"So, that’s what I think you should be doing again – taking down some of your gross exposure to the long side of US Equities." -Hedgeye CEO Keith McCullough to subscribers in this past weekend's Investing Ideas.
Takeaway: Below please find a replay of our discussion with David Sprinkle on the cereal category.
Thank you for those you were able to make the call today. We wanted to provide those who did not have a chance to tune in, to listen to what we learned about the cereal category today. Please click on links at the bottom of the page to listen or view the presentation.
- The cereal category is not in decline, it is merely at a point of maturity
- Manufacturers have to lead in innovation to lead in the category
- Cold breakfast cereal has the second highest household usage rate for breakfast, eggs are #1
- Opportunities for additional growth are in niche markets, such as ancient grains and muesli
- Breakfast is the most important meal in the eyes of the consumer
Audio Replay: Click Here
Presentation: Click Here
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.”
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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.
Add to that 21-year-old Jordan Spieth's record-breaking first major victory at Augusta last month...
And don't forget Tom Brady's win at the Super Bowl in February...
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.
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.
Other things to consider with a move like this (we call these Style Factors):
- Liquidity – total US equity market volume continues to decelerate on the up moves
- Size (meaning market cap) – Russell 2000 is signaling a potential phase transition from bullish to bearish
- Sector – with the company “news” out of the way, sector pressure associate with higher gas prices matters
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
UA - Stephen Curry Wins NBA MVP
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.
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
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:
- 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’.
- 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.
- 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
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.
M, RAD - Amex launches loyalty program
JWN - Nordstrom Board Of Directors Names Co-Presidents
NKE, AdiBok - Nike’s LeBron vs. Adidas’ D Rose: The NBA Playoff Signature Shoe-down
SBH - Sally Beauty investigating reports of unusual activity on payment cards used at US stores
COST - Report: Costco sues Johnson & Johnson, Utah
RKET - Rocket Touts 82% Growth for ‘Winners’
ECOM - ChannelAdvisor names new CEO
Former PetSmart CEO joins board of home décor chain At Home
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