Takeaway: Here we explore a) brand loyalty and b) why people spent less - critical factors we'll be looking at for incremental change on Mon 3/24
Here's the fourth note in a series of five in advance of our LULU Consumer Survey results on Monday March 24th at 11am ET. When we polled consumers three months ago, we pulled away some clear insights. The concerns largely outweighed the strengths, which foreshadowed the company's results, and ultimately the stock price.
We're re-running our survey to gauge the incremental change over the past quarter, with the goal of seeing whether LULU is making progress (which could get us more constructive on the name) or not.
In preparation for 'Round 2' we want to offer up some of the notable takeaways from our last survey, as they'll be framing the discussion on Monday.
'LIKELY TO RECOMMEND'
We asked consumers which Yoga brands they are likely to recommend to friends. The highest scores were Sweaty Betty, Prana, Nike, UnderArmour and Idealogy (Macy's). At the other end of the spectrum, unfortunately, was Lululemon, Old Navy, Puma and Roxy. Definitely a problem for LULU -- one that few people, even the company, are likely to debate.
On the flip side, we asked which brands are highest on the list of brands that you are UNLIKELY to recommend to friends. This is slightly different than the inverse of the first question, as it looks to measure negativity as opposed to lack of positivity. But the results are the same in that Lululemon scored higher than any other brand on the 'unlikely to recommend' scale. Other notables include Old Navy and VS/Pink.
WHY NOT PURCHASING
Next we asked the people who have never purchased anything at Lululemon why they don't shop there (this was about 30% of our sample). The primary factor is that there are no stores in their area -- which is actually a bullish factor for LULU. That speaks to the square footage growth opportunity for the company. The next factor -- and only other one that registered at a notable level -- is that prices are too high. We discount this to some degree, as certain people in the sample simply might not be able to afford high end Yoga apparel.
WHY PURCHASING LESS
More interesting to us is the rationale people who are purchasing less product than they used to gave as to their altered purchasing habits. This one was interesting.
The top answer -- by a country mile -- is that the prices are too high. In fact 76% of the people in this group said so. Importantly, they are preexisting customers of LULU, so you can't just say that they can't afford it. The reality is that at one point price was not a factor, but three months ago, it was.
#2 answer = Dislike Corporate Management. Seriously, have you ever heard Main Street talk about not liking a corporate management team? Wall Street says it all the time, but for this to be an issue with Main Street it has to be really bad.
#3 answer = Poor Reputation. Again, this is likely a function of LULU's self-inflicted wounds. It had nothing but a stellar reputation 13 months ago.
#4 answer = Poor Quality Products. We're the first to admit that Lululemon's product -- generally speaking -- is outstanding quality. In fact, that may be an issue for them in that a pair of Yoga pants can literally last 5-years (not good for the replacement cycle). But that's not a bad problem to have. In this case, most of us agree that any ding to LULU's reputation on quality is entirely a function of Luon. We'll see with our next survey on Monday if public perception on this issue is getting a bit more forgiving.
Takeaway: Lab consumption data combined with our physician survey is pointing to an improvement in patient volumes, not declining.
Editor's Note: This research note was originally published March 18, 2014 by Hedgeye’s Healthcare Team. For more information on Hedgeye please click here.
Is Patient Traffic Really Down 6%?
We Doubt It
A widely followed physician office visit data series has been showing dramatic declines in doctor visits in the negative -6% to -7% range over the last two months. The implication (which we disagree with) is that UNH and other managed care companies have a meaningful tailwind in Q114.
We do not find, when comparing this medical utilization series to any of UNH's cost trend metrics, or those of other managed care companies, a meaningful positive relationship. We also fail to find any relationship to this series to any of the historical company data sets in our database.
We do find, as it relates to UNH's cost trend, several alternative data items that do appear worth following. The most interesting of these to us is the trend in the Personal Consumption Expenditure for Medical Laboratories (PCE: Med Labs, charted above) which has a positive correlation of 0.83 across multiple durations between 2008 and 2013.
The PCE: Med Labs trend agrees with our recent physician survey work where, after posting very strong patient volume metrics in Q413, January patient volume turned very weak. However, February volumes have rebounded, particularly in the Midwest, where weather headwinds were likely worst.
Right here, we don't see a reason to change our negative view.
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Client Talking Points
If you’re still staring at Q3/Q4 2013 US growth and inflation data and think everything in between was the “weather”, you’d be bullish on growth, USD, and rates here – we’re not – that was last year’s call. Yes, USD ripped off its year-to-date lows. But, it remains well below TREND resistance of $81.14 on the US Dollar Index. Short it here.
