Takeaway: Footwear/Jordan on fire. MW biz weakens as deal inks. Music to boost AMZN Prime. LB/Giselle lovers quarrel. H&M invades. Swatch sues TGT.
EVENTS TO WATCH
- DKS - BofA Consumer & Retail Conference: Wednesday 3/12, 10:30am
- JWN - BofA Consumer & Retail Conference: Wednesday 3/12, 10:30am
- PETM - BofA Consumer & Retail Conference: Wednesday 3/12, 1:30pm
- WSM - Earnings Call: Wednesday 3/12, 5:00pm
- GCO - Earnings Call: Thursday 3/13, 8:30am
- DG - Earnings Call: Thursday 3/13, 10:00am
- ARO - Earnings Call: Thursday 3/13, 4:15pm
- ZUMZ - Earnings Call: Thursday 3/13, 5:00pm
- ANN - Earnings Call: Friday 3/14, 8:30am
- BWS - Earnings Call: Friday 3/14, 9:00am
- BKE - Earnings Call: Friday 3/14, 10:00am
- HIBB - Earnings Call: Friday 3/14, 10:00am
Sales over the past 3-weeks have been on a tear -- +27%, +10%, and +10% in each week, respectively according to NPD data. Brand Jordan has been particularly strong -- which is an understatement -- with trailing three week sales numbers up over 75% YY. The other callout would be UA, which released the Speedform Apollo two Fridays ago. Due to the timing of the release it's tough to get a good sense of sales trends - but one thing of note is that Units and $ are up big while ASP's are negative. This is due to two factors 1) liquidation of excess inventory, and 2) lower starting price point for the Speedform Apollo which retails for $99 compared to last years releases which started at $120.
MW - 4Q Earnings
Takeaway: Convenient for MW that they preannounced a quarter with their worst inventory position in years on the same day they ink the deal for the transformational JOSB acquisition.
MW, JOSB - Men's Wearhouse To Acquire Jos. A. Bank For $65.00 Per Share In Cash
- "The Men's Wearhouse and Jos. A. Bank Clothiers today announced that they have entered into a definitive agreement under which Men's Wearhouse will acquire all of the outstanding shares of common stock of Jos. A. Bank for $65.00 per share in cash, or total consideration of $1.8 billion. The boards of directors of both companies have unanimously approved the transaction."
- "Men's Wearhouse shareholders will benefit from approximately $100 to $150 million of run-rate annual synergies realized over three years, through improving purchasing efficiencies, optimizing customer service and marketing practices, and streamlining duplicative corporate functions. Additionally, Men's Wearhouse's vertical direct sourcing model will be leveraged to improve combined merchandising and sourcing across the combined company and rationalize inventory over time."
- "The combined company will be the fourth largest U.S. men's apparel retailer with pro forma sales of approximately $3.5 billion. This transaction brings together a high-value collection of national and owned brands. Building on the two companies' complementary business models, the combined company will better serve an expanded customer base in more locations and optimize merchandising and sourcing capabilities."
AMZN - Amazon Working on Music-Streaming Service
- "Amazon.com Inc. is hoping to offer an on-demand music-streaming service to customers of its Amazon Prime program, but it may limit how much a person can listen to any given song, according to people familiar with the matter."
- "The Seattle-based company has held negotiations with record companies and music publishers seeking to license their music for the planned service, but it remains far apart from some record companies on financial terms, these people said."
- "The music service is one of several new features that Amazon may add as it raises the price of Prime to as much as $119 a year."
Takeaway: AMZN's world continues to revolve around Prime -- much like how Costco's revolves around its membership fee. COST loses money excluding its fee -- AMZN loses money regardless. Perhaps a boost in Prime would put AMZN solidly into the black, as $119 per year represents a 50% increase from current levels. But customer attrition is obviously critical. Sounds risky to us.
