Retail – Winners/Losers in One Visual

Takeaway: There’s so much noise from companies around e-commerce trends. Contrary to what they say, they’re not all winning. Here’s the scoreboard.

Retail – Winners/Losers in One Visual - 8 26 chart 1 ecom

Listening to a full quarter’s worth of conference calls might lead one to think that e-commerce is the savior to everyone’s business. It’s not. Here’s a visual that might help contextualize e-commerce trends by retailer. On the left axis we show e-commerce comp by retailer (columns). There all on there – except those that don’t disclose data (i.e. Macy’s). The right axis shows e-commerce sales as a percent of total for each company (represented as circles). A few takeaways…

1) E-commerce represents about 7% of sales for retailers in aggregate, and the group put up a collective 20% comp this quarter – or about 140bp in total growth. This accounts for about half of the 2.6% average revenue growth for the group.

2) It’s impossible to miss that 3 of the top 5 growth rates are Athletic brands. Yes, Nike and Adidas have an embarrassingly low e-commerce penetration rate of 3-4%, which is a third of what we see at brands like KATE and RL. But there’s no denying that these brands are stepping up efforts to go direct to consumer. Can’t be bullish for Foot Locker.

3) Who would have thunk that the highest e-commerce penetration rates among the more traditional retailers is GPS and SHLD, which are topping out at 14%. They also have among the lower growth rates in the quarter. GPS is particularly noteworthy at 11%.

4) Rounding out the bottom with e-commerce penetration – i.e. worst execution but biggest opportunity – are SKX, VFC, WMT and TGT.

EXPERT CALL | Analyzing the BKW/THI Merger

We are hosting an expert call tomorrow, August 27th @ 1pm EST to discuss the recent BKW/THI merger.  Dial-in information will be distributed tomorrow morning.


Our call will feature John Barker, former Senior VP and CCO of Wendy’s, who lived through the merger of Wendy’s and Tim Hortons.

Key Topics Will Include:

  • Why was the merger of Wendy’s and Tim Hortons a failure?
  • Why has Tim Hortons been slow to grow in the U.S.?
  • Can Tim Hortons leverage Burger King's infrastructure to accelerate growth in the U.S.?
  • What are some of the issues Tim Hortons will face in its attempt to grow globally?

About John Barker

John Barker joined Wendy's in 1996 as VP of Investor Relations when the company acquired Tim Hortons.   He worked closely with senior management of Tim Hortons and led IR for the IPO and spinoff of the chain 10 years later.  While at Wendy's through the end of June 2014, Barker was Chief Communications Officer and reported directly to the CEO. He led IR, Marketing PR, Government Relations, Crisis Management, Internal Communications, Corporate Services and other corporate functions.  He is currently at The Ohio State University's Fisher College of Business teaching strategy and marketing.  Previously he led IR at American Greetings and was a financial journalist. 


Howard Penney

Managing Director


Fred Masotta


BKW: Flame-Broiled Crawlers

We are adding BKW to our Investment Ideas list as a short.


BKW: Flame-Broiled Crawlers - 8 26 2014 3 00 23 PM


The surge in BKW's stock following the deal to buy THI makes the stock safe to short for many reasons.  Additionally, we see significant risks to the combined company once the deal is completed.  To be fair, Warren Buffett's halo is on the deal, but we have reason to believe this halo will tarnish.


We have several concerns with the deal, including:

  1. Levering up to pay a premium for a slow growth CDA company
  2. The lack of synergies with the transaction; in fact, costs will accelerate to jumpstart unit growth
  3. We doubt the merger will accelerate the growth of THI globally
  4. The two companies have fundamentally different views on franchising
  5. The Burger King franchisee base is weak and getting weaker by the day
  6. BKW is likely to miss 3Q14 estimates, including USA and CDA comp expectations
  7. The social media backlash, on both ends of the spectrum, to this transaction cannot be underestimated
  8. The conference call announcing the deal was far from impressive; in fact, it was rather discouraging
  9. The transaction is dilutive to current shareholders
  10. Current valuation is unwarranted


Our thoughts about the conference call Q&A:

Q: How much overlap is there between these two companies?

  • Planning on managing the two brands independently of one another
  • No plans to mix products or do co-branding
  • The real driver is growth -- the potential to take THI global

Hedgeye -- On the surface this appears to be a positive, but we're not buying it.  It's a matter of time before they try to combine products, especially coffee.  Remember, Seattle's Best has failed to help BKW's breakfast business.  In addition, we fail to see how merging two companies that have distinctly different views on franchising will help accelerate growth.  The fact remains that Tim Hortons hardly has any brand awareness outside Canada and select parts of the U.S.


Q: Tax rate of the effective company?

