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Macro Minute: What's The Next Stop For Oil?

Hedgeye Director of Research Daryl Jones recaps the results of today's Poll of the Day and outlines some of the key bullish and bearish elements in this “battleground commodity.”

 

 


Under Armour Strikes Gold With These Three Epic Athletes | $UA

Editor's Note: This is an edited excerpt from a research note sent out earlier this morning by our Retail team. Click here for more information on how you can subscribe to Hedgeye research.

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Under Armour has struck gold in the first 4+ months of 2015.

 

Stephen Curry? Nails all year long. That ultimately culminated in his MVP award announced yesterday. From overlooked college recruit to NBA's Most Valuable Player.

Under Armour Strikes Gold With These Three Epic Athletes | $UA - z curry

 

Add to that 21-year-old Jordan Spieth's record-breaking first major victory at Augusta last month...

Under Armour Strikes Gold With These Three Epic Athletes | $UA - z spieth

 

And don't forget Tom Brady's win at the Super Bowl in February...

Under Armour Strikes Gold With These Three Epic Athletes | $UA - z tom brady

 

It makes sense why Under Armour Founder/CEO Kevin Plank dedicated a significant amount of real estate to the company's athletes roster during the last conference call.

 

But, that's been expensive for UA as endorsements as a percentage of sales climbed around 400 basis points over the past two years with the top line growing at an average of 30%.

 

If there’s any real takeaway here it’s that as UA grows and succeeds in its own right, it is competing increasingly against the big boys (NKE, Adidas, Reebok, Puma) for marketable talent. It has a great advantage in that the brand is so hot, authentic and relevant. But those factors do not trump the economics associated with a higher ante-chip for sponsorship deals.

 

We can see what’s coming on the cost side, now we just need the revenue to follow. It’ll probably come. But anyone looking for margins to go up might be in for a surprise.


ZOES: Removing Zoe's Kitchen from Investing Ideas

Takeaway: We are removing ZOES from Investing Ideas today.

Please be advised that we are removing ZOES from Investing Ideas today. Below is a brief note explaining why from Hedgeye CEO Keith McCullough.

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This is a not a fundamental research call from Hedgeye Restaurants Sector Head Howard Penney – if your investment horizon is 1-3 years, this note may not matter to you.

 

From an intermediate-term risk management perspective (in line with my note from this weekend) this is a “grossing” down call of most things equities ahead of what may very well be a real US equity market correction.

 

ZOES: Removing Zoe's Kitchen from Investing Ideas - z yell

 

Other things to consider with a move like this (we call these Style Factors):

  1. Liquidity – total US equity market volume continues to decelerate on the up moves
  2. Size (meaning market cap) – Russell 2000 is signaling a potential phase transition from bullish to bearish
  3. Sector – with the company “news” out of the way, sector pressure associate with higher gas prices matters

KM

 


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Retail Callouts (5/5): UA, NKE, Adidas, FL, COH, HIBB, Chain Store Sales

Takeaway: UA struck gold with endorsements YTD. Adidas e-com strong=bad for B&M. Stuart Weitzman=costly for COH. HIBB opens 1k door, short of target.

EVENTS TO WATCH

Retail Callouts (5/5): UA, NKE, Adidas, FL, COH, HIBB, Chain Store Sales - 5 5 chart2

 

COMPANY HIGHLIGHTS

 

UA - Stephen Curry Wins NBA MVP

(http://footwearnews.com/2015/focus/athletic-outdoor/under-armour-sponsored-stephen-curry-wins-kia-nba-mvp-award-27425/)

 

Takeaway: UA has struck gold in the first 4+ months of 2015. Steph Curry has been nails all year long and that culminated in the MVP award announced yesterday. Add on to that the Jordan Spieth coupe at Augusta and Tom Brady win at the Super Bowl and it makes sense why Plank dedicated a significant amount of real estate to the company's athletes roster on the last conference call. But, that's been expensive for UA as endorsements as a % of sales climbed ~400bps over the past 2yrs with the top line growing at an average of 30%. If there’s any real takeaway here it’s that as UA grows and succeeds in its own right, it is competing increasingly against the big boys (NKE, Adidas, Reebok, Puma) for marketable talent. It has a great advantage in that the brand is so hot, authentic and relevant. But those factors do not trump the economics associated with a higher ante-chip for sponsorship deals. We can see what’s coming on the cost side, now we just need the revenue to follow. It’ll probably come. But anyone looking for margins to go up might be in for a surprise.

