Takeaway: #GrowthSlowing, reiterated.
Takeaway: The longest and deepest baby recession since the 1970s may be coming to an end.
The Great Recession triggered a steep decline in the U.S. birth rate, but signs show the downward trend may be slowing.
U.S. births are down -10% since 2008. In other words, the cumulative decline over the last five-plus years means almost 1.5 million American babies have not been born. That’s obviously a lot of babies who will never exist, never grow up, never go to school, never enter the workforce (not to mention have their own families) and so on—especially when compared to the 3.8 million kids under one-years-old in the United States today.
While the economic toll of the Great Depression during the 1930s engineered the biggest decline in birth rates over the last century, this present decline is pretty close in scale. Fortunately, the decline of births which occurred during the Depression was eventually followed by the Baby Boomers, The Boomer Echo, as well as the multiple generations in between. These cycles clearly play big roles in economic, political, and social trends as the synchronized peaks and troughs of millions of people wind through the system.
The recent decline is suggesting that a large number of young American adults and potential parents are signaling that they are not quite ready—financially or otherwise—to take on the significant commitment of a life, and a lifetime. That’s a lot of “leaning in” going on: (see Lean In: Women, Work, and the Will to Lead by Facebook COO Sheryl Sandberg) if indeed we are witnessing a deeper, secular change in the attitude women and their partners have toward having children.
That said, our model below shows why we believe the baby making tide may be turning.
While we can’t measure attitudes, we can measure the result using some clever manipulation of data the federal government produces each month. Small positive percentage changes in the last 6 months may mark the beginning of a much bigger move over years to come. After all, there are millions of biological clocks ticking away all across the country.
There are plenty of reasons to care about the trend in baby making in the United States. Our focus and work on the US Medical Economy has drawn us into the analysis; For example, having a baby is the single biggest reason anyone not on Medicare is admitted to a hospital, accounting for 30% of all hospital admissions.
But there are many other reasons to care about declining birth rates, some of which can imperil entire economies and countries. Some of the more obvious implications from a drop in births include the related and chilling effect on retail spending, education, housing, food, and so forth. In other words, less babies means less spending on baby clothes (CRI), toys (MAT) and Happy Meals (MCD). Not to mention an aging workforce heading into retirement and attendant strains on Social Security and tax revenue. On the other hand, “Junior” may have a better shot getting into the college of his choice in 2028.
Look no further than countries like Russia and Japan which are both concerned over declining births in their respective countries. Japan is aggressively encouraging its young people to date and mate to reverse its birth rate plunge which has dropped to just half of what it was only six decades ago.
Meanwhile, “Mother Russia” hasn’t exactly been living up to its name of late and is facing its own plunging population crisis. Not too long ago, Vladimir Putin went so far as incentivizing women with $9,200 to have a second baby—that’s in a country where average monthly incomes are a small fraction of that.
Bottom line: We are bullish on American baby making. We believe an uptick in U.S. births is coming. Of course, there is always the alternative downside scenario lurking in a Children of Men like dystopian future if we’re wrong.
Still not enough stability in the Caribbean puts us on the sideline despite continued improvement in Europe. NCLH at risk.
OVERALL SURVEY SENTIMENT
- CCL: NEUTRAL
- RCL: NEUTRAL
- NCLH: NEGATIVE
CALL TO ACTION
Our pricing survey on May 27-28 showed continued pricing pressure in the Caribbean, although some of it could be attributed to a seasonally slower summer. European pricing was stronger in May for the Royal Caribbean brand, Celebrity and Costa. We’re also seeing pockets of strength in the upcoming summer cruising season in Alaska.
Norwegian remains the brand at most risk given the unabated, pervasive discounting in the Caribbean. Can Breakaway premiums withstand the new competition from Quantum later in the year?
CCL reports FQ2 earnings in four weeks. CCL has the easiest comps among the three publicly traded cruise companies, particularly for the Caribbean. Hence, Carnival brand Caribbean pricing YoY for 2H 2014 is still up mid-to-high single digits YoY, despite the heavily competitive environment. Europe is more of a mixed picture with Costa leading the charge.
We’ll have a more detailed earnings preview on CCL the next time we run the pricing survey on June 18th.
- Carnival brand: Rough seas in the Caribbean as pricing is off substantially for the early summer itineraries in FQ3. More discounting was seen in the Western Caribbean segment, which has been a weak spot. FQ4 2014 and FQ1 2015 pricing are fairly steady. On a YoY basis, pricing dipped for FQ3 in late May but for the past 3 months, it has averaged close to high single digit growth.
- Princess/Holland America: Pricing recovered slightly but remain at lower levels than that seen in late March
- Seasonal discounting for some June itineraries at Holland America
- Princess pricing unchanged
- Costa pricing for FQ3/FQ4 mainly kept its course in late May, suggesting higher YoY comps, +20% in some cases.
