Takeaway: Risk happens slowly at first...
Takeaway: SIGMA review for the 16 retailers reporting this week. TGT, DKS, URBN, FL, HIBB, TJX, HD, LOW, DLTR, SPLS, AEO, BONT, GPS, GME, SHLD, PETM
Here's a SIGMA review of every retailer that reported earnings this week. As a reminder, the analysis triangulates sales, inventories and margins. The vertical axis is the spread between sales and inventories -- the higher on the scale, the better. The horizontal axis is the y/y change in EBIT margin. In effect, you want to be either in the upper right hand quadrant, or headed there. The opposite holds true for the lower left.
There are 16 charts in total. The group overall carried on the trends we started to see with department stores last week, where inventory positions are improving across the board. The exception report had been made up of the winners that stood out amongst the list of dogs. But this time, we're seeing the opposite. Target, Dollar Tree ,Sears, Staples and Hibbett are leading the charge for those that are tuning the wrong way. No major surprises there. URBN and GPS are two of the more notable positive turns to us.
DICK'S SPORTING GOODS
HD - The Home Depot Names Craig Menear CEO, Effective November 1, 2014
- "The Home Depot®, the world's largest home improvement retailer, announced that Craig Menear, currently president, U.S. retail, has been named CEO and president, effective November 1, 2014, and has been elected to the company's board of directors, effectively immediately. Current chairman and CEO Frank Blake will remain chairman."
DG, FDO, DLTR - Family Dollar Board of Directors Rejects Proposal from Dollar General Based on Antitrust Issues
- "Family Dollar Stores, Inc. announced today that its Board of Directors has unanimously rejected the non-binding proposal made by Dollar General Corporation on the basis of antitrust regulatory considerations. In addition, the Family Dollar Board unanimously reaffirmed its recommendation in support of the merger agreement with Dollar Tree, Inc."
UPS - UPS confirms malware breach at 51 stores
- "UPS Stores, a subsidiary of United Parcel Service, said that a security breach may have led to the theft of customer credit and debit data at 51 UPS stores in the United States."
- "In a statement, the company said that customers who had used their debit or credit cards at affected locations (which are listed on the UPS site) from Jan. 20 to Aug. 11 may have been exposed to the malware. However, the company noted, exposure began after March 26 in most cases."
LUX - Luxottica to Discuss CEO's Possible Departure at Next Board Meeting
- "The world's largest eyewear maker, Luxottica Group SpA, said Thursday that it will discuss the possible departure of Chief Executive Andrea Guerra at its next board meeting."
BRBY - Burberry chief executive sells more than £5m of luxury brand's shares
- "Burberry chief executive Christopher Bailey has sold £5.2m of shares in the luxury fashion company, four months after taking over from predecessor Angela Ahrendts."
- "Bailey has offloaded 68,667 shares and nearly three quarters of two sets of performance related shares granted in 2011 and 2009 when he was the company's chief creative officer and which recently vested. It is understood that nearly half of the shares granted under the performance related schemes were sold to cover taxes. Of the remainder, half were retained and half were cashed out."
DDS - Dillard's Announces CFO Departure
- "On August 22, 2014, Dillard’s, Inc. announced that James I. Freeman, Senior Vice President and Chief Financial Officer of the Company and a director, informed the Board of Directors of his intent to retire as an executive officer of the Company effective February 1, 2015. Mr. Freeman will remain on the Board of Directors."
Takeaway: Some cracks in the RCL bullish thesis while more positive pivots for CCL and NCLH on the margin
Some cracks in the RCL bullish thesis while more positive pivots for CCL and NCLH on the margin
CALL TO ACTION
Wall street darling RCL has seen little resistance this year. Quantum pricing looks good and up until now the RCL thesis looked bullet proof. However, our August survey revealed some discounting in the RC Caribbean itineraries. Stocks trade on the margin and the pivot here looks negative for RCL despite unabated strength in Europe.
