Tick, tick, tick. It’s not really different.
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Takeaway: May pending home sales rose 6.1% m/m, but remain down -5.2% year-over-year. The data also seems at odds with the MBA numbers.
Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.
*Note - to maintain cross-metric comparability, the purchase applications index shown in the table above represents the monthly average as opposed to the most recent weekly data point.
Today's Focus: May Pending Home Sales Index
The National Association of Realtors (NAR) today released its Pending Home Sales Index for the month of May.
Pending Home Sales rose by 6.1% month-over-month to an index level of 103.9 (vs 97.9 in April). For reference, an index value of 100 corresponds to the average level of contract activity in the year 2001. While the report was positive month-over-month, contract activity remains down year-over-year by 5.2%. This is a stark contrast vs where we were one year ago, when contract activity was running +10.7% year-over-year.
Geographically, weakness on a year-over-year basis was most notable in the West, where volume was down 11.1% Y/Y, while the Northeast looked the best (& the lone region registering positive growth) at +0.2%.
This morning's data is notable for two reasons. First, it shows substantial strength in the contract volume of existing homes being sold. Second, it shows substantial divergence relative to mortgage purchase applications data.
As the first chart below shows, the Pending Home Sales index and MBA Purchase Applications index are substantially dislocated right now. Historically, the two series have had a strong tendency towards co-integration, meaning that when they diverge they tend to re-connect a short while later.
We'll get the final weekly print for June mortgage purchase applications data in two days, and barring a moonshot of a print we would expect substantial weakness from the June Pending Home Sales report in one month's time.
About Pending Home Sales:
The Pending Home Sales Index is a monthly data release from the National Association of Realtors (NAR) and is considered a leading indicator for housing activity in the US. It is a leading indicator for Existing Home Sales, not New Home Sales. A pending home sale reflects the signing of a contract, but not the closing of the transaction, which occurs 1-2 months later. The NAR uses data from the MLS and large brokers to calculate the Pending Home Sales index. An index value of 100 corresponds to the average level of activity during 2001.
The NAR Pending Home Sales index is released between the 25th and the 31st of each month and covers data from the prior month.
Joshua Steiner, CFA
Christian B. Drake
HEDGEYE RETAIL IDEAS LIST
EBAY removed from long bench. NKE removed from short bench.
DG - Dollar General CEO Announces Retirement Plans
"Dollar General Corporation announced that its chairman and chief executive officer, Rick Dreiling, 60, has informed the Board of Directors of his intent to retire as CEO effective May 30, 2015 or upon the appointment of a successor. Dreiling has agreed to serve, at the discretion of the Board, as chairman during a transition period following the appointment of a new CEO."
"Dreiling has served as CEO since January 2008 and was named chairman of the Board in December 2008. Under his leadership, the Company's annual sales have increased more than 80 percent to $17.5 billion in 2013 and store count has increased by 38 percent to more than 11,000 stores in 40 states."
Takeaway: Dreiling was critical in leading DG in the two years leading up to its (re)IPO in December 2009. Since that point, he's executed on the real estate growth strategy, but also in a meaningful shift into consumables. We've been vocal about the category shift being largely played out at DG (and FDO). And although there is admittedly still room for the company to expand (and fill out) its footprint, we can't imagine that a CEO switch at this point does not signal either a change in the growth trajectory, or the likelihood that growth is simply harder to come by. That's a similar theme these days in retail -- DG, TGT, JCP, KSS.
FINL - 1Q14 Earnings
All in, a good quarter for FINL -- and it's not too often that we say that. Comps were good, costs were well-controlled (usually a problem for FINL) and inventories looked outstanding. It's been better than three years since we've seen FINL's inventories so low and improvement so robust.
U.S. retailers nervous as West Coast port labor talks running out of time
"With peak shipping season approaching, U.S. retailers are anxiously monitoring labor negotiations affecting 20,000 workers at West Coast ports that handle more than 40 percent of goods shipped in ocean containers."
"The six-year contract between dockworkers and the employers who operate port terminal and shipping lines expires on July 1 at 5 p.m. PDT. It covers workers at 29 ports from California to Washington state, including major hubs in Los Angeles/Long Beach and Seattle/Tacoma."
"Representatives for the workers and their employers said they expect container cargo to continue moving until an agreement is reached, but retailers and other business that depend on the ports are still haunted by a costly 2002 shutdown."
UA - Under Armour opens new retail experience in Panama
"Under Armour Founder and CEO Kevin Plank hosted the launch event for the brand's new retail space in Panama City, Panama. Located in one of the country's premiere shopping destinations, Multiplaza Pacific Mall, the store offers the brand's diverse range of performance footwear, apparel and equipment designed to give athletes an advantage when they train and perform."
"The first Under Armour retail store in Central America features a giant LED Screen positioned in the center of the display window to showcase the brand's impactful advertising. The metal and wood finishing throughout the interior design underscores the signature raw and gritty ethos of the brand and the innovation and technology engineered into its performance gear."
"Opening a brand store in Panama City represents the latest international expansion effort, for Under Armour, which continues to build its presence outside North America. In the past six months, the brand has launched in Brazil, Chile, the Philippines and Singapore."
