Foodstuffs Index +21.9% YTD

10 More Signs of #InflationAccelerating - 1

CRB Commodities Index +10% YTD

10 More Signs of #InflationAccelerating - 9

Coffee +57.6% YTD

10 More Signs of #InflationAccelerating - coffee

Nickel +42.1% YTD

10 More Signs of #InflationAccelerating - nickel3

Lean Hogs +28.3% YTD

10 More Signs of #InflationAccelerating - pork chops

Soybeans +19.2% YTD

10 More Signs of #InflationAccelerating - Soybeans Beige 5 08

Cattle +15.4% YTD

10 More Signs of #InflationAccelerating - 700cow

Palladium +15.4% YTD

10 More Signs of #InflationAccelerating - palladium 3428

Orange Juice +10.9% YTD

10 More Signs of #InflationAccelerating - orangejuice

Oil +7.9% YTD 

10 More Signs of #InflationAccelerating - petroleum

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