prev

JAPAN POLICY VACUUM PART II?

Takeaway: We lack conviction on the intermediate-term direction of the Abenomics Trade and we think investors should remain on the sidelines for now.

I know. The only thing worse than an offensive lineman who can’t block is a sell-side strategy note that lacks conviction. But don’t take our lack of conviction as the absence of conviction altogether; rather, we have conviction in the view that it makes little sense for investors to have conviction in either direction of the Abenomics Trade (SHORT Japanese yen + LONG Japanese equities) with respect to the intermediate term.

 

Consider the following arguments that are in favor of this investment strategy:

 

  1. A likely transition from Quad #3 (i.e. growth slowing as inflation accelerates) in 2Q14 to Quad #1 (i.e. growth accelerating as inflation decelerates) in 3Q14: Not exactly the hardest call to make. Japanese growth has certainly stabilized here in the back half of 2Q and that is very supportive in the context of an easier GDP compare and tougher CPI compares.
  2. A re-risking of the GPIF portfolio: Per Japanese Prime Minster Shinzo Abe, a review of GPIF’s target allocation is due anytime in the next 1-3M. He has gone on record to suggest that the portfolio rebalancing will “benefit the insured and also bring investments that foster growth”. The general consensus among the investment community is that GIPF will likely reduce its JGB holdings from 60% of its $1.2T in assets to 40% and increase its allocation to Japanese equities to 20% from 12% currently.
  3. Favorable micro tailwinds: Japanese companies have announced a record $25B in share repurchases as of the last week of JUN and are sitting on a record $3T in cash to the extent they will look to continue engineering an optical improvement in ROE over the intermediate term. Per Bloomberg, TOPIX companies posted an 8.6% ROE in the year through 1Q14, the most since the 12M ended 1Q08. That’s well in advance of the trailing 10Y average of 6.2%  – which is the 2nd lowest reading of the 24 developed markets tracked by Bloomberg and less than half that of the S&P 500.

 

 

JAPAN POLICY VACUUM PART II? - JAPAN

 

JAPAN POLICY VACUUM PART II? - Japan High Frequency GIP Data Monitor

 

JAPAN POLICY VACUUM PART II? - GDP COMPS

 

JAPAN POLICY VACUUM PART II? - CPI COMPS

 

Now, consider the following two arguments that are particularly unsupportive of the aforementioned investment strategy:

 

  1. Abe’s “Third Arrow” is more talk; less walk: In an op-ed this weekend, Abe defended the “Third Arrow” of his economic reform agenda, claiming that it will “fell Japan’s economic demons”. While time will ultimately tell on that front, we do not share Abe’s bullish conviction with respect to the current plan.
    • We like that he remains committed to lowering Japan’s corporate tax rate to sub-30% “over the next several years” (after a -240bps reduction in the effective rate in FY14), but we do not think it’s particularly helpful to ensure that the measure will be “revenue neutral” in the context of long-term fiscal consolidation targets. That likely equates to even more pressure on Japanese households from a tax perspective. Moreover, it’s unclear how promoting marginal growth in corporate profits will benefit Japan; if the US experience is any indication, the only growth Japan will see from rising corporate profits is growth in socioeconomic inequality.
      • The Third Arrow is woefully short on ameliorating Japan’s core economic issue: woeful demographics. Specifically, a policy to promote mass immigration is conspicuously absent from the Third Arrow as it stands currently. Per StreetAccount:
        • Kyodo cited government data that indicated Japan's population fell 243,684 YoY to 126,434,964 as of 1-Jan. 
        • Deaths hit a record high of 1,267,838 last year while births were up modestly YoY to 1,030,388.
        • Those 65 or older increased to 31,582,754, and those under 15 hit 16,489,385, a twenty-year low.
        • 39 of 47 prefectures experienced a fall in population, with Hokkaido seeing the largest decline.
        • Elderly people accounted for 24.98% of the population, and the number of foreign residents declined 2,347 YoY to 2,003,384.
  2. Easier Fed + Japanese monetary policy vacuum = stronger JPY: We continue to be the bears on the USD because we continue to be the bears on domestic economic growth and the latter supports our contrarian view that the Fed will continue to ease monetary policy, at the margins, as we progress throughout the year. We put out a deep-dive on this topic last week; CLICK HERE to access that report. While down from the trailing 3Y reading of +0.98, the Japanese equity market remains tightly correlated to the USD/JPY cross (+0.73 over the TTM). We expect that correlation to tighten (in a manner that is negative for Japanese stocks) as consensus is forced to review its lazy expectations for US monetary policy, at the margins.

