Takeaway: Much going on today – too much to list. Apparently all a company has to do is print a number – any number – and stock goes up. #expectations
EVENTS TO WATCH - Big Earnings Week
- TGT - Earnings Call: Wednesday 2/26, 10:30am
- TJX - Earnings Call: Wednesday 2/26, 11:00am
- JCP - Earnings Call: Wednesday 2/26, 4:30pm
- BBY - Earnings Call: Thursday 2/27, 8:00am
- KSS - Earnings Call: Thursday 2/27, 8:30am
- DECK - Earnings Call: Thursday 2/27, 4:30pm
- GPS - Earnings Call: Thursday 2/27, 5:00pm
CRI - 4Q Earnings
Carter's (CRI) beat the quarter by a penny, which is good enough in this tape. But the quality of earnings left much to be desired. Guidance was weak, but that's typical for CRI. They're a 'guide and beat' kind of company. But the SIGMA chart really tells all here. The past five quarters have been a downward spiral. Margins slowly eroding, while sales weaken and inventories build. There are factors to explain some of this away, including international expansion. But the fact is that when the line in the chart below goes down and to the left, it means that cash flow compresses.
TGT - 4Q Earnings
Please check out what we just said about Carter's. Now substitute the word Target for Carters'. That pretty much sums it up. The only real difference is that TGT's guidance in 1Q is worse than CRI's . Makes sense given that now they have to deal with their data breach. We'll get more details on the quantification on the company's conference call at 10:30. But it looks like they've thrown a very beared-up scenario into their comp. But just because they set appropriate expectations, it doesn't mean that it's worth buying. Not by a long shot.
ANF - 4Q Earnings
Notice a trend anyone? Over the past 5 quarters ANF looks just like the names above. ANF clearly put up a good number relative to expectations -- which is has to do given that it's in the midst of a management coup and it has to put its best foot forward. ANF actually did what CRI and TGT did not…it took a turn in the SIGMA analysis up and to the left, which is almost always an extremely bullish signal. Let's not declare victory here, as the move is a small one. But we'll take it.
JCrew - J. Crew Said to Be Talking With Banks About 2014 IPO
- "J. Crew Group Inc...is interviewing banks as it weighs an initial public offering in the U.S. later this year, people familiar with the matter said."
- "With 451 stores and about $2.4 billion in annual sales, J. Crew may fetch a valuation of as much as $5 billion, one of the people said, asking not to be identified discussing private information. That’s almost twice the $2.64 billion value of J. Crew’s buyout by TPG and Leonard Green three years ago."
Takeaway: Remember when going private at its all-time high was a great idea AFTER JCG went on a blistering run from $9 to $43 back in 2010/11? Well… let's forget that. Now going public is an even better idea. This article says that J Crew is 'interviewing' bankers, but something tells us that the bankers had this planned all along. Now Drexler's appearance at ICR last month makes all the more sense.
UA - UnderArmour set to release Speedform Apollo 2/28
Takeaway: Like 'em or not, UA is doing an outstanding job marketing this new footwear launch. It's heads and tails above prior launches. Quite frankly, if you did not see an UA reference, you'd probably otherwise think that this is Nike. UA is turning footwear into a two-horse race in the US. Adibok is no longer a factor.
ADDYY - World Cup T-shirts pulled by adidas after Brazilian tourism board complain they 'encourage prostitution'
- "Sports brand adidas have accepted a request from Brazil's tourism board to stop selling two T-shirts it marketed ahead of this year's World Cup because they encourage sexual tourism."
- "One shirt shows a bikini-clad woman with open arms on a sunny Rio de Janeiro beach under the word-play 'Looking to Score.'"
- "The other has an 'I love Brazil' heart resembling the upside-down buttocks of a woman wearing a thong bikini bottom."
Takeaway: I think I've got to bow out of commenting on this one.
MW, JOSB - Men's Wearhouse Wins First Battle
- "Men's Wearhouse on Tuesday won court approval to expedite its request for a hearing on whether it can bar the planned acquisition of Eddie Bauer by Jos. A. Bank Clothiers Inc."
