Takeaway: Hedgeye Retail Ideas List. WWW - international opportunity. KATE talks e-comm strategy.
HEDGEYE RETAIL IDEAS LIST
WWW - In Person: Jim Zwiers Takes Wolverine To New Heights
- Entering into your new position, what are your priorities?
- JZ: "The first is to lever the brands in the portfolio. Right now, our mix is about 50-50 in terms of U.S. pairs versus international pairs, and so that’s heavily weighted to the brands that were in the portfolio prior to the Performance & Lifestyle Group acquisitions [from Collective]."
- Will expansion into additional overseas markets be a priority?
- JZ:" Every once in a while, we ask whether there’s any other countries and territories left. [Laughs.] We definitely have scope; what we need to continue to drive now is scale. We have not achieved our optimal market share in any market in any region. We have a long ways to go to get to where we think we can get to in terms of operational excellence, in terms of demand planning and demand creation, but we’re taking steps in that direction, and it’s beginning to show some strong results."
- Sperry Top-Sider was lauded as one of the biggest overseas opportunities for Wolverine at the time of the acquisition. How much progress has that brand made internationally?
- JZ: "When you take some of our most penetrated brands, they’d be well above 50 percent of their pairs being sold globally. We’ve not committed to when that will happen for Sperry, but we know the trajectory and we’ve been able to execute it with many brands. We’re still in the first inning with Sperry international. Sperry is priority No. 1, with both new distributor sign-ups and in our owned operations."
Takeaway: At the time of the PLG acquisition in 2012, WWW was the most global footwear company in the world with over 60% of its unit sales coming outside the US, while International accounted for just 5% of sales for the four brands it acquired (Sperry, Saucony, Keds, and Stride-Rite). Over the next 5 years we see $600mm in International revenue opportunity for the acquired PLG brands as WWW layers these brands on to its global infrastructure spanning 200+ markets and 10,000+ points of distribution.
KATE - Kate Spade's Mary Beech Talks Brand Storytelling
- "[Mary Beech, Chief Marketing Officer] said when Kate Spade launched e-commerce, which accounts for more than 20 percent of sales, the brand committed to content and commerce. 'But the content wasn’t editorializing our products, it is true content — dance lessons, or recipes, or great tips for when you visit another place. The lifestyle side of Kate Spade was of equal importance to sales,' she said."
- "Illustrating the value of brand storytelling, Beech said the opening of Kate Spade’s first London store was a 'missed opportunity.' The unit opened in London with brick- and-mortar only...The company quickly added a worldofkatespade.com site that had no e-commerce element, but rather offered customers information about the brand. E-commerce in the U.K. is set to launch before the end of the year, and Beech said as the brand enters new markets, it would lead with digital storytelling, over and above physical locations."
Takeaway: KATE is a brand that built a strategy around selling product across multiple categories (handbags, accessories and apparel, etc…), to multiple affluent consumers (Kate Spade, KS Saturday, and Jack Spade) in several channels of distribution (wholesale, retail, dot.com, and concessions) in several regions of the world. These characteristics might be expected from a multi-billion dollar company. But keep in mind that KATE was less than $800mm in sales in FY13.
LULU - Lululemon seeks a leg up on knockoffs
- "Lululemon Athletica Inc. has filed a lawsuit in a U.S. federal court in Illinois targeting a sealed list of unidentified defendants that it says are China-based knockoff artists selling fake versions of its ubiquitous yoga pants and other merchandise online."
Herman Miller to acquire Design Within Reach
- "Herman Miller has entered into an agreement to acquire high-end furniture retailer Design Within Reach Inc. (DWR) for about $154 million in cash."
- “'This combination expands our reach in the higher margin consumer sector and we have identified multiple points of strategic leverage that will benefit our other segments and operations, as well as DWR’s own growth plans,' Walker said."
TGT - YouTube Stars Sell Target to College Set
- "TODRICK Hall, Ann Le, Tiffany Garcia and Michael Balalis, a.k.a. Mikey Bolts, are unlikely to be household names in households of consumers in their 30s, 40s or 50s. But Target is hoping those monikers mean money as it seeks to reach members of the millennial generation who are shopping for apparel, electronics and home furnishings as they head to college."
- "Target is featuring the group, known for video clips they create for YouTube, in four online video shows. Composed of four episodes each, they will be available on Target’s YouTube channel."