 

Net-net, we do not think it’s appropriate for investors to gross up their exposures here in either direction. Our call for investors to cover Abenomics shorts ~1M ago was highly appropriate, but the outlook from here is less than clear.

 

As such, we think it makes sense to hold tight through 3Q so that we can finally be 1-2M striking distance of a likely expansion of the BoJ’s QQE program. Again, that is the approximate timing of the next major pro-Abenomics Trade catalyst according to our Hedgeyes, as the resiliency of the Japanese economy post the consumption tax hike should continue to keep Kuroda and Co. at bay for at least the next 3-4M.

 

Specifically, given the large amount of “hay” that the LDP has promised to bale on the growth and inflation front, we continue to see no reason why long-term investors should bail on the Abenomics Trade (i.e. they should remain involved on the long side of Japanese equities). Policies to Inflate out of Tokyo aren’t going anywhere anytime soon; that’s more than we can say for the Japanese consumer, however.

 

JAPAN POLICY VACUUM PART II? - 5

 

JAPAN POLICY VACUUM PART II? - 6

 

Email us if you have any further questions and we’d be more than happy to follow up. Best of luck out there!

 

DD

 

Darius Dale

Associate: Macro Team


Dollar General: Our Take on the Chairman and CEO's Resignation

Takeaway: The resignation of DGs chairman and CEO likely signals either a slowdown in the growth trajectory or simply that growth is hard to come by.

(Editor's Note: Here is an excerpt from a note our Retail Team published to institutional subscribers earlier today.)


DG - Dollar General CEO Announces Retirement Plans (PRESS RELEASE)

(http://investor.shareholder.com/dollar/releasedetail.cfm?ReleaseID=856844)

 

"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."

 

Our 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.


YELP: Debating TAM

Takeaway: We realize there may be some confusion regarding our US TAM estimate for YELP. Below we clarify our analysis, and reiterate our estimates.

NOTE SUMMARY

  1. YELP's US TAM = 3.4M: We have segmented the market in terms of all US businesses by end-customer and income. Our 3.4M estimate is still generous, including two cohorts that may not be all that addressable.

  2. Peak Penetration = 170K: We've said that YELP's realistic TAM is 170K, but we realize our wording here is somewhat confusing.  We're referring to its peak quarterly penetration, not the total number of accounts that YELP will ever penetrate (we believe it has already penetrated in excess of this metric).  

  3. YP ≠ Low-Hanging Fruit: Management has suggested that YP's 575K accounts are a realistic target for YELP.  However, YP has a considerably larger TAM.  575K isn't the low-hanging fruit, it's a pipe dream.

YELP'S US TAM = 3.4M

YELP: Debating TAM - YELP US TAM 1

Consensus may argue that YELP’s total addressable market (TAM) is substantial, with a pool of 27M businesses in the US.  But after digging deeper into census data, YELP's TAM is considerably smaller.  Two things to consider 

  1. Can’t Afford: 75% of US businesses make under $100K in annual revenue.  YELP’s cheapest ad package is $3,600 annually.
  2. Wrong Audience: ~47% of US businesses are B2B, largely outside the scope of YELP’s core retail audience.

