Hedgeye CEO Keith McCullough talks tech stocks with Maria Bartiromo, host of Fox Business' Opening Bell.
Hedgeye CEO Keith McCullough talks tech stocks with Maria Bartiromo, host of Fox Business' Opening Bell.
Takeaway: UA could not afford even the slightest blemish this quarter, unfortunately.
Here are some key takeaways from a research note that was originally sent to subscribers on April 24, 2014 by Hedgeye Retail sector head Brian McGough. Follow McGough on Twitter @HedgeyeRetail.
Takeaway: Maidenform carries HBI. AMZN good, but needed great. BRBY taps Alibaba. NKE/UA store openings. WMT changes up Asia.
HBI - 1Q14 Earnings
Takeaway: The good: HBI continues to push margin expansion and still has some room to run as it recognizes the synergies from the Maidenform integration. The bad: HBI's core business was flat after stripping out FX on top of a -2% number in 1Q13, which equates to a -1% 2yr core run rate. Yes, this company can and will acquire to grow the top line, but what happens when they can no longer take price and commodity costs turn from a tailwind into a headwind?
AMZN - 1Q14 Earnings
Takeaway: AMZN results were slightly above printed expectations -- but how do you really measure expectations for something that trades at 135x earnings. Top line grew at 22.8% at $19.74 billion vs Consensus $19.46 billion (21.1%), and accelerated YoY and sequentially -- good news there. But North American Media decelerated sequentially, which is not what we want to see. Sure, AWS (Amazon Web Services) picked up some slack -- but is that really the future of this brand? #no.
BRBY, Alibaba - Burberry Teams With Alibaba's Tmall.com
Takeaway: BRBY's move validates the Alibaba platform in China. Adidas, New Balance, and GPS among others already use Tmall as the platform for their dot.com presence in China, but luxury brands have been hesitant to follow suit primarily because of fears over brand integrity and counterfeiting. We think its an interesting opportunity for RL in particular who we think has a lot to gain from partnering with Alibaba for its e-commerce operations in China.
NKE, UA - New Doors for NKE in Boston and UA in New York
Takeaway: New doors for both brands opened over the past week. For UA, it’s a major milestone for the brand as it opens its first significant full-price door -- and in New York nonetheless. What strikes us is the influence LULU has had on the athletic retail store experience - the brand redefined the way brands sell athletic apparel especially to women.
WMT - Wal-Mart Names China CEO to Head Asia as Regional Sales Slow
Takeaway: McMillion and WMT continue to rework the international leadership. Since the announcement of his promotion to CEO, new leadership has been put in place for Walmart International, WMT India, and now Asia. Clearly the former strategies weren't working, and now WMT is trying to get its C-suite in place as it renews its International push.
UA - S&P 500 Adds Navient, Under Armour
AMZN - Amazon, in Threat to UPS, Tries Its Own Deliveries
ARO, HMB - Aéropostale Sues Hennes & Mauritz
WTSL - The Wet Seal, Inc. to Exit Arden B Business
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Lorillard reported Q1 2014 results yesterday that were lukewarm, missing Street estimates on the top and bottom lines, however the stock closed up on the day. Our long-term bullish outlook remains unchanged and built on 1.) the strength and profitability of its advantaged menthol portfolio, 2.) our belief in the limited menthol regulatory risk over the longer term, and 3.) upside growth in its blu e-cigarette business that commands leading share in the U.S.
CEO Murray Kessler commanded a confident tone in reviewing the quarter, yet clearly knew the company didn’t hit the cover off the ball, citing numerous headwinds that impacted results: for cigarettes lower wholesale inventory levels, severe weather affecting core markets, a tax increase in Puerto Rico and holiday timing (Easter), as well as in e-cigs lower prices of its rechargables kits and pipeline inventory build versus the year ago-quarter.
All that said, LO had impressive price/mix of +5.8% to offset total cigarette volume decline of -2.9% (outperforming the total industry at -4.0%). Total LO retail market share in the quarter rose 30bps to 15.2%, its highest level ever and its first quarter above 15%, and Newport’s share grew 40bps to 13% while LO’s share of the menthol market was flat Y/Y at 40.7%, but improved 80bps sequentially.
Although Newport Gold continues to struggle (share was not qualified on the call), and blu contributed a $0.02 loss in the quarter, we remain committed to LO’s long-term opportunity to lead the e-cig market in the U.S. and U.K. (more below), as we remain committed to LO’s industry-leading fundamentals, built on its core menthol business. As we outlined in our Best Ideas long call on LO in March, we see the stock trading to $80 over the longer term.
On blu E-Cigs
Net sales for blu declined -10.5% y/y to $51MM, versus flattening growth across the entire category (slowing to +10% in the quarter). The loss was a contribution of lower prices of its rechargeable kits and a pipeline inventory build versus the previous year quarter.
The results show two straight quarters of slowing, and reflect an increased competitive and promotional environment as e-cig manufacturers spare for share and brand loyalty – both RAI and MO plan to launch nationally with Vuse and MarkTen, respectively, in June, and we like blu’s first to market leadership advantage.
In the quarter, blu commanded a leading 45% share of the market in the U.S., or 10 points higher versus the year-ago period, according to Nielsen channel data which the company switched to in the quarter to measure sales.
