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Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
Takeaway: Nike up to record 73% of FL purchases in 2014. RH expanding its Greenwich footprint. WMT cutting vendors to pay employees.
FL, NKE - Nike % of purchases up to 73% in 2014
Takeaway: Nike purchases increased 500bps from 68% to 73%, the largest bps jump we've seen since 2008 and now sits at the absolute highest level in forever. That doesn't sound like good risk management to us. Because of AdiBok's utter collapse and the absence of a clear cut number #2 in the US market, we don't know that FL has any other option. The best possible environment for an athletic retailer is when the major brands are heavily competing for shelf space. Nike and UA (to a lesser extent) won't have to fight as hard, or spend as much, to get incremental space at FL. Foot Locker wants nothing more than to have a strong staple of contenders looking to take a few points of share. It just doesn't have that luxury.
It's not like Nike and Brand Jordan are the only brands on FL shelves, its that FL's new concepts (House of Hoops, Fly Zone, and Yard Line) are 100% Nike. It's these concepts that FL is looking to for growth in its core business, which means the Nike allocation goes up as remodels continue. We can't say Nike will back away from this strategy because it increases its distribution footprint and showcases its tier 1b product (tier 1a is saved for its own stores and website) with very little cost of capital. But, if there is one company you don't want to be monopolized by it's NKE. Especially as it continues to ramp its own direct business after a multi-year investment cycle.
Lastly on gross margin, over the past 5 years we've seen gross margin head north as Nike percent of purchases has climbed about 1000bps. This seems counter intuitive due to the leverage Nike typically exerts on its partners, but we'd argue that this is due in large part to Nike's ability to drive traffic thus taking the attachment rate higher for things like socks, headwear, etc. But, what happens when there is nothing but Nike to attach to? We think it means FL will see the full brunt of the IMU pressure the company has been calling out.
RH - Adding 2nd Store In Greenwich Market
Takeaway: Link to full note CLICK HERE
WMT - Wal-Mart Ratchets Up Pressure on Suppliers to Cut Prices
Takeaway: 1) Walmart is cutting vendors again, but this time to pay employees instead of customers. 2)Not good for the rest of retail when the giant starts ratcheting down on suppliers. 3) This is exactly why we won't see commodity deflation (especially cotton) flow through on the P&L. WMT will set the tone and everyone will follow causing the industry to compete the benefit away.
SHLD - REIT
BURL - Burlington Stores, Inc. Announces Secondary Offering of Common Stock
MW - Report: Jos. A. Bank lays off 122 headquarters employees
TGT - Target releases fresh merchandise in rapid-fire 2015 overhaul
LULU - Lululemon Athletica Inc’s new men’s ‘anti-ball crushing’ pants grab media buzz and sales
RL - Ralph Lauren, USPA Continue Legal Squabbling
CBK - Macellum Delivers Letter to the Chairman of Christopher & Banks Corporation
Macerich Rejects Enriched Simon Offer
Torrid opening Chicago flagship; on track to open 60 stores in 2015
Our Tactical Asset Class Rotation Model (TACRM) remains an invaluable input in our research process. Listed below is a summary of noteworthy observations from the latest refresh (CLICK HERE to download the presentation):
In the context of the continued uptrend in cross-asset volatility (GFSI) – as well as the uptrend in the volatility of volatility (VVIX) – we hope you find these quant signals helpful in your risk management process. As always, feel free to ping us with questions.
Best of luck out there,
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