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Retail Callouts (1/23): KATE, RH, AdiBok, TGT

Takeaway: KATE breaks 'Wall of Silence' pre-announces pre-announcement Thurs 1/29. RH adds new member to Board.

COMPANY HIGHLIGHTS

 

KATE - To Pre-Announce 1/29, Breaks 'Wall of Silence'

 

Takeaway: There's a first time for everything. KATE pre-announced that next Thursday it is going to pre-announce. As bizarre as this seems to be, the only negative is that it confirms a severe disconnect between this company's communication strategy vs. the fundamental strength in its business, and the upside to the long-term financial model. For the full link to our note from this morning, CLICK HERE.

 

RH - RH APPOINTS ALI ROWGHANI TO BOARD OF DIRECTORS

(http://ir.restorationhardware.com/phoenix.zhtml?c=79100&p=irol-newsArticle&ID=2009793)

 

Takeaway: RH needed one more independent Board member to be compliant with the listing requirements after Barry Sternlicht stepped down from the board mid-Summer. We don't know Rowghani personally but his resume speaks for itself. Sternlicht was invaluable in helping build out the blueprint for the Full Line Design Gallery. A framework that is still guiding the negotiations for new deals. We like that that Rowghani checks a box in two departments - finance and tech.

 

 

OTHER NEWS

 

AdiBok - ADIDAS GROUP TO SELL ROCKPORT TO A NEW ENTITY FORMED BY BERKSHIRE PARTNERS AND NEW BALANCE

(http://www.adidas-group.com/en/media/news-archive/press-releases/2015/adidas-group/)

 

TGT - Target launching its first plus-size clothing line in 7 years

(http://www.nydailynews.com/life-style/fashion/target-launching-plus-sized-clothing-line-article-1.2087089)

 

HBC - Hudson's Bay Company Announces $100 Million Bought Deal Offering

(http://investor.hbc.com/releasedetail.cfm?ReleaseID=892575)

 

WMT - Wal-Mart Canada opening 11 supercenters in January

(http://www.chainstoreage.com/article/wal-mart-canada-opening-11-supercenters-january)

 

EBAY - Ebay Cutting 2,400 Jobs

(http://www.wwd.com/business-news/human-resources/ebay-cutting-2400-jobs-8130460?module=Retail-latest)

 

CACH - Caché Closer to a Ch. 11 Filing

(http://www.wwd.com/business-news/financial/cach-closer-to-a-ch-11-filing-8133845?module=Business-latest)


Daily Trading Ranges, Refreshed [Unlocked]

This is a complimentary look at Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers every weekday morning by CEO Keith McCullough. It was originally published January 23, 2015 at 07:26. Click here to learn more and subscribe.

Daily Trading Ranges, Refreshed [Unlocked]   - Slide1

BULLISH TRENDS

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BEARISH TRENDS

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KATE - WALL OF SILENCE BROKEN

Takeaway: Breaks 'wall of silence' and takes a step to get people focused back on the strength of its model

There's a first time for everything. KATE pre-announced that next Thursday it is going to pre-announce. As bizarre as this seems to be, the only negative is that it confirms a severe disconnect between this company's communication strategy vs. the fundamental strength in its business, and the upside to the long-term financial model. 

 

As we stated on January 14th (see below) we welcome a pre-announcement, as it bulldozes the 15 week wall of silence between the start of the abnormally long quiet period and the print. 

 

We think the company's presentation next week will quiet many of the errant bear cases  that have hurt the stock so much year to date. 

 

01/14/15 10:10 PM EST

KATE - RISK REWARD LOOKS SOLID HERE

 

Takeaway: There’s been way too much misinformation on KATE in Jan-to-date. Trends are better than people think. Risk/reward here is outstanding.

 

We think that KATE’s risk/reward on the long side is simply too great to pass up with the stock in the mid-$20s. KATE is down -17.1% since the start of the year (over a whopping 9 trading sessions), vs -1.1% for the XRT due to factors that we think largely have no merit. We think that the brand is extremely healthy, business trends are strong, and the growth trajectory is squarely in-tact. In short, based on the earnings ramp we’re expecting to be evident over the next year, we think that KATE is looking at 50% base case upside from today’s $26.80. That’s $13.50 upside with what we think is about $5 downside – a risk reward we’re more than prepared to take given our view that KATE probably has the best likelihood of doubling out of any US retail name this year.

