Underneath the Hood of January's Retail Sales Report

Editor's note: This is a complimentary research excerpt written by Hedgeye U.S. macro analyst Christian Drake. For more information on how you can subscribe to the fastest-growing independent financial research firm in America click here.

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Underneath the Hood of January's Retail Sales Report - g1


Bottom Line: It was an “okay” report for January with the Headline less flattering than the under the hood. 


  • Headline sliding a big -0.8% while holding flat on a year-over-year basis.
  • Gas Stations:  Sales at gas stations (which reflects the gasoline price drop) are obviously everyone’s key focus item and the biggest driver in the headline change – Nominal dollar sales at gas stations were down -9.3% month-over-month and -23.5% year-over-year.
  • Sales ex-Autos & Gas were up +0.2% month-over-month and accelerated to +5.7% year-over-year from +4.7% in December
  • Control Group: Retail Sales control Group (which feeds the GDP calculation) were +0.1% month-over-month and accelerated to +4.3% year-over-year from +3.3% last month
  • Industry:  Positive on balance - Sales growth was positive in 8 of 13 industries on a month-over-month basis.  On a year-over-year basis 8 of 13 industries saw sales growth accelerate relative to December  


*Rememberadvance retail sales are notably volatile and subject to big revision. They are also reported in nominal dollars, so price vs. volume effects have to be inferred.  


Underneath the Hood of January's Retail Sales Report - Retail Sales Summary Table

Retail Callouts (2/12): SKX, NKE App, Ports, JCP, WMT, TGT

Takeaway: New Nike App is another demonstration of DTC commitment. Bad for FL, HIBB, etc


Retail Callouts (2/12): SKX, NKE App, Ports, JCP, WMT, TGT - 2 9 chart2




SKX - 4Q14 Earnings


Takeaway: In line quarter with a solid algorithm on the P&L -- revs up 26%, EPS +53%. The mid-point of 1Q guide was 8% and 18% above consensus for revs and EPS respectively. But, keep in mind that SKX has never made it more than 8-quarters with out an earnings surprise on the down side. This quarter marks the 5th quarter in a row where the company beat but that has slowed dramatically from the big blowouts we saw at the start of the year. Sales are slowing sequentially on both a 1yr and 2yr basis. We're 3-6 months away from a tough margin comparison, and the company will lap the memory foam benefit from 2014 this year. Overall AUR trends for the year were a big benefit for SKX, the trend looks like this: -3.1% in 4Q13, +5.1% in 1Q14, +4% in 2Q14, +1.2% in 3Q14, and +7.4% in 3Q14. Gross margins ended the year about 40bps off all time highs and EBIT margins are creeping in the same direction. Though we have a negative bias on this name, we have to respect what the company has done over the past two years. The question for us is whether there is something structurally that has changed for the better at this company, or is it due for another Skecher-esque blow up. If we see the inventory/sales trend continue to drift lower in 1Q, this will make it to our Short bench for sure. 


NKE - Nike SNKRS App


Takeaway: There is a lot going on with this new Nike SNKRS app. The takeaway right up front is that it makes buying shoes easier on a mobile device. That's bad for retailers like FL, HIBB, FINL, etc. We haven't seen this type of technology before but it makes sense given Nike's push into the direct business. A few more nuances worth mentioning…

  1. Everything purchased on the app ships for free. The free shipping threshold on sits at $75. As we were typing this it made sense to us because this is a sneaker-head app which will probably not feature any styles under the current hurdle rate, but it’s a solid piece that the marketing department can use. We think that Nike moving to free shipping across the board is a 12-18 month development.
  2. The app will curate specific styles that fit the consumers taste. That's cool, but we think the more important feature is the limited/new release notifications. Limited releases are a big driver for the likes of FL. Nike now has a way of communicating with its target consumers directly about these releases.

