Positions in Europe: Spain (EWP)
Keith shorted EWP in the Hedgeye Virtual Portfolio today with the IBEX 35 broken on its intermediate term TREND level and dancing on its immediate term TRADE line (see chart below).
We’re forecasting a long TAIL to Europe’s sovereign debt crisis. While Greece and Portugal are currently in the spotlight, we think Spain remains a much larger domino of risk on the near horizon. We think the news out today that the European Union is putting pressure on Spain to make additional budget cuts worth 0.5% of GDP will put further downward pressure on the broader Spanish index and dim an already fractured economy with weak confidence and sky-high unemployment (23% avg. and +50% for youth). Given this environment, we also think a social uprising is in the cards.
Spanish PM Mariano Rajoy, elected in December of 2011, has inherited a budget that was fudged last year, with the previous budget deficit target at 6% of GDP for 2011 now estimated at 8.5%. This gap has thrown off the 2012 budget deficit reduction program, and the government unilaterally (ex-EU agreement) revised its 2012 deficit target to 5.8% versus the original 4.4% promise. The EU says that’s not enough, and now the rub will be that further spending cuts will put additional downside pressure on the broader economy (fiscal multiplier) and tax receipts to pay down the deficit, which is targeted to be limited to 3% in 2013.
In typical political fashion, Rajoy will present his spending plans and additional austerity measures on March 30, days after regional elections in Andalusia, a Socialist stronghold that his People’s Party is attempting to win back.
Good underlying Retail Sales numbers today. But watch gas prices at the pump as well as tough compares in April and May. We need continued underlying acceleration to sustain current yy growth.
Things looked good in the rear view for Retail Sales in Feb. Specifically, sales for Clothing/Accessory Stores & Department Stores (~9% of retail sales) – while flat vs. Jan levels (YoY) – accelerated slightly on a 2-year basis.
During the same time period, we saw a modest sequential slowdown in total retail sales excluding autos and fuel. So in effect, we simply stepped up our purchases of apparel in Feb relative to other items.
Good stuff. But keep in mind that:
a) Gas is sitting at $3.22 on average in the US (regular unleaded). That is a factor now that was not in place in Jan/Feb. The current price for gas at the pump is ~10% higher than last year. If prices remain flat, then we could be looking at
an 8% increase in prices over the coming seasonal driving months. Should we see LSD-MSD growth from here, prices could reach $3.40 for regular gas representing 13-15% growth over last year. That equates to $9-12bn less consumers will have to spend on cargo shorts during peak driving season (or $40-50bn of total retail sales annually).
b) The spread between chain store sales and Retail Sales (gov’t-reported) ticked up last month – meaning that the public clothing companies outperformed. But check out the spread in the two in the chart below. There is a nearly surmountable spread that the public companies need to comp in April and May. This will be tough with gas sitting where it is.
c) While sales this morning reaffrim the top line strength we’ve been seeing, keep in mind that the retailers who report SSS now only account for ~$260bn/year with JCP and DDS recently hanging up the cleats. Total retail sales are roughly $3.5 trillion (ex auto) with annual PCE near $11 trillion (72% of the economy) meaning that only ~30% of consumer expenditures take place in retail stores or online.
There’s a lot to read into with today’s CFO announcement. They passed over some stars. Overwhelming focus on operational/financial/digital integration and growth. All in, a great announcement with low risk.
This morning’s announcement by LIZ that George Carrera joined the company as CFO might not seem notable at face value. But we think it’s rather big. The punchline relates not only to whom they chose, but to who they passed over. Our sense is that the others that were in the running were extraordinarily strong from an operational perspective – particularly as it relates to growing solid brands in a digital age outside the U.S. while not missing a beat operationally, logistically, and financially.
Additionally, our sense is the candidates did not have great (if any) capital markets experience. Carrera spent the better part of 10 years as CFO/COO of Tommy Hilfiger, including the period during which it was bought by Apax Partners for $1.6bn and subsequently sold for $3bn to PVH.
The knock for some investors on more of an internal vs external focus would be that someone focused on capital markets might want to monetize Kate ASAP. We’re not worried there. That’s a CEO/Board level decision, and would not happen until 2H at the earliest (after McComb’s contract renews). Also, if/when such a monetization event happens, it is likely to be a stub to establish value rather than to sell outright.
Our big concern would be if they brought on someone that can pander to the capital markets while leaving operational gaps in the infrastructure. Then we’d be left with the corporate version of Ben Bernancke. Now we’re far less likely to think that this concern comes to fruition.
All-in, this is a great event.
Here are a couple bullets on Carrara:
- Apax Partners bought Tommy in May 2006 for $1.6Bn
- Carrara was the COO/CFO at Tommy from 9/06-2/11 during which time it was turned around and then bought by PVH for $3Bn in March 2010
(Source: LinkedIn Profile)
(Source: Company Documents)
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