LB - Gisele Bundchen Is No Angel as Victoria’s Secret Rival
- "Gisele Bundchen...is teaming up with closely held lingerie maker Hope to open the first Gisele Bundchen Intimates store in Sao Paulo in May. That same month, a Victoria’s Secret-branded shop is set to begin selling bras and panties in Brazil."
- "...Gisele will also help Sao Paulo-based Hope open stores in London, New York, Los Angeles and other major cities next year, said Fabio Figueiredo, the company’s director of expansion. Hope aims to more than double the number of countries where it sells its underwear to 40 this year, he said."
Takeaway: LB has zero recourse on this one. The damaging part is not that it no longer has Giselle, but that she's helping to build a competitor.
TGT, UHR - Swatch Files Lawsuit Against Target Corp.
- "Swatch AG has filed a lawsuit against Target Corp., alleging the discounter of selling watches that copy its designs."
- "The filing includes images of Swatch and Target watches with zebra-printed wristbands, as well as multicolor watches from both companies. Swatch’s round, brightly colored face without numerals are among the item’s elements, the suit notes."
- "Swatch described the quality of Target’s watches as “inferior” to its own and said the continued sale of those watches is likely to confuse shoppers and damage the company’s sales. Swatch’s aim is to have Target cease selling the alleged copies, recoup profits from prior sales and attain damages."
Takeaway: Seriously…this is all Target needs right now. Jewelry/Watches is a reasonably profitable part of the store, and profit is driven not by $45 Timex Ironman watches, or Disney watches at $16.99 -- but by its similarly-priced product under its own store brands. The challenge for Swatch will be in proving that the designs are proprietary. But Swatch is traditionally not a very litigious company -- it only picks a fight when it really thinks it can win.
HMB - H&M's COS Set to Cover the Coasts
- "H&M’s plans for COS’ arrival in the U.S. are taking shape. After the first COS store in the U.S. premieres this spring at 129 Spring Street in New York’s SoHo neighborhood, the sleek, professional sibling of H&M has set its West Coast debut by signing a lease for an estimated 13,000-square-foot unit at 357 North Beverly Drive in Beverly Hills. COS, which stands for Collection of Style, has about 80 stores worldwide, but has yet to open stores in the U.S."
- "COS isn’t only coming to America via its own stores. The retailer will continue a partnership started last year with Opening Ceremony by opening pop-up stores at the designer retailer’s outposts in New York and Los Angeles on April 17. The COS pop-up stores at Opening Ceremony will last until supplies run out. COS will be made available on opening ceremony.us as well."
Takeaway: There are maybe two or three companies in retail where we pay attention to WHATEVER they do. H&M is one of them. We hope other retailers in the US are doing the same.
Alibaba - Alibaba buys majority stake in ChinaVision
- "Alibaba...has paid more than $800m for a majority stake in Hong Kong-listed ChinaVision Media Group, continuing a string of acquisitions that total nearly $3bn over the past year."
- "Alibaba is preparing for an initial public offering expected for this year either in Hong Kong or New York that is expected to value the company at more than $100bn...Most of Alibaba’s recent acquisitions have been intended to shore up perceived weaknesses ahead of the IPO, mainly in the area of mobile internet."
- "The ChinaVision deal will address what analysts say is Alibaba’s competitive disadvantage in video entertainment, where it lags behind both Baidu and Tencent. China’s online video scene is already the biggest in the world, with more than 400m viewers and hundreds of millions more set to join as superfast 4G connections become more popular."
Ace Metrix Unveils Top Ad Brands
- "Ace Metrix’s Blackbook list of the most effective television advertising brands is out, and Reebok scored the top spot."
- "Winners are based on their Ace Scores, which reflect the interplay between an ad’s measured 'persuasion' — comprised of likability, information, attention, change, relevance and desire — and its measured 'watchability' and the likelihood of watching the ad again. All nationally aired ads are scored by more than 500 U.S. consumers weighted to the U.S. census for age, gender and income."
