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RH - Why NSP is NOT An Issue

Takeaway: Punchline = if you’re worried about RH New Store Productivity, don’t be.

We’ve had a barrage of questions over the past 24 hours about Restoration Hardware’s new store productivity – or lack thereof. First off… there is absolutely positively nothing ‘funny’ going on here as it relates to asset productivity. Unlike an apparel retailer that adds four stores per week, RH is adding four this year. It is a different animal altogether, one where the timing of an opening date, revenue recognition, and whether or not a Legacy store is closed all meaningfully impact what people consider ‘New Store Productivity’. Second, this is absolutely positively nothing new. There have been anomalous factors impacting the reported numbers for nine months now. Someone simply decided to write a report yesterday highlighting it 2 weeks after the earnings report.


Also, let’s not forget the big picture here. This company just finished a seven-year period where it consistently shrunk its square footage footprint every year, and just started off an inverse period where it will grow square footage by 20-30% annually over another 5-7 years. Given its limited store count, unique customer ordering profile, and radical change in the box size, it’s a near certainty that there will be major swings in ‘new store productivity’.  The good news is that what has hurt RH for the past nine months should start to go the other way later this year.


There are 3 factors impacting the numbers, which are as follows:


1) Timing of Sq. Ft. Growth – RH grew square footage by 9.6% in the quarter. By standard thinking, that should flow through to the top line. But over the past 4 quarters, we’ve seen sq. ft. growth in the 5%-10% range while the spread between Brand Comps and Consolidate Revenue growth has been flat to negative. We understand why that draws red flags. In the most recent quarter – that is mostly explained by the timing of the new design gallery openings in Melrose (10/24/14) and Atlanta (11/21/14). If we exclude the net new square footage from these two stores, about 50k sq. ft., square footage growth in the quarter would have been flat. With the 16k additional sq. ft. from New York and Greenwich offsetting the lost square footage from the Legacy Store closures in Berkley, West Nyack, and Providence.

RH - Why NSP is NOT An Issue - rh 4 9 chart1 


2) Shipping Window – The main reason we need to exclude the additional square footage from Melrose and Atlanta is because of the 8 to 12 week (even longer with the port issues) fulfillment window between the time an order is placed and the time that product arrives in homes. Because RH doesn’t recognize revenue until that order arrives in a consumers home, there has been almost 0 benefit from the additional square footage -- YET. This will change in 1Q and build throughout the year.

3) Legacy Store Closures – The company has been paring back its store portfolio for the better part of 7 years. It is finally to the point where all the ‘bad’ Legacy stores are history. We’ve thought all along that RH would not close as many of its remaining legacy stores from this point forward (which is inconsistent with guidance) as it would likely utilize the real estate in new concepts, and would also serve as a buffer for new Design Galleries, which – while bigger – are still arguably not big enough for the respective markets.

a) To offer up some numbers, RH has 64 markets by our classification, and when we analyze each one (which we did) they all have the spending characteristics on high end household furnishings to support at least a 7,000 sq. ft. Legacy Store. That’s calculated by looking at the 2018 addressable market, assuming 10% market share, and 1,200/sq. ft. in productivity.

b) The way the math works, 22 of the 64 markets could support a store between 25k sq. ft. and 39k sq. ft., 16 could support a store between 40k and 59k sq. ft., and another 22 have the market characteristics that could support upwards of 60k sq. ft (that’s 22 Atlantas). Note: in the chart below each bar represents a market where RH currently opperates. The height of the bar signifies the size of the store each market could support. Blue line is an existing Legacy store, red line is a first gen Design Gallery, and green line is an Atlanta.

RH - Why NSP is NOT An Issue - rh 4 9 chart2

c) The decision to close those markets was calculated – meaning that the company could capture sales lost in a closed market in one of its existing locations or online. Some of those sales are probably lost for good, but the dollars that remain get allocated to either the direct channel or another store which is already in the comp calculation.

VNQ: Adding Vanguard REIT ETF to Investing Ideas

Takeaway: We are adding REITs (VNQ) to Investing Ideas.

Please note that we are adding VNQ to Investing Ideas today. Below is a brief note written earlier this morning by Hedgeye CEO Keith McCullough.


VNQ: Adding Vanguard REIT ETF to Investing Ideas - z22


On Tuesday I presented our Q2 Global Macro Themes that boiled down to Lower-For-Longer (on rates). 




#LateCycle USA: Employment, Inflation and Earnings follow an archetypic progression over the course of the economic cycle and always look best before the crest.  We’ll detail where we are in the current cycle, the likely trajectory for this trinity of late-cycle macro indicators from here and how best to be positioned in the twilight of the current expansion.  


#DemographicYields: Year after year in the post-crisis era, investors, economists and policy-makers alike have consistently seen their estimates for GDP growth, inflation and interest rates surprised to the downside. Perhaps there is some merit to the “secular stagnation” thesis most recently highlighted by Bernanke’s blog. In this theme, we pull back the curtains on the impact of demographics on the domestic and global economy. The conclusion? Lower-for-longer...

Oil’s #DeflationDeck: Taking a birds-eye view of oil prices throughout the peaks and troughs in business cycles provides essential context as deflation’s dominoes continue falling on a global scale. With the U.S. production machine changing the supply/demand dynamics in global energy markets, a deep-dive of this shift is key to generating sector-specific alpha into


One way to invest in Lower-For-Longer, from an equity perspective, is being long US REITS. They are testing the low-end of my immediate-term TRADE range today, but remain bullish from a TREND perspective.




McCullough: Secular Stagnation Is a Real and Systemic Threat


In this brief Q&A excerpt from Hedgeye’s Q2 quarterly macro themes call, CEO Keith McCullough discusses why former Fed chairman Ben Bernanke has the story completely wrong on secular stagnation.

