Takeaway: SIGMA review for companies reporting this week. Definitely worse on the margin, with very few exceptions.
Here's a SIGMA review of every retailer that reported earnings this week. As a reminder, the analysis triangulates sales, inventories and margins. The vertical axis is the spread between sales and inventories -- the higher on the scale, the better. The horizontal axis is the y/y change in EBIT margin. In effect, you want to be either in the upper right hand quadrant, or headed there. The opposite holds true for the lower left.
We've done this summary over the past few weeks, and the trends have been overwhelmingly positive -- with most companies improving inventories relative to sales and/or margins significantly. But this week, we're definitely looking at a different picture. The only companies that showed any material improvement were WSM and ANF -- and both of those names clearly had issues of their own that took the stocks down. Interesting to see that the companies reporting so late in the season (i.e. taking longer to close their books) are the ones that are putting up the worst directional trends.
WSM - 2Q14 Earnings
GES - 2Q15 Earnings
ANF - 2Q14 Earnings
DG - 2Q14 Earnings
CHS - 2Q14 Earnings
PSUN - 2Q14 Earnings
BWS - 2Q14 Earnings
WTSL - 2Q14 Earnings
TLYS - 2Q14 Earnings
BBY - 2Q15 Earnings
TIF - 2Q14 Earnings
DSW - 2Q14 Earnings
WMT - Wal-Mart Looks Online for Chinese Growth
- "As Alibaba Group Holding Ltd. courts investors for a highly anticipated public offering next month in the U.S., Wal-Mart Stores Inc. is busy trying to win over online shoppers in the Chinese e-commerce company's backyard."
- "Wal-Mart's online arm in China—called Yihaodian, meaning No. 1 Store—has recently increased the number of products sold on its site, built up its supply chain and streamlined its mobile site in a push to boost sales. Wal-Mart owns a 54% stake in Yihaodian."
TGT - How Target Aims To Turn Instagram Into Shopping Spree
- "Target on Wednesday adopted Curalate's software Like2Buy for its Target and Target Style Instagram feeds, in the hopes that users will turn a casual scroll into a shopping spree."
- "Target has 319,000 Instagram followers and Target Style has 375,000, which means nearly 700,000 potential online customers."
APP - Robert Mintz appointed to American Apparel B.O.D.
- "On August 26, 2014, Lion/Hollywood designated Robert Mintz to be a director of the Issuer pursuant to its rights under the Investment Agreement, as amended to date."
GPS - Gap Files Report on Myanmar Factories
- "Through the U.S. Responsible Investment Reporting Requirements, U.S. companies making significant investments in Myanmar must be fully transparent about payments made to the government and about how they respect human rights in their business operations. Gap Inc., the first U.S. retailer to reenter Myanmar since sanctions were eased, submitted a report to the U.S. State Department this week on conditions it found at the first two factories it engaged to produce clothing for its Old Navy and Banana Republic factory stores."
GPS - Gap returning to television with ‘Dress Normal’ campaign
- "Gap is returning to television. The brand debuted four commercials that will air on TV, in cinema, in stores and online. Created by Academy Award-nominated director David Fincher, the films were created with Wieden+Kennedy New York as part of Gap's new marketing campaign, Dress Normal. The TV campaign launches in the United States and United Kingdom in the week of Sept. 1."
JWN - SNEAK PEEK: Inside Canada’s first Nordstrom store
- "It’s just three weeks until American retailer Nordstrom opens their first store in Canada, but there’s still lots of work to be done."
- "Shelves in the 140,000 square foot retail space at Chinook Centre remain bare, as hundreds of newly hired employees work to assemble racks and get familiar with the high-end merchandise they’ll soon be selling."
Analysis: Holt Renfrew to Close its Smaller Stores Amid Increased Competition
- "Holt Renfrew has announced that it will close its small Ottawa and Quebec City locations early next year, and we think that more Holt Renfrew store closures could follow. The company will instead concentrate on operating larger locations in just five Canadian cities. This strategy could be in response to expected competition from Saks Fifth Avenue and Nordstrom, both opening Canadian locations over the next several years. "
Tickers: SGMS, WYN, MTN
- Sept 1/2: Revel closes
SGMS – (Leveraged Finance News) A banker’s meeting is scheduled for Sept. 3 for the launch of a $2.085 billion loan facility for Scientific Games Corp., which is using the proceeds to partially fund its announced $5.1 billion acquisition of Bally Technologies.
Takeaway: Financing shouldn't be a problem.