Takeaway: Yesterday we highlighted a survey of the least favorite brands, as measured by an independent survey of 32,000 consumers. American Apparel, Sears and K-Mart all scored among the most hated. But this survey is tougher to stomach. Only 500 consumers -- and they collectively rated Reebok and Skechers ahead of Nike. Seriously?
ANF - Hollister to Sell SeaVees Footwear
- "...Hollister will feature an exclusive male footwear line from SeaVees featuring signature Hollister colors on twill lace-up and slip-on sneakers."
- "The exclusive line, which will be available only at hollisterco.com, is the latest effort to move the businesses toward a wholesale model."
SQBG - Sequential Taps Jameel Spencer as CMO
- "Sequential Brands Group Inc. has hired brand strategist Jameel Spencer as chief marketing officer, a new position. Spencer will report to Sequential chief executive officer Yehuda Shmidman."
- "Prior to joining Sequential, Spencer was cmo at Iconix Brand Group, and oversaw the marketing for brands such as Ed Hardy, Ecko, Umbro, Rocawear and Roc Nation."
- "In his new role at Sequential, Spencer will develop and lead global marketing initiatives for the firm’s portfolio of brands that include William Rast, DVS, Caribbean Joe, Ellen Tracy and Revo, among others."
Hedgeye CEO Keith McCullough discusses growing market complacency and where the biggest market risks and opportunities exist in this morning's macro call.
Risk Managed Long Term Investing for Pros
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.
Tickers: NCLH, CCL
EVENTS TO WATCH: UPCOMING EARNINGS/CONFERENCES
- SGMS F4Q 2013 conference call: 5:00 pm (pw: 36357318)
- STN F4Q 2013 conference call: 4:30pm
- MTN FY2Q 2014 conference call: 4:30 pm
- JP Morgan Gaming, Lodging, Restaurant & Leisure Forum
- HOT, STAY, WYN, MGM, HLT, BYD, BEE, WYNN, LVS, MGAM, RHP, HST, IGT
Thursday, March 13
- JP Morgan Gaming, Lodging, Restaurant & Leisure Forum
- FCH, PNK, PENN, BYI, CCL, SGMS, GLPI, SHO, MCRI
Monday-Thursday, March 10-13
- 2014 Cruise Shipping Miami Conference (CSM)
Friday, March 14
- Hyatt Investor Day
NCLH (CSM): Norwegian Escape home base in Miami - will sail Eastern Caribbean itineraries starting 11/14/2015. Harvest Caye in Belize on track for 2015.
Takeaway: Isn't Miami and the Caribbean crowded enough?
NCLH (CSM): The rates for near-term Caribbean continue to be pressured, and it appears that when others are troubled, Norwegian’s rates suffer in tandem, though perhaps it could be a temporary situation because Norwegian’s increasing Caribbean capacity is happening so quickly. Asked if Norwegian gained or lost from Carnival's woes last year, CEO Sheehan said, "We're competing with two big public companies that have multiple brands. In the case of Carnival Corp., there are 10 or 11 brands, so we never really know exactly what's going on in a particular brand." Sheehan stressed the importance of attracting the 1st time cruiser - "At the end of the day, when you think about that last third, or whatever the percentage that people say is new to cruising piece, maybe that was a little bit more [for us due to the woes of] Carnival."
Takeaway: Our pricing survey detected price discounting by NCLH in the Caribbean a couple of months ago. This remains an overhang on the company.
CCL (CSM): Costa to add a second seasonal ship in Miami Miami Herald
Costa Cruises will double its presence in Miami at the end of the year, sailing two ships in the Caribbean - Costa Luminosa and Costa Mediterranea. Scott Knutson, vice president of sales and marketing for Costa Cruises North America, said the demand was strong enough to bring more capacity over. “We’ve had nice momentum here in the North American market,” he said. “I think that’s been recognized.”
Takeaway: Costa is having a decent year in Europe. Positive commentary for its small Caribbean presence is encouraging for the brand.