 

KATE - WALL OF SILENCE BROKEN - kate financials

 

OUR ANSWERS TO NINE DAYS OF INVESTOR CONCERNS

1. Shhhh…. We’ll start with the concern that is the most valid, and that’s the Wall of Silence that emanates from the company. KATE’s quiet period started on Thanksgiving, and it might not report its fourth quarter until the first week of March. That’s about 15 weeks of sheer silence. Seriously, we’re going to see retailers on a January fiscal year report 4Q before KATE does. At this rate, nothing would make us happier than if KATE preannounced. It did so last year at this time – though that was before a series of investor meetings that are not happening this year. With no information coming from the company, investors are taking negative anecdotes and trading the stock down with nobody to answer the many questions that are swirling around. We can give it our best shot, but what we want is a press release out of KATE.

 

2. ‘Excessive Discounting’ in the Department Store Channel. This was what set the stock into its initial spiral. Analyst reports talked about excessive discounting, without a) adding the context of the fact that wholesale handbags account for only 15% of KATE’s sales, b) looking at a balance of discounts for a representative sample of wholesalers over the course of the entire quarter/holiday season, and most importantly, c) without looking at the discounting cadence versus last year. Looking at sequential changes in pricing without considering velocity, inventory, and what trends were a year ago is an otherwise useless exercise. In sum, we did not find anything in any of the reports that struck as valid or concerning.

 

3. Promotions Are NOT Greater Than Last Year. The graphic below shows the promotions in 2013 versus 2014. While there are some variances vs last year, one major point we can make is that there was NOT a more promotional cadence this year online. Rest assured that if KATE’s wholesale sales or store sales were suffering, there would be unexpected sales that would pop up online. That definitely did not happen.  Some subtleties…

  • In 2014 KATE moved the October surprise sale back a week into Nov.  Online traffic started to pick up immediately thereafter (see below).
  • Mid November 25% off offer was 2 days longer this year.
  • This year the Black Friday sales was shorter, but cyber Monday sale was longer.
  • Surprise sale in mid-December was a one day 75% off sale last year, this year it was a 2 day sale but it didn’t advertise any specific discount (gifts $99and under), as KATE shifts away from 70%+ ‘Flash’ Sales.
  • The 25% off sale items started earlier this year, will end up being 20 days vs 11 last year.

EXHIBIT 2: KATE PROMOTIONS VS LAST YEAR

KATE - WALL OF SILENCE BROKEN - kate ads 3

 

4. KATE On-Line Presence. We measure traffic trends for about 250 brands and retailers by triangulating many different sources. The reality is that no one source is accurate anything more than 2/3 of the time. But this approach has proven to be a very strong gauge of a company’s business. Could it be that there are excessive promotions driving traffic? No – as we already outlined in point #3 above. If we saw excessive emails promos and accelerating traffic we’d be concerned. No need to be concerned here.

  • Exhibit 3 is the Indexed traffic rank for katespade.com. We re-indexed in June 2014 (blue line) when we hit the YY mark. Not the way we typically look at this metric, but it does a good job accentuating the ramp we’ve seen in traffic rank since mid-October. You can see the divergence in performance compared to last year from July-September which coincided with the comp slowdown we saw in 3Q. Since it is a 90-day moving average the best reflection of the quarter in aggregate is the 12/28 reading – on that date Traffic Rank was up 55% YY.

EXHIBIT 3: KATE INDEXED TRAFFIC RANK

KATE - WALL OF SILENCE BROKEN - kate ex 3 

  • Exhibit 4 looks at the year over year change in traffic for both katespade.com and michaelkors.com. There is a meaningful divergence between the two starting in Week 22, which, because of the way we indexed, equates to 11/4/14. Week 30 marks the quarter end and as in the earlier chart is the best reflection of the quarter in aggregate because it is a 90-day moving average. The reading on that day was +55%. This is big for KATE with online accounting for about 20% of revenue compared to KORS who set a 2-3yr target to hit 10%. Overall demand in that channel looked very healthy throughout the quarter and especially so during the Holiday selling period.