On the other hand, the CCL and NCLH pivots look positive, on the margin. The August survey indicated slightly higher pricing for the Carnival brand pricing for FQ4 2014 and FQ1 2015. For NCLH, the Norwegian brand (through mostly Getaway) seems to be reflecting CEO Sheenan's promise of a 3% price increase.
We've been negative on NCLH, neutral on CCL, and positive on RCL. Given the survey results versus current sentiment, we could see the relative performance of the stocks reverse somewhat over the coming weeks.
SURVEY vs SENTIMENT
- CCL: Positive
- RCL: Negative
- NCLH: Positive
We track YoY and sequential pricing for 13,000 ship itineraries spanning across 8 geographic regions. We rely on sequential pricing trends (defined as how pricing has changed relative to pricing seen at the last time the company provided guidance) for price pivot signals.
Our pricing survey for mid-August suggests the RC brand underperformed in the Caribbean and for some Asia itineraries. Meanwhile, we saw a slight improvement for CCL and NCLH due to stronger pricing for the Carnival and Norwegian brands. European pricing, which is Q3 heavy, remained steady.
Caribbean pricing continues to be volatile but in mid-August, the Carnival brand showed higher pricing. In stark contrast, the other brands in the Caribbean fared poorly, particularly Princess.
- Carnival brand
- Sequential pricing rose slightly for FQ4 as well as for FQ1/FQ2 2015.
- On a YoY basis, FQ4 pricing is trending up in the mid-teens for the Eastern Caribbean itineraries and mid-single digit growth for the Western/Southern Caribbean itineraries.
- Princess/Holland America
- Pricing is significantly lagging behind. Princess, in particular, has been discounting aggressively for Caribbean and Western US itineraries for FQ4 2014 and FQ1 2015. Holland America pricing was a tad lower.
- Costa continues to be the shining light for CCL’s European business thanks to very easy comps. FQ4 pricing growth remains comfortably near 20%. 1H 2015 pricing comparisons will be a challenge if Costa does not raise prices. Pricing for the other brands were either flat or slightly higher.
- Pricing ticked up for Holland America and Princess itineraries.
- Costa pricing for FQ4 moved modestly lower while 1H 2015 pricing was a tad higher
- Holland America/Princess pricing was unchanged for early 2015
Royal Caribbean brand pricing receded somewhat in mid-August in the Caribbean. However, that was offset by its pricing leadership in Europe.
- RC brand
- A bit of a surprise as sequential pricing turned south for many of the Royal Caribbean brand itineraries for FQ3 and FQ4. The discounting extends to Allure of the Seas and Oasis of the Seas.
- Excluding Quantum of the Seas, on a YoY basis, FQ3 pricing is trending down mid-single digits, while FQ4 pricing is down slightly.
- Quantum of the Seas pricing was steady as a rock
- FQ4/FQ1 sequential pricing was steady but due to hard comps, YoY pricing is lower by high single digits.
- Pricing was steady for Q4 2014 but a challenging start to Q1 2015 due to more difficult comps
- August sustained the pricing momentum seen earlier in 2014. For the RC brand, FQ3 pricing is trending 20% YoY and slightly above 10% YoY for FQ4.
- Celebrity pricing increased sequentially for 2H 2014 with YoY pricing in the low double digits.
- After creeping higher for the previous two months, Anthem of the Seas pricing rose modestly in mid-August for May-October 2015 sailings.
- Pullmantur pricing slightly increased sequentially
- Pricing was generally weak for the RC brand while Celebrity is seeing pricing growth.
NCL has been slumping for much of 2014 due to Caribbean overcapacity. But do pricing signals from mid-August suggest the beginning of an inflection point or a head fake?
- Still discounting in the Caribbean for FQ3 but the sequential cutting has tapered.
