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Takeaway: M comp doesn't translate well for KSS. Dept store closures - another 90mm sq. ft. needs to go. UA footwear milestones. BBBY off Long Bench.

COMPANY HIGHLIGHTS

M - Our Take on Macy's Comp and Restructuring Plans

(http://phx.corporate-ir.net/phoenix.zhtml?c=84477&p=irol-newsArticle&ID=2005216)

Takeaway: What's more important to us than the 2.7% comp (2.1% owned) is the relative outperformance of JCP. This is the first quarter that JCP was comping against market share gains from both KSS and M after ceding over $5bil in sales. Our work suggests that M took $450mm, and KSS took a whopping $1bil of the market share, and both are in denial about the potential risk of JCP winning/buying the share back. It's unlikely that KSS will release a sales update based on the trend of less disclosure over the past year, but we're pretty comfortable in what we'll see on the print. For the past 11 quarters M has outcomped KSS - the average spread = 2.7%. That coupled with JCP stealing market share, and the recent trend in e-commerce visitation, doesn’t translate well for KSS.

JCP - J.C. Penney Closing 39 Stores in April -- Not Nearly Enough

(http://www.wwd.com/retail-news/department-stores/jc-penney-closing-40-stores-in-april-8092977?module=Business-latest)

Takeaway: We weren't surprised by the JCP's decision not to announce any store closures at its Analyst Day in October. It was too close to Holiday for Ullman to stand up in front of his rank and file announce closings/layoffs. Employees who know they'll soon be out of a job aren't exactly positive for the top line.

Our work shows that JCP needs to close 300 stores. Whether it actually will is up for debate because of the inextricable link between e-comm and B&M which we quantified in our Department Store Black Book from October. Our sense is that retailers will be more hesitant to close stores than in the past because of the fear that e-comm sales will go along with them.

JCP's 39 paired with M's announced 14 means that 6.5mm sq. ft. is being pulled out of the industry's aggregate sq. ft. Our model suggests that 93mm sq. ft. or over 1,000 stores needs to be shuttered over the next 5 years to compensate for $20bn in sales that will be lost by the department store group.

Bottom line -- 6.5mm square feet is nice, but the reality is that half of that will come back as capacity selling apparel. We need to see another 90mm square feet, or 950 stores need to go away -- and never come back.

UA - New Speedform Iteration, First Signature B-Ball Shoe

Takeaway - Two announcements out of UA on the footwear side yesterday.

1) The company released the 3rd iteration of it's Speedform platform. UA's answer to Nike's FlyKnit but instead of being made on a cotton loom its assembled in a Bra factory. The shoe itself is notable - though the marketing behind it is far below where it was last year when UA took over Grand Central station in New York to host one of its brand holidays around the release. One thing that caught our eye in the email blast sent around was the phrase at the bottom, "Also available at your local Brand House." This is new for UA for a reason. It finally has a store platform (UA Brand House) to showcase its full price line outside of its wholesale partners. The footprint is still small - just 5 stores- but the company is slowly building out its network. The newest door will be 30K sq. ft. on Michigan Ave in Chicago. Another example of the content owners circumventing the 40yr old wholesale model to reach the end consumer.

Retail Callouts (1/9): Dept Store Closures, M, JCP, KSS, UA Footwear, BBBY - 1 9 chart2

Secondly, UA released its first signature basketball shoe for Steph Curry yesterday. It's a milestone for the company for sure, but we wonder why it took them so long. Curry signed with the brand in October of 2013 and it took them this long to build up the infrastructure to release his first signature shoe? Imagine what would have happened if UA had stolen KD from Nike. Think about UA and Nike in the footwear space like this - Nike releases a new iteration of its signature line for its athletes about once a month. UA just released its first in 8+ years.

Retail Callouts (1/9): Dept Store Closures, M, JCP, KSS, UA Footwear, BBBY - 1 9 chart3

BBBY - 3Q14 Earnings, Off the Long Bench

Takeaway: We added BBBY to the Long Bench following the 2Q14 beat. After missing 7 of the last 8 quarters and seeing the multiple compress from 16x to 11.5X our thinking was that expectations had been right sized and the top line would stabilize. But the run in the stock from the low-60's to the high-70's and last nights underwhelming #'s make this less attractive to us on the long side. We're taking it off of our Long Bench.

Retail Callouts (1/9): Dept Store Closures, M, JCP, KSS, UA Footwear, BBBY - 1 9 chart1

OTHER NEWS

ZU - Zulily mulls closing U.K. operations after tough year

(http://www.chainstoreage.com/article/zulily-mulls-closing-uk-operations-after-tough-year)

FIVE - Five Below Names Michael Romanko EVP of Merchandising

(http://investor.fivebelow.com/releasedetail.cfm?ReleaseID=890406)

ZARA - Inditex to open more than a dozen Zara stores in U.S. this year

(http://www.reuters.com/article/2015/01/08/us-inditex-usa-zara-idUSKBN0KH1LR20150108)

China to allow online sales of prescription drugs as early as this month: sources

(http://www.reuters.com/article/2015/01/09/us-china-pharmaceuticals-idUSKBN0KI0Y220150109)