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Retail Callouts (7/10): FDO, Adi, NKE, JCP

Takeaway: FDO - little faith in core consumer. Adi releases 2nd fitness tracker...doubt we see a 3rd. Tough week for NKE soccer. RonJon speaks.

EVENTS TO WATCH

 

Friday (7/11)

  • PSMT - Earnings Call: 12:00pm

 

COMPANY HIGHLIGHTS

 

FDO - 3Q14 Earnings

 

Retail Callouts (7/10): FDO, Adi, NKE, JCP - chart2 7 10

 

Takeaway: Slight beat on the top line driven by a better than expected comp offset by  margin pressure due to sales mix (consumables penetration up 73bps), fixed cost deleverage, and increased ad spend led to the $0.04 EPS miss. We still have very little faith in FDO's core consumer.

 

AdiBok - Adidas Gets Smart

(http://www.wwd.com/footwear-news/markets/adidas-launches-fit-smart-7791209)

 

"Adidas unveiled Fit Smart, a fitness-training product worn on the wrist, at the Wearable Technologies Conference in San Francisco today...Fit Smart measures heart rate, calories, pace, distance and stride to calculate workout intensity."

"Fit Smart, which retails for $199, will be released in late August exclusively at Best Buy and Bestbuy.com, and then on Adidas.com."

 

Retail Callouts (7/10): FDO, Adi, NKE, JCP - chart1 7 10

 

Takeaway: Interesting move here by Adi given the moves made by its competition over the past 3-6 months. NKE appears to be walking away from fitness tracking hardware - choosing instead to outsource the design to Apple. UA won't be releasing another iteration of its Armour39 fitness tracker, deciding to partner with best-in-class products already on the market. This is the 2nd stab Adi has taken at the smartwatch/ fitness tracker, and our guess is that we won't see a 3rd. Sports brands have tried and failed repeatedly to establish a market presence in this growing category. Best to leave hardware to the Apples, FitBits and Jawbones of the world. 

 

AdiBok, NKE - Argentina Win Hands Adidas World Cup Win Before Final

(http://www.bloomberg.com/news/2014-07-10/argentina-win-hands-adidas-world-cup-win-before-final.html)

 

"Argentina, sponsored by Adidas AG, triumphed on penalty kicks in Sao Paulo to eliminate a Dutch side outfitted by Nike Inc. of the U.S. In the final, it will face fellow Adidas-backed team Germany, which defeated Nike-supported Brazil 7-1 on July 8. The Herzogenaurach, Germany-based company also outfitted the Spanish team that won the last World Cup in 2010."

 

Takeaway: Tough week for NKE soccer. First the Brazil disaster, then ManU, and now an all Adi final.

 

OTHER NEWS

 

JCP - Ron Johnson: ‘I was a terrible fit for J.C. Penney’

(http://www.chainstoreage.com/article/ron-johnson-%E2%80%98i-was-terrible-fit-jc-penney%E2%80%99)

 

  • "Ron Johnson, who has been keeping a relatively low profile since he was ousted from J.C. Penney in April 2013, took to the podium in May, as a guest lecturer at Stanford University."
  • "’It was disappointing because I really believed we would make it work, but it was a relief because the lesson I learned is I was a terrible fit for J.C. Penney,’ he said. ‘I'm a creative person, here's a company that isn't uber-creative. I believe in change, this company’s much more comfortable, like many people are, with the status quo.’"

 

Full Video: http://www.gsb.stanford.edu/news/headlines/ron-johnson-its-not-about-speed-market-its-really-doing-your-level-best

 

ZQK - Quiksilver Announces Additional Licensing Agreements

(http://ir.quiksilver.com/phoenix.zhtml?c=110264&p=irol-newsArticle&ID=1946381&highlight=)

 

  • "Quiksilver, Inc. (NYSE: ZQK) today announced that it has entered into licensing agreements for several product categories, including Roxy young girls and children’s apparel, watches and socks/legwear, as well as other product categories including luggage, beach towels and surfboards."

 

DSW - New DSW Designer Shoe Warehouse Stores Open in Canada

(http://investors.dswshoe.com/index.php?s=43&item=275)

 

  • "Town Shoes Limited is excited to announce the opening of its first two DSW Designer Shoe Warehouse locations in Canada. DSW Designer Shoe Warehouse will open at Heartland Centre in Mississauga and Woodland Hills in Newmarket, Ontario, on August 7."