Regulatory Shout-Out | New York Judge To Congress: Write A Law, Already!

By Moshe Silver

Regulatory Shout-Out | New York Judge To Congress: Write A Law, Already! - jed1


New York district judge Jed Rakoff continues to annoy folks by insisting that government do its job.  In his famous rant about a proposed settlement between the SEC and Citigroup over allegations of billion-dollar fraud, Rakoff said “you’re asking me to exercise my authority, without exercising my judgment,” pushing back against the age-old practice where the SEC reaches a settlement with an accused party and a court rubber stamps it.  The standard outcome is, the accused pays a lot of money to the SEC, the SEC doesn’t identify accused individuals, no one has to admit to anything, and the firm or individuals who paid the settlement resume Business As Usual.


If, like us, you get your daily dose of rage by watching the ongoing blatant collusion between the worst of Wall Street and government’s “brightest and best,” you may recall that Rakoff held firm on not approving the Citi/SEC settlement without knowing the details.  Finally, the SEC and Citibank got together and sued in appeals court to force Rakoff to sign off.  We think this looks like the sheriff and the burglars getting together to poison the watchdog, but the courts are generally not interested in our opinion.


Now, Judge Rakoff is giving the SEC the go-ahead to proceed with a civil insider trading case against two stockbrokers, even though federal prosecutors have dropped the case. 


Prosecutors are treading gingerly after an appeals court threw out the insider trading convictions of Anthony Chiasson and Todd Newman, respectively of Level Global Investors and Diamondback Capital.  This was a mega-high-profile case – complete with FBI raids of hedge fund offices in broad daylight – and was considered a major win for the government.  Until another arm of that same government ruled that – in the absence of clearly defined insider trading laws – prosecutors had to meet an increasingly heavy burden of evidence, the further the insider tip was from its source.  In the Newman case, the fund managers were found to have benefited from tips that originated three or four degrees of separation away from them and their firms – hardly the same as handing the CFO a bag full of unmarked $100 dollar bills to get him to tell you what next week’s earnings report will be.


Judge Rakoff found that, while prosecutors may not have been comfortable bringing a criminal case, the charges meet the lower standards of evidence for civil cases, and the SEC could proceed with its independent case.


But Judge Rakoff also wrote that “difficulties” arise from the current scenario, where courts and regulators are forced to make insider trading law case by case.  “The tensions thereby created cannot always be resolved in satisfactory fashion,” he wrote, “thus reinforcing the need for Congressional action.”


Late last year Supreme Court justices Scalia and Thomas wrote that it is not up to appointed members of government agencies (the SEC, the Justice Department) to decide what constitutes a federal crime.  The court has declined to hear insider trading appeals, indicating a general discomfort with letting the SEC call the shots on a case-by-case basis, in the absence of actual legislation.


Judge Rakoff suggests that Congress should make black-letter laws defining insider trading, thereby telling prosecutors when they can bring future cases.  These laws would clarify categories requiring punishment for wrongdoing – which, unlike the current practice of settling with the Commission, would require identifying wrongdoers by name and maybe even putting them in prison.


Following up on our favorite legal doctrine, the Law of Unintended Consequences, we note that, the minute Congress sets out to write laws defining securities fraud in such a way that people run a real risk of going to prison, there will be a massive shift in campaign funding.


According to the website OpenSecrets.org, the financial and securities sector comes in as far and away the largest donor to Congressional races – nearly twice the amount given by the next-largest donor group: lawyers (who get paid to represent guys on Wall Street… are you beginning to see where this is going?) 

We applaud Judge Rakoff for telling Congress it’s time they actually do their job.


A man can dream, can’t he?


Moshe Silver is a Managing Director at Hedgeye Risk Management and author of Fixing a Broken Wall Street.




Takeaway: Inclusive of the holiday distortion, the separations side of the labor market continues to signal ongoing strength.

Seasonal distortions in high frequency macro data during peri-holiday periods are notoriously prevalent.  Floating holidays, such as Easter, are particularly challenging in terms of normalizing so investors should take an un-convicted view of the single-week seasonally adjusted initial claims data in isolation.   


Indeed, over the past five years, the holiday week data has carried a discretely upward bias with the week-over-week change averaging +20K.  This morning’s data – which was up +14K WoW - is largely congruent with the recent historical tendency.


Holiday related noise aside, the broader conclusion remains unchanged.   With single week claims holding below the 300K level, rolling claims improving to their best level since June of 2000, and the year-over-year change in rolling NSA claims improving to -13% in the latest week, the separations side of the labor market continues to signal ongoing strength.   


And while conspicuous weakness in the energy sector remains  a concern along with emergent weakness in goods employment (strong dollar, declining export demand, lower energy sector investment, and residual port shutdown impacts), strength in the balance of the economy continues to swamp that duo of drags, for now.


INITIAL CLAIMS | EGG-CELLENT - IC Easter Wk historical


The Data

Prior to revision, initial jobless claims rose 13k to 281k from 268k WoW, as the prior week's number was revised down by -1k to 267k.


The headline (unrevised) number shows claims were higher by 14k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -2.25k WoW to 282.25k.


The 4-week rolling average of NSA claims, another way of evaluating the data, was -13.3% lower YoY, which is a sequential improvement versus the previous week's YoY change of -11.3%


Our basket of energy-heavy state claims fell in the week ending March 28th. However, as oil prices remain low, the spread between that basket and the U.S. as a whole continued to widen to 27.5 from 24.8.














Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


Keith's Daily Trading Ranges [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 April 09, 2015 at 08:07. Click link above to subscribe.

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Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.