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USD, Oil and the UST 10YR

Client Talking Points

USD

The opposite of the Fed’s Policy To Inflate = #deflation; the Dollar Up, Rates Down move of 2014 continues to crush former carry trades (Energy and Basic Material stocks) and pay slow-growth #yieldchasing.

OIL

Another 1-day bounce is met with more selling; WTI down -0.8% this morning to $81.51 and has no immediate-term support to $79.98/barrel. Gas prices are 6.4% of the median consumer (U.S.) budget – that’s not nearly enough to offset either the all-time highs in U.S. cost of living or the wealth compression of falling stock and home prices.

UST 10YR

The UST  10YR Yield is meandering around the top end of its immediate-term 2.16-2.35% risk range; don’t forget that the UST  10YR Yield, like oil, has crashed in 2014 (-23%) and that its highly sensitive to U.S. #GrowthSlowing data (like Durable Goods, Retail Sales, New Homes, etc.).

Asset Allocation

CASH 72% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 28% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.

TLT

We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).

RH

Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road

TWEET OF THE DAY

RUSSIA: probability of economic collapse continues to rise; Russian stock market continues to crash -23.8% YTD

@KeithMcCullough

QUOTE OF THE DAY

Well done is better than well said.

-Benjamin Franklin

STAT OF THE DAY

A Starbucks Grande Pumpkin Spice Latte has 49 grams of sugar, compared to a 1.55 oz Hershey’s Milk Chocolate bar, which has 24 grams per bar. That’s more than double the amount of sugar.


CHART OF THE DAY: @Hedgeye Longs vs. Shorts #TimeStamped

 

CHART OF THE DAY: @Hedgeye Longs vs. Shorts #TimeStamped - Chart of the Day


Deflated Disputants

“How many a dispute could have been deflated into a single paragraph if the disputants had dared to define their terms?”

-Aristotle

 

Are you a central planning disputant? I am, big time. So, please, allow me to define my terms:

 

  1. The Fed’s QE was a Policy To Inflate asset prices
  2. After that inflation, you get the #deflation

 

That is all.

 

Deflated Disputants - EL chart 2

 

Back to the Global Macro Grind

 

I know. So easy a Mucker can explain it.

 

If you’d like to have a dispute with me on these terms (or change the M in my nickname to an F like the 1997 Princeton Hockey Team did), I’m happy to have it as long as you define yours. Mr. Market has been pricing them in all year long.

 

When our #process signals #Quad4 deflation (growth and inflation slowing, at the same time) here’s our asset allocation:

 

  1. Cash
  2. Long Term Treasuries (TLT, EDV, etc.)
  3. Municipal Bonds (MUB)
  4. Healthcare Stocks (XLV)
  5. Consumer Staple Stocks (XLP)

 

We #timestamped that in our Q4 Macro Themes deck on October 1st (pre-Oct 14th fetal position for the levered long beta portfolios) and we’ll reiterate that again, now that the Fed has done precisely what they said they’d do (ending the Policy To Inflate).

 

Now that that’s over, what I think happens next is where I’ll have many disputes. Here’s what I’m thinking:

 

  1. As both US and Global growth slows, the Fed will be under pressure to say that they can provide moarrr #cowbell
  2. Mean Reversions: classic late-cycle indicators (like employment and “confidence”) should roll over; Fed will freak out on that
  3. Long-term rates will continue to make a series of lower-highs and lower-lows, tracking lower growth and inflation expectations

 

Again, think like a Fed head. Define their terms – then front-run their proactively predictable behavior.

 

The main problem my disputants have with me is that I don’t think like they do. I am a dynamic counter-cyclical strategist and they are pro-cyclical linear economists. The economy is non-linear. It’s also one massive cyclical. You don’t buy a cyclical at the top of a cycle – you sell it.

 

The #1 question you should be asking Ed & Nancy (linear economists) has two parts:

 

A)     After 65 straight months of US economic expansion, isn’t this an early-cycle slowdown, and

B)      Now that everyone has cut to zero, where are we in the worldwide easing-cycle?