Retail Callouts (2/12): SKX, NKE App, Ports, JCP, WMT, TGT - 2 12 chart1





Work at West Coast ports to scale back for 4 days



WMT - Walmart Canada announces expansion plans



TGT - Target Cuts 550 Jobs With More to Follow



GOOG, AAPL - Google Testing Payment Service


JCP - J.C. Penney expanding Disney shops to additional 116 stores



ZU - Zulily CFO Out


Scott Kessler Named Belk's Chief Information Officer



ASNA - Ascena Retail Group, Inc. Appoints Robb Giammatteo as Chief Financial Officer



Plac to Enter U.S. Retail Market




Takeaway: Not as bad as the headline number. Margins a worry although some of the higher cost related to employee retention


  • Challenging period for Macau
  • Gained market share in rolling chip
  • Repositioning in larger, higher quality junkets for CoD and Altira
  • MSC will open in 3Q 2015
  • Property margin:  25.1% in 4Q 2014, 28.5% in 4Q 2013. 27.5% in 3Q 2014
  • Luck-adjusted: $290m (25.8% margins) 
  • 85% of luck-adjusted EBITDA came from CoD
  • Employee retention program in 4Q:  required to increase retention by $5m (was not included in guidance)
  • CoD Manila:  from 1Q 2015, they will provide key operating metrics
  • 1Q 2015 guidance: 
    • D&A: $110-115m
    • Corp expense: $30m
    • net interest expense $40 ($11m Manila cost, $30 of capitalized interest)


  • Why margins down so much:  $5m incremental retention costs, operating leverage, lower mass market hold rates, lower entertainment revenues due to seasonality (more darker days)
  • Mass market hold rate decline:  need more time to do more research.  Hold rate may have been influenced by length of play, which was hurt by smoking ban.
  • Hit record levels in market share in mass and rolling chip volume share
  • CoD:  in terms of unit customers, was stable in 3Q and 4Q
  • New macau govt review:  non-gaming investment - MPEL feels very comfortable where they are.  
  • MSC hiring:  started mass recruitment recently
  • 2015 Macau GGR:  revised down to 'slight negative YoY'
  • CoD Manila:  strong domestic market 
  • Mocha clubs:  revenue decline due to smoking ban
  • Concerned about full smoking ban in 2016
  • Underutilized table capacity: continue to optimize table mix; happy to accept 200-300 new tables
  • Studio City has capacity for 500 tables:  MPEL believes they need 400 tables 'to make casino busy'.
  • Altira:  have created some of the nicest looking junket rooms. Will open 2 nice rooms before CNY 2015.  January did well, particularly in Rolling Chip. Has 3 out of the biggest 4 junket operators in Macau.
  • Smoking dispute:  100% comply with law
  • VIP Table productivity difference between Altira and CoD: at this point, it is quite close as Altira's has improved.  
  • Mass table productivity has also closed between the two properties
  • Promotional environment:  reinvestment in existing players has been similar in Q4 and Q3, from MPEL's perspective
  • MSC:  will attract daytrippers

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February 12, 2015

February 12, 2015 - dtr

CHART OF THE DAY: Beware of China Growth Slowdown

CHART OF THE DAY: Beware of China Growth Slowdown - 02.12.15 chart


Editor's note: This is an excerpt from today's Morning Newsletter written by Hedgeye Director of Research Daryl Jones. 


In the Chart of the Day, we show Chinese GDP growth going back 25 years. The clear takeaway from this chart is obviously that last year Chinese growth was at its lowest level in 24 years.  In part, the government is actively trying to slow growth, so this makes sense.  But even in a command economy like China, the ability of central bankers to manage a slow down in a perfectly orderly fashion is limited. 



"It ain't what they call you, it's what you answer to."

-W.C. Fields


Chutzpah in English connotes courage or confidence. In Yiddish, the language from which the word originates, chutzpah means extreme arrogance.  Which describes you?


As stock market operators, capitalists and business builders, we are often called arrogant, when in fact we are actually just confident. We are confident in our work ethic, teammates and vision. 


In case you missed it, a couple of days ago the Huffington Post ran an interesting article about Hedgeye. The author, Ben Walsh, came to our office for a day and had some very thoughtful questions about our company and business.  


Admittedly, he also struggled with the question of confidence or arrogance.  Nonetheless, he did have some interesting insights about Hedgeye and we thought we’d share the article.


Click image to read. 

