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Cartoon of the Day: Pricey Beef!

The seasonally-adjusted price index for meats, poultry, fish, and eggs hit an all-time high in May, according to data from the Bureau of Labor Statistics (BLS).

In January 1967, when the BLS started tracking this measure, the index for meats, poultry, fish, and eggs was 38.1. As of last May, it was 234.572. This past May it climbed to a record 252.832.

 

Cartoon of the Day: Pricey Beef! - Beef cartoon 06.18.2014


Target to Canada: We're Sorry

Takeaway: At least Target (finally) recognizes that it has a brand problem in Canada.

Editor's note: This is an excerpt from retail sector head Brian McGough's morning research. Click here for more information on options available to Hedgeye subscribers.

 

TGT - Target trying to woo back Canadian consumers with video apology

 

  • "Target has taken to YouTube in order to apologize to Canadians, using the voices of its employees to take responsibility for a disappointing first year in the country. The two-and-a-half-minute video features interviews with Target employees reflecting on the problems the company has faced and promising improvement in the future."

 

Takeaway: At least Target finally recognizes that it has a brand problem in Canada. Whether or not this plea for forgiveness actually works is for the consumer to decide. But, we don't think execution is the only thing to blame for TGT's underwhelming results North of the border.The fact is that Canadian marketplace can't support the revenue projections the company set. In order the hit the $6bil revenue target in FY17, TGT Canada would have to eclipse the US store share of wallet in 4 years. Consensus estimates have come down about $1.3bil since we published our report in late April and are now under $4bil, but we think numbers are still too high. 

 

Target to Canada: We're Sorry - 445



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Restaurant Sector Valuation

In our newest biweekly product, we look at valuations across the restaurant industry categorized by specific sub-sectors. While these posts will primarily consist of charts, we have a few notable callouts in this week’s addition:

  • For the most part, we've seen a healthy correction in early 2014 across most of the industry.
  • Rising coffee prices and slowing domestic traffic trends at SBUX led to a notable correction in the valuation of the Coffee Category.
  • Rising cheese prices led to a notable correction in the valuation of the Pizza Category. 
  • Rising seafood, beef and produce prices have not yet led to a notable correction in the valuation of the Fine Dining Category.  We believe this day will soon come and have positioned accordingly – short DFRG.
  • From both a historical and relative perspective, the Fast Casual Category looks like the most attractive one in the restaurant space as PNRA, PBPB and NDLS have struggled of late.  FRGI is an intriguing story that we intend to familiarize ourselves with over the coming weeks.  It appears, to some extent, that the Street has not yet acknowledged it as a true fast casual competitor. 

Please note that the valuation tables below include the minimum, maximum and average valuations from 2010 and on.

Casual dining category

Restaurant Sector Valuation - one

Restaurant Sector Valuation - two

Restaurant Sector Valuation - three

coffee category

Restaurant Sector Valuation - four

Restaurant Sector Valuation - five

Restaurant Sector Valuation - six

family/fine dining category

Restaurant Sector Valuation - seven

Restaurant Sector Valuation - eight

Restaurant Sector Valuation - nine

Restaurant Sector Valuation - ten

Restaurant Sector Valuation - eleven

fast casual category

Restaurant Sector Valuation - twelve

Restaurant Sector Valuation - thirteen

Restaurant Sector Valuation - 14

pizza category

Restaurant Sector Valuation - fifteen

Restaurant Sector Valuation - sixteen

Restaurant Sector Valuation - seventeen

sandwich category

Restaurant Sector Valuation - eighteen

Restaurant Sector Valuation - nineteen

Restaurant Sector Valuation - twenty

 

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


Retail Callouts (6/18): TGT, UA, WMT, COST, AMZN

Takeaway: TGT issues apology to Canadian guests & prices $2bil bond offering. UA opening 30,000 sq.ft. 'Brand House' in Midwest.

EVENTS TO WATCH

 

Thursday (6/19)

  • PIR - Earnings Call: 11:00am

 

COMPANY NEWS

 

TGT - Target trying to woo back Canadian consumers with video apology

(http://www.ctvnews.ca/business/target-trying-to-woo-back-canadian-consumers-with-video-apology-1.1873538)

 

  • "Target has taken to YouTube in order to apologize to Canadians, using the voices of its employees to take responsibility for a disappointing first year in the country. The two-and-a-half-minute video features interviews with Target employees reflecting on the problems the company has faced and promising improvement in the future."

 

VIDEO LINK - https://www.youtube.com/watch?v=vIBqv2BDU4E

 

Takeaway: At least TGT finally recognizes that it has a brand problem in Canada. Whether or not this plea for forgiveness actually works is for the consumer to decide. But, we don't think execution is the only thing to blame for TGT's underwhelming results North of the border. The fact is that Canadian marketplace can't support the revenue projections the company set. In order the hit the $6bil revenue target in FY17, TGT Canada would have to eclipse the US store share of wallet in 4 years. Consensus estimates have come down about $1.3bil since we published our report in late April and are now under $4bil, but we think numbers are still too high.

