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Under Armour: Brand Heat Has A Price | $UA

Takeaway: UA could not afford even the slightest blemish this quarter, unfortunately.

Under Armour: Brand Heat Has A Price | $UA - ua kevin plank


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.

Key Takeaways

  • Not the quarter a 50-times multiple needed. We remain confident that this company will double – at least – over 5-years. But will continue to spend heavily to achieve that goal.
  • One thing we’ve got to give UA regardless of margin trajectory – this management team is as focused as any we know.
  • Overall, it was a great quarter for Under Armour when viewed in isolation.  Unfortunately, the market does not view things in isolation – nor do we.
  • People obviously did not love UA’s guidance for the upcoming year. UA beat by $43mm in revenue, but only took up full-year guidance by $40mm.
  • There was something about CEO and founder Kevin Plank today on the call that seemed exceptionally mature, seasoned, focused, and not only a great Brand ambassador (which he’s always been) but a flat-out solid leader for Under Armour.

Under Armour: Brand Heat Has A Price | $UA - UA sigma


Retail Callouts (4/25): HBI, AMZN, BRBY, Alibaba, NKE, UA, WMT, ARO, HMB

Takeaway: Maidenform carries HBI. AMZN good, but needed great. BRBY taps Alibaba. NKE/UA store openings. WMT changes up Asia.



HBI - 1Q14 Earnings


Retail Callouts (4/25): HBI, AMZN, BRBY, Alibaba, NKE, UA, WMT, ARO, HMB - chart1 4 25


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


Retail Callouts (4/25): HBI, AMZN, BRBY, Alibaba, NKE, UA, WMT, ARO, HMB - chart5 4 25


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



  • "Burberry has unveiled a collaboration with the Alibaba Group to open a Burberry store on Tmall. The new tie-up is a first for any luxury brand on the platform. The collaboration with China’s largest online retail platform will further connect Chinese consumers to the Burberry brand."
  • "The official Burberry store will offer a tailored assortment of products from all of the brand’s product categories. The store will be accessible in China across all mobile, tablet and desktop devices. The custom-built, dedicated space mirrors the brand’s own online flagship store,…"


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 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


Retail Callouts (4/25): HBI, AMZN, BRBY, Alibaba, NKE, UA, WMT, ARO, HMB - chart1 4 24

Retail Callouts (4/25): HBI, AMZN, BRBY, Alibaba, NKE, UA, WMT, ARO, HMB - chart2 4 24


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



  • "Wal-Mart Stores Inc. named its top China executive to head its Asian operations amid store closures and sluggish sales in the region that have hampered the retailer’s attempts to counter slowing growth in the U.S."
  • "Greg Foran, the chief executive officer of Wal-Mart’s Chinese operations since 2012, will take over as president and CEO of Asia from Scott Price, Wal-Mart, the world’s largest retailer, said today. Price, 53, will move to the company’s headquarters in Bentonville, Arkansas, as an executive vice president. The changes take effect June 1."


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



  • "S&P Dow Jones Indices said Thursday it would add...athletic-goods maker Under Armour Inc. to its S&P 500 index, effective April 30."


AMZN - Amazon, in Threat to UPS, Tries Its Own Deliveries



  • "Adjacent to recently closed Candlestick Park, Amazon is testing its own delivery network for the 'last mile,' the final leg of a package's journey to consumers' doorsteps. Trucks loaded with Amazon packages and driven by Amazon-supervised contractors leave for addresses around San Francisco. Similar efforts are under way in Los Angeles and New York."
  • "Delivering its own packages will give Amazon...which have grown as a percentage of sales each year since 2009, according to securities filings."


Retail Callouts (4/25): HBI, AMZN, BRBY, Alibaba, NKE, UA, WMT, ARO, HMB - chart2 4 25


ARO, HMB - Aéropostale Sues Hennes & Mauritz



  • "The New York-based specialty chain sued Swedish fast-fashion giant Hennes & Mauritz in Manhattan federal court Thursday over use of the Live Love Dream, Aero and 87 trademarks."
  • “'H&M engaged in a pattern of conduct involving the use of identical, or nearly identical marks on some of the same goods for which Aéropostale uses its marks, namely, clothing and tote bags,' Aéropostale said in the suit."
  • "Aéropostale said it discovered in March that H&M was selling a graphic T-shirt and a cloth bag with the words Live Love Dream and upon further investigation discovered other looks that it claims infringe on other trademarks."


WTSL - The Wet Seal, Inc. to Exit Arden B Business



  • "The Wet Seal, announced that it will begin winding down its Arden B brand. Arden B currently operates 54 mall-based stores and an e-commerce web site...In the fiscal year ended February 1, 2014, Arden B generated net sales of $60.4 million and represented 11% of consolidated net sales."
  • "31 Arden B locations will transition to Wet Seal Plus merchandise and the remaining 23 locations will transition from Arden B to Wet Seal merchandise. Where permissible, Arden B locations will be refreshed with either Wet Seal or Wet Seal Plus signage. The Company expects to complete this conversion by the start of the back-to-school selling season in late July."
  • "Through lease expirations and the exercise of early termination provisions, the Company will close 15 Arden B locations through the remainder of fiscal 2014 and 16 Arden B locations in fiscal 2015. For the interim period while Arden B locations remain open, the stores will offer Wet Seal or Wet Seal Plus merchandise, as noted above."


LO: Ho-Hum Quarter But We Remain Bullish on the Strategy

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.SWe 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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Howard Penney

Managing Director


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