Conclusion: In the charts below, we highlight the fairly symbiotic relationship between U.S. import demand and headline economic growth, as well as what that means for the 1Q12 GDP report.
On the heels of a narrowing of the Trade Deficit to $46.0 billion in FEB (vs. $52.5B prior and a Bloomberg Consensus estimate of $51.8B), a rather large sell-side firm came out an increased their 1Q12 U.S. Real GDP growth forecast, citing the both the sequential improvement in the Trade Balance and the pickup in Export growth, which accelerated in FEB to +9.3% YoY vs. +7.8% prior.
While that firm has developed a history over the years taking the other side of a few of our more contrarian calls, their maneuver today does make sense intuitively to us. After all, GDP = C + I + G + NX, where “NX” is the Net Export/Trade Balance figure. In theory, a narrowing of a country’s trade deficit is explicitly supportive of a higher gross domestic product reading in the period.
In actually (i.e. according to the data), the U.S. Trade Balance actually has an inverse correlation to U.S. Real GDP growth. Keynesians want us to believe that “export boosting” currency devaluation policies are the elixir to all of our economic woes, but the fact of the matter is that the best Net Export reading the U.S. has posted over the last ten years came during the thralls of the Great Recession (JUN ’09).
The issue with debasing your currency and stoking cost-push inflation ('08; '11; '12) is that it slows the growth rate of end demand for goods in both the household and corporate sectors. At this point, it’s far beyond trivial to remind readers that the U.S. economy is levered to the “C” in the aforementioned equation. That domestic demand/GDP relationship is highlighted in today’s Balance of Payments report, with U.S. Import demand slowing to +6.9% YoY. Over the past 18yrs of data, the quarterly YoY growth rate of U.S. Imports has carried a +73% correlation to the quarterly growth rate of U.S. Real GDP.
Net-net-net-net-net, don’t be surprised if our call on JAN 25 for Bernanke’s Inflation to Slow Growth continues to show up in the data as we continue to expect it to.
It just so happens that URBN dominates the age category where we’re seeing the greatest improvements in unemployment. There’s much more to this story than a simple change in employment for 16-24 year olds. But the modest tailwind can’t hurt.
BLS unemployment trends released last week show that the unemployment rate for Americans ages 16-24 now stands at 16.4% as of March, down 10bps vs. February. Despite only a modest sequential improvement last month, the rate improved 110bps year over year – the most significant improvement across all age groups (see chart 2/3).
Next step…check out who has the greatest exposure to that age group.
While URBN’s greatest individual exposure is in the 25-34 year old age group, no other retailer out of the 100+ we evaluated has more exposure to the 16-24 yr old demographic. On average within the online retail channel, 19% of sales come from consumers below the age of 25 and 25% come from ages 25-34. URBN’s exposure to these demographics is significantly higher at 26% & 33% respectively. Because we’re looking at demographics for E-Commerce consumers and company-direct online sales are only a minority of total sales for most companies, the analysis is all relative. URBN stands out regardless.
LET’S BE CLEAR…WE’RE NOT SAYING THAT URBN WILLL BE CURED BY BETTER EMPLOYMENT AND SPENDING LEVELS WITH ITS CORE CUSTOMER. There are much bigger issues there. But on the margin a macro factor turning into a tailwind could only help URBN at this point in its turnaround. URBN remains one of our a top longs.
Below, we’ve included links to recent notes outlining our view on URBN across multiple durations:
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Short interest data released yesterday shows that for the two weeks ending 3/30, there were some large swings in sentiment in restaurant stocks. The standouts were BJRI, CBRL, PEET, RRGB, SBUX, DIN, CBOU, THI, TXRH, BWLD, CAKE and RT.
Sentiment Scorecard Callouts
SBUX: Despite having been on a tear for 2011, Starbucks has been the best performing QSR stock of 2012 to-date! Starbucks saw an uptick in sentiment (and short interest) during the last two weeks of March as the Annual Shareholders meeting, Verismo news, and other growth layers emerged to buoy the stock. We see Starbucks as the standout coffee play, despite the outstanding returns the stock has seen over the last three years, as it continues to innovate and grow internationally. All that being said the multiple is priced for perfection; any disappointments or mishaps could bring a strong leg down in the stock.
BWLD: As the sell-side gets more bearish the buy-side gets bullish. Is management whispering something the ear of the buy side and not the sell-side? Personally I don’t think they are saying anything to anybody, because they don’t want to admit they have a problem. This quarter is going to be fun. This stock continues to defy the gravitational pull of significant commodity inflation. With SSS expectations of 10.7% for Q1, the street is expecting a strong quarter. What if same-store sales are 9.5%, comps for the first three weeks of 2Q are 5-6%, and wing prices are up 100% in 2Q? Hope and pray! Short interest at 11% of the float is not that high and this company is not that well run.