After netting out both B2B-focused businesses, and retail businesses with less than $100K in annual revenues, we estimate the total addressable US market is closer to 3.4M.  However, 3.4M is still a generous assessment.

 

Note the two business cohorts in the yellow boxes above.  In the first box from the left are businesses generating $100-$250K in revenue.  However, these are segmented by revenues, not profits, which means the price of YELP's ad packages may still be prohibitively expensive to this group as well.  For example, a business with $150K in revenue and a 20% operating margin generates $30K in profits; paying $3,600 for an ad package is still a prohibitive cost in this scenario.  1.4M businesses out of our 3.4M estimate lie within this cohort (40%).

 

In the yellow box to the right are businesses generating over $1M in revenues.  Many of these business are national businesses, which may be looking for broader reach outside of a local sponsored search results.  We're not saying that national businesses would not use local advertising, but that these businesses likely have more advertising options at their disposable, thus tougher accounts for YELP's reps to penetrate.  644K businesses out of our 3.4M estimate lie within this cohort (19%).

 

So while we estimate YELP's US TAM to be 3.4M, over half of that estimate may not be all that addressable.

PEAK PENETRATION = 170K 

We understand there may be some confusion here.  So below we will clarify how we arrive at this metric

 

YELP currently has 74K active local business accounts (ALBAs), which is only ~4.6% penetration of the 1.6M claimed business pages as of 1Q14.  YELP’s advertiser base has never exceeded 5.0% penetration of its claimed pages since at least 1Q10. 

 

YELP: Debating TAM - YELP   Ad penetration

 

But there is a more important point: YELP's recurring attrition issues will always drag on the number of accounts that it will report in any given period.  YELP can continue hiring more reps, and close more new business, but it will continue to lose more accounts as its business grows.  YELP's quarterly attrition rate has hovered in a relatively tight range since 1Q12 (18.7% average, with a standard deviation of 60bps). So unless there is a seismic shift in retention rates, penetration will always be capped by what will be a growing number of lost accounts on a quarterly basis moving forward (e.g. the 12K accounts that YELP lost in 1Q14 is roughly 1/3 of the total accounts it lost in 2013). 

 

So unless retention changes, which we believe will be dependent on future pricing decisions, we can't see how YELP will ever surpass its peak quarterly penetration rate of 5% by any material margin.  In turn, we estimate that YELP’s realistic peak penetration in any given quarter is 170K businesses (5% of the total 3.4M opportunity). 

 

YELP: Debating TAM - YELP   Attrition Q Rate ex Qype 1Q14

YELP: Debating TAM - YELP   Cum Lost Q

YP ≠ LOW-HANGING FRUIT 

We understand, that 170K may sound crazy relative to the consensus narrative, especially since management has implied that YP's 575K customers are the low-hanging fruit for YELP.  But when you compare the two companies, you can see that they are not actually comparable.  The bottom line is that YP has a materially larger TAM.  Some points to consider below

  • YP has a much broader product portfolio; Not all businesses are looking to do local sponsored search results, and while YP's customer count includes fading offerings like print yellow pages and direct mailing, there is still a demand for it today and that won't change overnight.  YP's broader portfolio means it is tapping a segment of the market that YELP cannot.  That alone means it has a larger TAM.  
  • YP can penetrate the B2B market: Services such as website design/hosting, and search engine marketing & optimization are not confined to the retail market.  YELP’s users are exclusively retail, so there is no basis to assume it can penetrate the B2B market, which is 47% of all US businesses.
  • YP has lower priced products: this is extremely important since 75% of all US businesses make less than 100K in revenue.  YELP’s cheapest ad package is $3600 annually, which is prohibitively expensive for most companies in the US.  YP's lower-priced offerings means it can penetrate a much larger segment of the market that YELP can't today.