 

Retail Callouts (6/18): TGT, UA, WMT, COST, AMZN - Chart 1 6 18 14

 

OTHER NEWS

 

TGT - Target Sweetens Yields on $2 Billion Bond Sale

(http://online.wsj.com/articles/target-sweetens-yields-on-2-billion-bond-sale-1403042618)

 

  • "Target Corp. increased yields to sell $2 billion of bonds on Tuesday, as the retailer continues to deal with the fallout from a customer-data breach late last year."
  • "The company priced five-year bonds to yield 2.348% and 10-year bonds to yield 3.553%, 0.60 percentage point and 0.90 percentage point more than comparable U.S. Treasurys. Earlier in the day, Target shopped the bonds to yield about 0.50 percentage point and about 0.80 percentage point more."
  • "Target said it planned to use proceeds from the sale for general corporate purposes and to buy back existing debt, which carried higher interest rates. Concurrently with Tuesday's bond sale, the retailer offered to buy back bonds maturing between 2028 and 2038."

 

UA - Under Armour is bringing "Brand House" concept to Chicago

(http://www.bizjournals.com/chicago/news/2014/06/17/under-armour-is-bringing-brand-house-concept-to.html)

 

  • "Under Armour said today it will open its sixth so-called 'Brand House' in Chicago in March of 2015 at 600 N. Michigan Ave., literally a stone's throw from a large Nike brand store at 669 N. Michigan Ave."
  • "Under Armour's new Chicago shop will be housed in a 30,000-square-foot space...The new Chicago store will be the sixth specialty retail outlet Under Armour has opened and the largest to date."

 

WMT, COST, AMZN - Big Retailers Agree to List Unit Prices on Websites

(http://www.nytimes.com/2014/06/17/business/big-retailers-agree-to-list-unit-prices-on-websites.html?ref=technology&_r=1)

 

  • "Some of the country’s largest supermarkets and drugstores have agreed to display prices by unit of measurement, as well as by item, on their websites and mobile apps, to help customers slice though the confusion that sometimes arises from different packaging and discounts."
  • "Major retailers including Walmart, CVS and Costco have agreed to the deal, brokered by the office of New York’s attorney general, Eric T. Schneiderman."
  • "Mr. Schneiderman had aimed even wider but was rebuffed by one online retailing giant, Amazon.
  • 'Amazon refused to participate in this consumer-oriented initiative,' Mr. Schneiderman’s office said in a statement."

 

WMT - Wal-Mart Advances Made in USA Plan

(http://www.wwd.com/business-news/government-trade/wal-mart-advances-made-in-usa-plan-7742431?module=hp-topstories)

 

  • "Wal-Mart Stores Inc. is determined to give a boost to apparel and textile production in America."
  • "In town for the Commerce Department’s SelectUSA summer conference, Michelle Gloeckler, Wal-Mart’s senior vice president of home and the executive leading the U.S. manufacturing initiative, told WWD that fostering more apparel and textile production is key for the retail giant’s Made in America initiative."

 

ZQK - Julien David Teams with Quiksilver

(http://www.wwd.com/menswear-news/sportswear/julien-david-teams-with-quiksilver-7742715?module=hp-topstories> )

 

  • "The designer, best known for his laid-back city suits, has teamed up with U.S. surfwear brand Quiksilver. The three-year partnership will span six capsule collections and is to include men’s board shorts, wetsuits, rashguards and T-shirts."

UP: POUND, OIL, & GOLD

Client Talking Points

BOE

Our un-elected central planning overlords at the Fed should be taking down their U.S. growth estimates today. Bank of England, on the other hand, is basically chirping group-thinking economists, telling them to take up their expectations for a rate hike; not surprisingly, the Pound loves that ($1.694 vs USD, +8% year-over-year); the FTSE likes it too – We like it.

OIL

After last week’s ramp, oil prices holding strong; WTI crude up another +0.3% this morning to +$106.68/barrel, all but assuring you that the new year-to-date highs you saw in U.S. CPI yesterday (May +2.1% year-over-year) are going to continue higher in June #InflationAccelerating.

GOLD

Starting to make a stealth series of higher lows (vying for its 3rd consecutive up week at +6% YTD); if the Fed freaks on housing (MBA mortgage application awful again this morning) and/or growth, we think Gold continues higher in 2014.

Asset Allocation

CASH 10% US EQUITIES 4%
INTL EQUITIES 12% COMMODITIES 22%
FIXED INCOME 30% INTL CURRENCIES 22%

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.

LM

Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road

TWEET OF THE DAY

42 days since $SPX has had a +/- move of 1% (2nd longest streak in 15yrs)

@KeithMcCullough 

QUOTE OF THE DAY

The strength of a family, like the strength of an army, is in its loyalty to each other.

-Mario Puzo

STAT OF THE DAY

Today in 1940, Winston Churchill gave his "Finest Hour" speech.


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