 

We know how they think about this. They’re making the same calls that they made at the top of prior cycles (that the cycle wasn’t slowing in 2H of 2007). They have defined their surveys and their terms. Those are pro-cyclical too.

 

What does being pro-cyclical mean?

 

  1. That you think late-cycle indicators being good is good
  2. That you don’t think in 2nd derivative terms (going from great to good is bad)
  3. And that once things are actually bad, you’re both late and getting bearish a lot lower

 

No,  I’m not calling anyone names. I am not being “mean” either. Rather than drifting from bullish to bullish thesis on the economy (at the beginning of the year they said inflation and capex would drive the economy; now they are saying global slowing and deflation will), I am being a consistent disputant.

 

This morning I’ll list the Top 12 Big Macro Risk Ranges (and our TREND views in brackets) – they are in our Daily Trading Ranges product too:

 

UST 10yr yield 2.16-2.35% (bearish)

SPX 1 (neutral)

RUT 1071-1157 (bearish)

DAX 8 (bearish)

VIX 12.89-22.25 (bullish)

USD 85.34-86.24 (bullish)

EUR/USD 1.25-1.27 (bearish)

Yen 107.11-109.77 (bearish)

WTI Oil 79.98-83.05 (bearish)
Natural Gas 3.57-3.82 (bearish)

Gold 1194-1231 (neutral)

Copper 2.96-3.09 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Deflated Disputants - Chart of the Day


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – October 30, 2014


As we look at today's setup for the S&P 500, the range is 136 points or 5.61% downside to 1871 and 1.25% upside to 2007.                                              

                                                                                 

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.82 from 1.84
  • VIX closed at 15.15 1 day percent change of 5.28%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Init Jobless Claims, Oct. 25, est. 285k (prior 283k)
  • Continuing claims, Oct. 18, est. 2.352m (prior 2.351m)
  • 8:30am: GDP, 3Q, est. 3% (prior 4.6%)
  • 9am: Fed’s Yellen speaks in Washington
  • 9:45am: Bloomberg Consumer Comfort, Oct. 26 (prior 37.7)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 1pm: U.S. to sell $29b 7Y notes
  • 3pm: Puerto Rico Govt. Devel. Bank webcast for bondholders

 

GOVERNMENT:

    • Senate, House out of session
    • Ideas Forum speakers include Sec. of State John Kerry, Anthony Fauci, director of Natl Inst. for Allergy and Infectious Disease; Senate Ag. Cmte Chairwoman Debbie Stabenow;  U.S. Trade Rep. Mike Froman
    • U.S. ELECTION WRAP: GOP Path to Victory Not So Easy; Ad Money

 

WHAT TO WATCH:

  • ValueAct’s Ubben Sees Agrium’s Retail Unit as ‘Stable Jewel’
  • Container Store Targeted by Apex Capital’s Colen Urging Growth
  • American Realty Says Accounting Error Was Intentionally Hidden
  • Standard Chartered, Mitsubishi UFJ Said to Face Fresh Inquiries
  • Citigroup Said to Seek Initial Offers for OneMain by Nov. 20
  • Barclays Profit Jumps, Sets Aside $799 Million FX Provision
  • Visa Profit Surpasses Estimates as Consumer Card Spending Rises
  • Suncor 3Q Operating EPS Tops Est., Total Production Below Est.
  • Fifth Street Raises $102 Million in Reduced Initial Offering
  • German Unemployment Unexpectedly Falls as Economy Weathers Woes
  • Samsung Has Smallest Profit Since 2011 as Smartphones Stall
  • Obama Says Attempts to Seal U.S. Futile in Battle Against Ebola

 

AM EARNS:

    • Air Products (APD) 6am, $1.61
    • Alpha Natural Resources (ANR) 7am, ($0.71) - Preview
    • AltaGas (ALA CN) 7:45am, $0.19
    • Altria (MO) 6:58am, $0.68 - Preview
    • American Tower (AMT) 7am, $0.56 - Preview
    • AmerisourceBergen (ABC) 7am, $1.05 - Preview
    • Avon Products (AVP) 7:01am, $0.16 - Preview
    • Ball (BLL) 6am, $1.06
    • Baytex Energy (BTE CN) 7:30am, C$0.74
    • BGC Partners (BGCP) 8am, $0.16
    • Bombardier (BBD/B CN) 6am, $0.10 - Preview
    • BorgWarner (BWA) 8am, $0.79
    • Bunge (BG) 6:30am, $1.90
    • Cardinal Health (CAH) 7am, $0.96
    • Catamaran (CCT CN) 6am, C$0.56 - Preview
    • Cigna (CI) 6am, $1.83
    • CME (CME) 7am, $0.82
    • CNH Industrial (CNHI) 9:30am, $0.13
    • ConocoPhillips (COP) 7am, $1.21 - Preview
    • CVR Energy (CVI) 8:30am, $0.62 - Preview
    • Diebold (DBD) 8:16am, $0.50
    • Elizabeth Arden (RDEN) 7:15am, ($0.53)
    • Enterprise Products (EPD) 6am, $0.37
    • Fidelity National Information (FIS) 7am, $0.79
    • Fortress Investment (FIG) 7:09am, $0.16
    • GNC (GNC) 8am, $0.74
    • Goldcorp (G CN) 8am, $0.18 - Preview
    • GrafTech Intl (GTI) 8:56am, ($0.04)
    • Greenbrier (GBX) 6am, $1.03
    • Harman Intl (HAR) 8am, $1.11
    • Host Hotels & Resorts (HST) 6am, $0.09
    • Incyte (INCY) 7am, $0.07 - Preview
    • Invesco (IVZ) 7:30am, $0.62
    • Iron Mountain (IRM) 6am, $0.40
    • ITC (ITC) 8:30am, $0.47
    • Johnson Controls (JCI) 7am, $1.01
    • Kellogg (K) 8am, $0.92 - Preview
    • L-3 Communications (LLL) 7am, $1.84
    • Lincoln Electric (LECO) 7am, $0.90
    • LKQ (LKQ) 7am, $0.32
    • Maple Leaf Foods (MFI CN) 7:30am, (C$0.03)
    • Marathon Petroleum (MPC) 7am, $2.29 - Preview
    • MasterCard (MA) 8am, $0.78 - Preview
    • MGM Resorts Intl (MGM) 8am, $0.06
    • Mosaic (MOS) 7am, $0.58 - Preview
    • MSCI (MSCI) 7:30am, $0.49
    • National Oilwell Varco (NOV) 7am, $1.54
    • New Gold (NGD CN) 7:30am, $0.02 - Preview
    • New York Times (NYT) 8:30am, $0.00
    • NiSource (NI) 6:30am, $0.16
    • Ocwen Financial (OCN) 7:30am, $0.60 - Preview
    • Old Dominion Freight Line (ODFL) 7am, $0.87
    • PBF Energy (PBF) 6:30am, $1.04
    • Pitney Bowes (PBI) 7am, $0.46
    • Public Service Enterprise (PEG) 7:30am, $0.74
    • Radian (RDN) 7am, $0.32
    • Scana (SCG) 7:30am, $0.96
    • Starz (STRZA) 7:30am, $0.51
    • Taser Intl (TASR) 7:30am, $0.11
    • Teva Pharmaceutical (TEVA) 7am, $1.24 - Preview
    • Thomson Reuters (TRI CN) 7am, $0.45
    • Time Warner Cable (TWC) 6am, $1.90
    • TransAlta (TA CN) 7:30am, C$0.07
    • Ultra Petroleum (UPL) 8am, $0.51
    • Vantiv (VNTV) 7am, $0.49
    • Xcel Energy (XEL) 6am, $0.76

 

PM EARNS:

    • Aegerion Pharmaceuticals (AEGR) 4:15pm, ($0.15)
    • AlonA Energy (ALJ) 5:03pm, $0.59
    • Bally Technologies (BYI) 4:01pm, $1.17
    • Bell Aliant (BA CN) Post-Mkt, C$0.42
    • Boyd Gaming (BYD) 4:05pm, $0.01
    • Canadian Oil Sands (COS CN) 4:51pm, C$0.42
    • Constellation Software (CSU CN) 5pm, $3.16
    • Crown Castle (CCI) 4:02pm, $0.27
    • Eastman Chemical (EMN) 5:15pm, $1.80
    • Eldorado Gold (ELD CN) 5:41pm, $0.06 - Preview
    • Energen (EGN) 4:30pm, $0.46
    • Expedia (EXPE) 4:09pm, $1.74 - Preview
    • Fairfax Financial (FFH CN) 5pm, $14.04
    • First Quantum Minerals (FM CN) 5pm, $0.25 - Preview
    • FleetCor Technologies (FLT) 4:01pm, $1.33
    • Fluor (FLR) 4:05pm, $1.10
    • GoPro (GPRO) 4:05pm, $0.08
    • Groupon (GRPN) 4:05pm, $0.01
    • Investors Bancorp (ISBC) 5pm, $0.10
    • LinkedIn (LNKD) 4:05pm, $0.47
    • Live Nation (LYV) 4:09pm, $0.36
    • MasTec (MTZ) 4:30pm, $0.55
    • MB Financial (MBFI) Post-Mkt, $0.44
    • MercadoLibre (MELI) 4:04pm, $0.66
    • Microchip Technology (MCHP) 4:15pm, $0.67
    • Mohawk Industries (MHK) 4:01pm, $2.42
    • Mylan (MYL) 4pm, $1.14
    • Newmont Mining (NEM) Post-Mkt, $0.16 - Preview
    • ON Semiconductor (ONNN) 4:05pm, $0.22
    • PerkinElmer (PKI) 4:05pm, $0.57
    • Republic Services (RSG) 4:05pm, $0.53
    • Scientific Games (SGMS) 4:08pm, ($0.39)
    • Seattle Genetics (SGEN) 4:05pm, ($0.24)
    • Sirius XM Canada (XSR CN) 4:05pm, C$0.05
    • Spansion (CODE) 4:04pm, $0.27
    • Standard Pacific (SPF) 4:02pm, $0.15
    • Starbucks (SBUX) 4:05pm, $0.74 - Preview
    • Tempur Sealy Intl (TPX) 4:05pm, $0.89
    • Tesoro (TSO) 5pm, $2.16 - Preview
    • Theravance (THRX) 4:08pm, ($0.13)
    • Trimble Navigation (TRMB) 4:05pm, $0.38
    • Western Union (WU) 4:01pm, $0.38

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • China Said to Probe September Surge in Precious Metals Exports
  • Metals Investors Seeing Slowdown Head for ETP Exit: Commodities
  • WTI Falls From One-Week High on Fed Stimulus Halt, U.S. Supply
  • Gold Equals 15 Barrels of Oil in Sign Inflation Wagers Too High
  • Oil Stocks Lure Most Bearish Bets Since ’07 After Slump: Options
  • Diamond Dealers Using Web Bring Light to $18 Billion Gem Trade
  • U.S. Light-Crude Production Spurs Export Debate, Official Says
  • Raw Sugar Drops as Oversupply Caps Prices; Arabica Coffee Gains
  • Gold Slides to Three-Week Low as Dollar Strengthens After Fed
  • Trafigura Seeks to Handle More Copper Ore Amid Arsenic Hurdles
  • Bauxite Supplies From Africa Seen Showing Resilience Amid Ebola
  • Copper Drops From Five-Week High as Fed Decision Boosts Dollar
  • China State Reserves May Buy Copper in Bonded Zones: Citigroup
  • How Oil’s 29% Drop Took Investors by Surprise on OPEC Price War

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


October 30, 2014

October 30, 2014 - Slide1

 

BULLISH TRENDS

October 30, 2014 - Slide2

October 30, 2014 - Slide3

BEARISH TRENDS

October 30, 2014 - Slide4

October 30, 2014 - Slide5

October 30, 2014 - Slide6

October 30, 2014 - Slide7

October 30, 2014 - Slide8

October 30, 2014 - Slide9

October 30, 2014 - Slide10

October 30, 2014 - Slide11


KSS – ‘Short'ness Agenda

Takeaway: The Greatness Agenda is neither investable nor believable. 35% EPS downside. Stock downside/upside is 3 to 1. We’d press this one here.

