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October 15, 2014

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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:


  1. Making a minor change to some language in/around TACRM to improve ease of user interpretation (no change to the underlying model, however)
  2. Swapping out domestic mega-cap exposure for the Japanese yen on the long side of our top global macro ideas 


Best of luck out there,


Darius Dale

Associate: Macro Team


Takeaway: In Thursday's Black Book, we dive into the industry's supply/demand balance, real estate profiles, category exposure and e-commerce margins.

Please join us Thursday, October 16th at 11:00 am ET for our Deep Dive on Department Store Fundamentals and Stocks. 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? This includes looking at the physical supply/demand balance in the industry.


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

  • Visitation statistics
  • Dot.com and Mobile trends
  • Buy Online/Pick Up in Store – does anyone really use this? Which retailers have the competitive advantage?
  • Detailed category analysis – what retailers are top of mind in each category
  • Who wins on price, sales, selection, and quality

6. Real Estate Deep Dive

  • What does the competitive matrix look like across the space
  • Winners &  losers from a demographic and spending vantage point
  • Are department stores over or under-indexed to their target customer?
  • The JCP and SHLD affect – what do more store closures mean for other names in this space

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.


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Cartoon of the Day: Crank It Up

Cartoon of the Day: Crank It Up - volume cartoon 10.14.2014


As markets are melting down, volume is going up.  Take Monday’s sell-off, for example. Total exchange volume soared 44% compared to its three-month average.



#EuropeSlowing: Some Ugly Charts

Takeaway: Here are a half-dozen charts that show just how poorly Europe's economies are faring.

This note was originally published October 14, 2014 at 10:29 in Macro

This market does not trust Draghi’s Drugs! (Draghi is European Central Bank President Mario Draghi.)


Below we show recent data points that are supportive our Q4 Macro Theme #EuropeSlowing.  Here’s an update on the latest Eurozone experiment:

  • Draghi’s policy to inflate has only resulted in deflation (France and Italy CPI in September fell 10bps to 0.4% Y/Y and -0.1% Y/Y, respectively)
  • BOTH the periphery and the core are contributing to the regional slowing
  • The gap between Germany’s fiscal policy stance and France and Italy is widening
  • There remains no singular voice from the ECB on the merits of its policy actions to produce sustainable economic growth

We’ll let the recent data from the region’s economic heavyweight speak for itself, #EuropeSlowing:

  • The German Government lowered its GDP forecast (leaked on Friday) to 1.2% in 2014 (vs 1.8% prior); and 1.3% in 2015 (vs 2.0% prior)
  • Germany ZEW Economic Growth Expectations in October hit a 2 year low
  • German Exports in August (down -5.8% M/M) largest fall in more than 5 years
  • German Factory Orders fell -1.3% in August Y/Y
  • German Industrial Production in August weakest reading in more than 5 years
  • German Bunds are making all time lows @ 0.855% and down 101 bps Y/Y

From an investment position, we are recommending shorting French (EWQ) and Italian (EWI) equities and the EUR/USD (FXE).

 #EuropeSlowing: Some Ugly Charts - z. ZEW Germany

 #EuropeSlowing: Some Ugly Charts - z. germnay exports imports

 #EuropeSlowing: Some Ugly Charts - zz. factorders

 #EuropeSlowing: Some Ugly Charts - zz. German Indust

 #EuropeSlowing: Some Ugly Charts - z. Germany 10YR yield

 #EuropeSlowing: Some Ugly Charts - z. cpi falling


WWW – Penalty Box

Takeaway: WWW is in our penalty box. We need to see better top line numbers in 1-2 quarters, else we’re out. But at this level, you’re paid to wait.

Conclusion: Despite the 5% pop in the stock, WWW is officially in the penalty box from where we sit. Our long thesis builds to 20%+ EPS growth, or a $45 stock in 12-18 months (70%+ upside). But we’re not seeing the revenue that we want to see to support a big call. We still think that a worst case top line is 200bp better than the consensus for next year, which should result in a minimum of 10-20% upside in the stock. But is that enough for WWW to remain on our Best Ideas list? Probably not. It’s not bad, but it wouldn’t be the kind of return Hedgeye Retail is playing for. We think we’re being paid to wait on this cheap, high quality, hated name. We have it on a 3-6 month leash.



Our patience is wearing thin for our bullish call on WWW. Yes, the headline was good -- $0.63 vs our $0.62 and the Street at $0.59. But revenue missed our estimate. We don’t care that sales were in line with WWW’s internal forecasts, and largely in-line with guidance. We need to see something bigger than guidance. And thus far it’s nowhere in sight.  The crux of our call is predicated on a meaningful growth acceleration in Sperry, Keds, Saucony and Stride Rite outside of the US – in markets that were largely ignored by the prior owner. Our math gets us to growth of 8-10% on the top line, 12-14% gross profit, 16-18% EBIT, and 20-22% EPS as the company’s cash flow is used to de-lever its balance sheet. That’s an algorithm we can get behind, especially for a company that has such a proven track record of consistently creating shareholder value over such a long period of time. That kind of sustainable growth is probably worth a high teens p/e, which implies a stock near $45 in 12-18 months (18x $2.50 in ’16).


This thesis is fine and good, but the reality is that the company is not delivering the revenue upside we need to see. Management talks about how revenue penetration for brands like Sperry has doubled in two years as a percent of total (5% in 2012 up to 10% of Brand revenue). But if consolidated revenue is flat does it really matter? The answer is no. We get their point that there are a lot of moving parts on the top line – like the Stride Rite realignment plan, decision to take Sperry out of bad channels of distribution, and the general hit we’ve seen all year with the Women’s Sperry business.  The strategic actions are temporary, and the Sperry business in the US appears to have stabilized. As such we should see a natural lift in sales next year.


That said, our point all along is that we needed to see a sequential acceleration to a mid-high-single digit growth rate by 4Q, which should set the company up to benefit meaningfully from significant depth on the international bench starting in 1Q15. Based on what the company says, at least the 4Q growth ramp is in the cards. But there’s no question that our conviction is waning in its ability to drive an incremental 800-1,000bp of growth starting in another 12 weeks. To be clear, this growth level is our goal – not the company’s. The money making call will be in management’s ability to deliver sales growth that is far in excess of what it is telling the Street. The good news there is that consensus sales growth expectations next year are only for 3.7%. We think that a worst case number is 5-6%.  


Is that enough for WWW to remain on our Best Ideas list? Probably not. Is it enough to make the stock work by 10-20% from here? Probably. But that’s not the kind of return Hedgeye Retail is playing for.


The good news is that the stock is trading at only 14x earnings, remains quite hated, and is facing a near term bump in its revenue – as evidenced by its order trends. We still think that there will be a more meaningful contribution from its non-US business in 2015, which does not appear to be represented by the consensus estimates. We’re not worried about this stock working, but based on the company’s top line success over three (six tops) months we’ll know whether we should fish or cut bait on WWW as one of our core long ideas.


Our Sentiment Monitor (which combines short interest and sell side ratings) shows just how bad WWW Sentiment is.

WWW – Penalty Box - WWW Sent


WWW – Penalty Box - WWW ET2