CAKE: Coming into EPS on 4/25 CAKE is the only casual dining name that has seen a consistent increase in short interest, the short interest ratio now being at 18%. With bearish sentiment building through the quarter, what are the chances that the numbers are “bad” and the outlook is even worse? Cheesecake Factory is a high quality name in the casual ding space that could post a disappointing comp number and also see deterioration in its fundamentals as we proceed through 2Q. California, an important market for Cheesecake Factory given that 20% of the company’s system is in the Golden State, is being impacted heavily by rising gasoline prices given the Californian consumer’s dependence on private cars for transport. ICSC data (chart below) is also indicating that the first quarter could come in below current expectations of 2.7%. That said, given the bearish sentiment around the name, it could be a good pick on the long side if earnings disappoint on the 25thof April. Some seem to be anticipating that disappointment right here and now.
EAT: Brinker is at the bottom of the pile in terms of sentiment. We like this stock over the TAIL duration but have to respect the fact that casual dining stocks tend to move together. The slowing trends in casual dining suggest that Chili’s needs to take significant market share in the quarter to gain the 1% in traffic that we think they will need to stay on track to meet FY12 comp guidance of 2%. The last couple of weeks saw incremental shorting as the sales data slowed.
PFCB: The covering in PF Chang’s continued during the last two weeks of March. Over that same period, however, the stock declined as investors booked gains even as shorts capitulated. The success of the Triple Dragon promotion, launched April 2at the Bistro, is the next key data point for the company.
TXRH: Texas Roadhouse is another name that, into the end of 1Q, the sell-side grew more cautious on while the buy-side got more bullish. Over the past month, the stock has significantly outperformed the casual dining space. If the company notices any dip in demand for its products resulting from the “pink slime” controversy lessening appetite for beef more broadly, the negative impact of casual dining sales slowing could be amplified in the case of Texas Roadhouse.
RT: Over the past month, Ruby Tuesday has been the worst performing casual dining name on the heels of a disappointing quarter. Despite the asset value of the company and the free cash flow, management’s actions are conveying a message that the core Ruby Tuesday business is slowly going away. The company converting Ruby Tuesday stores to other concepts and closing stores out right does not instill much confidence in the investment case. At best, bulls can buy the stock back and pray that increasing advertising can temporarily boost comps and allow for some profit-taking in the stock. In terms of a longer term play, we would look elsewhere.
WEN: The shorts have been climbing all over Wendy’s since the analyst meeting and the marketing debacles in 1Q12. There is no reason, in our view, to be long this one. As an aside, if Burger King is fixed that will put incremental pressure on Wendy’s and vice versa. But we don’t think either chain will be “fixed” any time soon.
GMCR: The sell-side is still drinking the kool-aid. We think the stock could get cut in half.
DPZ: The shorts have been pressing this one all quarter and the sell-side has been getting incrementally more bearish. We’re also in that camp. The top line should slow considerably both in the U.S. and in Europe.
JACK: We think the sells-side is too bearish on Jack in the Box. Shorts covered for much of the first quarter. The company may have given the street too much data on Qdoba at the analyst meeting and some concern about margins that we think are overly cautious, may have arisen from that. We are buyers on weakness and currently long in the Hedgeye Virtual Portfolio.
MCD: McDonald’s already raised some red flags on this quarter by changing its tone on austerity in Europe. We are not expecting a dazzling beat in 1Q but think that the look into April will be the focus of investors. We are currently short in the Hedgeye portfolio. In a soft macro environment, MCD is a “go-to” stock for investors.
YUM: Like Starbucks, Yum Brands is on fire. Is it because Taco Bell is having a great quarter? We don’t think the sell-side can get any more bullish on YUM. We are not confident that the turnaround is truly underway at Taco Bell. The stock has barely reacted to China-related fears recently but softness in that market remains a big risk for the stock.
Conclusion: Another leg down in Spanish home prices seems likely and this could potentially be the event that leads to an acceleration of stress in Spanish sovereign yields.
The focus of the sovereign debt crisis in Europe has been, rightfully so, on Greece and the potential derivative effects of a Greek default. This despite the fact that Greece’s economy, based on the CIA’s 2011 Fact Book estimates, is only $312 billion, or less than 2% of the European Union in aggregate. With an estimated 2011 GDP of $1.5 billion, Spain has the 12th largest economy in the world and an economy that is almost 5x the size of Greece’s GDP.
As the chart below of debt-as-percentage-of-GDP shows, Spain, so far, has been able to manage its balance sheet somewhat better than many of its neighbors with a debt-to-GDP of roughly 68.5% as of the end of 2011. (Incidentally, many believe that when incorporating regional debts, Spain is closer to 90%, currently.) Based on Spanish government estimates, this ratio will jump to 79.8% at the end of 2012. While still below the Eurozone average of 90.4%, this is the highest acceleration in the Eurozone. This last fact is at least partially reflected in the credit default swap market with Spain’s 5-year CDS accelerating in price in the year-to-date.