- It’s a different picture for CCL’s other brands. Princess pricing fell further, suggesting a modest decline overall for FQ3. While Cunard pricing has stabilized, comps are very difficult, particularly for FQ4. Holland America is struggling with pricing in FQ3. AIDA pricing slipped again for both FQ3 and FQ4 across all itineraries. P&O Cruises UK is doing a little better with pricing holding steady for the latter half of FY2014.
- Fairly quiet with some summer discounting in Princess’s Japan itineraries.
RCL is probably best positioned for this year with its price leadership in Europe and the highly anticipated arrival of Quantum to the New York/New Jersey market. But so far, the brands haven’t been immune to the Caribbean discounting. RCL is doing exceptionally well in Europe and the favorable pricing for Anthem’s 2015 sailings bodes well for that region. After an unusually slow start to the year for the Alaska itineraries, pricing is beginning to pick up.
- For the summer, RC brand pricing slumped in the Caribbean, especially in June/July. However, this is slightly offset by stronger pricing in Alaska.
- Celebrity pricing is down significantly for FQ4 in the Caribbean
- Quantum pricing for Nov/Dec itineraries remain relatively unchanged
- Pullmantur pricing steady
- Pricing in Europe has been extremely robust and they got stronger at the end of May for both the RC and Celebrity brands. Pricing was up high double-digits for the rest of FY 2014.
- Azamara modest declines in pricing for summer itineraries
- While Pullmantur pricing fell sequentially in both the Mediterranean and Baltic Sea regions, comps are so easy that on a YoY basis, they are still able to maintain high double digit pricing growth.
- Slight uptick in Anthem pricing for 2015 itineraries
- While this region will be more material in the 2nd half of 2015, pricing has been generally steady among the RCL brands with the exception of Celebrity which slashed pricing for its January 2015 Singapore itineraries.
- YoY pricing is still significantly behind for winter 2014 but sequential pricing trends have been positive
NCLH maintains the most exposure to the Caribbean which remains a struggle for brand. The charts below show no pricing power. Strength from Europe is a buffer to the bleeding but as the recent lower FY yield guidance indicated, the Caribbean declines have been overpowering.
- Caribbean pricing still has not bottomed for NCLH as it suffered almost a double digit pricing decline since late April. The quarter we're now focused on is FQ4 given Breakaway’s pricing with Quantum of the Seas entering the NY/NJ market. For FQ4, Breakaway’s APD is averaging $86, while Quantum’s APD is ~$200.
- Although premiums for the most part improved for NCLH’s newer ships as seen below, Q4 Breakaway premium shrunk from 24% in April to 15% at the end of May.
- NCLH has 49%, 40% and 62% of its capacity in the Caribbean (including Bermuda) for Q2/Q3/Q4 2014, respectively. Compared with last year, Caribbean (including Bermuda) capacity is up 6% points.
- Pricing environment is challenging with pricing barely up.
- NCLH has 10% and 18% exposure to Alaska in FQ2 and FQ3.
Europe and Hawaii
- Europe looks outstanding for the summer with steady sequential pricing and strong double digit YoY pricing growth
- Hawaii FQ2 summer pricing was slightly weak
STOCK VS SURVEY
Survey has been mostly positive for CCL in the past 6 months
Survey has suggested mixed signals for RCL in the past 6 months
Survey has been bearish on NCLH since the 02/12/14 survey
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Takeaway: Target's e-commerce problem can't be fixed by a simple digital advisory council.
- "Target Corp. announced it has formed a Digital Advisory Council, as part of its efforts to accelerate its digital transformation. The panel of technology industry leaders will help guide Target’s omnichannel strategies and push Target to innovate faster, and discover new ways to leverage technology to enhance the guest experience – both online and in stores."
- The council includes experts with varied tech backgrounds, and is comprised of:
- Ajay Agarwal, Managing Director of Bain Capital Ventures
- Amy Chang, CEO/Co-Founder of Accompani, formerly led Google Analytics
- Roger Liew, Chief Technology Officer of Orbitz Worldwide
- Sam Yagan, CEO of the Match Group and CEO/Founder of OkCupid
- "The council will meet quarterly as a group with Carl and others driving Target’s omnichannel strategies, including Target.com and Mobile teams, the Enterprise Strategy team and other Target leaders. Council members, who will serve two-year terms with an optional third year, also will be called upon to provide guidance on various topics and to help Target connect with other tech leaders."
- "In addition to forming the new council, Target is bolstering its internal digital talent with plans to hire at least 50 new software engineers this year for Target.com and Mobile product teams. The engineers will be primarily based in Minneapolis, where they will work as part of the company’s new digital product teams. Some new engineers will be based in Target’s San Francisco office."