 

AAP - American Apparel Signs Support Agreement with Standard General

(http://investors.americanapparel.net/releasedetail.cfm?ReleaseID=858956)

 

  • "American Apparel, Inc. announced it has reached a Nomination, Standstill and Support Agreement with Standard General L.P. and company founder Dov Charney, the beneficial owners of nearly 44% of the Company's outstanding stock. Under the agreement, Standard General will provide up to $25 million in immediate financial support to the Company, the Company's board will be reconstituted..."

 

LE - Lands’ End deploys Fit Predictor to help online shoppers get best fit

(http://www.chainstoreage.com/article/lands%E2%80%99-end-deploys-fit-predictor-help-online-shoppers-get-best-fit)

 

  • "Lands’ End has deployed Secret Sauce’s Fit Predictor service, which proactively finds a customer's best fit in seconds using existing data, without the need for physical measurements."
  • "For new customers without a Landsend.com shopping history, the service can predict the best fit based on the customer's sizing with other brands."

 

BEBE - Apparel retailer Bebe stores revamps management board

(http://www.fibre2fashion.com/news/garment-company-news/newsdetails.aspx?news_id=165677)

 

  • "bebe stores, inc. announced that Seth Johnson, Blair Lambert and Brett Brewer have replaced Caden Wang, Barbara Bass and Cynthia Cohen on the Company’s Board of Directors, effective immediately."

INITIAL CLAIMS: ACCELERATING IMPROVEMENT

Takeaway: Claims continue to lead the charge on the labor market front, although there may have been some tailwind from the July 4th week.

Positive Thinking

While most of us were barbecuing and reciting the Declaration of Independence last week, something else positive happened as well. Fewer people filed for initial unemployment insurance benefits.

 

There's been a steady stream of positive newsflow on the labor market front of late. Recent numbers from ADP, NFP, JOLTs and claims have all been pointing in the same direction. Claims numbers this morning suggest the rate of improvement may be accelerating still. The year-over-year improvement in NSA jobless claims surged to 16% in the latest week, up from 9% improvement in the previous week. Meanwhile, the 4-wk rolling average of NSA claims improved to 11% from 9%. One caveat is that the July 4th holiday last week may have created some distortion in the number. We'll see what next week brings.

 

The Data

Initial jobless claims fell 11k to 304k from 315k WoW. The prior week's number was unrevised. 

 

The headline (unrevised) number shows claims were lower by 11k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -3.5k WoW to 311.5k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -11.4% lower YoY, which is a sequential improvement versus the previous week's YoY change of -8.7%

 

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Yield Spreads

The 2-10 spread fell -3 basis points WoW to 207 bps. 3Q14TD, the 2-10 spread is averaging 210 bps, which is lower by -11 bps relative to 2Q14.

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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ICI Fund Flow Survey - Negative Inflection in U.S. Fund Flows...Bonds Keep Chugging

Takeaway: The latest survey of mutual fund trends relayed the biggest weekly outflow in U.S. stock funds in 79 weeks since the first week of 2013

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent 5 day period, aggregate bond funds including both taxable and tax free products netted another $3.2 billion in new investor subscriptions. Conversely, the combined equity mutual fund complex had substantial outflows with $8.8 billion alone coming out of domestic equity mutual funds, their 10th consecutive week of redemptions and the worst outflow in 79 weeks since the first week of 2013. The broad take-away is that the U.S. retail investor has been retrenching for most of the first half of the year (with only one week of outflows in the past 21 weeks in taxable bonds and 25 consecutive weeks of tax-free or muni bond inflows). This compares to over 2 consecutive months of outflows in U.S. stock funds. We are positioned accordingly with this emerging asset allocation having removed T Rowe Price from our Best Ideas list on May 14th (see report here) and are positioned more conservatively with our ongoing Long recommendation of leading fixed income manager Legg Mason (see our LM research here).

