Keith just added NKE to the Hedgeye virtual portfolio on red. Both top-line and futures came in better than expected and inventories improved on the margin this quarter driving our incremental bullishness on the immediate-term TRADE and intermediate-term TREND in light of our already bullish long-term TAIL call.
The bottom-line is that sales momentum is strong, margins are on the mend, inventory is coming down, the event schedule looks great, capital intensity is moderating, and Nike is showing greater focus in returning capital to shareholders.
The biggest risk here is the ‘can things really get any better’ factor, but the reality is that we don’t have to worry about that for another year – at least.
Consider the following regarding the current TRADE and TREND setup:
- futures growth of 13% is more heavily weighted towards the back-end of the 5-month window,
- this only partially reflects pricing increases that are in the midst of going into effect. In other words, futures will accelerate simply bc of pricing in 2H (this is one of the very few times in the better part of 15 years that I can recall the company having the confidence to actually guide futures), and
- the company is looking at an outstanding event year, with assumption of the NFL license in April, European Football Championship (Euro 2012) , and the Olympics from July 25 to Aug 12.
- rest assured, as we do, that these events will simply not come and go, leaving Nike with a tough revenue hurdle in 2013. The company will use each of them to build sustainable businesses to take share long after the games are
complete. In fact, Charlie Denson noted several times that there are a few ‘surprises’ coming down the pike later this year. This is the same kind of posturing we saw around major launches like Air 180, Free, Lunar and Nike +. Again, these are platforms, not just products.
We remain 15-20% above consensus for the next three years. For additional detail, see our post Q2 note “NKE: Too Good.”
Buffalo Wild Wings was shorted moments ago in the Hedgeye Virtual Portfolio. From a fundamental perspective, this is one of our favorite names on the short side.
Buffalo Wild Wings’ share price has popped up 14% over the last week after trading below $60. A sell-side upgrade generated some attention for the stock last week and since then BWLD has strongly outperformed the market. The stock is currently being awarded an EV/EBITDA NTM multiple of 8.3x by the Street. Only BJRI and DIN trade with higher multiples in the casual dining space. The Hedgeye Macro Team’s current theme, “King Dollar”, has played out nicely and a corollary of that has been a strengthening of U.S. consumption. While our longs have worked nicely under this macro theme, BWLD has worked less effectively over the past week than it had been. From a quantitative and fundamental perspective, however, we are still bearish on the stock – at these prices, only more so.
We have discussed our short thesis at length: wing prices are heading higher in a hurry and this will greatly dilute the effectiveness of any promotional approach the company might take to driving comps, a strategy that worked well in 3Q. Margins are likely to take a leg down and, while King Dollar is likely helpful for comps, we are pessimistic about the prospects of the company taking further price in the hyper-competitive discounting environment that exists in casual dining today. At the same time, dropping price in 4Q and (especially) 1Q12 is a completely different proposition than doing so in 3Q11 when wing prices were down year-over-year. 1Q12 is the litmus test of this fundamental thesis; we expect wing prices to be up 50-60% year-over-year.
This company has growth and that is part of the reason why it is being awarded a (relatively) rich multiple but we believe it is worth noting the G&A associated with that growth since much of it is focused in new markets. On the 2Q11 earnings call, management had this to say:
“We underestimated in two areas for the second quarter: the one is the amount of money that we were putting into recruiting training managers, staffing, regional managers in these new markets on both coasts, where we don't have an infrastructure to do any of the training locally. So, a lot of travel expenses related to that that we – I just could not have fully captured in my estimate for the second quarter.”
From a quantitative perspective, the TRADE line of resistance is at $69.19, as illustrated by the chart below.
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Positions in Europe: Short France (EWQ)
Keith shorted France via the etf EWQ in the Hedgeye Virtual Portfolio today getting a better re-entry price. The CAC40 is in a bearish formation, broken across its immediate term TRADE, intermediate term TREND, and long term TAIL lines (see chart below).
We remain bearish on France over the intermediate term due to:
- Pending downgrade of France’s AAA Sovereign Credit rating
- Public debt rising through the 90% (as a % of GDP) next year
- Slowing growth (below the government’s 1% 2012 projection) and sticky inflation alongside Austerity’s Bite = Stagflation
- Banking risk, including any difficulties for its major banks (BNP, Credit Agricole, SocGen) to raise capital to the 9% Core Tier 1 ratio, and sovereign risk as France is the largest holder of Italian public debt and private debt, according to BIS
- EFSF and IMF are undercapitalized to materially aid any potential sovereign and banking bailout needs of France
- High unemployment rate of 9.8% (versus 7% in Germany); 22.8% among the French youth
- Smaller export profile (versus Germany), so there’s less benefit to grow via exports
This morning Josh Steiner of our Financials teamed passed along a very interesting chart that shows the correlation between Citi (C) and EWQ. The correlation is 0.88! In a note yesterday, Josh said: “Fundamentally, we continue to dislike Citi. We expect Citi to have significant margin pressure in the coming quarters. Moreover, as European investors are still largely unable to short European financials, they continue to flock to Citi on the short side as their go-to substitute. We see little changing in this regard.”
We’ll continue to monitor this rather notable correlation.
Initial Claims Continue Their Winning Ways
The headline initial claims number fell 2k WoW to 364k (down 4k after a 2k upward revision to last week’s data). Rolling claims fell 8k to 380k. On a non-seasonally-adjusted basis, reported claims fell 17k WoW to 418k. Claims are currently at a level that is consistent with a reduction in the unemployment level: generally anything in the 375-400k level has been consistent with falling unemployment.
It strikes us that claims have exhibited similar tendencies for the past few years. Starting around week 36 of the year, rolling claims begin improving and continue that improvement through year-end. While we don't have a great explanation for why that is, considering the data is seasonally adjusted, it does seem to be a recurring trend. Also important is the fact that in the first 1-2 months of the new year, claims seem to go the wrong way, or least have done so in the past few years.
We'd also highlight the sizeable divergence that has emerged between claims and the S&P. Historically these divergences have not lasted. Right now the divergence is suggesting that either claims back up to ~445k or the S&P 500 puts on a move to ~1375. Last time a comparable divergence emerged it was in the Fall. The mean reversion instrument at that time was the market, as claims showed resilience, and, ultimately, improvement.
The 2-10 spread widened 3 bps versus last week to 170 bps as of yesterday. The ten-year bond yield increased 6 bps to 197 bps.
Financial Subsector Performance
The table below shows the stock performance of each Financial subsector over four durations.
Joshua Steiner, CFA
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