Spain’s most significant headwind going forward is, simply put, growth. Over the last two fiscal years of 2010 and 2011 combined, the lowest average growth rates in the European Union were the following countries in order:
- Greece at an average annual growth rate of -5.2%;
- Iceland at an average annual growth rate of -0.45%;
- Portugal at an average annual growth rate of -0.1%;
- Ireland at an average annual growth rate of +0.08%; and
- Spain at an average annual growth rate of +0.15%.
Clearly, this is not an enviable group of countries and Spain is the only one amongst them that hasn’t had a complete sovereign debt meltdown.
As any sovereign credit analyst will tell you, the easiest way to resolve a sovereign debt issue is to grow out of it. Spain’s economic growth outlook is constrained by two separate, though related, factors: employment and housing.
In the chart below, we’ve highlighted Spanish unemployment going back to 2000. The unemployment rate of Spain hit 23.6% in February for the 8th consecutive monthly increase, which is both the highest rate since 2000, but also literally the highest unemployment rate since World War II. As if that weren’t enough, the government expects the unemployment rate, already the highest in the industrialized world, to increase to north of 24% this year. The current number of unemployed in Spain is equivalent to 4.75 million, which is the highest number since the Spaniards began keeping the data in 1996.
The counter view to this abnormally high unemployment rate in Spain is that there is a large and thriving underground economy, which means that government reported employment figures are understated. Certainly, there is likely credence to this, but, even so, most estimates suggest accounting for the underground employment would only reduce the overall unemployment rate by 400 basis points. In the shorter term, there is also the employment head wind of a recently implemented labor reform law in February that will make it easier for employers to unilaterally lay employees off and cut salaries. Eventually, though, this is expected to make the Spanish employment market more fluid as it will likely make employers more willing to take on the risk of hiring.
The chart below highlights the structural employment issue in Spain versus the remainder of the Eurozone. Specifically, it emphasizes the year-over-year change in unemployment by country. In 2011, Greece was the only nation that saw unemployment increase at a quicker pace than Spain.
A key reason that Spanish unemployment rates have ballooned versus the rest of the Eurozone is because Spain had a vastly more inflated housing and construction sector during the boom years. In fact, according to Eurostat, Spain employed 2.9 million people in construction industries at, or near, the peak in 2007. In total, this was about 1/5th of all construction workers in the EU-27 despite the fact that Spain has less than 10% of the total population. Clearly, an improvement in Spanish employment will be predicated on a recovery in the construction sector.
Unfortunately, a recovery in Spanish housing and construction markets appears to be a long way in the coming. Unlike most industrial nations that experienced extended housing price inflation in the late 1990s and mid-2000s, Spain actually had two bubble periods with the first beginning in 1985. As the chart below highlights, from 1985 – 1991 home prices basically tripled, from 1992 – 1996 they basically remained flat, and from 1996 – 2008 prices more than doubled. So far, from the peak, Spanish home prices are in aggregate only off about 20%.
There are two potential proxies for how much further home prices in Spain may have to fall. The first is wage growth, which has historically tracked housing prices. Intuitively, this makes sense. The more consumers have in their pockets generally, the more they have to spend on housing (all else being equal). As the chart below shows, wages and home prices tracked each other steadily until 2000, at which point home prices began to accelerate beyond wage growth. Currently, home prices would need to decline just over 30% to revert back to wage growth.
The second proxy for further correction in Spanish home prices is the path of U.S. home prices. Based on the Case-Shiller 20-city seasonally adjusted series, U.S. home prices have already corrected 34% peak-to-trough. Comparing Spain to the U.S. is not quite apples-to-apples as home prices were driven much higher due to ownership rates that eclipsed 80% at the peak in Spain. So, depending on the data set we use, from the start of the second leg of the Spanish home price bubble in 2000 compared to the U.S., Spanish home prices have a potential downside of more than 35% from current levels.
The risk to the downside in Spanish home prices is being clearly reflected in real estate transactions in Spain. The chart below highlights year-over-year real estate transactions by month. In the most recent month of February 2012, transactions were down more than -30% from the prior year. Without a sustainable pick up in the real estate market, it will be impossible for employment to improve meaningfully.
The second derivatives of continued decline in real estate prices in Spain are both economic growth and the health of the banking system. On the first point, the Bank of Spain estimates that a decline in home prices of one dollar will decrease consumption by $0.03. Thus, a 15% decline in housing should reduce GDP by almost 2% over the next two years. (Hat tip to Carmel Asset Management for highlighting this analysis in the WSJ.) This would obviously have a direct impact on Spanish banks.
