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    MARKET EDGES

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Takeaway: RL- No Rush Here. M- This Was A Bad Number. LULU- Board doing what it needs to, shake up management. KSS selling banner ads on e-comm site.

EVENTS TO WATCH

Retail Callouts (5/13): RL, M, KSS, LULU, NKE, AMZN - 5 13 chart2

COMPANY NEWS

RL - No Rush Here

Nice headline beat by RL ($1.41 Street at $1.32), but this can hardly be called a victory with the company earning $1.83 last year. In fact, comps were down -4.0% -- a sequential slowdown on a 1 and 2-year basis. The ensuing algorithm was less than stellar. Total revenue was up a whopping 1% due to Wholesale (up 2.4%), Gross Income down 1%. EBIT down 16%, and EPS down 23%. On the plus side, the cash cycle was 'less bad' -- up only 2 days vs last year to 122 days. Also, on a go-forward basis FX was guided to -450bps, a positive delta from the -550bps handed out at the end of RL's 3Q. On top of that RL upped the stock repo authorization by $500mm to a total of $580mm. But truth be told, we'd rather it be executing better on its business and not be buying any stock than the opposite. Also a $580mm authorization for a company with $11.3bn in equity value and $1.15bn in cash and short term investments sitting on the balance sheet is hardly anything to write home about.

We believe in this brand. It's not dead, and not dying -- like some people are suggesting. And we love to buy stocks of great brands when the top line is under pressure, margins are caving (due to sustained investment) and capex is going up. This is exactly what RL is right now. But there's something that we can't put our finger on right now with Ralph compared to other cycles. Maybe it's that the company is not buying back geographic/product licenses and therefore the ROI on investment is simply harder to calculate. That's an opportunity for those who can figure it out faster than us. But we can't shake the concern that this is another 1-2 year investment cycle that might not end until the CEO and Founder (who is immensely involved in the day to day operation) is in his late 70s.

Retail Callouts (5/13): RL, M, KSS, LULU, NKE, AMZN - 5 12 chart4

M - This Was A Bad Number

  1. 10% earnings miss was the worst downside surprise M has posted since 2Q07. This is the first time the company has not grown earnings since 2010. Comps decelerated by 270bps from 2% to -0.7% on a 2yr basis sequentially. Not a good barometer for the rest of the industry.
  2. Deleveraged -0.7% sales growth into -7% EPS growth. Gross margins up 10bps as inventories looked good coming out of 4Q. SIGMA trajectory moved into Quad 3 as margins deteriorated and sales/inventory spread -3.5%. SG&A delivered by 60bps. And management indicated that the brunt of the port issues and sales miss would be felt in 2Q15 on the gross margin line.
  3. Company closed Blue Mercury acquisition during the quarter, but no detail given on top line benefit. Really too small to move the needle.
  4. Holding guidance for the year despite the miss. Makes the earnings cadence very back half weighted as comps get tougher industry wide. Have to assume that EPS growth accelerates to low DD to get to the low end of the guided range from negative in the first half of 2015.

Retail Callouts (5/13): RL, M, KSS, LULU, NKE, AMZN - 5 13 chart3

LULU - lululemon announces departure of evp, global retail

(http://investor.lululemon.com/releasedetail.cfm?ReleaseID=912822)

Takeaway: Schweitzer has been with the company since store 1. Working her way through the ranks from 'Educator' to near the top of the company org chart as the Head of Retail ops. The management team that Chip built around him may be good enough for a $500mm company, but not a company on it's way to $4bil. That was on full display at the Analyst day the company hosted in April of 2014. With Advent now on the board and new blood in the CFO and Head of Retail seats, it appears the board is taking the steps necessary at LULU to get a management team in place that can support the next leg of growth.

KSS - Selling Banner Ads?

Takeaway: 1) We've never seen this from a retailer, ever. There are probably a few e-comm only operations selling banner ad space on the company's homepage, but for an established Brick and Mortar retailer, this is uncharted territory. The point is that M, JCP, DDS, you name it, haven't gone to the ad well to help offset an increasing cost structure as unit growth and comps slow. To us it seems a little bit desperate. 2) It's a bit ironic that KSS is posting AMZN ads on its site. KSS probably doesn't control all of the content posted to its site, but really Audible, who is owned by Amazon?

Retail Callouts (5/13): RL, M, KSS, LULU, NKE, AMZN - 5 13 chart1

OTHER NEWS

NKE - Did Nike Say 10,000 Jobs If TPP Passes? Why Not 20,000?

(http://tinyurl.com/lhldem2)

AMZN - Coming This Summer: U.S. Will Run Out of Internet Addresses

(http://www.wsj.com/articles/coming-this-summer-u-s-will-run-out-of-internet-addresses-1431479401)

Fitbit’s Pending IPO Shows Wearables Gaining Traction

(http://wwd.com/business-news/technology/fitbit-ipo-wearables-growing-quickly-10127730/)

Bonobos founder shifts to chairman, hires Coach exec as CEO

(http://www.chainstoreage.com/article/bonobos-founder-shifts-chairman-hires-coach-exec-ceo)

JWN - ​Nordstrom hiring 1,000 people for Vancouver store

(http://www.cbc.ca/news/canada/british-columbia/nordstrom-hiring-1-000-people-for-vancouver-store-1.3071914)