Retail Callouts (5/5): UA, NKE, Adidas, FL, COH, HIBB, Chain Store Sales - 5 5 chart1

 

adidas - eComm Strength Continues -- Negative Datapoint for FL and Brick & Mortar Retailers

 

Takeaway: Dot.com revenues for AdiBok were up 56% in constant currency. We typically flag UA and NKE when we discuss the shift away from traditional wholesale models to brands on the internet, but AdiBok has printed at least 10 straight quarter of 50% + sales growth online. The channel is still tiny, even smaller than NKE, at 3% of sales, but it’s a point of emphasis for just about every brand out there who competes in the athletic space. The way the math works, because of the incremental growth coming from DTC, we'd need to see over 6% growth in industry footwear sales to get brick and mortar sales growth positive.

 

COH - COACH COMPLETES ACQUISITION OF LUXURY DESIGNER FOOTWEAR BRAND STUART WEITZMAN

(http://phx.corporate-ir.net/phoenix.zhtml?c=122587&p=irol-newsArticle&ID=2043691)

 

Takeaway: We covered our long-standing short about nine months ago in the low $30s. The cash flow characteristics of the company were simply too attractive to us, which made an acquisition/LBO all too plausible – even if Coach is forever relegated to an outlet brand. But now the acquiree has turned acquirer. So to own Coach today you have to actually believe that 1) the (new) management team can turn around the core brand over a multi-year duration without sacrificing profitability, and 2) that this new deal will not destroy value.  We can’t believe either of those things.

 

Some Key Points:

  1. People forget that Sycamore Partners has owned Weitzman for less than a year – through its acquisition of Jones Apparel Group in February 2014. We can’t imagine that it would have shopped Weitzman so quickly if the view of its prospects were ‘just so good’.
  2. This is an example where one private equity firm shopped a company (Weitzman), and bypassed another PE company in favor of a strategic investor who is willing to pay more with shareholder’s capital.
  3. Don’t forget that Jones bought Weitzman in 2Q10. If there’s one thing you can say about JNY (and we’ll go to the mat on this one with historic examples), it’s that the company was second to none when it came to acquiring content/licenses and drawing out near-term cash flow at the expense of long term value. We’re near certain that this deal will end up costing COH well North of $574mm.

 

HIBB - Hibbett Sports opens 1,000th store, in Texas

(http://www.chainstoreage.com/article/hibbett-sports-opens-1000th-store-texas)

 

Takeaway: HIBB does not need a 1,000th store -- it needs an e-commerce business.  Regardless of what it needs, the consensus is expecting 1,011 stores by the end of the quarter (up from 988 stores at the end of 4Q). The problem is that the quarter just ended, and this 1,000th store apparently opened in May. Unless we're missing something, that suggests the company will fall short of store opening expectations this quarter.

 

WEEKLY RETAIL SALES (ICSC -- 80 General Merchandise Stores)

 

Takeaway: No major changes to Retail Sales trends -- while the headline numbers look very good relative to last year, the 2, and 3-year trends (which are more important to us) are holding relatively constant.

Retail Callouts (5/5): UA, NKE, Adidas, FL, COH, HIBB, Chain Store Sales - 5 5 chart3

Retail Callouts (5/5): UA, NKE, Adidas, FL, COH, HIBB, Chain Store Sales - 5 5 chart4

 

 

OTHER NEWS

 

M, RAD - Amex launches loyalty program

(http://www.chainstoreage.com/article/amex-launches-loyalty-program)

 

JWN - Nordstrom Board Of Directors Names Co-Presidents

(http://investor.nordstrom.com/phoenix.zhtml?c=93295&p=irol-newsArticle&ID=2043781)

 

NKE, AdiBok - Nike’s LeBron vs. Adidas’ D Rose: The NBA Playoff Signature Shoe-down

(http://footwearnews.com/2015/focus/athletic-outdoor/nike-lebron-james-adidas-derrick-rose-nba-playoffs-27636/)

 

SBH - Sally Beauty investigating reports of unusual activity on payment cards used at US stores

(http://www.canadianbusiness.com/business-news/sally-beauty-investigating-reports-of-unusual-activity-on-payment-cards-used-at-us-stores/)

 

COST - Report: Costco sues Johnson & Johnson, Utah

(http://www.chainstoreage.com/article/report-costco-sues-johnson-johnson-utah)

 

RKET - Rocket Touts 82% Growth for ‘Winners’

(http://wwd.com/business-news/financial/rocket-growth-winners-10123301/)

 

ECOM - ChannelAdvisor names new CEO

(http://www.retailingtoday.com/article/channeladvisor-names-new-ceo)

 

Former PetSmart CEO joins board of home décor chain At Home

(http://www.chainstoreage.com/article/former-petsmart-ceo-joins-board-home-d%C3%A9cor-chain-home)


BABA: Thoughts into the Print (F4Q15)

Takeaway: There could be some upside to the print, but more importantly, we expect the setup to progressively deteriorate thereafter through F2016.