EXHIBIT 4: Y/Y TRAFFIC RANK – KATE VS KORS

KATE - WALL OF SILENCE BROKEN - kate ex 4

  • Exhibit 5 shows the YY reach spread for KATE, KORS, and COH – which captures the change in total reach online versus a year ago. Anything above the x-axis is positve, anything below = negative. Trend here is the same as in previous charts though you can see the relative outperformance around Black Friday/Cyber Monday through the holiday in more detail when compared to KORS and COH.

EXHIBIT 5: KATE, KORS, COH REACH

KATE - WALL OF SILENCE BROKEN - KATE EX 5

 


Early Look

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Replay | HAIN: Best Idea Short Call

Yesterday we hosted a conference call reviewing our bearish thesis on The Hain Celestial Group (HAIN).  Link to audio replay and materials are below.

 

Audio Replay: CLICK HERE 

Presentation: CLICK HERE

 

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#Deflation and Volatility Perpetuated

Client Talking Points

EURO

$1.12! vs USD this morning.  And European equities absolutely love it – taking everything from Belgian to French stocks to +7-8% year-to-date in Burning Euro terms. For now, that crushes year-to-date returns in U.S. equities (SPX =0.2%, Russell -1.2% year-to-date).

COMMODITIES

But don’t confuse Draghi’s move with results where it matters; inflation expectations are falling faster now (Down Euro = Up Dollar à #Deflation Risk) with the CRB Index dropping -1.3% yesterday to multi-year lows. Copper is getting smoked to -10.2% year-to-date this morning, and Oil signaling a lower-low of support down at $44.82.

VIX

Short-term U.S. Equity beta chasing just knocks front-month volatility to higher-lows within a bullish intermediate-term TREND. Refreshed risk range for VIX = 16.05-23.05, so they can move this market as fast to the downside as they did to the upside. Be nimble and trade this macro market. Panic central planning perpetuates volatility.

 

 

*SPECIAL ALL-DAY LIVE EVENT JANUARY 27TH

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Special appearances by market experts, including best-selling "Currency Wars" author James Rickards, money manager Michael Holland, Jones Trading chief market strategist Michael O'Rourke and many more. CLICK HERE to sign up.

 

Asset Allocation

CASH 52% US EQUITIES 6%
INTL EQUITIES 3% COMMODITIES 0%
FIXED INCOME 31% INTL CURRENCIES 8%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1.  Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.

TLT

As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT). We believe the TLT has plenty of room to run. We strongly believe the dynamics in the currency market are likely contribute to a “reflexive deflationary spiral” whereby continued global macro asset price deflation and reported disinflation both contribute to rising investor demand for long-term Treasuries, at the margins.

HOLX

Hologic (HOLX) is a name our Healthcare Sector Head Tom Tobin has been closing monitoring for awhile. In what Tom calls his 3D TOMO Tracker Update (Institutional Research product) of U.S. facilities currently offering 3D Tomosynthesis, month-to-date December placements signaled a break-out quarter after a sharp acceleration in October and slight correction to a still very high rate in November. We believe we are seeing a sustained acceleration in placements that will likely drive upside to Breast Health throughout FY2015. Tom’s estimates are materially ahead of the Street, but importantly this upward trend in Breast Health should lead not only to earnings upside, but also multiple expansion and a significant move in the stock price.

Three for the Road

TWEET OF THE DAY

Yield Spread (leading indicator for rate of change in US growth) compresses 6bps vs yesterday - short $KRE on that

@KeithMcCullough

QUOTE OF THE DAY

Giving should be entered into in just the same way as investing. Giving is investing.

-John D. Rockefeller

STAT OF THE DAY

A WBUR poll showed that 75% of Boston residents want a public referendum on whether the city should host the Olympic Games.


CHART OF THE DAY: Central Planners + Panic Mode = Volatility

CHART OF THE DAY: Central Planners + Panic Mode = Volatility - 01.23.15 chart

 

Editor's note: This is a brief excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough.


...As we learned in both 2008 and 2011, when central planners move into panic mode, they also perpetuate volatility, across asset classes. That’s mainly because they are trying to artificially inflate (centrally plan) asset prices higher. 

 

In doing so, they open up what we call the risk of the market’s most probable range. What I’ve learned by doing over the course of the last 15yrs is that widening risk ranges tend to lead to rising volatility.  

 



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%
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