The big news was LO’s decision to step up marketing and distribution in the U.K to launch blu this quarter. It announced a $10-20MM spend over next 6 to 9 months to rebrand SKYCIG as blu and continue to support incremental brand building for blu in the U.S. We like LO’s strategy to invest early to become category leaders. They’ll match up against BAT, who is also in the process of rolling out a national launch. The U.K. is the second biggest e-cig market behind the U.S. and currently highly fragmented, with no brand greater than a 5-6% share, according to Kessler. Unlike in the U.S. with the acquisition of blu, the company has to pay for a sales force to support its rebranding and sales efforts. Kessler underlined that to create the U.K. branding of blu, they expect the business to be break-even in the near term.
In the U.K. as in the U.S., the longer term strategy of the e-cig business is clearly not selling blu at break-even or a loss, however in the near term the company is willing to take the charge and investment now to win long term brand loyalty in a category with huge growth potential -- we support this strategy.
Other announcements and e-cig category color:
On vaporizers (tank/open/etc.) taking share from “tradition” format e-cigs like blu, Kessler said he believes vaporizers -- sold primarily at vape shops -- are taking some share from blu and other “traditional” style e-cig players (the format Big Tobacco is using today), because the products deliver a better experience at a lower price point. Although he was quick to note that this e-vapor format comes with regulatory challenges – in fact reading the tea leaves we think Kessler was betting the FDA was going to put more prohibitive measures on this format and e-vapor juice. (For more see yesterday’s note FDA Finally Proposes E-Cigarette Regulations - They’re Surprisingly Mild!). Because the FDA largely didn’t touch non-traditional vaporizers and e-vapor juice, Kessler was quick to counter that LO is considering the landscape, and was suggestive that though the current traditional e-cig is the company’s format of choice, his team is currently working on devises that deliver superior vapor and battery life to close what may be a widening sales gap with non-traditional e-cig formats. He expects these improvements to be rolled out over the next 6 months, and to hit the market piece by piece, rather than a giant roll out (similar to how new razor blades come out for the same razor). Note: we’ll be doing survey work in the coming weeks to better understand the trends of non-traditional e-cig usage.
On proposed deeming regulations from the FDA, Kessler said he was pleased that the FDA is taking a science based approach with its proposed regulation. On the banning of sampling, he said the company will have a chance to comment on that and hopes it’s overturned.
On any read-through on the FDA’s stance on menthol, Kessler said it was a positive read-through – the FDA is taking a science based approach on flavors – can’t say they’re an “issue”/more addictive than traditional tobacco flavor without the science.
On any merchandizing shift for blu with MarkTen and Vuse being rolled out nationally, Kessler said that it looks like his major competitors are choosing to place e-cigs alongside their cigarettes, whereas blu wants to remain in stand-alone cases, and he’s perfectly fine if his competitors’ e-cigs are not near blu.
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Takeaway: We’re Adding TGT to our Best Ideas list as a short. We’ll be hosting a call Wed. 4/30 at 11am ET to review our thesis. Call details below.
The crux of our argument? Wall Street's perception of Target's financial trajectory is more upbeat than Main Street. When the stock glossed over the company's weak 4Q earnings report, it was because Steinhafel (CEO) issued guidance that he hoped the company would grow into if the Company repaired its reputation after the data breach - not guidance that he knew TGT could meet or beat. We don't think that the Street is giving TGT credit for a) a miss this year, and b) another one in 2015. The reality is that when a customer has a great experience in retail, they tell a friend. When a customer has a bad experience, they tell 20. Just ask JC Penney or Lululemon. Some of these 'fire your customer' events are worse than others, but there's one commonality - they take a very long time to recover.
We think that TGT will be lucky to earn $3.75 this year, and $4.00 in 2015. The current 15x multiple is about as high as TGT has seen in 5-years - clearly the market is not factoring in a miss. We think that multiple compression alone on a weaker EPS number gets to a $48-50 stock, or $12-13 downside. If we're wrong, then we're looking at about $5 upside. That's about 2.5x to one, which we like on sleepy mega-cap shorts in Retail.
KEY TOPICS WILL INCLUDE:
Post the bond auction failing this week, risk is getting real in Russia – faster. The CDS is ticking up to +282 (greater than 300 is what we call the “Lehman Line”) as the Russian stock market continues to crash (down -1.5% to -22% year-to-date). We’re keeping a close eye on these developments.
It’s just plain ugly and, for American cost of living, this is getting worse. Faster too. The CRB Commodities Index is holding on to its year-to-date highs at +11.5% as American rents rip and the Fed continues to print/devalue ($4.3 trillion Fed balance sheet, up another +$12.4 billion week-over-week).
While US equity market centric investors might be confused by the no-volume bounce to lower highs into month end, the bond market gets that #InflationAccelerating is slowing real consumption growth. The 10-year is at 2.67% this morning and falling.
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Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration. The first survey tool measures 3-D Mammography placements every month. Recently we have detected acceleration in month over month placements. When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner. With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.
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.
Another fantastic UK #GrowthAccelerating data pt w/ #StrongPound - Retail Sales for MAR +4.2% y/y @KeithMcCullough
“We can't change the course of events, but we can attempt to protect capital in the face of foreseeable risks.” – David Einhorn
Tokyo’s consumer prices rose 2.7 percent in April from a year earlier, the biggest jump since 1992, pumped up by a sales-tax increase and a year of unprecedented stimulus from the Bank of Japan. Inflation excluding fresh food accelerated from 1 percent in the previous month, while nationally the same price gauge rose 1.3 percent in March from a year earlier, statistics bureau data showed. (Bloomberg)
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