Chutzpah  - 88


The fact is, none of us will ever build anything in life if we aren't confident.


Speaking of chutzpah, it's clear that embattled NBC news anchor Brian Williams has some. Although now that he's sitting in the penalty box for six months, feeling shame, perhaps that will change. In the cartoon below, we actually propose an alternative job for Mr. Williams. 


Chutzpah  - Williams cartoon 02.11.2015


Back to the Global Macro Grind ...


Chutzpah or confidence in your analytical abilities is a truly important characteristic of being a good stock market operator. For as you all know, and as Ben Graham famously said:


"In the short term stocks are a weighing machine, in the long run they are a voting machine."


Speaking of analytical abilities, on the Hedgeye team, our Internet analyst Hesham Shabaan has been on a run of almost epic proportions with his short calls on Pandora, Yelp and Twitter.  (If you aren't currently subscribing to his research, it would be worth emailing to do so.)


His newest Best Idea short is the Chinese juggernaut Ali-Bubble. Sorry, Alibaba. The core of his thesis is as follows:


1.    GMV GROWTH TO SLOW PRECIPITOUSLY: China's upper class drives the bulk of BABA's GMV.  There is no other plausible explanation after comparing BABA's reported metrics to China consumer demographic data.  That means the next wave of user growth will come from a much weaker consumer, leading to declining GMV/Active Buyer, and slowing GMV growth.


2.    MODEL FACING SECULAR PRESSURE: Slowing GMV growth naturally bodes poorly for commissions.  But the bigger issue is Marketing Revenues (~60% of total), which are facing secular pricing pressure as a weaker consumer pressures ad conversions and ROI.  We were already seeing this in BABA’s financials, but the street just took notice of this last print, because...


3.    TMALL CAN'T SAVE THE DAY: The one thing that was keeping us on the sidelines was the migration of GMV moving over to BABA's Tmall platform (where BABA collects commissions).  That sputtered out in F3Q15, leading to a sharp slowdown in Commission revenue growth, which exposed the weakness in its Market segment (both reported in its China Retail segment).  Tmall Mix shift can't be trusted a secular growth driver moving forward, so we don't need to worry about getting run over by it longer term.


Yes, BABA on some level is the Chinese Internet, but if its growth is decelerating and potentially going to disappoint, does it matter?


The other component to the thesis on BABA is the macro economic backdrop in China.  If BABA is indeed the majority of e-commerce that occurs in China, it will be on some level hostage to economic activity in China.


In the Chart of the Day below, we show Chinese GDP growth going back 25 years. The clear takeaway from this chart is obviously that last year Chinese growth was at its lowest level in 24 years.  In part, the government is actively trying to slow growth, so this makes sense.  But even in a command economy like China, the ability of central bankers to manage a slow down in a perfectly orderly fashion is limited. 


On Sunday we received Chinese trade data, which further emphasized a Chinese economy that is slowing.   While it is always dangerous to take data in isolation, Chinese exports in January fell by -3.3% from year ago levels.  Meanwhile, imports dropped a staggering -19.9%, which was the lowest level since the financial crisis of 2009.


More so than the U.S., China is an economy that is largely driven by exports.  In fact, in 2014 Chinese exports totaled $2.34 trillion, which are about 50% larger than the world’s second largest exporter, the U.S.  Combined, Japan and the EU are well more than 25% of Chinese exports.


The implication here is pretty clear, which is that the combination of a government that is trying to at least manage growth, if not slow it, with an economy that is dependent on exports to regions in which growth is definitely decelerating, means that the Chinese economy may be set up to disappoint on the downside.


Frankly, if the Chinese economy is going to disappoint, we aren’t sure there is a better way to play that then a company that is levered to Chinese wealth creation and trades at almost 14x 2015 sales.  Valuation, of course, isn’t everything, but it is a good measure of expectations.  And as they say about expectations, they are the root of all heartache.


Our immediate-term Global Macro Risk Ranges are:


UST 10yr Yield 1.62-2.09%

SPX 2026-2090

VIX 15.41-20.80

USD 94.04-95.64
Oil (WTI) 46.43-53.66
Gold 1 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Chutzpah  - 02.12.15 chart

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