Currently, the Spanish banking system is estimated to have a 1.8 trillion euro loan book. It is estimated that roughly 20% of that is in real estate assets, of which almost half are considered troubled. Obviously both declining real estate prices and slowing economic growth generally put increased pressure on the portion of the loan book which is currently not troubled, and equates to almost 150% of Spanish GDP.
Certainly Greece has been the rightful focus of the sovereign debt issues in Europe, but the likelihood of another serious leg down in Spanish home price could put Spain front and center in 2012.
Daryl G. Jones
Director of Research
Underlying Trends in Athletic Apparel & Footwear appear healthy, though the 1-year comp will suggest otherwise in the coming weeks. NKE continues to gain share across several major categories in both FW & Apparel. FINL and NKE both remain among our favorites.
Footwear sales were up ~22% last week driven almost entirely by volume; units were +21% with ASP +1%. Last week’s outperformance does reflect the tailwind from the Easter shift however the acceleration on the margin from the prior week is notable. Sales were up 4% prior to last week and grew ~18 points sequentially (to +22%) despite the industry comp increasing from (-13%) to +12%.
Beginning next week, the Easter tailwind will fade into a headwind as the industry starts to comp the weeks last year that led up to Easter weekend (4/24/11). If we assume underlying 2 yr trends remain flat, we would expect a sharp deceleration in sales down to flat to +LSD. In addition, next week’s results will include Easter (little to no spending) compared with last year which excluded the Holiday and should begin to show the seasonal spend leading up to the holiday weekend. The Footwear market has remained healthy through March and started April strong but is now approaching the Easter shift headwind. NKE (inc Brand Jordan & Converse) as well as ADIBok have been gaining share from the rest of the industry. UA lost 9bps of share last week preventing its market share from breaching the 1.1% threshold.
Unlike Footwear, Athletic apparel sales slowed last week reflecting less favorable comps which won’t fade until after Easter. Beginning next week, we expect to see a more pronounced negative impact in athletic apparel top line results from the 2012 Easter shift (4/8 this year vs. 4/24 last year). As such, we will continue to assess the health of the athletic apparel industry using underlying trailing 3 week and 2 yr growth rates. Over the past 4 weeks, we’ve seen sequential improvements in these trends within the athletic specialty channel. Should these rates remain flat as the industry laps the holiday shift, we expect year over year growth within the athletic specialty channel to be down LSD-MSD next week which will not accurately reflect top line momentum.
Over the past 2 months, strength in apparel within the athletic specialty channel has been consistently driven by NKE who has gained ~1pt+ of share per week. Alternatively, Under Armour has been losing market share. In order to identify where NKE has been gaining share, we analyzed four key categories below within the athletic specialty channel where NKE & UA combined account for ~60%+ of the domestic market.
- Both NKE and Adidas have consistently gained share across the 5 durations below. UA has started losing share over the past 3 months - at the same time NKE’s gains have accelerated meaningfully.
- In the Shirts/Tops Category, NKE’s share is 43% vs. UA’s 29%. In this category, NKE has been gaining share over the past 2 years while UA has been losing. Based on the graph below, while the 28% of the industry classified as “other” has had an impact on changes in share with sales up +7%, UA’s losses over the past 5-months reflect NKE’s sales growth up +11% outpacing UA, which has been essentially flat.
- Nike has 47% share of the bottoms category while UA only has ~11% share. The tradeoff in share is less pronounced here - while NKE has gained share over the past couple of weeks, it seems to be primarily from the “other” companies, though UA’s gains have decelerated.
- Under Armour’s “Storm Fleece” platform is classified primarily as “sweats;” UA holds 28% share of the category vs. NKE at 47%. UA has been losing share here, down ~350 bps over the past couple of weeks, however the 27% of the industry classified as “other” has lost significantly more share. NKE has gained over 6 pts of share YTD with sales up +48% over the past 5 months, outpacing UA (+42%), and Other (+27%).
- NKE and UA account for 95% of the compression category (27% & 68% respectively). In this category, (see chart below), major gains and losses in share do indeed come at the loss of either UA or NKE as a result. Note that NKE has been gaining 200bps+ in share over the past 2 years while UA has been losing that amount. Category sales are up +3% with NKE up +19% and UA down 1%.
It appears that the categories where NKE is in fact taking direct share from Under Armour are the shirts/tops & compression categories.
A key consideration here is that with the mid-teens US Futures growth we’ve seen out of Nike over the past quarters, we NEED to see these levels of share gains. We KNOW the product was ordered, and we KNOW the product is hitting shelves and needs to be sold. That’s why we pay particular attention to the ASP – a weak ASP would indicate that the goods needs to be heavily discounted to move off the floor. But that’s not the case. In fact, Nike’s trailing 3-week change in average price point is better than 10%. Trends appear on track here.
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