AEO - American Eagle Outfitters Announces Entry into United Kingdom
"American Eagle Outfitters, Inc. today announced its entry into the United Kingdom, as the Company further expands its global presence with the opening of three new company owned and operated stores. The American Eagle Outfitters stores will be located in the Bluewater premier mall in Kent, England, as well as the Westfield Group’s London and Stratford City shopping centers in London, England. The stores opening in the Westfield centers will include an aerie presence in shop-in-shop form. All of the stores are expected to open during the fall of 2014."
BEBE - Plans to Exit 2b Concept to Focus on the bebe Brand Initiate Cost Reduction Program
"bebe stores, inc. announced the exit of its 2b business and a comprehensive cost reduction program as part of the Company's on-going turnaround plan. Following a strategic business review, the Company has identified key initiatives it estimates will generate approximately $9-10 million in annualized pre-tax savings, beginning in fiscal 2015."
"Following careful evaluation, the Company has made the determination to exit the 2b business by the end of fiscal 2014, July 5, 2014, enabling it to increase its focus on the core bebe brand’s retail and outlet stores, e-commerce and international licensing business. The 16 2b mall-based stores including e-commerce business are expected to generate pre-tax losses of approximately $5-6 million in fiscal 2014, excluding impairment charges. The Company estimates that it will record pre-tax restructuring charges of approximately $5-6 million in relation to lease termination, asset write-off, inventory liquidation write downs and employee termination costs to close the remaining 16 2b mall stores including the e-commerce business."
APP - American Apparel Adopts Poison Pill Defense
"The company scrambled over the weekend to set up a stockholder rights plan, or poison pill, to prevent ousted Charney from regaining control of the firm by accumulating more stock."
"Charney — a lightening rod libertine who was sidelined as president, chief executive officer and chairman for alleged misconduct — already owns 27.2 percent of the company, or 47.2 million shares."
"And on Wednesday he quietly inked a deal that would have Standard General buy at least 10 percent of the company’s stock and then loan Charney the money to acquire the stake."
CHS - Chico's FAS, Inc. Appoints Todd E. Vogensen to Senior Vice President, Chief Financial Officer
"Chico's FAS, Inc. announced that its Board of Directors has appointed Todd E. Vogensen as the Company's new Senior Vice President, Chief Financial Officer, replacing Pamela Knous, who has left the organization to pursue other interests. Prior to his appointment as CFO, Mr. Vogensen had been the Company's Senior Vice President, Finance. Mr. Vogensen will report to Kent Kleeberger, the Company's Executive Vice President, Chief Operating Officer and its Chief Financial Officer from 2008 to 2011."
Forever 21 - Forever 21 Sets Ambitious Growth Plan
"Don Chang is plotting a dramatic expansion for Forever 21."
"The founder and chief executive officer of the fast-fashion chain, based here, told WWD his “ultimate goal is to double the size of our company within the next three years,” giving it a footprint of 1,200 doors globally."
"And the company’s newest concept, F21 Red, could be key to that ambitious plan. Last month, Forever 21 launched the banner at the Azalea Shopping Center in South Gate, Calif., a working-class community about 20 miles south of here."
"The 18,000-square-foot store targets a value-oriented customer with a deeper selection of the Forever 21’s core items at seemingly sharper price points. The move surprised many analysts and retail experts, who questioned how the company would make its margins on $1.80 camisoles, $3.80 tank tops, $4.80 bikinis and denim starting at $7.80."
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Investment Position: we remain long Lorillard (LO), which we added as a Best Idea on February 26, 2014 with a longer term price target of $80/share.
Boosting investor spirits that a RAI-LO deal gets done is news that Imperial Tobacco may soon be flush with cash and shopping the market to increase its U.S. business.
Imperial is planning to sell 30% of its stock next month in its Madrid unit, Compania de Distribucion Integral Logista Holdings SA, which is expected to raise about $800 million for the fourth-largest global cigarette maker.
The Imperial news comes as RAI is likely shopping some of its menthol-related brands (Kool, Winston and Salem, around ~5% total market share) to divest exposure and prevent anti-trust hurdles. Currently, the main flags weighing on a RAI-LO getting done include:
Imperial currently has around 3% market share of U.S tobacco, and may be looking to boost its U.S. exposure. In 2007 it acquired Kentucky-based Commonwealth Brands for $1.9 Billion and sells under such brands as USA Gold, Sonoma and Fortuna brands.
Below we’ve outlined our TREND duration over the intermediate term (3 month); our longer term price target of $80/share represents +30% higher than Friday’s closing price of $61.50.
Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor". If you'd like to receive the work of the Financials team or request a trial please email .
European Financial CDS - Swaps were generally wider across the board in Europe's banking system, but were acutely wider in Portugal. Portugal's largest bank, Banco Espirito Santo, is being probed by Luxembourg's justice department. The swaps widened to 318 bps (+130 bps w/w).
Sovereign CDS – Sovereign swaps were generally little-changed on the week, though Portugal was +9 bps to 154 bps in response to concerns over the probe into its largest bank, Espirito Santo, by Luxembourg's justice department.
Euribor-OIS Spread – 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. The Euribor-OIS spread tightened by 1 bps to 15 bps.