Takeaway: Lots going on today. JCP, NKE, ADDDY, M, RL, PUMA, Clicks-to-Bricks concepts.
JCP - Allen B. Schwartz Doesn't Renew Line at J.C. Penney
- "Allen B. Schwartz, co-owner, founder and design director of A.B.S. by Allen Schwartz, has pulled the plug on his Allen B. collection for J.C. Penney Co. Inc. after five years at the beleaguered retailer."
- "Allen B., which started out as a sportswear collection but morphed into a dress line, was carried at 908 Penney’s stores. Schwartz said he designed, fit and sourced the collection, which was manufactured by Penney’s. The deal was under a royalty license."
Takeaway: If JCP wanted to keep this product, it would have kept the product. This is all a part of JCP getting its merchandise back on its feet and more appropriate for the core JCP shopper.
ADS - Adidas lowers FY guidance
- "Adidas AG...cut the low end of its 2013 profit forecast by 7.9 percent, citing the euro’s strength, a glitch in a Russian distribution site and weakness in the global golf market...Net income this year will be [820 million euros - 850 million euros]...Adidas had previously forecast net income of [890 million euros to 920 million euros]. Adidas also cut its operating margin forecast to about 8.5 percent from a previous forecast of 9 percent."
Takeaway: Definitely a sloppy preannouncement. The biggest notable is that it makes you think how infrequently this happens to Nike. It shows the quality gap between the two competitors.
NKE - Nike launches LunarFly 306 and shareholders approve CEO Mark Parker's 2013 compensation package of $15.4 million.
Takeaway: It’s good to be Mark Parker. No surprise here with either the level of compensation, or the approval of this year’s package. Note, however, that last year Parker made $35.2mm, including $23mm in stock awards. Yes, he’s taking a pay cut.
Neiman Marcus - Neiman launches ad campaign to promote new "Cusp" department that targets more youthful, hipper demographic
- "The Neiman Marcus department and store that represents a hipper, more youthful demographic, has created a fall ad campaign that celebrates music and those who make it."
- "The retailer chose up-and-coming rockers as models…[who] appear in ads wearing designs by Rag & Bone, Vince, Alexander Wang and Robert Rodriguez."
- It seems as if everyone is launching a new ad or department centered on capturing the millennial shopper these days.
RL - Orland Bloom struts his stuff in the new Romeo & Juliet on Broadway in RL Denim and Supply Jeans
Takeaway: RL has been getting bolder with product placement. But unlike the US Open, they couldn’t have Orlando wearing a 12-inch Polo Pony on his back.
M - Macy’s is launch partner for Apple’s new streaming music service, iTunes Radio
- "Macy’s announced that it is an exclusive launch partner for Apple’s new iAd-supported streaming radio service, iTunes Radio. In line with the retailer’s omnichannel strategy, Macy’s said the new service will allow it to reach a broad cross-section of consumers with compelling digital, visual and audio engagement experiences on their iPhone, iPad, iPod Touch, Apple TV, Mac or PC."
Takeaway: Not a surprise. Macy’s continues to make strides in furthering its OmniChannel platform. We just question if people will pay for it.
LVMH - LVMH Acquires Stake in Nicholas Kirkwood
- "...Moët Hennessy Louis Vuitton is to reveal today that it has taken a majority stake in London-based [women's shoe designer] Nicholas Kirkwood."
- "The exact size of the stake and financial terms could not be learned. LVMH characterized the deal as a 'long-term partnership' that affirmed its commitment to 'nurture talent and creativity,' and said it would provide its expertise to help Kirkwood develop his brand internationally….At present, Kirkwood’s shoes are carried at about 150 department and specialty stores, and sold in three flagships: in London, New York and Las Vegas."
LVMH - Rumored to be in advanced talks to acquire J.W. Anderson
- "Moet Hennessy Louis Vuitton ...is in advanced talks to acquire a stake in fashion designer J.W. Anderson, according to two people familiar with the situation."
- "LVMH...could sign a deal with London-based Anderson as soon as this month, said the people, who asked not to be named as the information is confidential."
- "Jonathan William Anderson set up the label bearing his name in 2008, three years after graduating from London College of Fashion. He has collaborated with Gianni Versace SpA and Philip Green’s Topshop."
Takeaway: Someone is on a buying spree. Yeah, that’s suspect.
PUM - Puma Signs Jamaal Charles
- "Puma has signed Kansas City Chief’s running back Jamaal Charles to a two-year contract to be one of the faces of the brand’s training category for men."