- Breakaway cut FQ3 prices to a new low of $91 per diem
- FQ4 pricing showed a 3% sequential price increased led by Getaway in the Nov/Dec months
- This is the 1st sequential price increase since we started tracking the data for FQ4
- FQ4 ship premiums rose for Breakaway and Getaway
- Q1 2015 pricing lower - as expected, due to difficult comps
- Q2 2015 up slightly
- Pricing was stable; few itineraries available
- Continues to be a struggle for the rest of the year
CCL/NCLH outperformed while RCL was the laggard in August, at least relative to recent trends. The Caribbean has been a roller-coaster ride for the cruisers this summer as mixed brand pricing trends are the norm and we may see more volatility ahead. A trend or an outlier, only time will tell.
The good news is that Europe pricing remains quite robust for the rest of 2014 despite the significant global geopolitical turmoil. The question is whether it can be sustained into 2015. While it is super early, we're seeing mixed pricing there as well.
The Carnival brand is making strides in pricing thanks to ridiculously easy comps but it is not translating into higher prices for CCL's other brands. With earnings in one month, we look to September's survey for confirmation of these trends.
Though NCLH performed better in mid-August, we wait to see if it is indeed an inflection point. Remember, CEO Sheehan promised investors a 3% price increase across its fleet during its Q2 conference call. Among the big 3 operators, NCLH is most sensitive to the Caribbean/Bermuda market, and faces harder pricing headwinds in 1H 2015 along with no yield boost from a new ship until FQ4 2015.
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Client Talking Points
Domestic stock funds put up their 16 consecutive week of outflow and are now entering the seasonally weakest period of the year so avoid those equity managers JNS and TROW. The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $1.0 billion spread for the week ($3.0 billion of total equity inflow versus the $4.1 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds).
Indices are broadly lower in-line with recent economic data out of the region. Eurozone CPI is running at 0.4% year-over-year in July, which is the lowest since October 2009. Our quantitative lines of support have been broken across European equities for 1.5 months (the DAX, CAC, and MIB index all remain bearish TREND signals).
The U.S. dollar is up here week-over-week. If it holds above the tail line of 81.44 and continues to make a series of higher highs we may have to back away from our negative view. We will have to see what Yellen’s next move is, she speaks at Jackson Hole today at 10:00am (Mario Draghi speaks at 2:30pm).
|FIXED INCOME||24%||INTL CURRENCIES||4%|
Top Long Ideas
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.
The level of activism in the restaurant industry has never been more rampant. In the past year alone, we’ve seen CBRL, DAVE, DRI, BJRI and BOBE attract largely uninvited attention from these investors. BOBE has a long history of mismanagement, evidenced by flawed strategic rationale, an excessively bloated cost structure and severe underperformance relative to peers. Fortunately, its poor operating performance presents a tremendous opportunity. We believe activist investor Sandell has identified significant, largely feasible, opportunities to enhance shareholder value. Particularly, we see tremendous upside value in selling the foods business, transitioning to an asset light model and refocusing capital allocation.
Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position. Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.
Three for the Road
TWEET OF THE DAY
$GPS makes it clear that market share for Athleta will come from $NKE. No mention of $LULU. (not that we won't see share shift there too)
QUOTE OF THE DAY
Great moments are born from great opportunities.
STAT OF THE DAY
The A.L.S. Association has received $41.8 million in donations from July 29 until Aug. 21. More than 739,000 new donors have given money to the association. That’smore than double the $19.4 million in total contributions the association received during the year that ended Jan. 31, 2013, according to a filing with the Internal Revenue Service.
“There’s a lot of cash on the sidelines!”
Outspoken hedge fund manager Cliff Asness of AQR recently remarked “Every time someone says, ‘There’s a lot of cash on the sidelines’ a tiny part of my soul dies. There are no sidelines.”
Asness' pet peeve for this common saying implying “this is why the market still has room to run” based on absolute historical fund flows and equity valuations is based on a slightly different interpretation than we prefer to reference. Yet we absolutely agree with his disdain for this statement at face value (although maybe not as pointedly).
