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May 14, 2015

May 14, 2015 - slide 1 fix

RTA Live: May 14, 2015

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



KSS Quick Take - Not the Beat a $75 Stock Expected

Takeaway: Not the beat a $75 stock expected.

The headline beat does not mean much here, particularly given that the print is below where estimates were before it guided down in February. The key here is that the prevailing view over the past quarter has been that the KSS story is bullet proof. The company had just printed a 3.7% comp in 4Q, and people could not tell how much was easy comps, gas, or a structural change in the company’s model (new brands, beauty, rewards program). Management had an extremely active NDR schedule both on the road and at KSS HQ – where it seemed to perpetuate that the company was on the right path. Then the latest data from some of the more widely used services as well as commentary from its top competitor (JCP) all pointed toward comps of 4%+.


But here’s what we got…

  1. Only a 1.4% comp – far below the 4%+ expectation, and a sharp deceleration from the 3.7% comp that KSS reported previously that the Street seemed to think was straight-lineable throughout 2015.
  2. It was also well below JCP, which came in at 3.4%. We still think (based on our surveys) that KSS took $1bn in sales from JCP when it was down and out, and JCP will either earn it back, or buy it back. Either way, it’s bad for KSS.
  3. The upside was entirely due to lower SG&A spending, which grew at 1.6% versus guidance of 4-5%.  Let’s face it, if there’s any line item a company like KSS should be extremely accurate, it’s SG&A. It’s clear that they guided up on this line simply to take EPS numbers down for 1Q.  We think it will be tougher – if not impossible – to leverage this line once we see the changes in the credit program hit critical mass later this year (as outlined in our Black Book presentation on Tuesday replay link: CLICK HERE, materials link: CLICK HERE).
  4. Gross margins were up 18bps, which is nice. But at the same time we saw 5% growth in inventories, implying a 9-point negative swing in the sales/inventory spread – something we never want to see.


We still think that EPS will steadily march below $3.00 – at a time when consensus numbers are going over $6.00. There’ll be ebbs and flows by quarter, but overall we think this one will serve as an appropriate reminder when people are tempted to get bulled up on KSS’ multiple anytime in the future.


Weak U.S. Economic Data

Client Talking Points


The Euro is up +0.6% to $1.14 - two points here: A) the immediate-term risk range is now tightening and B) weak U.S. economic data is Dollar bearish, Euro bullish – is there a case for Euro 1.18-1.19 into the next Fed meeting? Yes – we’re starting to think that’s probable.


Oil would absolutely love EUR/USD $1.19 – we can get you to $71 WTI on that, so it’s a risk management scenario to consider ahead of a bearish U.S. GDP report on May 29th and the potential for another slowing U.S. jobs report on June 5th (FOMC = June 17th). 


The best sector to be short on the fundamental news yesterday was Consumer Discretionary and earlier this week we signaled SELL on U.S. Retail (XRT) too – Euro up (Dollar Down) + Oil up + tough U.S. consumption comps + labor cycle rollover.

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


The Macro Show, Live @ 8:30AM ET https://app.hedgeye.com/insights/44089-the-macro-show-live-with-keith-mccullough-today-8-30am-et… via @hedgeye



The trouble with not having a goal is that you can spend your life running up and down the field and never score.

Bill Copeland


Americans paid over $44 billion more in taxes during this year's filing than they did in 2014, according to the Congressional Budget Office. Meanwhile, income-tax refunds stayed relatively flat, at $202 billion.  

Confusion's Masterpiece

This note was originally published at 8am on April 30, 2015 for Hedgeye subscribers.

“Confusion now hath made his masterpiece!”

-William Shakespeare


Oh boy, are macro markets confused by the collision of central plans now!


Shakespeare fans will remember the aforementioned quote from Act II (Scene 3) of Macbeth. It’s a great metaphor to use in answering the question I get from most long-term risk managers: “How does this all end?


While it would be reckless to predict precisely how it ends, I have a pretty good idea how the beginning of the end looks – confusing. Confusion in the timing of central planning breeds contempt. And that perpetuates volatility which, in due course, crushes confidence.

Confusion's Masterpiece - Card house cartoon 12.03.2014


Back to the Global Macro Grind


How confident are you in explaining how rates can ramp to the top-end of their respective ranges as the US Dollar goes straight down? In rate of change terms, German Bund Yields doubled in 48 hours! Irrespective of what the Fed said, did that have anything to do with the US move in rates? Big time.


Was the rates move linked to the currency and commodity move (Down Dollar = Up Oil, Energy Stocks)? I don’t think so. The FX (foreign currency) market move and Global Rates moves went in the opposite direction of what most correlation models would have predicted. #Fun? Not.