Tesco - Appointment of Chief Executive Officer and Trading Update
- "Tesco plc announces that Dave Lewis will join the Board of Tesco on 1 October, 2014 as Chief Executive Officer in succession to Philip Clarke. Philip Clarke will continue as Chief Executive until that date when he will step down from the Board but will continue to be available to support the transition until the end of January 2015."
AMZN, BKS - Amazon Starts $9.99-a-Month Service for Unlimited E-Books
- "Amazon.com Inc. introduced a $9.99-a-month service for unlimited Kindle e-book downloads, letting customers devour books like they binge on TV services like Netflix Inc. and Amazon Prime.
- Kindle Unlimited includes more than 600,000 Kindle books and thousands of audiobooks from Audible Inc., Amazon said today in a statement. Readers can access titles like “The Hunger Games” and “The Lord of the Rings” without paying for them individually."
Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor". If you'd like to receive the work of the Financials team or request a trial please email .
European Financial CDS - Swaps across Europe were narrowly changed with one exception: Russia's Sberbank, which widened +35 bps to 265 bps.
Sovereign CDS – Sovereign swaps were little changed last week as the largest move came from Italy at +3 bps, while the average move was 0 bps.
Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 1 bps to 13 bps.
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Tickers: PENN, GLPI, WYNN, DRH
- July 23: TRIP 2Q call (430pm)
- July 24:
- WYN 2Q call (830am) ; pw: Wyndham
- PNK 2Q call (9am) ; pw: 27759616
- LHO 2Q call (930am)
- RCL 2Q call (10am)
- PENN 2Q call (10am)
- HOT 2Q call (1030am) ; pw: 61542222
- AWAY 2Q call (4pm)
- LA June revs released
- July 25: PEB 2Q call (9am)
- July 29:
- IGT 2Q release
- GLPI 2Q call (10am)
- July 30:
- MGAM 2Q earnings
- MAR 2Q call (10 am) : , pw: 59383825
PENN & GLPI – The Iowa Supreme Court granted a motion for an emergency stay on the Argosy Casino's closure in Sioux City, Iowa and Argosy Sioux City, which was slated to close July 21, will be open until the Iowa Supreme Court sets a hearing date. The IRGC has until today to file resistance to the supreme court's stay.
Takeaway: Again, good news for PENN but don't they still need to show this in discontinued operations?
CWN:AX – Australia’s Crown Resorts Ltd is teaming up with a subsidiary of Chinese property developer Greenland Holding Group Co Ltd to bid for a casino resort in Brisbane. If their bid is successful, Crown will manage the integrated resort and will have an ownership interest in that part of the precinct.
Takeaway: Packard continues to play his hot hand.
SINO:PM – the company is progressing with the reorganization and name change to Premium Leisure Corporation. Following the reorganization of the gaming assets in Sinophil, which will be entitled to half of the earnings from gaming operations at City of Dreams Manila, Belle will own close to 90% of the future gaming arm. According to media reports, Belle Corp is expected to increase the public float of Sinophil/Premium Leisure Corporation ahead of the opening of City of Dream Manila phase one.
Takeaway: Belle Corp looking to capitalize on the media attention and investor interest in City of Dreams Manila.
MNTG – MTR Gaming Group, Inc. announced that, at its special meeting of stockholders, a majority of the outstanding shares of MTR’s common stock voted to approve the merger agreement with Eldorado HoldCo LLC.
Takeaway: The final step in the delayed merger.
WYNN – (Boston Globe) Wynn Resorts has offered the City of Boston $5 million for road improvements, $1 million upfront and $2.6 million annually, along with hiring preferences for city residents, as compensation to offset the possible effects of a planned hotel and gambling resort on the Mystic River waterfront in Everett. The offer is the richest deal Wynn offered to any community around the company’s planned resort, but far less than the $18 million annual payment promised to Boston by a rival applicant, Mohegan Sun, which is proposing a Revere casino. Wynn has won arbitration hearings with Chelsea and Somerville, settling compensation packages worth about $650,000 annually with each community as each city had asked for more. Boston Mayor Martin J. Walsh last week announced that his administration would not participate in the arbitration, leaving the Massachusetts Gaming Commission in charge of setting the city’s compensation package
Takeaway: Boston is the city that initially didn't want a casino, but then fought to block casinos in neighboring towns, only to receive a surrounding city offer, but then walked away. Boston Mayor Walsh seemingly can't make up his mind...or is he simply playing the role of gadfly.
DRH - CEO Mark W. Brugger sold 40,000 shares of the stock on Wednesday, July 16th via a 10b5-1 transaction, at an average price of $13.05, and now owns 864,213 shares.
