Takeaway: The Hedgeye Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and noteworthy quantitative signals.
CLICK HERE to view the document. In today’s edition, we highlight:
Best of luck out there,
Associate: Macro Team
TODAY’S S&P 500 SET-UP – October 7, 2014
As we look at today's setup for the S&P 500, the range is 41 points or 1.42% downside to 1937 and 0.67% upside to 1978.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.
Takeaway: In this Black Book, we dive into everything from Dept Store current trends (survey) to what the group will look like in the next eco cycle.
Please note NEW DATE/TIME for our Deep Dive on Department Store Fundamentals and Stocks. Our call will be next Thursday, October 16th at 11:00 am ET. Relevant tickers: JCP, M, KSS, DDS, JWN, SHLD, TGT, WMT, TJX, and GPS.
Key Topics Will Include:
1. What will the Department Store Landscape look like (physically and financially) when we transition into the next economic cycle?
2. Detailed Revenue analysis for all the Department Stores – by category, consumer, and demographic. Who has the most risk/upside based on where we are in the economic cycle?
3. Margin Sustainability: Who has the most defendable margins and levers to pull in the event of a sales downturn?
4. The importance of Financial Engineering to earnings algorithms.
5. Current Business Trends: Results from our detailed 1,000 consumer survey. This is the 4th iteration of the survey that we started back in 3Q of 2013
6. Real Estate Deep Dive
7. E-commerce – we’ll be releasing a much more in depth look at e-commerce across the retail space in a Black Book due out in the next couple of weeks – but we will preview that work with a focused look on the department store space. Most importantly which retailers have invested the capital needed to drive growth in this channel.
Call details to follow
Takeaway: There’s a gap between what JCP should say vs. what it will say on Wednesday. All it needs to say is “break even in 2016.”
Ullman & Co have a pretty easy job at this Wednesday’s JCP analyst meeting. Expectations are low, and this company has not articulated a long-term plan since Ron Johnson took center stage and then proceeded to destroy $8.6bn in shareholder value – or 87% of JCP’s market cap. Talk about easy comps. We don’t think it will take much to get people excited.
There’s sure to be information overload on Wednesday, but there’s only a few simple messages we want to hear.
POSITIVE JCP DATAPOINT FROM OUR CONSUMER SURVEY
We’re in the process of compiling one of our Deep Dive Black Books and will be hosting a call next week. We’ll be discussing several things, including…
a) What the Department Store landscape should look like (operationally and financially) when we enter the next economic cycle.
b) Detailed Revenue analysis for all the Department Stores – by category, consumer, and demographic.
c) Detailed Results of our latest Consumer Survey on the department stores.
d) Real estate deep dive – including overlap with stores that are likely to go away.
e) E-commerce – growth and profitability prospects for the companies and industry.
Here’s one chart as it relates to JCP that we thought was worth sharing. Each time we conduct our Consumer Surveys, one thing we ask the 1,000 department store shoppers is to rank which are their ‘go to’ stores in each product category. We don’t necessarily look at the results compared to one another, as Macy’s will obviously get more votes across the board than Lord & Taylor or Bon-Ton, for example. But we can gauge the incremental change for each company from one survey to the next (in this instance, 1Q14 to today).
There’s only one company that improved its ranking in every single product category – and that’s JCP.
REAL ESTATE OVERVIEW
Here are a few select highlights of the JCP Real Estate Analysis we conducted in May.
1. Real Estate Approach: We did this analysis from the vantage point of a) optimizing JCP’s fleet, and b) seeing what the revenue impact would be for KSS. In order to properly assess the potential, we analyzed every JCP market to see where the most likely closures are, and whether or not they overlap with KSS. For starters, we did not simply map out store locations (a feat in itself) and draw a circle around each point on the map to gauge overlap by market. We mapped out a 15-minute driving radius around every store, which as you can see by the chart below is very different for every single store location in the country. This shows Tallahassee, FL, which has two locations where JCP and KSS overlap perfectly, and another location where JCP exists without KSS as a competitor. We did this in every market in the US.
2. Productivity Analysis. This next chart shows us what the implied sales per square foot range is for JCP’s 1089 stores. What we know is that in the US, JCP has 0.47% share of wallet in apparel, home furnishings and other relevant retail goods across its portfolio in aggregate – again, we’re looking at all expenditures within a 15 minute drive of its stores. If we apply that ratio to each market, we get implied sales/square foot levels ranging from $8 to nearly $1,000 (Manhattan). We know that share is likely to vary by market, so we’re not trying to say that these are the exact productivity levels of each store. But directionally, we think we’re right. And that direction tells us that 782 stores, or nearly 72% of JCP locations, are running below the system average of $98/square foot.
3. 300 Store Closures: We think that JCP needs to close 300 locations, at a minimum. We know that the demographic profile in the surrounding area of JCP stores in aggregate is about $66k in annual household income. We also know that JCP just identified 33 stores that it is closing. We analyzed those locations, and the demographic profile is $54k annually – that’s 18% lower than the portfolio average. So we looked throughout the system of JCP stores and looked to see how many other stores fit that profile. There are 300. If these stores are closed, the average income statistic goes up for the whole portfolio by 7% to $70k. The 300 stores closed have implied sales/square foot of less than $38 annually. There are still almost 500 stores above $38 and yet still below the system average.
4. Revenue Impact of Closures. Our math suggests that these stores would only result in about $550mm-$600mm in revenue loss to JCP. Importantly, KSS only overlaps in 42% of these markets. Our research shows that KSS took about 19% of the $5.4bn in sales JCP hemorrhaged over the past three years. If we apply a 20% share gain level to this analysis for KSS, it suggests about $73mm, or less than 0.4% to KSS in comp. If you want to get more aggressive and assume that KSS takes 100% of that revenue (which WMT won’t allow) you’re looking at about 1.9% in comp to KSS. We think something far below 1% is closer to reality. Here’s the sensitivity analysis below.
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