- "Delaware Chancery Court Vice Chancellor J. Travis Laster made the ruling... said that Men's Wearhouse made a 'credible basis for believing that the Eddie Bauer transaction is defensive' and that it was in response to a 'hostile bid.' He also noted that the features of the Eddie Bauer transaction 'totally may well fall outside the range of reasonableness,' noting for example the termination fee and its 'alleged magnitude.'"
Takeaway: This whole thing has turned into a circus sideshow, but we've gotta say that we're happy to see MW come out ahead on this one. The move to buy Eddie Bauer on the part of JOSB is one of the more laughable M&A moves we've seen in retail -- ever.
ARO - Aeropostale Said to Consider Investment From Private Equity
- "Aeropostale Inc., the teen apparel retailer under pressure from an activist investor to sell itself, is working with Barclays Plc to explore options such as the sale of a convertible note or preferred stock to a private-equity firm, people with knowledge of the matter said."
- "Aeropostale is also weighing a straight-up sale, said the people, who asked not to be identified because the talks are private. The New York-based retailer contacted at least two buyout firms as of last month as management weighs alternatives, people familiar with the situation said then."
TGT - House oversight panel seeks documents on Target breach
- "A House of Representatives committee with broad investigative jurisdiction has turned up the heat on Target Corp, demanding that the No. 3 U.S. retailer turn over internal documents and messages describing how and when it learned of a recent massive consumer data breach."
- "In a letter made available on Tuesday to Reuters, the House Committee on Oversight and Government Reform requested that Target turn over all documents or communications generated between November 1 and December 13, in which Target employees or 'agents' discuss 'any suspicion' that a data breach had occurred."
LVMH - All Eyes on Nicolas Ghesquière's Debut at Louis Vuitton
- "Nicolas Ghesquière is fashion’s man of the hour: 10 a.m. on March 5, to be precise. That’s when one of the most anticipated events of this international fashion season takes place as the French designer makes his runway debut at Louis Vuitton…"
- "Since being appointed to succeed Marc Jacobs as artistic director of Vuitton in October, roughly one year after ending a 15-year tenure at Balenciaga, Ghesquière has given scant indication about where he might steer the storied French firm, which is marking its 160th anniversary this year."
Client Talking Points
After failing our Hedgeye TREND resistance of 2.81%, yields dropped and bonds rallied to their highs for the month yesterday. We think a test of 2.54% for the 10-year is still in the cards if we’re right on U.S. economic growth slowing and GDP falling back towards the 2% handle.
Unsurprisingly (with Dollar Down, Rates Down) the Financials (XLF) were down yesterday, leading decliners alongside the Transports. Inflation slows earnings-per-share growth for the Transports, but the Fed having 0% credibility fighting inflation keeps Yield Spread compression in play (10s minus 2s = -5 basis points for the week.)
Oil is holding its $108.02 support (Brent) and looks primed for a breakout. It's just one of many commodity #InflationAccelerating signals in my model right now that you can make money on from the long side. Energy (XLE) looks great
|FIXED INCOME||16%||INTL CURRENCIES||17%|
Top Long Ideas
We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.
Las Vegas Sands has transformed into that rare stock that should appeal to “Growth,” “Value”, and “Dividend/Cash Flow” investors alike. The stock now yields higher than the S&P 500 (43% sequential quarterly dividend increase), and the company is buying back $200 million + in stock a quarter, yet still retains a pristine balance sheet. The significant capital deployment opportunities can be funded out of annual free cash flow of nearly $4 billion. Management has indicated they are willing to raise leverage 1.5x which would still keep them well below industry average and if directed toward dividends, would result in a yield of over 6%. And we haven’t gotten to the $10-14 billion in mall assets that could be monetized. We know of no other stocks in consumer land that provide this combination of cash flow, growth, cash return to shareholders, and value levers.
Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.
Three for the Road
QUOTE OF THE DAY
"Most of the shadows of this life are caused by our standing in our own sunshine." - Ralph Waldo Emerson
STAT OF THE DAY
Some numbers from YouTube’s own blog that put some perspective on its penetration into our culture and time.
