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

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.


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





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


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





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



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



Fitbit’s Pending IPO Shows Wearables Gaining Traction



Bonobos founder shifts to chairman, hires Coach exec as CEO



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


Keith's Macro Notebook 5/13: USD | Oil | UST 10YR

Hedgeye CEO Keith McCullough calls in from the road to share the top three things in his macro notebook this morning.


Takeaway: GTECH results a snoozer but management was reluctant to discuss IGT's awful performance.


  • Will not talk about IGT standalone results. IGT's results are for informational purposes only.
  • Italy unfavorable sports betting by 10% points (which was in-line with industry average). This will normalize over time.
  • North America:  Same-store benefited from jackpot and instant ticket segments
  • IGT's (Stand-alone) March quarter not indicative of its future
  • Confident synergies remain on track
    • Have consolidated production/maintenance...closing plants in Vegas and Canada
  • FX did not have a meaningful impact on operating income 
  • Americas:  Instants ticket sales (Double-digit increases in California and North America)
  • MegaMillions declined in 1Q
  • Gaming shipments declined due to hard comps boosted by Canada last year
  • International: instant ticket sales led by UK growth
  • Expect Greek VLTs revenues in 2H 2015
  • Italy:  machine gaming revenues impacted by Stability Law implementation. Excluding that rule, revs would have been flat.
  • 2Q results will be on a consolidated entity basis and reported in US$


Q & A

  • IGT results below expectations
  • IGT: Reduction in receivables have improved its profitability
  • Will provide some guidance at end of Q2. Expect 2H 2015 will have better performance, particularly on IGT's product sales with the introduction of new products
  • Leverage target at closing:  4.5-4.9x ; longer-term, will be at 4x or below 4x
  • Synergies:  on time and on target
  • IGT: conversion of units in Mexico impacted results.  Weaker period in industry due to less newer openings.  
  • Installed base count will be more balanced as a combined entity
  • Pro forma balance sheet shouldn't change much when translated to US GAAP.
  • Italian Lottery contract: waiting for issue of tender. Expect 1st installment by end of year.
  • IGT:  conversion of 1,000 units in Maryland which fully explain the ASP difference. 
  • GTECH:  no units were converted
  • IGT/GTECH Oregon units: 300 IGT units. Basically concluded.
  • Cost of debt:  5.25%-5.50% (depending on currency and product)
  • Debt:  50% in euros, 50% in dollars
  • 2015 Maintenance capex: US$150-$170m
  • 2015 growth capex:  some capex related to VLT Greece
  • Do you need to borrow additional funds?  It depends.
  • IGT:  have some visibility in the new openings (mainly Massachusetts)
  • GTECH Italian taxes paid:  paid 40% ($38m).  Finalizing contracts and resolution before next payment is due. GTECH will only pay their portion of the 60% ($5m euros).
  • IGT product sales will improve in US and international going forward. Spielo leading the charge. 
  • IGT product sales in 1Q 2014 not in 1Q 2015:  1,000 units in Illinois
  • Synergies:  will execute 65% by 1Q 2016
  • Property sales: different mix sold resulted in lower intellectual property fees.  Inventory write down.

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.

McCullough: 'Now I Don't Have a Catalyst, So Its Bear Time'

Editor’s Note: This is an edited amalgamation of tweets from Hedgeye CEO Keith McCullough’s Twitter feed yesterday. The 10-Year U.S. Treasury yield has dropped 14 basis points from 2.36% to 2.22% since.

*  *  *  *  *  *  *

McCullough: 'Now I Don't Have a Catalyst, So Its Bear Time' - z bear


Now that Fixed Income volatility has gone into phase transition mode, Equities look ripe to be next. In #timestamped terms (Real-Time Alerts), we'd be short the Russell (IWM) after being bullish on it in Q1 I'd also be net short US Equities for the first time for real in 2015. Timing matters.


On Bond Yields, this is the second day of loud and large scale sentiment capitulation. We were right on long-duration bonds for 16 months, then wrong for a month...But the truth is that you could have said I was wrong on long-term bond yields at every lower-high since Jan 2014 too.


This is a very interesting position to re-load and/or establish new positions in bonds - especially for those who missed the whole ride. If your outlook is for more Global #GrowthSlowing, there are very few ways to express that bullishly other than through lower-yields. That is, of course, unless "this time is different" and bonds go down as growth is slowing. Otherwise, the Bears on bonds have to hope to get lucky and see a sentiment (charts) reversal in bonds.


For the record, if the big bang theory on bonds is in motion, everything and anything you own is dead. And I wouldn't rule that out - that's why I like the Russell (IWM) short better than selling my long-term TLT idea. Incidentally, as you know, earnings are #LateCycle. Perma bulls learned this lesson the hard way buying the 2007 peak. (see chart below):


McCullough: 'Now I Don't Have a Catalyst, So Its Bear Time' - z west


Looking for SPX to test 2002-2013 zone at some pt this summer time, regardless - better way to be short than making up bond stories like some. Don’t forget, I was bullish on US equity beta into the last Fed meeting. 


Now I don't have a catalyst so its bear time.

May 13, 2015

May 13, 2015  - Slide1 


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2nd Big Capitulation Day

Client Talking Points


Meanwhile the U.S. Dollar continues to break down from an immediate-term TRADE perspective as the U.S. economic data continues to slow in rate of change terms. The EUR/USD risk range has tightened up as well (higher-low, which is new) to  1.09-1.13.


Oil loves Down Dollar; absolutely loves it – but does the consensus Consumer bull case on “lower gas prices”? WTI is up another +1.2% this morning to $61.53 and is also signaling higher-lows within its $55.06-62.36 risk range. 


Epic moves in the UST 10YR, almost daily, now – but the Bond Bears were backed off by another 13-14 basis points on the UST 10YR from around this time yesterday (2.36% drops to 2.22%). We would have to see a sustainable close > 2.39% to shake us out of Treasuries.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

One way to invest in Lower-For-Longer, from an equity perspective, is being long U.S. REITS (VNQ). The highly anticipated Non-Farm Payrolls report came and went Friday, and it was largely a non-event. The change in non-farm payrolls was +223K vs. consensus estimates of +228K for April. Considering last month’s report was a bomb (revised to 85K from 126K), April had an easy comp. Our thesis on interest rates remains lower-for-longer, but that view is being tested in the short-term.


iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. It was a relatively light data week for housing with weekly mortgage application data and the March employment report offering incremental updates on the current state of housing demand.  On the market side, interest rate volatility remained a concern for the public homebuilders but one we believe remains shorter-term in nature absent another expedited, step function increase in interest rates. We think the rate related pressure will be largely transient unless we see a further back-up in mortgage rates on the order of +50-100bps from here – a potentiality we would not view as probable at this point. On the fundamental side, the drumbeat of improvement remains ongoing.


The U.S. dollar has gone on a big reversal since the Fed’s March 18th meeting. Since the meeting, the dollar has moved lower and rates higher. This short-term move in rates has caused confusion with respect to our lower for longer call. Put simply, we have been wrong on the direction of our four macro tickers in the newsletter. A continuation of this trend will force us to re-evaluate the longer term call.

Three for the Road


NEW VIDEO | Will Rising #Rates Derail The #Housing Train?


via @HedgeyeUSA + @Hedgeye_Comdty

cc @KeithMcCullough



We all have experiences in our lives that change us, and we all learn from people, like my dad, but at the end of the day, it's only us. And we're only responsible to make ourselves happy.

Tom Brady 


The average American walks a total of 110,000 miles in their lifetime, that’s equivalent to 4 times around the world.

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