The UST 10-year yield bounced off its oversold lows from last week, and it grabbed headlines, but I wouldn’t confuse this as a change in TREND. I’d have to see a breakout above 2.81% (our TREND line) on the 10 year to stop buying bonds on corrections. Fed Chair Janet Yellen wants inflation, and she’s getting it. It slows real growth, and her forecast should get dovish again, but on a lag.
After signaling immediate-term TRADE overbought at $1,385 on Friday and the biggest net long (futures/options contracts) position in a year, yes, Gold corrected. But it didn’t break any line of support that matters in my model. At up +10.4% year-to-date, buy it if you missed the move towards +15% YTD. This is going to be your chance.
|FIXED INCOME||18%||INTL CURRENCIES||19%|
Top Long Ideas
Construction activity remains cyclically depressed, but has likely begun the long process of recovery. A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating. Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms. As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.
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.
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.
Three for the Road
QUOTE OF THE DAY
"The greatest achievement is to outperform yourself." - Denis Waitley
STAT OF THE DAY
If taxes were romantic, April 15 would make for the world's biggest singles mixer. That's because single people, including heads of household as well those who are widowed or divorced, account for the majority of federal tax filers in the United States. In 2011, they filed 61% of all returns, according to an analysis of IRS data by the Tax Foundation. Unmarried Americans who are 18 and older now comprise 44% of U.S. households, according to the latest Census data. And Americans who live alone accounted for 27% of all households in 2012, up from 17% in 1970. (CNN)
This note was originally published at 8am on March 06, 2014 for Hedgeye subscribers.
“What’s in a name? That which we call a rose by any other name would smell as sweet.”
What’s in a bubble?
I’ve been channeling my inner 1999 for the last 3-days in California. I’ve done Los Angeles, San Diego, and San Francisco. And while it would be cute to tell you that I can actually smell a bubble, these types of things don’t have a particular scent.
At the all-time highs, they just look sweet.
Back to the Global Macro Grind…
All-time highs? Yep. It’s not just Yelp (YELP) and Facebook (FB). It’s Barney Frank’s American Housing dream. The all-time highs in the largest component of American cost of living are here. It’s called rent.
Oh, you don’t rent? Ok, you’re like me then. You’re big time – you own. But don’t confuse the 20% of us who are long asset price inflation with the rest of them (80% of Americans) who get pulverized by Policies to Inflate. The cost to live in this country has never been bubblier.
What’s in the cost of living?
Unless you’re like the “folks” in Washington who take car service to work, you have to put gas in the transportation thing too. And if you can’t afford a car, you can always save some money and take the bus, or walk…
What’s in the all-time high in American “inequality”?
- The Housing Bubble
- The Commodity Bubble
- The Bond Bubble
One by one, central planners at the Fed blow these bubbles up so big that, like Jim Carey in The Truman Show, we start to live inside them. There’s an effervescence to that, I guess.
Or at least that’s what Oaktree’s Howard Marks said in our back to back presentations at the CFA Society’s Annual Forecast Dinner in San Diego on Monday night. He called the cov-light-pik-toggle-bond thing being “back” – an “effervescent bubble.”
As we went back and forth in the Q&A part of the event, Marks made an astute observation about real-world life. The average American has $20,000 in post tax income, but spends approximately $22,000 a year.
So, if you ramp up the Top 3 things Americans have to pay for (if they don’t pay for their kids to go to school), the Bush/Obama/Bernanke/Yellen Policy to Inflate should drive cost of living up to say $25,000-30,000/year. That’s why the US Savings (as a % of disposable income) is retracing its 2008 crisis lows. Like their government, Americans once again have to borrow to spend.
In other news, inflation slowed US consumption growth again in February:
- USA’s ISM Services report for FEB (reported yesterday) slowed to its lowest level since FEB of 2010
- The Employment component of the ISM Services Series dropped < 50 (largest m/m drop since NOV 2008)
- US Services PMI (Markit data series) slowed from 56.7 in JAN to 53.3 in FEB
No worries though, it’s all “weather.”
If you want to join the Federal Reserve and believe that (and tell the 80% that inflation doesn’t slow growth), you can start turning on the Weather Channel and buying the all-time highs in social media every day they forecast yesterday’s sunny news.
I’ll be selling stocks (and buying Commodities, Bonds, and Foreign Currencies) into that. Because, like in Q1 of 2011, Down Dollar and Down Rates were signaling a US consumption growth slowdown inasmuch as they did in Q1 of 2008.
As for retracing my California travels of 1999, Q1 of 2000 wasn’t exactly the time to be wearing rose colored glasses either.
Our immediate-term Macro Risk Ranges are now:
UST 10yr Yield 2.59-2.75%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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