Takeaway From Hedgeye’s Brian McGough:
Target's e-commerce problem can't be fixed by a simple digital advisory council. Some of the members make sense to us, like the former head of Google Analytics and the CTO of Orbitz. But the founder of OkCupid – the self-proclaimed 'best Free dating site on Earth'? Not so sure about that one.
The biggest positive, in our opinion, is that Target is hiring 50 new software engineers. We give Target props in that regard, as it's investing in an area it has long ignored. Most of the developers will be based in Minneapolis – which is not exactly a hub for code-writing talent. Most importantly, we've got to ask ourselves, is it enough? After all, Target has a $2.5 billion e-commerce business and it is hiring 50 people. Wal-Mart just announced that it is hiring 500 people to support its e-commerce platform. Could this effort be additive for Target? Possibly. But it can't continue to ignore that the competition continues to run at a faster rate.
Our sense is that this is the first thing that a new CEO addresses. We also think whatever we see out of the new CEO will take down margins for 2-3 years before it ultimately helps the top and bottom line.
* * * * * *
Editor's Note: This is a complimentary research excerpt from Hedgeye Retail sector head Brian McGough. Follow Brian on Twitter @HedgeyeRetail.
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THE STANDOFF: Initial Jobless Claims say the Labor Market continues to improve, 1Q14 GDP & April Pending Home Sales say “escape velocity” remains a panglossian phantasm, and consensus growth expectations continue to sing a sirenic but delusional tune around 2014 growth.
In this morning’s Early Look, ahead of the 1Q14 GDP revision, we made the following remark:
“ Q114 GDP probably wasn’t as bad as the headline and Q214 won’t be as good...taking the average of the two quarters offers the easiest smoothing adjustment and it will show we’re a high 1% economy – which is about right.”
In the wake of the worse than expected revision to reported 1Q growth that still pretty well characterizes our view.
THE CONCLUSION: Labor market trends remain solid, but with housing slowing, inflation rising, earnings growth static (w/ savings rates troughed) and the current level of consumption growth (which sat as the singular source of strength in 1Q14 GDP) overstated and/or unsustainable, we continue to think the currency and debt markets ($USD broken and rates in full retreat) are scoring the immediate/intermediate term growth outlook correctly.
THE DELUSION: Consensus GDP estimates for full year 2014 remain at +2.5-3%, implying 4% growth for the balance of the year. We’d argue the side on which the balance of risk in that expectation sits is fairly conspicuous.
(Note: This morning’s strategy note- Sell #OldWall Polish - reviews how the markets are scoring the data YTD and highlights our view and preferred positioning for the immediate/intermediate term. This morning’s housing note reviews the April Pending Home Sales data - Pending Home Sales Remain Sluggish)
INITIAL CLAIMS: ANOTHER STRONG PRINT
- The Data: Headline claims fell -26k WoW to 300K with the 4-wk rolling average declining -11K WoW to 311.5K. Non-seasonally adjusted claims, which we consider a more accurate representation of the underlying labor market trend, came in at -15% YoY (vs. -5.3% prior) with the 4-wk rolling average improving to -10.4% YoY vs. -5.3% last week.
- The Takeaway: The positive momentum in the labor market along with the broader, sequential improvement in the domestic macro data off the 1Q14 weather distortion suggest no change in the pace of Tapering. The improvement in claims also bodes well for the May employment report. While SA claims reported during the BLS survey period (conducted during the pay period including the 12th of the month) were less good than the most recent weeks figures, on balance, the May claims data is supportive of a good NFP print.
source: Hedgeye Financials
1Q14 GDP (1st Revision): #GrowthSlowing
- Bad But Not A Surprise: The first revision to 1Q14 GDP came in at -1.0%, missing estimates of -0.5%. The magnitude of the revision was larger than expected but the negative print and downward revisions to inventories, exports, & Gov’t spending was not a surprise as the actual march data came in worse than the BEA estimates embedded in the advance GDP report.
- Inventory Drag: The negative revision to inventories was the biggest contributor to the total revision. The inventory ramp, which comprised a big portion of reported nominal GDP growth in 2H13, is now reversing as end demand/income growth proved insufficient at expeditiously drawing down that burgeoning stock.
- Consumption: Strength in consumption growth, particularly Services, was the conspicuous positive on the quarter. Notably, Services consumption was supported by the significant acceleration in healthcare spending.
*Healthcare Spending: The strength in Healthcare Services spending stems largely from the implementation of Obamacare. The reported figures, by BEA’s own admission (see their note Here), are very much an estimate and the preliminary data are likely to be revised (significantly) over time as the Census bureau’s quarterly QSS and annual SAS survey’s provide harder data.
With reported Hospital and Outpatient spending both accelerating materially in 1Q14, it could also be that individuals are accelerating medical consumption ahead of ACA implementation and uncertainty around coverage changes.