Takeaway: More insider selling in lodging
World Cup Betting – (SCMP) Police in Hong Kong and the neighbouring province of Guangdong in China seized $750 million ($96.7 million) in illegal World Cup bets, more than double the amount estimated to have been gambled on the previous tournament. Hong Kong police broke up 97 operations after raiding some 140 locations including bars and residential flats. A separate report recently cited Chinese authorities as saying that illegal gambling during the World Cup on the mainland was thought to have been a much as $3.9 billion
Takeaway: $3.9 billion, that's HKD 30.225bn or roughly one month of Macau GGR!
Japan Gaming Legislation – (Kyodo News) The Japanese government plans to set up a new body that could help speed up the process of opening the first casino resorts in Japan in time for the Tokyo Olympics in 2020. Officials from various government agencies will come together to work on the matter, Chief Cabinet Secretary Yoshihide Suga told reporters on a conference. According to a Japanese legislative memo, lawmakers give the clearest indication yet that they are interested in foreign casinos operators participating in integrated resorts.
The note mentions a “need to work with appropriate operators as well as the domestic industry”. The note also shows that an entry levy could be imposed on foreigners as well as locals were casinos to be legalized in Japan.
Takeaway: "Integrated resorts are widely viewed as a main feature of my growth strategy,” said Mr Abe when he visited Singapore’s casinos during an official visit to the Lion City in May.
Bermuda Gaming Expansion – Bermuda legislators have completed a draft of a bill that would regulate casino gaming in the territory, said Shawn Crockwell, Bermuda’s tourism minister. The legislation will be presented before the end of 2014, said Crockwell.
Cruise Lines Philippines Expansion – Carnival Corp., Royal Caribbean International and Norwegian Cruise Lines have expressed interest to help develop the Philippines as a cruise-ship destination, according to the Philippine Embassy in Washington, D.C.
Takeaway: Another Asian destination in focus.
Macau International Airport Traffic – Macau International Airport Co Ltd released 1H 14 statics which included a 10.7% increase in passenger traffic to over 2.61 million passengers and the handling of 1,206 aircraft private jet movements, an increase of nearly 30% over the same period last year. The rise in passenger volume was registered when two new routes, launched between here and Dalian in mainland China and between here and Siem Reap in Cambodia.
Takeaway: Decent passenger growth
Pearl River Delta Manufacturing – (SCMP) According to the Chinese Manufacturers’ Association of Hong Kong, 29.6% of Hong Kong manufacturers are likely to scale back their investment in the next three years, an increase of 2.7% over last year. The survey also shows that 32% of Hong Kong manufacturers with factories in the area were planning to move their factories to other areas with lower labor costs, namely Southeast Asia and remoter parts of Guangdong or other provinces in mainland China. The increase in labor costs is the main reason these Hong Kong based companies are retreating from the area. According to the Association Hairman Irons Sze, labor cost in the area have increased 10% to 15% every year.
Takeaway: A potential headwind for Macau mass gaming if manufacturing jobs move elsewhere.
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.
The table below lists our current investment ideas as well as a list of potential ideas we are in the process of evaluating (watch list). We intend to update this table regularly and will provide detail on any material changes.
EVENTS THIS WEEK
7/21/14 CPB Investor Day 12:30pm EST
7/22/14 MO Earnings Call 9am EST
7/22/14 MJN Earnings Call 9am EST
7/22/14 KO Earnings Call 9:30am EST
7/22/14 KMB Earnings Call 10am EST
7/23/14 PEP Earnings Call 8am EST
7/23/14 TUP Earnings Call 8:30am EST
7/24/14 JAH Earnings Call 8:30am EST
7/24/14 HSY Earnings Call 8:30am EST
7/24/14 CCE Earnings Call 10am EST
7/24/14 DPS Earnings Call 11am EST
Consumer Staples fell -0.1% week-over-week versus the broader market (S&P500) up +0.5 %. XLP is up 5.2% year-to-date versus the SPX at 7.0%.
Positive Divergence: EL 2.1%; SMG 1.3%; KO 1.1%; CCE 0.9%; DF 0.9%
Negative Divergence: NUS -10.6%; BNNY -6.6%; LO -6.6%; HLF -5.7%; RAI -5.0%
- Replay Ballantyne Brands Expert Call - Are Vaporizers Stealing Share from Big Tobacco
- PM – Strong Q2; Rich Valuation Supported Over Long Term
- Removing Long LO from Best Ideas List
- Just Charts - Bullish Summer Charts
XLP remains bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up.