- "[He] will work with Puma on social media programs, beginning with a 'Get to Know Jamal' series of weekly videos that kicks off next week. He will also be featured in the brand’s 'Nature of Performance' campaign and will give input on the testing and development of future product."
Takeaway: Odd for Puma to deploy assets in the NFL. NASACAR and Indy? Yes. Football (Soccer)? Definitely. But NFL? It doesn’t sit well with us.
CFR - Richemont Said to Hire Adviser to Sell Lancel Luxury Bags
- "...Richemont SA (CFR) has appointed an adviser to sell its luxury leather-goods brand Lancel, the maker of Brigitte Bardot handbags, according to two people familiar with the matter."
- "Richemont hired investment bank Nomura Holdings...to help sell the brand, said the people, who asked not to be identified because the information is confidential. Lancel could be worth about 500 million euros ($668 million), according to one of the people...Richemont got control of the Paris-based brand when its Vendome unit bought it for 342 million francs ($375 million) in 1997."
TJX - TJX Quietly Relaunches Website
- "With surprising stealth, T.J. Maxx (TJX) has revived its online presence. Quietly, without fanfare or even an official announcement, TJX just appeared online, after a protracted, eight year absence."
- "TJX originally launched a retail website in 2004 but closed down after only a year, stymied by a weak response from its customers. Many experts believe that its unconventional business model was poorly suited to online retail."
- "Now, TJX intends to streamline their internet offerings, focusing more on higher priced items and more exclusive brands."
HD - Home Depot Sending 20,000 Part-Timers to Health Exchanges
- "Home Depot...plans to end medical coverage for about 20,000 part-time employees and direct them to government-sponsored exchanges scheduled to open next month as companies revamp benefits to fit the U.S. Affordable Care Act."
- "Employees with fewer than 30 hours a week will no longer be offered limited liability medical coverage, Stephen Holmes, a spokesman, said today by telephone. About 5 percent of Atlanta-based Home Depot’s 340,000 employees are enrolled in that plan.
- This follows on the heels of similar announcements by Trader Joe's, UPS, and WAG.
BBY - Best Buy takes its vending machines from airports to…rest stops?
- "These 'Best Buy Express' kiosks have been around since at least 2008, but mostly in airports—not off the New Jersey turnpike. ZoomSystems, the company that makes the kiosks, has created similar 'automated stores' for Apple and the Body Shop."
- "Along with iPads, the machine offered iPhone cases, phone-charging equipment, audio cables to use in the car, Beats by Dre headphones, and other gizmos that would be helpful if you'd forgotten something at home."
UK Office of Fair Trading investigates price fixing on sports bras
- "The Office of Fair Trading has accused leading underwear company DB Apparel and three department stores of price fixing on sports bras.
- Debenhams, House of Fraser and John Lewis are accused of cooking up anti-competitive deals with DB Apparel UK over their Shock Absorber sports bras."
- "The OFT alleges that the underwear maker and the stores committed a serious breach of competition law, by agreeing fixed or minimum prices for the bras."
- "Following its 17-month investigation into the sports bra market, the OFT says that DB Apparel made nine anti-competitive agreements with the stores between 2008 and 2011, with the aim of increasing the price of the bras. During this period, Shock Absorber bras had a 15% share of the market."
- "Shock Absorber bras were being sold today for between £25 and £38 on Debenhams' website."
Clicks to Bricks: Five Cool Concepts
- "In a role reversal of sorts, pure online retailers are venturing offline and into the world of brick-and-mortar retail. Here’s a look at [three] that are generating lots of buzz:"
- "Online subscription fashion retailer JustFab’s first retail store, in Glendale Galleria, Glendale, Calif., was designed to mirror the brand's online shopping experience. Customers shop curated product displays, with trend story videos and in-store 'stylists' offering fashion advice. They can also register for exclusive VIP member pricing"
2. Proper Cloth
- "Custom-made shirts — and fine Scotches — are the bill of fare in online shirtmaker Proper Cloth’s first brick-and-mortar outing. The store is located in New York City’s Soho neighborhood, in a walk-up, residentially-styled loft space. (Appointments are encouraged, but walk-ins are ok.) Customers can peruse the fabrics, be measured or fine tune the fit of a Proper Cloth shirt already ordered. They can also get style or fit advice, and place online orders."
- "Online menswear retailer Bonobos has entered the physical arena with Bonobos Guide Shop, a handsome and comfortably-furnished showroom where customers can try on the brand's shirts, pants and other products, get one-on-one expert fit advice and place an order (with delivery to their home). To date, the company has opened eight locations, from San Francisco to New York City."