Either way, in the context of the broader spending data, the takeaway is pretty straightforward – Healthcare Services represent ~17% of total household consumption expenditures and certainly impacts the direction of reported, headline consumption growth. To the extent that deceleration is the larger trend across the balance of services, a mis-estimation of ACA related spending and/or a significant, transient pull-forward in medical consumption could be materially distorting the prevailing, underlying trend.
- Real Final Sales growth (GDP less Inventory Change): decelerating 2.1% QoQ to 0.6%…revised lower by 10bps
- Gross Domestic Purchases (GDP less exports, including imports): Very Weak sequentially. Decelerating 160bps QoQ to +0%..revised lower by -90bps
- Real Final Sales to Domestic Purchasers (GDP less exports less inventory change): Probably the cleanest read on aggregate private sector demand was decent at 1.6% QoQ (flat sequentially)…revised up +7bps.
- So…: Ugly Macro or (now) easy comps – pick your spin!
Christian B. Drake
Takeaway: PLKI is up double-digits intraday and rightfully so.
Popeyes Louisiana Kitchen, Inc. (PLKI) continues to be on our Investment Ideas list as a long.
PLKI released earnings after the close yesterday, posting exceptional first quarter results despite a sluggish QSR environment. Rather than blame the weather, PLKI grew global, domestic and international same-store sales by 4.5%, 4.3% and 5.8%, respectively, while beating top and bottom line estimates. Similar to what we heard from Chipotle, management noted a strong bounce back in sales following periods of unfavorable weather.
Popeyes continues to outperform the domestic chicken-QSR and overall-QSR segments. Management noted intense competition in the quarter, as direct competitors sought to take advantage of favorable chicken costs by shifting their menu and promotional focus to chicken products. We believe this increased promotional activity actually benefitted Popeyes by bringing attention to its superior product. The company managed to increase its share in the domestic chicken-QSR segment to 22.3% from 20.2% a year ago.
Commodity prices are expected to be favorable throughout 2014, primarily led by lower chicken costs. Surging shrimp prices were a bit of a concern heading into the release, but management was quick to point out that shrimp only accounts for approximately 5% of total annual spend. All told, management doesn’t feel inclined to take any price increases this year as value continues to be very important to their guests.
The majority of leverage in its operating model moving forward will be driven by top line sales and, to a lesser degree, enhanced back of house operations. To that extent, management has notable top line drivers in place including the continuation of its reimage program (65% of domestic stores are currently remodeled; 80% will be by year end), the virtual success cycle of advertising (growing sales drive an increase in media spend), and a full calendar of resonant promotional activity. Remodels have typically resulted in a 3-4% sales lift although the remaining remodels will be some of the most expensive and dramatic ones to date, suggesting greater upside to any sales lift. In addition, the new model of restaurants (which is leading the expansion efforts) is generating $1.6 million in average unit volumes, significantly greater than the old model which generates $1.3 million.
Longer-term, we believe a significant domestic and international growth opportunity lies ahead for Popeyes and are confident they will expand at a rate that doesn’t sacrifice returns. Aside from continued expansion, we’re attracted to Popeyes’ diversified revenue stream and stable cash flows which enables management to continue pursuing value enhancing initiatives. In our view, Popeyes is well-positioned to outperform for the remainder of 2014 and we continue to view annual long-term guidance of 1-3% same-store sales growth, 4-6% unit growth and 13-15% adjusted EPS growth as achievable.
What we liked:
- It is clear to us that Popeyes is one of the best managed companies in the restaurant space.
- Global same-store sales increased 4.5% y/y.
- Total domestic same-store sales increased 4.3% y/y.
- International same-store sales increased 5.8% y/y.
- Management didn’t blame weather and noted a strong rebound in sales following unfavorable periods.
- Popeyes’ domestic same-store sales continue to outpace both the chicken-QSR segment and overall QSR segment.
- Popeyes increased its market share in the domestic chicken-QSR segment to 22.3%, up from 20.2% a year ago.
- Restaurant food, beverages and packaging costs for company operated stores decreased 40 bps to 32.7% of sales.
- Restaurant employee, occupancy and other costs for company operated stores decreased 34 bps to 46.9% of sales.
- Restaurant operating profit for company operated stores increased 74 bps to 20.4% of sales.
- Adjusted EPS of $0.46 grew 15% y/y.
- Free cash flow grew 21% y/y to $14.2 million.
- The company repurchased approximately $10 million worth of stock.
- The company increased full-year same-store sales guidance to 3-4%, up from 2-3%.
- The company increased full-year adjusted EPS guidance to $1.58-1.63, slightly up from $1.57-1.62.
What we didn’t like:
- Operating margin decreased 15 bps y/y to 26.7%.
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