The Hedgeye U.S. Consumption Model shows 7 of the 12 U.S. Economic Indicators flashing green.
Despite the bullish quantitative set-up for the sector, we continue to believe that the group is facing numerous headwinds, including:
- U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating, Q2 2014 theme of #ConsumerSlowing, and Q3 2014 theme of #Q3 Slowing
- The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
- The sector is loaded with a premium valuation (P/E of 19.6x)
- Less sector Yield Chasing as Fed continues its tapering program
- The high frequency Bloomberg weekly U.S. Consumer Comfort Index (rescaled for cosmetic and not component reasons) has not seen any real improvement over the past 6 months, and fell to 37.5 versus 37.6 in the prior week
In the charts below we look at the largest companies by market cap in the Consumer Staples space from a quantitative perspective.
BUD - bullish TREND w/ 109.97 support
DEO – bearish TREND w/ resistance = 126.49
KO – bullish TREND support = 40.92
PEP – bullish TREND support = 86.88
GIS – bullish TREND support = 52.39
MDLZ – bullish TREND support = 36.52
KMB – bullish TREND support = 110.41
PG – bullish TREND support = 79.71
MO – bullish TREND support = 40.52
PM – bullish TREND support = 84.15
Takeaway: Domestic indicators reflect growing risk aversion. High yield is blowing out while cash seeks safety (Treasuries).
Current Best Ideas:
In spite of the mounting tensions abroad, the risk parameters that are showing the most strain are domestic. For instance, high yield rates soared last week, rising 27 bps. Meanwhile, the 2-10 yield spread continues to compress, shaving another 6 bps to end the week at 200 bps. The only relief comes from falling commodity prices as the CRB was down 1.3% last week and is now down 4.6% on the month. Meanwhile, internationally, Sberbank widened by 35 bps to 265 bps as the condemnation of Russia grows.
* High Yield – High Yield rates rose 27.3 bps last week, ending the week at 5.70% versus 5.43% the prior week.
* 2-10 Spread – Last week the 2-10 spread tightened to 200 bps, -6 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
* CRB Commodity Price Index – The CRB index fell -1.3%, ending the week at 297 versus 301 the prior week. As compared with the prior month, commodity prices have decreased -4.6% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 1 of 12 improved / 3 out of 12 worsened / 8 of 12 unchanged
• Intermediate-term(WoW): Negative / 2 of 12 improved / 7 out of 12 worsened / 3 of 12 unchanged
• Long-term(WoW): Negative / 3 of 12 improved / 5 out of 12 worsened / 4 of 12 unchanged
1. U.S. Financial CDS - Swaps were fairly uneventful in the US with a median change of 0 bps. Large banks tightened by an average 4 bps as concerns around EU contagion receded while bank earnings came in modestly better than expected. Overall, swaps widened for 14 out of 27 domestic financial institutions.
Tightened the most WoW: AGO, MBI, MS
Widened the most WoW: ALL, ACE, AON
Widened the least/ tightened the most WoW: TRV, CB, SLM
Widened the most MoM: MBI, AGO, WFC
2. European Financial CDS - Swaps across Europe were narrowly changed with one exception: Russia's Sberbank, which widened +35 bps to 265 bps.
3. Asian Financial CDS - Bank swaps across Asia were modestly higher last week, rising by an average 3 bps. India saw a slightly larger increase at +8 bps.
4. Sovereign CDS – Sovereign swaps were little changed last week as the largest move came from Italy at +3 bps, while the average move was 0 bps.
5. High Yield (YTM) Monitor – High Yield rates rose 27.3 bps last week, ending the week at 5.70% versus 5.43% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1 point last week, ending at 1883.
7. TED Spread Monitor – The TED spread rose 0.3 basis points last week, ending the week at 21.9 bps this week versus last week’s print of 21.56 bps.
8. CRB Commodity Price Index – The CRB index fell -1.3%, ending the week at 297 versus 301 the prior week. As compared with the prior month, commodity prices have decreased -4.6% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
9. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 1 bps to 13 bps.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 4 basis points last week, ending the week at 3.25% versus last week’s print of 3.29%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
11. Chinese Steel – Steel prices in China rose 0.4% last week, or 12 yuan/ton, to 3144 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.
12. 2-10 Spread – Last week the 2-10 spread tightened to 200 bps, -6 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.6% upside to TRADE resistance and 0.5% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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