Two days, 240 meetings: Apparel pushes free trade on Hill
- "A small army of clothing-industry executives has fanned out across Capitol Hill this week, pinning down 240 members of Congress for individual and group meetings to talk free trade. They are the representatives of at least 50 apparel manufacturers and retailers who have taken up a new strategy in an attempt to get their way in the blockbuster Trans-Pacific Partnership, as U.S. negotiators are becoming more difficult to reach."
- "The U.S. apparel industry has formed a single coalition and set about the goal of finding friends who will push negotiators to insist that rules be included in the trade deal that help them sell cheaper products. They’re asking for signatures on letters, urging members of Congress to call President Barack Obama’s top trade negotiators and more — and trying to gin up attention along the way, tweeting about each meeting and even placing newspaper ads."
Turkey Emerges as Major Denim Producer
- "Turkey is garnering a reputation as an emerging producer of denim, breaking into an industry generally dominated by a small handful of colossal companies….The global denim market is poised to continue its vigorous growth, expanding to $56 billion by 2018, according to a report issued by Global Research Inc. While the U.S. has long been the world’s most prolific producer of denim, it has been surpassed by upstarts like China, India, Bangladesh, Pakistan and Turkey."
- Turkey, at the end of 12 month period ending 7/31/2013, was responsible for approximately 5.6% of Global cotton textile production.
Client Talking Points
India's new central bank chief Raghuram Rajan raised rates (I liked that call) in order to fight inflation with India’s currency. India’s stock market didn’t like it because it's addicted to Down Dollar, and the dollar is up this morning. The key to emerging markets not imploding again is Ben Bernanke devaluing the Dollar and US relative growth rates slowing – we’ll see what he can do.
The US Dollar is trying really hard to hold a) higher-lows vs the year-to-date low (February) and b) our long-term TAIL risk line of $79.11 on the US Dollar Index. If it can hold here, things get more volatile and tougher to manage. I think Bernanke calls this kind of thing “price stability” or something like that. Stay tuned. Right now it's economic gravity vs central planning.
Gold doesn’t like both the US Dollar and 10-year Treasury rates arresting their smack-down declines. Gold down -1% this morning and Silver down -2.5%. I’m not shorting either because of Bernanke, but it’s interesting to see that there was simply no follow through to Gold’s 1-day bid.
|FIXED INCOME||0%||INTL CURRENCIES||15%|
Top Long Ideas
WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.
Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward. Near-term market mayhem should not hamper this trend, even if it means slightly higher borrowing costs for hospitals down the road.
Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks. T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.
Three for the Road
TWEET OF THE DAY
The Fed's forecasting of growth has been wrong 63-71% of the time since Bernanke started @KeithMcCullough
QUOTE OF THE DAY
“The Fed is the greatest hedge fund in history.” -Warren Buffett
STAT OF THE DAY
Apple increased over 9,000% from 2002 to 2012, but declined on 48% of all trading days. In other words, it's never a straight path up.
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This note was originally published at 8am on September 06, 2013 for Hedgeye subscribers.
“To others, being wrong is a source of shame; to me, recognizing my mistakes is a source of pride.”
I’ve only ever bet on a fight once. It was for no money and with a guy who just happened to be standing next to the keg with me at the time. The fight itself was a late night, inebriated 3 vs. 1 event in the back of the ‘football house’ in Springfield, MA.
I bet on the “1”.
The #Tell, so to speak, was when the “1” stealthily, but deliberately, led the “3” to the fence in the back corner of the yard.
“Find the nearest fence and put your back to it” is Getting Jumped 101 material - but a person would probably only know that if getting jumped had actually been an acute risk in life for some protracted period.
If one’s collective life experience was capable of driving a self-defense instinct to be so ingrained as to be fully active on the back end of a 6 hour binge drinking session, then the odds of an upset victory are probably better than backyard consensus has them set.
Taking high probability swings at mispriced circumstances isn’t confined to markets. I’ll probably retire from amateur fight betting with my 1-0 record.
Professionally, we recently found ourselves in a stirring analytical scrap of sorts with an elite hedge fund manager over the conclusion on an investing idea. In this particular instance, we turned out to be right.
In defeat, the aforementioned manager didn’t become embarrassed, inimical or spiteful. He became a client.
Being wrong is okay, “I don’t know” is the right answer more of the time than most would admit, and egoless-ness and honest self-reflection in defeat is not a #Process (or person) you want to bet against longer term.
Back to the Global Macro Grind….
Regardless of the flavor of this morning’s employment data, we’ll be invariably deluged with sound bites lamenting the low level of labor force participation. Despite its descent to old-hat, punditry talking point over the last five years, Trend movement in labor participation remains critical to the forward growth outlook.