KEY POINTS

  1. F4Q15 = CAPPED UPSIDE: There could be some top-line upside to the print since F4Q15 estimates are down 6% following the F3Q15 miss.  However, we’re expecting much of that upside would come from its ancillary segments, with China Retail limited by sputtering Tmall Mix shift (commission revenue) and growing mobile user mix (advertising take-rates).    
  2. NOT MUCH BREATHING ROOM: The setup will get progressively worse through F2016 since consensus concentrated their estimate reductions into F4Q15 and F1Q16 following the F3Q15 top-line miss.  The sell-side is now expecting accelerating China Retail revenue growth from F1Q16 through F4Q16; a challenge given the secular headwinds facing the model.  Further, the YHOO SpinCo will come more into focus as we move closer to year end.
  3. WHAT WE’RE KEYING IN ON: Mobile take-rates, particularly on the advertising side.  The bull-case suggests that mobile will approach desktop rates over time, but we suspect the opposite.  We believe much of the rise in mobile monetization rates has to do with user mix shift to mobile.  If that is the case, BABA may hit a ceiling on mobile advertising take-rates since mobile user mix may already be over 80%.

 

F4Q15 = CAPPED UPSIDE

We’re expecting a top-line beat off reduced consensus estimates following the F3Q15 miss.  However, we’re expecting much of that upside would come from its ancillary segments.  We’re expecting any upside to China Retail would ultimately be limited by sputtering Tmall Mix shift (commission revenue) and growing mobile user mix (take-rates).  Mobile is the connecting theme.

  1. Vendors pay less for mobile ads: BABA runs a self-serve ad platform, so the lower price is likely the result of lower demand from what we believe to a lower-conversion/ROI product (weaker consumer).
  2. Tmall still nascent on mobile: BABA’s initial focus for its mobile build-out was on Tabao, where BABA doesn’t collect any commission.  In turn, mobile GMV favors Tabao.

 

We built our Tmall tracker to gauge GMV mix percentage between the two platforms since the y/y change in Tmall GMV Mix has been the driving factor behind BABA’s surging commission revenue.  The deceleration flagged by our tracker suggests commission revenue growth will decelerate sharply this quarter.  Note that our tracker only focuses on desktop traffic, so this dynamic will be exacerbated by the secular rise in mobile user traffic.  In turn, we’re expecting a greater percentage of ad-click volume to favor the lower-priced mobile product.

 

That said, any upside to China Retail will be driven by the combination of Total GMV and/or take-rates.  Very small variances in either could swing the print either way, and we don’t have any real edge calling the quarter for either.  But given the headwinds mentioned above, we're not expecting a strong top-line beat on the quarter.  

 

BABA: Thoughts into the Print (F4Q15) - BABA   Tmall GMV Tracker F4Q15

BABA: Thoughts into the Print (F4Q15) - BABA   GMV vs. Commissions F3Q15

BABA: Thoughts into the Print (F4Q15) - BABA   Mobile GMV vs. Tmall Mix F3Q15

 

NOT MUCH BREATHING ROOM

The setup will get progressively worse through F2016 since consensus concentrated their estimate reductions into F4Q15 and F1Q16 following the F3Q15 top-line miss.  The sell-side is expecting accelerating China Retail revenue growth from F1Q16 through F4Q16 (from 30% to 42%); a challenge given the secular headwinds facing the model.  Further, the YHOO SpinCo will come more into focus as we move closer to year end.

 

As a reminder on our thesis, we believe China’s Elite is driving the bulk of BABA’s GMV.  Average spending on the platform is well in excess of what the average Chinese consumer could afford.  In turn, we expect GMV/Active Buyer to decline as a progressively weaker consumer joins the platform, leading to precipitous slowdown in GMV growth, which will pressure its entire model.  For more detail, see the note below

 

BABA: New Best Idea (Short)

02/11/15 11:12 AM EST

[click here

 

BABA: Thoughts into the Print (F4Q15) - BABA   Lock Up YHOO

 

WHAT WE’RE KEYING IN ON

Mobile take-rates, particularly on the advertising side.  The bull-case suggests that mobile will approach desktop rates over time, but we suspect the opposite. 

 

We believe much of the rise in mobile monetization rates has to do with a growing mix of mobile users.  The corresponding decline in desktop take-rates would suggest as much, especially since ~75% of BABA's marketing revenues are CPC, which require user clicks to drive revenues.  If growing traffic is driving mobile take-rates, then BABA may eventually hit a a ceiling on mobile advertising take-rates (we estimate mobile is already over 80%).  

 

BABA: Thoughts into the Print (F4Q15) - BABA   Ad take y y

BABA: Thoughts into the Print (F4Q15) - BABA   Mobile Mix F3Q15

 

BABA: The Mobile Debate

03/04/15 10:34 AM EST

[click here]

 

 

Let us know If you have any questions or would like to discuss in more detail.

 

Hesham Shaaban, CFA

@HedgeyeInternet

 

 


RTA LIVE: May 5, 2015

Here is the replay of today's edition of RTA Live. 


 


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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