WYN – announced it renewed its securitized timeshare receivables conduit facility for an additional year, extending it through August 26, 2016. The facility bears interest based on variable commercial paper rates plus a spread or the LIBOR rate plus a spread and has a capacity of $650 million. The renewal involved execution of a Fifth Amendment, dated as of August 28, 2014, to the Amended and Restated Indenture and Servicing Agreement, dated as of October 1, 2010, by and among Sierra Timeshare Conduit Receivables Funding II, LLC, as Issuer, Wyndham Consumer Finance, Inc., as Servicer, Wells Fargo Bank, National Association, as Trustee and U.S. Bank National Association, as Collateral Agent.
Takeaway: The renewal was widely anticipated given the continued appetite for fixed income risk assets.
MTN – District Court Judge Ryan Harris delayed his decision on how much Park City Mountain Resort will have to pay if it wants to have a ski season this winter until September 3. During the hearing, PCMR said it was willing to post between $1 and 6 million in a bond. Talisker, on the other hand, suggested they should post as much as $124 million.
Takeaway: The battle for champagne powder continues.
Macau Package Tours and Hotel Occupancy Rate for July 2014
Visitor arrivals in package tour increased by 35% YoY to 1,158,000 in July 2014, attributable to a 39% surge in visitors from Mainland China (946,000), with 367,000 coming from Guangdong Province. Visitors from Taiwan (75,000) and Japan (12,000) increased by 28% and 23% respectively, and those from the Republic of Korea (27,000) also registered a slight growth.
Takeaway: Good visitation numbers
Changi – Singapore's Changi Airport passenger traffic grew 1% YoY in July to 4.582 million.
Takeaway: Flattish visitation continues at Changi
Native American Ruling – (Indian Country Today) Tribal advocates anxiously await a meeting of an en banc panel of federal judges who will soon decide whether a legal opinion that could have a negative impact on millions of acres of tribal lands should be overturned. The judges of the 11-member panel will scrutinize a January 21 opinion of a three-judge panel of the Ninth Circuit Court of Appeals in Big Lagoon Rancheria v. California. In that 2 -1 opinion, the judges ruled that the state of California was not required under the Indian Gaming Regulatory Act (IGRA) to negotiate in good faith with Big Lagoon on a new gaming compact. The en banc panel will hear oral arguments by the tribe and state on September 17, according to an order announced on August 22 by the U.S. Court of Appeals for the Ninth Circuit.
Why was this ruling important?
In coming to the original decision, the court ruled that the tribe was not under federal jurisdiction in 1934, so 11 of the acres it proposed for gaming could not be considered Indian lands under IGRA as a result of the 2009 Carcieri v Salazar U.S. Supreme Court decision. The acres were placed into trust by the Department of the Interior in 1994. Carcieri limited Interior’s ability to take lands into trust for tribes recognized by the federal government after the Indian Reorganization Act (IRA) of 1934. The decision has been widely controversial in Indian country, and U.S. Congress members and the Obama administration have been vowing since 2009 to remedy it through legislation, but that has not happened to date. A major concern for tribal advocates is that the Big Lagoon precedent could be applied to all tribes formally recognized after 1934 if it holds, thus limiting Indian lands, sovereignty and gaming. According to a list referred to in the original decision, 258 of the 566 tribes that are currently federally recognized were recognized after 1934.
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.
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Client Talking Points
Japan released a horrendous Household Spending report of -5.9% year-over-year in JUL (vs -3% JUN) and Housing Starts in Japan tanked -14.1% in JUL too – this is what happens when you print inflation but don’t get real consumption. But anyone who has studied monetary policy history already knows that.
It’s been a tight race between the Nikkei (-4.4%) and U.S. growth expectations (Russell 2000) all year, and now the Russell is right back to breakeven at 1165. After the no-volume ramp into month-end, what’s next in SEP? We say sell, but you already know that too!
UST 10YR Yield of 2.34% drives our Best Macro Idea (TLT) to +17.2% for 2014 (that’s pre dividends) and we still can’t understand why consensus doesn’t get the rate of return on slow-growth vs Russell 2000. Watching too much TV, perhaps.
|FIXED INCOME||22%||INTL CURRENCIES||4%|
Top Long Ideas
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.
The level of activism in the restaurant industry has never been more rampant. In the past year alone, we’ve seen CBRL, DAVE, DRI, BJRI and BOBE attract largely uninvited attention from these investors. BOBE has a long history of mismanagement, evidenced by flawed strategic rationale, an excessively bloated cost structure and severe underperformance relative to peers. Fortunately, its poor operating performance presents a tremendous opportunity. After almost a year of pushing for change at Bob Evans, activist investor Sandell Asset Management is claiming a big victory. Activist investor Sandell won at least five seats on the board of the restaurant operator and food processor, based on preliminary results from the company’s annual shareholder meeting last week. This is precisely the sort of bullish catalyst that was central to our high conviction on BOBE.
Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position. Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.
Three for the Road
TWEET OF THE DAY
RUSSIA: Ruble on its knees and the Russian Trading System is down -0.6% to -12.8% YTD
QUOTE OF THE DAY
I prefer to be true to myself, even at the hazard of incurring the ridicule of others, rather than to be false, and to incur my own abhorrence.
STAT OF THE DAY
Cattle and Coffee prices both up over +1% yesterday to +15% and +76% year-to-date, respectively.
“Because there is no effort without error and shortcoming.”
That’s one of the best quotes from one of the best leadership speeches in American history – President Teddy Roosevelt’s “The Man In The Arena” (more formally referred to by political types as his “Citizenship in a Republic” speech).
I’m not much of a political type. I’m more of a Mucker in the arena type. Perversely, I love getting smacked around once in a while. I love to fight against consensus. Yes, it can get messy. But working alongside those of you whose portfolios are “marred by dust and sweat and blood” drives me.
Those of you who didn’t get run over buying the tops of the 2000 and 2007 US stock market bubbles get where I am coming from. We are going to do this all over again. And while this time may be different, we know “the triumph of high achievement” … and if we fail, at least we’ll do so “while daring greatly.”
Back to the Global Macro Grind…
I obviously love that speech, but I don’t think our call for US #GrowthSlowing as inflation accelerated (from 3 year lows) in 2014 was much of a dare at all. It was a playbook modeling call. Amidst all of the storytelling out there, the easiest US Macro positions to take were:
- Long Inflation Assets in 1H 2014 (JAN-JUN)
- Long Slow-Growth all year long (Long Bond and anything Equities that looks like a Bond)
- Short US Domestic Growth (Russell 2000)
Score: Long Bond (TLT) +17.2% vs. Russell 2000 0.0% YTD #timestamped (10yr yield = 2.34%)
*that’s pre-reinvesting dividends if you are long the 30yr UST Bond, the absolute return is even better
But you won’t hear that on Old Wall TV. You probably won’t read that in the paper either (I certainly haven’t – mainly because I don’t read newspapers!). Instead, you’ll hear something from the cheap seats like, “look at the Dow – its above its 50-day moving avg.”
The Dow, btw, is up less than 3% for 2014. Thanks for coming out.
If you’re a hard core perma growth bull, where you should really be long is India. Unlike the Russell 20000, India’s stock market (BSE Sensex) closed the month at its YTD highs, +27.7% YTD. Inflation is falling there – and real consumption growth is accelerating. Sound familiar?
It certainly doesn’t sound like Europe.
European central planning bureaucrats (who are just like the un-elected ones we have here at the Fed) live in perpetual fear of what the general population wants (hint: lower cost of living). Read their conflicted and compromised media headlines this morning:
- “Eurozone deflation risk at its highest level since 2009”
- “Draghi hints at more stimulus”
This isn’t the arena of real life where real players have a real scoreboard. This is a joke.
For those of you who recall what the Keynesian finance newspaper (The Economist) was trumpeting last year (Abenomics), only 1-year after implementing 60-70 TRILLION Yen in incremental “easing”, here’s what Japan reported for July 2014:
- Japanese inflation +3.4% y/y
- Japanese Household Spending -5.9% y/y
- Japanese Housing Starts -14.1% y/y
In Hedgeye rate of change speak, “y/y” means year-over-year (or what it is now versus last year). And in Japan it’s just plain sad to watch. If you’re blowing up on the golf course this weekend, try it yourself – just keep doing the same things, over, and over, and over again. But don’t expect different results.
“So” Europe definitely needs to do that… definitely, right?
Right, right. And as US growth continues to slow from this fanciful Q2 headline Obama was trying to trumpet yesterday (newsflash: it’s Q3), guess what your central planning committee at the Fed is going to do in the face of that? Must do moarrr easing…
With a few Hedgeye Best Short Ideas going against us (like YELP) right now, I have plenty of issues of my own to deal with, but a broken process is not one of them. If I had a broken process, I would either get fired or mocked.
Where I grew up, they call the place where people who get paid to get mocked a circus. That’s the perfect place for a bunch of unaccountable people who are bought and paid for by governments policies to perform.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.32-2.39%
Shanghai Comp 2181-2280
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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