  • Don't expect the tax rate to change materially

Hedgeye -- Then why do the deal? At best this statement from management is disingenuous.  In Canada, the corporate rate is about 15% compared with 35% in the U.S.  More importantly, Canadian citizenship will allow the new company more opportunities to use various accounting and business “schemes” to shift profits north of the border and out of the reach of the IRS.


Q: What are the synergies between the two companies?  Are they quantifiable?  Timing?

  • Transaction is not about synergies, it is about growth
  • The priority is how quickly they can enter new markets and win in the U.S.
  • They will be able to leverage BKW's infrastructure in the U.S.

Hedgeye -- Again, why do the deal?  What BKW infrastructure are they referring to?  The BKW franchisee base is suffering financially and doesn't quite mesh with THI's "mom and pop" franchise model.


Q: Any immediate feedback from franchisees on either side?

  • Franchisees understand the purpose of the deal

Hedgeye -- The franchisees don't have a say in the deal!


Call or email with questions.


Howard Penney

Managing Director


Fred Masotta


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Cartoon of the Day: Going Nowhere

Takeaway: Average Americans' cost of living is running right around the all-time highs.

Cartoon of the Day: Going Nowhere - Middle class 08.26.2014

"[D]espite falling interest rates, not as many Americans are either able or in the mood to lever themselves up on a new home these days," wrote CEO Keith McCullough in today's Morning Newsletter. "With cost of living running right around the all-time highs, many of your median income earning neighbors are broke too."

6 Tweets: Hedgeye's Howard Penney Thinks Burger King Is 'Disaster Waiting to Happen'

Takeaway: We don't like this Burger King/Tim Horton's deal.

Veteran Hedgeye restaurants analyst Howard Penney is not shy about his opinion on what's going on with Burger King (BKW). He was quoted in today’s Wall Street Journal and says ‘BKW is a disaster waiting to happen thus the need to buy Tim Horton’s (THI)’


Here are 6 tweets which capture Penney's less-than-bullish view. 


6 Tweets: Hedgeye's Howard Penney Thinks Burger King Is 'Disaster Waiting to Happen' - h2


6 Tweets: Hedgeye's Howard Penney Thinks Burger King Is 'Disaster Waiting to Happen' - h3


6 Tweets: Hedgeye's Howard Penney Thinks Burger King Is 'Disaster Waiting to Happen' - h4


6 Tweets: Hedgeye's Howard Penney Thinks Burger King Is 'Disaster Waiting to Happen' - h5


You can follow Howard Penney on Twitter at @HedgeyeHWP.


Takeaway: Deceleration saturation complete as second derivative HPI slowed across all 20-cities…..

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. 




Today's Focus: June S&P/Case-Shiller Home Price Report & FHFA HPI


Key Takeaways

With July data from Corelogic in hand for almost a month already, we knew the slope and likely magnitude of the deceleration for Case-Shiller in June, but it's nice to get the official confirmation. We should get the Corelogic home price report for August either Monday or Tuesday of next week, which will be the far more important report.


* Home Price growth slowed for a seventh consecutive month, decelerating -130 bps sequentially in June to +8.1% YoY.  This was the third biggest month of deceleration since August of 2010 (last month and the month before that were the other two largest months). 


* Notably, June marked the 2nd consecutive month of negative MoM price growth - the first such occurrence since January 2012 in the seasonally-adjusted series. 


* As the release aptly highlights, the 2nd derivative slowdown in HPI remains discrete and broad based:  


"For the first time since February 2008, all cities showed lower annual rates than the previous month"


So, all the primary price series continue to tell a cohesive story of deceleration – one which we expect to continue through the back half of the year. 















Bottom Line:

Housing-related equities follow the path of HPI. So long as HPI is decelerating, housing equities will move sideways to lower. We can forecast HPI's path by looking at demand trends on a 12-18 month lead/lag basis. Our expectation is that prices continue to decelerate throughout 2H14 and potentially into 1H15.



The FHFA HPI for June showed home prices decelerated a further -10bps sequentially to +5.2% YoY from 5.3% in May. It's worth noting that the May growth rate was downwardly revised from the previously reported +5.5%.  





About Case Shiller:

The S&P/Case-Shiller Home Price Index measures the changes in value of residential real estate by tracking single-family home re-sales in 20 metropolitan areas across the US. The index uses purchase price information obtained from county assessor and recorder offices. The Case-Shiller indexes are value-weighted, meaning price trends for more expensive homes have greater influence on estimated price changes than other homes. It is vital to note that the index’s printed number is a 3-month rolling average released on a two month delay.


Frequency and Release Date:

The S&P/Case-Shiller HPI is released on the last Tuesday of every month. The index is on a two month lag and therefore does not reflect the most recent month’s home prices.



Joshua Steiner, CFA


Christian B. Drake

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