 

Total equity mutual funds put up a significant outflow in the most recent 5 day period ending July 2nd with $7.8 billion coming out of the all stock category as reported by the Investment Company Institute. The composition of the $7.8 billion redemption continued to be weighted towards domestic equity funds with a massive $8.8 billion coming out of domestic stock funds which was offset by a $1.0 billion inflow into international products. This significant drawdown in domestic equity funds was the biggest outflow in 79 weeks since the first week of 2013 and has become an intermediate term trend with now the tenth consecutive week of outflow in the category. The running year-to-date weekly average for equity fund flow is now a $1.9 billion inflow, which is now below the $3.0 billion weekly average inflow from 2013. 

 

Fixed income mutual fund flows had a solid week of production with the aggregate $3.2 billion that came into the asset class besting the 2014 running year-to-date average inflow of $2.2 billion. The inflow into taxable products of $2.9 billion made it 20 of 21 weeks with positive flow for the category and the inflow into municipal or tax-free products of $277 million was the 25th consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $2.2 billion weekly inflow, an improvement from 2013's weekly average outflow of $1.5 billion, but still a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow). 

 

ETF results were broadly negative with outflows in both equity and fixed income products. Equity ETFs experienced $1.1 billion in redemptions, breaking two consecutive weeks of strong subscriptions, while fixed income ETFs suffered another outflow of $1.1 billion. The 2014 weekly averages are now a $1.6 billion weekly inflow for equity ETFs and a $856 million weekly inflow for fixed income ETFs. 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $11.0 billion spread for the week ($8.9 billion of total equity outflow versus the $2.1 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $5.9 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   

 

ICI Fund Flow Survey - Negative Inflection in U.S. Fund Flows...Bonds Keep Chugging - chart 1

 

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product:

 

ICI Fund Flow Survey - Negative Inflection in U.S. Fund Flows...Bonds Keep Chugging - chart 2

 

ICI Fund Flow Survey - Negative Inflection in U.S. Fund Flows...Bonds Keep Chugging - chart 3

 

ICI Fund Flow Survey - Negative Inflection in U.S. Fund Flows...Bonds Keep Chugging - chart 4

 

ICI Fund Flow Survey - Negative Inflection in U.S. Fund Flows...Bonds Keep Chugging - chart 5

 

ICI Fund Flow Survey - Negative Inflection in U.S. Fund Flows...Bonds Keep Chugging - chart 6

 

 

Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:

 

ICI Fund Flow Survey - Negative Inflection in U.S. Fund Flows...Bonds Keep Chugging - chart 7

 

ICI Fund Flow Survey - Negative Inflection in U.S. Fund Flows...Bonds Keep Chugging - chart 8

 

 

Net Results:

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $11.0 billion spread for the week ($8.9 billion of total equity outflow versus the $2.1 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $5.9 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 

 

ICI Fund Flow Survey - Negative Inflection in U.S. Fund Flows...Bonds Keep Chugging - chart 9 

 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA


LEISURE LETTER (07/10/2014)

Tickers: GPI, IGT, WYNN

EVENTS

  • July 15-17 Pre-RCL 2Q earnings Hedgeye Cruise pricing survey

COMPANY NEWS

GTECH/IGT – (Reuters) GTECH owners have authorised management to make an all-cash 4-billion euro offer for IGT, La Repubblica said.  The offer should be presented soon, it said. The interest came to light in June.

Takeaway: We don't doubt the interest but the rumored offer price is too low and not realistic - trial balloon?

 

GPI – Gaming Partners International announced the resignation of CFO Michael Mann. GPI chairman Alain Thieffry was appointed interim CFO until a replacement for Mr. Mann is hired. GPI is a US-based casino equipment supplier and recently announced the acquisition of GemGroup, a US manufacturer of playing cards, casino chips and table layouts for US$19.75 million.

Takeaway: Mr. Mann's tenure was very short - he signed on to the roll less than a year ago, in September 2013. Our sources tell us that the GemGroup acquisition is not paying off as expected.

 

IGT (GGRAsia) reporting an increased interest by gaming operators in IGT's newest Asian themed games including San Xing Bao Xi, Azure Dragon and Great Zodiac Race.  On a side note, IGT recently unveiled games related to Tokidoki lifestyle brand - which it licensed earlier this year.