NCLH: Israeli tourists on cruise prevented from disembarking in Tunis Jerusalem Post
Israeli tourists traveling on Norwegian Jade were prevented from disembarking at a stop at the Port of Tunis. As a result of this incident, NCLH has dropped Tunisia from its itineraries and will not return.
Ukraine & Russia Tensions (CSM): RCL CEO Richard Fain said while many customers aren’t concerned, “some customers” booked on Baltic voyages visiting St. Petersburg were indeed calling to express concern or ask to make changes to their booking. At present, there are no changes in his brands’ itineraries, though.
Takeaway: While the Baltic/Black Sea itineraries are a small part of European cruise itineraries, they will still have an impact on cruiser sentiment and should not be ignored.
Macau – United States Department of State’s wants Macau to lower the threshold for reporting gaming-related financial transactions from US$62,500 to US$3,000. The US Department of State also wants increased oversight and regulation of junkets in an effort to reduce potential money laundering activities.
Takeaway: Political payback for Steve and Sheldon? Maybe. It's not like US government agencies haven't been used against political enemies in the [recent] past (cough, cough, IRS, cough, cough). Macau can tell the US to pound sand and probably will. It is something to monitor, however, as this would not be good for the Operators and Junkets for obvious reasons.
Delaware – The Lottery and Gaming Commission recommended financial relief to Delaware’s casinos including a decrease in table gaming tax from 29.4% to 15%, elimination of the annual table game fee, and sharing the cost of slot machines. The recommendations were sent to Delaware’s General Assembly for debate and vote.
Takeaway: Another gaming jurisdiction under pressure. Would be good for DDE.
Las Vegas – Culinary Workers Union Local 226 continue to picketed outside Strip properties ahead of a March 20 vote that would give the union the right to call a strike. Culinary Workers Union Local 226 is pushing about a dozen of its employers to contribute more money to its health insurance fund to cover rising Affordable Care Act costs. Local 226 it is pressing its employers to boost their contributions by 35 cents per worker in the first year, 50 cents in the second and 55 cents in the third. So far, the union has reached agreement with five casino operators, leaving 7,000 union members with expiring contracts.
Takeaways: Can't really keep modelling flat costs for Vegas operators.
Hedgeye remains negative on consumer spending and believes in more inflation. Following a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive.
Takeaway: We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.
Client Talking Points
Front-month volatility continues to signal a series of higher-lows in our model and actually closed back above Hedgeye TREND support of 14.71 yesterday. Add that to a wicked wide II Bull Bear Spread this morning (Bulls up +3,770 basis points over Bears). People, we have officially entered the land of serious complacency for US Equities.
Unlike US Equities, Japanese stocks are already getting totally smoked in 2014. The Nikkei was down another -2.6% overnight to essentially 9.0% year-to-date as the Yen strengthens versus America’s Burning Buck, which is at YTD lows. The rate of change in Japanese growth should slow well into Q314. This going to get interesting. Fast.
The Russian Ruble crashing was the leading indicator for the subsequent crashing of the Russian stock market. It's down another -1.6% this morning to -22.6% year-to-date. Since October it's dropped -26.7%. Nice Olympic bump, right? Sorry Vlad.
|FIXED INCOME||25%||INTL CURRENCIES||20%|
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
TWEET OF THE DAY
The purchasing power and currency of The People are inseparable #USDollar @KeithMcCullough
QUOTE OF THE DAY
"Any fool can criticize, condemn and complain and most fools do." - Benjamin Franklin
STAT OF THE DAY
"Veronica Mars" shattered crowdfunding records last year; this weekend we'll find out if that translates to box office success. A Kickstarter campaign last spring raised $5.7 million to bring the cult TV hit to the big screen. With backing from 91,585 fans, the film received more contributions than any other project in the crowdfunding platform's history. It is currently the third highest-funded Kickstarter project ever. (CNN)
This note was originally published at 8am on February 26, 2014 for Hedgeye subscribers.
“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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