But isn’t this what we’ve all signed off on? Wasn’t central planning of markets supposed to be a “smoothing” exercise whereby all of us “smart” people could make linear-assumptions to drum up macro correlation models for all of our asset allocations and bonuses?


Let’s get real here. Macro markets just did.


Setting aside the non-linear-multi-standard-deviation-move in both German Bund Yields and the European Currency for a minute, let’s bring this discussion back to the USA and what the Federal Reserve said yesterday:


  1. On Growth – ‘our forecasts continue to be too high, but it’s all “transitory” because it snows in the winter time’
  2. On Inflation – ‘our forecasts on 2% inflation were wrong, but that’s transitory too – everything we get wrong is’
  3. On Timing –  ‘rate liftoff is data dependent on the labor market – so run money on best #NFPGuesses’


That last point isn’t a joke (neither are paraphrasing points 1 and 2). The Fed has effectively reduced the timing of its first rate hike to the most lagging of #LateCycle economic indicators. And now you literally have to guess what the next jobs number is going to be.


Since my research team cannot predict an un-predictable number (we’ve tried to build models to front-run BLS Labor report data and, trust me, I’d have a prediction if there was a repeatable #process to be accurate with one), guessing is the only option.


Confused yet? You should be. Much like the March 18th Fed decision on “to, or not to, be lower on rates for longer” the May 8th jobs report is a binary event:


A)     Jobs report “beats” useless forecasts of lagging indicator = Dollar Up, Rates Up, Oil Down (hard)

B)      Jobs report “misses” useless forecasts of lagging indicator = Dollar Down, Rates Down, Oil To Infinity And Beyond


“So”, as my hedge fund friends in Chicago would say, place your bets!


Oh, did I mention that this is only a 6-7 day trading bet? Dammit this is getting good! Not only do we have to now day-trade US monetary policy based on best-guesses, but we have to completely ignore this longer-term thing called the cycle, at the same time.


What happens if the June and/or July jobs reports are bad? What happens if the May report is bad? I can tell you one thing – the entirety of Old Wall Consensus isn’t predicting anything bad – every question I get on rates has to do with ‘what if it’s good?’


There is nothing good about confusion in macro market correlations when volatility accelerates. There is no risk management #process in guessing either. So I’m selling in May and getting the heck out of the way. For now, going to cash beats confusion.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.84-2.06%

SPX 2085-2117
RUT 1237-1260

VIX 12.96-14.91
USD 95.12-97.66

EUR/USD 1.05-1.12
Oil (WTI) 52.96-59.69

Gold 1180-1215


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Confusion's Masterpiece - z 04.30.15 chart


SHAK is on the Hedgeye Best Ideas list as a SHORT.


Last night SHAK posted impressive 1Q15 earnings $0.07 above-consensus 1Q15 EPS of $0.04 on same store sales of +11.7% vs consensus' +5.1%.  In the release management raised full-year same-store sales guidance to "low-to-mid single digits" vs. prior "low-single-digits."  Our bearish view is that the market is placing too much value on SHAK's differentiated burger concept.


The better than expected 1Q15 EPS was driven by:

  1. Stronger than expected operating margin
  2. Better 1Q15 comps of +11.7% vs. consensus’ +5.1%
  3. Price of +6.0%
  4. Sequential better traffic +2.1%
  5. Positive mix of +3.6%
  6. Strong store-level margins of 25.7%
  7. Better-than-expected food and paper costs and sales leverage on other operating line items


Management Increased 2015 guidance following 1Q15 results:

  1. 2015 Revenue of $161mm to $165mm vs. prior $159mm to $163mm
  2. Same-store sales growth of low-to-mid-single digits vs. prior low single digits.
  3. Unit development guidance of at least 10 new domestic company-operated Shacks and at least five international licensed Shacks in U.K. and Middle East.


Based on the guidance management provided, we believe they are either 1) being less than genuine or 2) don’t know the tone of the business going forward.  The most visible place of uncertainty is in same-store sales guidance.  In the model for the balance of 2015, we are assuming +6% price and +2% mix good for 8% same-store sales growth over the balance of the year.  This would result in 2015 same-store sales in the high single digit range versus guidance of low-to-mid single digits.  Baked into management’s assumptions is significant cannibalization from the reopening of the flagship store in NYC.


While the 1Q15 earnings release was very strong the valuation the market is awarding SHAK is mindboggling!  If we model out $40 million in EBITDA in 2016 (which is nearly double the current street estimate of $22 million) and put 30x on it the stock is worth $32 or 52% down side.  If we value the company closer to CMG the downside approaches 75% from current levels. 



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