YELP: Debating TAM - YELP   vs. YP DXM

 

Each of these points individually means that YP has a much larger TAM; collectively they suggest that the two companies aren't comparable.  So when we say that YELP's peak quarterly penetration will not exceed 170K accounts in any given period, are we really that crazy? Or does the data raise enough red flags to cast serious doubt as to what YELP can reasonably penetrate? 

 

 

If you have any questions, or would like to discuss further, let us know.  For additional detail, let us know if you would like to see our updated deck from our call last week.

 

Hesham Shaaban, CFA

@HedgeyeInternet


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

Cartoon of the Day: It's Different This Time

Tick, tick, tick. It’s not really different.

Cartoon of the Day: It's Different This Time - Tick tock 06.30.2014

 

SUBSCRIBE TO CARTOON OF THE DAY.

 


NAR SAYS PENDING HOME SALES SURGED IN MAY, BUT MBA DATA TELLS ANOTHER STORY

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.

 

NAR SAYS PENDING HOME SALES SURGED IN MAY, BUT MBA DATA TELLS ANOTHER STORY - Compendium 063014

 

*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. 

 

NAR SAYS PENDING HOME SALES SURGED IN MAY, BUT MBA DATA TELLS ANOTHER STORY - Pending vs. Purchase Apps w June Apps Data

 

NAR SAYS PENDING HOME SALES SURGED IN MAY, BUT MBA DATA TELLS ANOTHER STORY - PHS Index   YoY TTM

 

NAR SAYS PENDING HOME SALES SURGED IN MAY, BUT MBA DATA TELLS ANOTHER STORY - PHS LT

 

NAR SAYS PENDING HOME SALES SURGED IN MAY, BUT MBA DATA TELLS ANOTHER STORY - PHS Regional May

 

NAR SAYS PENDING HOME SALES SURGED IN MAY, BUT MBA DATA TELLS ANOTHER STORY - PHS vs EHS 1mo Lag

 

NAR SAYS PENDING HOME SALES SURGED IN MAY, BUT MBA DATA TELLS ANOTHER STORY - Demand Model Pending vs Case Shiller 18 Mo. Lag

 

 

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.

 

Frequency:

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


Retail Callouts (6/30): Idea Bench, DG, FINL, UA, APP, CHS, AEO

HEDGEYE RETAIL IDEAS LIST

 

Retail Callouts (6/30): Idea Bench, DG, FINL, UA, APP, CHS, AEO - Chart 1 6 30 2014

EBAY removed from long bench.  NKE removed from short bench.

 

 

COMPANY NEWS

 

DG - Dollar General CEO Announces Retirement Plans

(http://investor.shareholder.com/dollar/releasedetail.cfm?ReleaseID=856844)

 

"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.

Retail Callouts (6/30): Idea Bench, DG, FINL, UA, APP, CHS, AEO - Chart 2 6 30 2014

 

 

OTHER NEWS

 

U.S. retailers nervous as West Coast port labor talks running out of time

(http://www.reuters.com/article/2014/06/27/us-usa-ports-labor-idUSKBN0F22FI20140627)

 

"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

(http://www.fibre2fashion.com/news/garment-company-news/newsdetails.aspx?news_id=165227)

 

"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

(http://investors.ae.com/financial-news/financial-news-details/2014/American-Eagle-Outfitters-Announces-Entry-into-United-Kingdom/default.aspx)

 

"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

(http://investorrelations.bebe.com/press-release/other/plans-exit-2b-concept-focus-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

(http://www.wwd.com/business-news/financial/american-apparel-adopts-poison-pill-7771613?module=hp-topstories)

 

"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

(http://www.chicosfas.com/investor-relations/press-releases/press-release-details/2014/Chicos-FAS-Inc-Appoints-Todd-E-Vogensen-to-Senior-Vice-President-Chief-Financial-Officer/default.aspx)

 

"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

(http://www.wwd.com/retail-news/mass-off-price/forever-21-sets-ambitious-growth-plan-7775404?module=hp-topstories)

 

"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."


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

next