With all global market participants attempting to front-run the RELATIVE positioning of each monetary authority, finding the right RELATIVE positioning across asset classes is the key starting point for global macro risk management in today’s environment. We strongly believe that our implication of the POLICY metric into our quantitative model for pinning the convexity of growth and inflation is a key differentiator. Sticking solely with a strategy that seeks fundamental value through historical, absolute metrics has been a difficult task during the second half of this 6-year bull market.
In an interview discussing his pet peeves and preferable investment strategy, Asness went on to say that in his opinion, two of the main strategies that have worked over the long-term, are value and momentum investing and that combining those works much better than either one.
Value with a catalyst as we prefer to call it?
Back to the Global Macro Grind...
This is only his high level opinion about what works, but when we look at our own process, we believe it’s plausible to back into our own process from this simple statement. We describe our process as “a multi-factor, multi-duration model that utilizes a fundamental and quantitative approach to global macro risk management.” The quantitative sequence for buying or selling a single security is as follows:
- Is the slope of growth and inflation in those economies under the guise of central banks with the ability to print money accelerating or decelerating RELATIVE to consensus expectation as reflected in market prices?
- What is the fiscal and monetary response RELATIVE to the other central banks of the “reserve currencies” who, with the confidence of all global participants for now, tighten their credit spread by printing more money? What emerging market economies benefit or suffer?
- What do the effects of a stronger or weaker domestic currency mean for real domestic growth based on the componentry of its growth dynamics? How is this observed to confirm or discredit the tendencies in markets?
- Now with this overlay, what is fundamentally happening in a domestic economy to strengthen or weaken the outlook for growth?
- Which sectors perform better or worse under each scenario (see all four below)?
- With this sector bias, pick your long-short ideas
- MOST IMPORTANTLY, how do you execute this fundamental call (HINT: Some form of momentum?)
- By studying our intermediate-term duration, we can observe key levels of support and resistance to observe the overall TREND in the market.
- If in fact the fundamental and TREND signals match up we manage the risk of the range by buying on red and selling on green on the signals.
Generating alpha in a market that has gone straight up for the last two years is no easy task. Our best way to seek outperformance begins with #1 above. There are simply four main scenarios in our GIP model (GROWTH, INFLATION, POLICY) for real economic expansion, and front-running the inflection points allows us to pick SECTORS that outperform under each scenario:
- Growth accelerating, inflation decelerating
- Growth accelerating, inflation accelerating
- Growth decelerating, inflation accelerating
- Growth decelerating, inflation decelerating
The monetary response to each scenario and the implications for the strength of an economy’s real purchasing power is predictable in our opinion, but in this never-before seen monetary experiment, front-running the RELATIVE policy response when the centrally-planned machines of different monetary authorities are confronted with the same scenario is difficult. We believe the best- way to front run the big turns is to take in the relevant economic and market data on a day-to-day basis, and position accordingly.
Janet Yellen’s commentary on Wednesday was perceived as more hawkish than the market expected. We weren’t “trading the speech” or hanging on every word, but we didn’t get any indication she is taking a hawkish turn.
Across the pond, Europe has turned severely weaker out of a strong first-half, and the market over the last month has indicated an expectation for a RELATIVELY more dovish Draghi. The tone in his most recent speech reflected his willingness to stand ready for an ABS purchase program. In fact, he more or less said that he would implement an asset-backed purchase program (QE without the government bond and public asset purchase program) immediately if given the authority.
Both the quant signals and our GIP model suggest Europe may slow for the next three consecutive quarters and the FX and gold markets are expecting a relatively more dovish Draghi.
- The EUR/USD has backed off 1.5% bps over the last month
- USD breakout vs. EURO breakdown in our model
- Gold (USD and POLICY-denominated) is down 3% over the last month
CAN DRAGHI CONVINCE THE MARKET HE’LL BE MORE DOVISH FROM HERE? Unfortunately we don’t possess a crystal ball, but our domestic view on overly optimistic growth expectations for the full-year remains intact as it has for all of 2014.
Don’t be afraid to take up your USD exposure and put a little cash on the sidelines (When the USD is going up!)
Have a great weekend.
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