After all, if population growth is slowing and the share of that population that is working is declining, productivity has some heavier lifting to do to keep real per capita output going in the right direction.
Demographic, cultural, and institutional trends are generally glacial and collectively serve to drive the broader, directional Trend in the Labor Force Participation Rate (LFPR). Over the last 5 years, the straightforward, central question facing economists is what temporary (& potentially permanent) impact the shock of the Great Recession had on labor participation.
From a research perspective, the aspirational goal has been to discern what the prevailing gap is between where we are currently on the LFPR and where we would have been without the cyclical impacts.
Academic literature over the last 5 years is replete with analyses attempting to decompose the cyclical and secular components impacting labor force participation. On average, the research suggests around 40-60% of the decline in the LFPR since 2007 could be attributed to cyclical factors.
The truth is that attempting to parse the Cyclical and Trend components of Labor Force Participation, with precision, is a quixotic pursuit. It’s some amorphous combination of the two.
From an investment perspective, understanding the principal drivers of the LFPR, the key considerations facing the forward outlook, and the highest probability TREND trajectory hold more practical significance than decomposing the Cycle/Trend impacts with exact precision.
With that in mind, let’s take an abbreviated, Socratic tour of Labor Force Participation.
What has been the larger Trend in Labor Force Participation?
Taking a long-term view, the Chart of the Day below illustrates the 3 primary labor participation trends which have prevailed over the last 65 years. Briefly, from 1948 to the mid 1960’s, participation was largely stable.
From the 1960’s until the turn of the century, driven by Baby Boomers (born 1946-1964) entering prime working age (24 – 54) and a secular increase in female participation, LFPR showed a persistent increase.
From 2000 to present, the trend has been one of decline as the median age of the workforce rose, Boomers began matriculating towards retirement and dual recessions all weighed on the participation rate.
Is Labor Force Participation sensitive to the Business Cycle?
The correlations aren’t exceedingly strong, but yes. Here, it’s sufficient to simply observe the LFPR in the post-recessionary periods in the chart below. In each instance, the participation rate dips in the wake of the cyclical downturn.
So, labor participation shows some economic/business cycle dependence and the broader Trend since the turn of the century has been one of decline. With no peri-recession tailwinds from cyclical or secular factors, the fact that Labor Force Participation declined in the wake of the Great Recession is not a surprise.
What has been the impact of domestic demographic Trends?
We’ll explore the multitude of factors impacting the LFPR in more detail in a subsequent note. Here, we’ll consider the impact of age demographics on the Trend movement in the LFPR.
Historically, different age groups have shown typical, largely fixed, participation rates. Labor Participation peaks progressively from age 16 into the mid 40’s, gradually declines to age 64, then drops precipitously. Thus, as population shares of the different age groups change it impacts the prevailing, aggregate participation rate.
In addition to plotting the actual LFPR (blue line), in the Chart of the Day, we show the estimated trajectory of participation based on the average 1997-2007 participation rate by age for those aged 16 years and older (orange line). The extrapolation suggests greater than ~40% of the decline in the LFPR post-2007 could be attributed purely to age demographic trends.
Extending the forecast, demographic trends, in isolation, would predict LFPR to decline to 64.1% in 2015 and a further decline to 62.5% in 2020. Clearly, the Trend remains one of decline.
What sits as a primary swing factor for LFPR over the intermediate term?
The level of long-term unemployed associated with the great recession was unprecedented. If the long-term unemployed do come back then we can expect upward ‘cyclical’ pressure on labor force participation as economic conditions improve.
If, however, the LT unemployed fail to return to the labor force, the recessionary shock could be viewed to have changed the structural and secular outlook for labor market participation. In effect, shifting the LFPR Trend line lower, compressing the existent cyclical gap (i.e. the spread between the orange & blue lines below), and lowering the potential upward pressure on the LFPR (& unemployment rate) as economic conditions improve.
Regardless of the cyclical impacts on Labor Participation, growth in the supply of labor will continue to slow vs the multi-decade average.
A TREND deceleration in working age population growth alongside a decline/flattening in labor force participation rate will put secular pressure on domestic labor supply, serving as a headwind to potential GDP and a tailwind to real wage growth. As a result, productivity gains will be an increasingly important driver of real output growth over the coming decade(s).
Innovation drives productivity. Human Capital drives innovation. Circumstance will necessarily drive our collective pursuit of human capital. We’ll be increasingly responsible for our own (economic) fate – fancy that.
Our immediate-term Macro Risk Ranges are now:
UST 10yr Yield 2.82-3.06%
Enjoy the weekend.
Christian B. Drake
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