Oil prices continue to fall as both WTI and Brent prices are hovering around five-year lows.
Considering last night’s news that COO Troy Alstead is taking a “coffee break” from the company, we are inclined to believe there is more to the story than Starbucks is willing to tell. The general sentiment in the investment community seems to be that the move doesn’t “feel” right – a sentiment we share. Yesterday morning we firmly believed Troy was next in-line for the CEO position and, now, we’re left with little more than questions and skepticism.
Whether it played a direct role in Troy’s departure or not, the company has taken a big bet on food and it doesn’t seem to be working. With this in mind, we decided to re-run our consumer survey focused on the food at Starbucks – and the results revealed a noticeably unfavorable trend. Knowing this, along with the recent timeline of events below, we continue to have sound conviction in our short thesis.
September 2014: Hedgeye adds Starbucks to the Best Ideas list as a short. The core of the thesis is predicated on rapidly decelerating traffic – the new food is not resonating with consumers and is leading to increased menu and operational complexity.
October 2014: Starbucks misses 4Q14 EPS and guides down FY15 estimates. Traffic trends are a serious red flag for analysts, but management insists any concerns are unfounded.
December 2014: COO Troy Alstead plays a major role at Starbucks analyst day and is clearly positioned as the heir apparent to the CEO role. Food is a major topic of discussion and is framed as one of the keys to the future of the company.
December 2014: Hedgeye’s channel checks indicate that holiday promotions are not being as effective as planned.
January 2015: The Street begins to lower 1Q15 same-store sales and traffic estimates.
January 2015: Starbucks hires a new VP of Food. The Street begins to wonder why it has taken this long to hire a culinary person given the company’s food ambitions. Furthermore, it’s unclear what happened to the two executives that presented at the analyst conference.
January 2015: Starbucks announces that COO Troy Alstead is taking an “unpaid coffee break” to “spend time with his family.” Given Troy’s role at the recent analyst meeting, his rash unpaid leave is taken with significant skepticism.
Last September, we ran a consumer survey in which we gathered over 1,500 responses and learned that the overwhelming majority of Starbucks customers that participated were not in favor of the company's new food offerings.
We recently re-ran this survey in order to gauge any swing in sentiment one way or the other. The results were quite telling:
Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
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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.
M - Our Take on Macy's Comp and Restructuring Plans
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
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.
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.
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.
ZU - Zulily mulls closing U.K. operations after tough year
FIVE - Five Below Names Michael Romanko EVP of Merchandising
ZARA - Inditex to open more than a dozen Zara stores in U.S. this year
China to allow online sales of prescription drugs as early as this month: sources
Oil bounced, and then failed. Remember when they said that higher lows could be good for oil? Well, that’s gone now. Stay tuned … . Our immediate risk range for WTI Oil today is 46.43-51.86.
Don’t forget that most bounces were led by counter-trends: oil, Russia and junk. That’s low value bouncing.
As far as Russian equities (RTSI) are concerned, they’re getting tagged and bagged for another -5.3% loss. So much for the oil-driven bounce. And that has everything to do with deflation.
Takeaway: In today's Macro Playbook, we highlight one of the key demographic components to our bullish bias on long-duration U.S. Treasury bonds.
THEMATIC INVESTMENT CONCLUSIONS
Long Ideas/Overweight Recommendations
Short Ideas/Underweight Recommendations
QUANT SIGNALS & RESEARCH CONTEXT
Developed World Demographic Tailwinds? Yes, For Bonds, That Is: Yesterday afternoon we held our 1Q15 Macro Themes conference call (CLICK HERE to review). As always, the presentation was jam-packed with cutting-edge data analysis and thoughtful, well-researched assertions. One of those cutting-edge analyses in the presentation is among my favorite slides in the deck, #24:
What this chart shows is the ratio of the number of people in the world that are at/above retirement age as a ratio of 25-54 year-olds (black bars). The grey line shows the YoY bps change on the right axis. What you should quickly note is the steepening of the slope starting in 2014 and continuing over the next four years.
The key takeaway here is that the population of people that are predisposed to de-risk their investment portfolios (think “60/40” going to “40/60”) and have little-to-no income growth is growing increasingly faster than those that are inclined to own “stocks for the long term” and have (or at least prefer) income growth.
The net result is the number of people that prefer deflation is growing faster than the number of people that prefer inflation, at the margins. We think this demographic trend has the potential to weigh on both reported inflation readings and long-term interest rates across the developed world’s liquid bond markets over the long term.
With 10Y Treasury yields at/near 2%, that call seems downright preposterous – especially to someone who has yet to sit down and do their homework on the subject. But I’m guessing 10% on the 10Y Treasury yield sounded equally as preposterous to an investor in the early-to-mid 1980s. It certainly doesn’t sound preposterous to retirees in Germany or Japan right about now.
Source: Bloomberg L.P.
Source: Bloomberg L.P.
So why does the buy-side remain heavily short of 10Y Treasuries on a tired U.S. “escape velocity” thesis?
Perhaps we’ll learn the answer to that question in the coming weeks and months…
***CLICK HERE to download the full TACRM presentation.***
TRACKING OUR ACTIVE MACRO THEMES
Global #Deflation: Amidst a backdrop of secular stagnation across developed economies, we continue to think cyclical forces (namely #StrongDollar driven commodity price deflation) will drag down reported inflation readings globally over the intermediate term. That is likely to weigh heavily upon long-term interest rates in the developed world, underpinning our bullish outlook for U.S. Treasury bonds.
#Quad414: After DEC and Q4 (2014) data slows, in Q1 of 2015 we think growth in the US is likely to accelerate from 4Q, aided by base effects and a broad-based pickup in real discretionary income. We do not, however, think such a pickup is sustainable, as we foresee another #Quad4 setup for the 2nd quarter. Risk managing these turns at the sector and style factor level will be the key to generating alpha in the U.S. equity market in 1H15.
Long #Housing?: The collective impact of rising rates, severe weather, waning investor interest, decelerating HPI, and tighter credit capsized housing in 2014. 2015 is setting up as the obverse with demand improving, the credit box opening and 2nd derivative price and volume trends beginning to inflect positively against progressively easier comps. We'll review the current dynamics and discuss whether the stage is set for a transition from under to outperformance for the complex.
Best of luck out there,
Associate: Macro Team
About the Hedgeye Macro Playbook
The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.