Conclusion: We went into this meeting expecting to hear at least a few points that would go toe-to-toe with our Short call. But management spent the better part of seven hours articulating (despite its intentions) why it has Zero competitive advantage. We still don't think there's a viable financial plan, and if there is one, we have less confidence today in the company's ability to execute on it. What we do know is that this management team comes across as being extremely comfortable being very mediocre. Guidance implies 2017 EPS of $5.30, which our analysis suggests is a pipe dream. Our math gets us to $3.50. This should be a $35 stock -- a level that does not provide meaningful cash flow yield support relative to where other names in this space have traded. With at least 3 to 1 downside upside, this remains our top short in retail.

 

DETAILS

Well...if you were wondering why KSS does not regularly host analyst meetings, now you know. While Hedgeye was not physically present at the event (having a short call and 60 page slide deck doesn’t get you a seat in the room with KSS) it was still easy to hear the oxygen get sucked out of the room on a number of occasions via webcast. Yes, it was that bad.

 

We went into this one looking for areas that could challenge our bear case, but could not find a single one. Though we found a few of the presenters to be high quality (Logistics, Digital, Marketing) the collective message was extremely unconvincing and unimpressive. In fact, we are not really clear as to what the message was. What we do know is that this management team comes across as being extremely comfortable being very mediocre.

 

We think the company’s financial targets are entirely unbelievable. The company basically guided to about $5.30 in EPS in 2017 ($21bn revs and 9% margins). So you need to believe that KSS can comp nearly 3% for three years. The last time it did this was 13 years ago when it had a base of only 350 stores, had nearly a fifth of its square footage base entering the peak part of the maturation curve, and as a kicker, was bouncing back after a recession. But the company’s targets today assume that the industry goes nine years without a major correction/reset in sales/margins. That’s never happened. Not even close. We’ve never seen a cycle go more than six years (and we’re still in it). We think that’s extremely poor risk management on the part of the team steering this ship. We think earnings will be $3.50 in 2017 – that’s 35% below guidance. And if we had to pick an over/under on our estimate, we’d say closer to $3. 

 

Let’s say – just for a minute – that the company is right. You’re playing for a ‘goal’ of sub-3% growth and $5.30 in earnings in 3.5 years. At best that’s worth a 12x p/e, or $64 – in 3-years. Discount that back by 10% annually, and you get to $48 today – for a best-case scenario. If we’re right, then we’re looking at about 10x $3.50 in EPS. The bulls would point to the company’s cash flow as support, and that’s fair. But as the P&L gets hit, cash flow comes down as well. A $35 stock suggests about a 12% free cash flow yield on our model. That’s high, but far from egregious. Dillard’s, for example, has traded in recent years at a free cash flow yield as high as 25%.

 

The bottom line is that we think this name is still very shortable today with at least 3 to 1 downside/upside. It remains our top short in retail.

 

Here are a few things that stood out for us at the meeting (in no particular order).