- 1 billion unique monthly visitors
- 6 billion hours of videos are watched every month
- YouTube reaches more U.S. adults ages 18-34 than any cable network
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“Opium is like Gold – I can sell it at any time.”
Per British historian Julia Lovell, that’s what one of James Matheson’s first partners told him about selling opium to the Chinese in 1818. Matheson was one of the first Scottish traders to hit the ground running (selling drugs) in China in the early 19th century.
If you’re a market #history student, it’s a fascinating story to try to understand. I’m getting into it via a book all Global Macro investors should have on their shelf called The Opium War – Drugs, Dreams, and the Making of China, by Julia Lovell (pg 25).
“The PRC’s state media works hard to convince readers and viewers that modern China is the story of the Chinese people’s heroic struggles against “imperialism” and its running dogs. In reality, the story of modern China could probably be told just as convincingly as a history of collusion with imperialism and its running dogs” (pg 13).
Back to the Global Macro Grind …
Teddy Roosevelt wrote poignantly about the American “struggle.” You know, the alarm clock – the grind - the tireless hours we commit to whatever it is that we are committed to. And since most of us are human, we have a tendency to believe that what we are doing is “right”; especially if it gets us paid.
In America today, politicians are trying to pin us against one another using emotional weapons like class and gender. Leaders want the poor to think they are struggling against the rich. They want you to buy into “inequality” being someone else’s (your) fault. In reality, the 2011-2012 all-time highs in US consumer and producer price inflation is a history of US politicians perpetuating a Policy To Inflate.
Why is that?
Q: How do you have the all-time highs in prices for just about everything in your life… and both a Republican and Democrat government telling you there’s a “great recessionary risk of deflation”? A: Debt.
As John Allison simply puts it in The Financial Crisis and The Free Market Cure, “If you owe a great deal of debt (like the US Treasury) it is to your advantage to have inflation.” (pg 21)
In other news, Venezuela is considering defaulting on its debt.
That’s how this bubble story of government debt ends. And no, this isn’t a new story. Countries have been bankrupting their people via currency devaluation for centuries. There’s a 3-step default process – and it takes time:
- Politicians have to borrow from The People to meet spending promises (and get paid)
- Too much debt leads to deficits and slower growth, which fuels the need for more debt and cheaper money
- Inflation crushes real-growth; spending and liabilities run past the point of return, and the country defaults
But don’t worry, the stock markets in Argentina and Venezuela aren’t down YTD (in their burning currencies). So, in an effort to get their ratings off all-time lows, CNBC will be moving live broadcasts from NJ to Buenos Aires.
BREAKING: “stocks rally – things must be great”
Oh, and don’t forget to bring on the Top 100 Central-Planning Socialist Bureaucrats of the last 25 years for an “exclusive interview” on how they think Argentina’s Kirchners can keep it going!
Today’s morning missive was inspired by one of the best days of Institutional Investor meetings I’ve ever had in NYC. What’s fascinating about our #InflationAccelerating theme is that some buy siders really get how this ends – and some are just starting to put all of the pieces of the puzzle together.
I have a very privileged research position as I get to hear the best incremental research thoughts of some of the best investors in the world. Some are extremely well versed in the bottom-up analysis of inflation (i.e. the structural part that is born out of this government forcing companies to disinvest). It’s called constrained fixed capital formation, labor, and capacity.
No, I’m not talking about the overcapacity in things like asset managers, social media companies, and tulips. I’m talking about things like cement, fiberglass, and plumbers. Layer on the structural inflation that you’re already seeing due to capacity shortages with a cyclical rip in things like wage, rent, and commodity inflation – and voila, you find yourself approaching the aforementioned step #3.
But don’t worry, inflation that slows growth is like Gold - you can invest in it at anytime; it’s just that poor people (80% of the country) have to eat it.
Our immediate-term Macro Risk Ranges are now:
UST 10yr Yield 2.66-2.79%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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