Takeaway: IGT is finally targeting Asian gaming markets with Asian themed games.  We saw the new games in Vegas a few weeks ago and it was clear that management is targeting this market where it's share is very low.

 

WYNN (GGRAsia) The revamping of two VIP rooms at hotel casino Wynn Macau has had a negative impact on the property's VIP overall market share. 

Takeaway: This has certainly contributed to lower share in Q2 for the property and probably helped boost Galaxy's share which has been trending higher.

INDUSTRY NEWS

New Jersey Gaming Expansion (PIX11) Venture capitalist and developer of Liberty National Golf Course (Jersey City), Paul Fireman, is in discussion with the State of New Jersey to build a 95 story casino-hotel-condo development on the bank of the Hudson River across from Liberty National Golf Course.

Takeaway: A property located just across the Hudson River from Manhattan would negatively impact the RWNY, Empire City at Yonkers, as well as Mohegan Sun and Foxwoods and of course Atlantic City.

 

Macau Cotai Water Jet – announced additional daily sailings effective July 16, 2014 with a 0630 sailing from HK's Macau Ferry Terminal to Macau's Taipa Ferry Terminal as well as a 1930 sailing from Macau Taipa to SkyPier at HKIA.

Takeaway: We have heard repeated commentary that the high speed ferries are often sold out in advance of sailing time.  As a result, the casual walk-up mass gambler will often need to wait 2-4 hours for ferry transit on a non-soldout ferry.

 

Missouri Smoking Measure – Gov. Jay Nixon signed a bill that could shield St. Charles' Ameristar Casino from any future countywide smoking ban. The measure, passed by the Legislature earlier this year, adds St. Charles to a list of cities exempt from county health rules if they set up their own municipal health departments. St. Charles Mayor Sally Faith, who sought the bill, worries that millions of dollars in city tax revenue from the casino would be reduced if smoking is prohibited and attendance dropped. Under current law, cities with at least 75,000 residents with their own health agencies are exempt from county rules "to enhance the public health." The bill adds St. Charles, which had 65,794 residents in the 2010 census to that category.

Takeaway: Good news for Ameristar St. Charles in a challenging, demand environment.

MACRO

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.


LODGING: STRONG EARNINGS SEASON

We're mostly above the Street but we suspect Q2 earnings season could mark a near term top in the stocks

 

CALL TO ACTION

Very strong Q2 RevPAR translates into upside revenue and EBITDA revisions for the lodging operators and REITs, but could Q2 earnings season represent the near-term peak in the stocks?

SET-UP

During Q2, US RevPAR growth developed slowly due to the April calendar shift vs the prior year.  However, the April showers transitioned to a robust May and June. May posted Upper Upscale RevPAR growth 7-8% while June moderated slightly.

 

We believe HLT and H have the most upside versus current consensus estimates and even we might be conservative.

DETAILS

Despite the optimism by lodging management teams surrounding the recovery of the Group travel segment, their 2014 annual guidance commentary and expectations remained somewhat muted.  However, the strong Q2 RevPAR results should contribute to an earnings season of EBITDA and EPS beats.  We believe the street will revise lodging estimates higher over the coming weeks.

 

When we reach “the news” (the Q2 earnings releases), expectations should be elevated.  Going forward, there are some warning signs that Q2 earnings and higher 2H estimates could represent the near term peak of sentiment. 

 

Namely, we are concerned by the sizable insider selling across lodging c-corps and REITs during Q2 – despite “fifth inning commentary”.  Next, our Hedgeye Industrial team is warning of slowing airline operating metrics in June – a trend our counterpart expects to continue into 2H14.  Third, we are mindful of somewhat higher consumer prices, which act as a tax on consumer spending and a headwind for all consumer discretionary stocks.  Indeed, the head of tourism marketing for New York City was recently quoted as saying that spending by NYC tourists was not as robust as he expected.

 

Don’t get us wrong – we like the hotel fundamentals and business spending remains strong.  Our long-term outlook (and very near term) remains positive.  However, for traders and investors looking to take some profits, late July/early August might be an opportunistic time.

 

Our Q2 estimates as compared to the street are as follows:

 

LODGING: STRONG EARNINGS SEASON - a

 

LODGING: STRONG EARNINGS SEASON - b


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