  1. Is This Really A Goal. The overreaching goal was “To Become the Most Engaging Retailer in America”. Didn’t Ron Johnson have some iteration of that mantra when he killed JC Penney and replaced it with jcp? We like setting goals that are quantifiably achievable. Nike couldn't even achieve this goal if it tried (which it's not).
  2. Greatness Redux. Initially we gave Kevin Mansell (CEO) credit as he started off by talking about the challenges they have faced (share too high in categories that consumers are shifting away from, and share too low in categories consumers are embracing, and relevancy of real estate). Then he flashed a slide that said “Time to Evolve” That was pretty exciting, as KSS does not evolve very well. We held our breath and thought we’d get some cool new insightful strategy. But no. We got the good ‘ol “Greatness Agenda”. It’s the same thing we hear about every conference call.
  3. Numbers are Not Believable. We said this above, but it's worth repeating. In fact, Mansell openly said that he did not want to give financial targets – he wanted to qualitatively show that KSS “has the right team in place to take the company into the new era of retailing”. Wes McDonald (CFO) did the right thing and put his foot down by handing out at least a few numbers, even though there’s no evidence that these targets fully address the substantial risks that KSS will increasingly face.
  4. Who Were They Talking To? Our sense is that the numbers that KSS targeted -- $21bn in sales in 2017 and flattish margins – represent a statement to employees more than to the financial community. They can’t get up there on stage and tell the rank and file (who are all listening in) that sales and profits will be flat to down over the next few years.
  5. JCP Won The Battle of the Analyst Meetings. For what it’s worth, last month JCP gave the Street 10x as much information in just three hours (whether you choose to believe it or not), while it took Kohl’s seven hours to say almost nothing.  
  6. Nothing Unique. We can't recall hearing about a single initiative all day – whether it be product, marketing, or customer engagement -- that other retailers are not already doing.
  7. Stores Too Big? Kevin Mansell actually said something to the tune of “Yeah, many of our stores are probably too big. I wish they were smaller.” We think we got those words right – but if we’re off (transcript not out yet), they’re at least in the ballpark. His somewhat cavalier attitude toward the whole issue was quite offputting.
  8. Unlikely to Close Stores. The worst performing stores are ‘only losing a few hundred thousand dollars each.’ That’s pretty bearish as it suggests that there’s not exactly a few hundred stores they can close to meaningfully boost profitability.
  9. Acquisitions. They actually started talking about acquisitions. That’s just baffling. What they’re basically saying is that (and these are our words, not theirs) “we don’t have opportunities to reinvest in our own business, and are less interested in buying our own company (stock repo), so we’ll try buying other business for the first time in our history." People hanging their hat on the free cash flow yield should consider how fast the cash could go away when it’s spent on an off-price apparel chain or luxury flash-sale site.
  10. Frozen Love. We wish we could make our own word cloud from this analyst day, but unfortunately the transcript isn't out yet. We think the words "Love", and "Frozen" would take center stage (let’s say 24 size font) and the key words like margins, earnings, and cash flow maybe about a 6 font. Seriously, Michelle Gass, the Chief Customer Officer, literally said “Love will drive our business”. We understand that a) it's her job to talk like this, and b) she meant it in the context of caring for customers. But this was over the top.
  11. JCP/Share. The fact that JC Penney was not uttered all day is bothersome. That’s a consistent miss we see in Kohl’s strategy to deal with a competitor that lost $90/foot in sales over three years, and is clearly on the rebound. All of our research (including several consumer surveys) shows that KSS won (fair and square) about $1bn in revenue from KSS – half of which was online. JCP will take it back. Our surveys suggest that consumers want to go back to JCP with the right product/promotions. JCP will get the sales back, whether it earns it, or buys it. Either way it's bad for KSS.
  12. E-commerce is not margin accretive on the Gross or EBIT level. Management wouldn't quantify, but did characterize it as worse than in store. Plus it cannibalizes sales from it's brick and mortar business. The company validated our survey research. 96% of shoppers who don't visit the store will not shop online. With a fully extended store base how do they attract new customers? We don’t think the answer is personalization. We did a lot of work on this one in our recent report. Click here for the link.
  13. Loyalty Math. Initial loyalty sign up numbers are impressive with 5mm added in new markets over the past 21 days. 58% of the now 15.5 million members are non-credit users. But, take into consideration that there are 30mm active credit card members. That implies that 21.7% of active credit card users are now card carrying members of the Y2Y. Credit accounts for 57% of purchases and offset SG&A by $407mm in 2013. Any shift by the customer away from the Credit program to loyalty (they get basically the same deals without a 24% APR) would be a significant margin headwind.
  14. Two Conflicting Initiatives. ‘Buy-online and pick-up in-store’ and ‘store vs. same day ship’. Our research on buy-online, pick-up in-store (See our Department Store deck from last week) indicates that the #1 reason for choosing this option is free shipping. #2 and #3 on that list, faster fulfillment and convenience, are solved by same day delivery. Shipping costs are already below the rest of the industry average at $75 and we think that goes lower before it goes higher. Which offsets the incentive to pick up items in store.

real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

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