Retail Callouts (6/10): LULU, RH Real Estate, JCP/M

Takeaway: 1) Even when LULU beats 2Q, algorithm will be bad, w returns declining. 2) JCP R.E. event shows oppty for those that deserve ‘A’ malls.



RH - Roadmap Into Thursday's Print  -  To see our full note CLICK HERE


LULU - Not Much to Get Excited About

We exited our long position on 3/26 with a view that at that $65, you have to really believe that the current operating plan that LULU management has in place is the right one to double the size of this company. We're by no means bearish on this name, but there's absolutely nothing  that came from yesterday's print that causes us to second-guess our logic.

  1. As close to a $0.01 beat as LULU could conceivably get with a 2% share reduction giving LULU the extra juice.  Comps slowed sequentially on a C$ basis continuing the downward trend on a 2yr basis. Store sales were underwhelming, down 400bps sequentially, but e-comm picked up the slack (up 27%) reaccelerating on a 1yr & 2yr -- inline with what we've seen from online traffic/visitation metrics.
  2. We're surprised that the earnings algorithm hasn't come under more scrutiny. In the quarter earnings were down 2% on 22% sq. ft. growth and mid-single digit constant currency comps. The 2Q guidance implies more of the same -- 25% sq. ft. growth, HSD constant currency comps and earnings down -7.5% to -1.5%. This creates a bit of a mixed dynamic; a) on one hand, the company is likely to beat its guidance -- even if EPS growth is flat to down. b) declining returns as unit growth is up, productivity is down and costs can't (and shouldn't in LULU's [underinvested] case) make up the difference. So a beat is likely to trump anything else, but it is in the context of a horrible algorithm and return profile.
  3. This is the 9th straight quarter where sales have grown ahead earnings, as gross margins were down another 230 bps -- off 10 percentage points from 2011 1Q peaks. With more headwinds on this line over the near term as inventories grew 33% on 10% sales growth taking cash flow from ops down $50mm YY. The one positive being merchandise margins were up 100bps,but were against a 310bps decline last year. Management's plan for GM improvement next year is largely comprised of benefits that are out of its control.
  4. As we look at the growth drivers for FY16 on the gross margin line -- we're not overly excited about a couple bps from reduced fabric expense and air freight cost (the two main drivers of GM expansion CFO Haselden called out). If management is going to make mid-20's operating margins a priority then we need to see more meat on the bone.
  5. No change to our thesis here. We still see $4.00 in earnings power locked away in this brand, but right now the slow drip and lack of an articulated plan by management isn’t enough for us to get excited about. Guidance came up by $0.01 in line with the beat. 2Q guidance isn't heroic with -7% to -2% earnings growth on HSD C$ comps. The questions we have is what are people looking at for an earnings number in ’16? Unless we can build to a number well above the consensus number of $2.34 for FY16, with the stock in the mid $60's at 28x it looks flat out expensive.


RH, JCP, M, Dept. Stores - JCP Lease Termination a Blessing?



Takeaway: If you're curious about where the square footage for RH's expansion plans is coming from and why the deal economics are so attractive, look no farther than the commentary from Kemper Freeman. The Bellevue Collection property just replaced an existing JCP location with a Zara, Uniqlo, and an 'Urban Grocery'. “It took 12 years to get Penney’s out...It took 30 days to find tenants to replace it.” We're not surprised that these conversations are taking place, JCP still has over 130 locations in  'A' malls where it flat out doesn't belong. By our math (in the example below we use an RH, Cheesecake Factory, and a Whole Foods) the income generated from anchor tenant pads increases by 134%. And, it has the potential to complete gentrify the entire wing of the mall. It's likely we'll see more of these types of deals moving forward -- especially in the 'A' malls.

Retail Callouts (6/10): LULU, RH Real Estate, JCP/M - 6 10 chart1




FRAN - 1Q15 Earnings

Retail Callouts (6/10): LULU, RH Real Estate, JCP/M - 6 10 chart2


Lands' End adds Saks, J.Crew vets to exec team



AMZN - Amazon to open its fourth fulfillment center in Texas



HBC - Hudson’s Bay Co. eyeing real estate deals, but wont say if Kaufhof chain among them



WMT - Walmart to pilot online grocery in Ottawa



LEISURE LETTER (6/10/2015)

Tickers: LVS, WYNN, G13.SI

company news

LVS - Two organizations have asked a Clark County district judge to unseal documents that could reveal business ties between LVS and Cheung Chi Tai and Heung Wah Keung, alleged organized crime figures in China.


Guardian News & Media, publisher of the British newspaper The Guardian, and the Campaign for Accountability, a new nonprofit watchdog organization, have filed separate motions to intervene and unseal records in the wrongful termination case brought by Steven Jacobs against LVS and Sands China Ltd.


Takeaway: We don't know what is in those documents but a seemingly forgotten risk could be re-emerging. With the anti-corruption program still going strong, can the Macau and Chinese governments look the other way if triad ties with Sands China are sufficiently proven?


Neptune - Neptune GD Group is planning to dismiss around 300 of its employees at the end of this month. The Forefront of Macau Gaming’s vice-president, Lei Kuok Keong, said that aside from the sharp reduction in staff welfare, many junket employers have slumped.  Meanwhile, he said, some others have streamlined their operations by closing unnecessary gaming rooms in casinos due to the shrinking VIP market.


Neptune warned on Tuesday it was likely to make “a substantial loss” for the year ending June 30, 2015 due to “the closure of Lucky Star, a VIP gaming lounge in Macau in which the group has a 20% interest, on July 1, 2015”. The facility, operated by a gaming promoter called Lucky Star, is at StarWorld Hotel.



Takeaway: More pressure on VIP and, specifically, on Galaxy.


Bloomberry - is looking to Taiwan, Korea and Japan as possible expansion opportunities. 



WYNN - The International Union of Operating Engineers (IUOE) has urged the city’s Legislative Assembly to take action to investigate a land deal involving MOP400 million (US$50 million) on Cotai that gaming operator Wynn Resorts made with two local firms in 2006. “The Assembly should further inquire whether government officials acted within their legal authority when they required Wynn Macau to deal with the Beijing Ho Ho group, even though Ho Ho and his associates had no documented claim to the Cotai land,” the union wrote.


Takeaway: This Union is relentless  


GENTING SINGAPORE - on June 10, bought back 761.7 thousand shares at S$0.91 each, bringing the total to 8.6482 million shares, or 0.072% of shares outstanding, under its repurchase plan.


China Lottery Sales - total lottery sales increased by 3.4% YoY to RMB 32.612bn in April 2015. But instant scratch card sales fell 9.2% and 16.9% in the Welfare Lottery and Sports Lottery, respectively.  


LEISURE LETTER (6/10/2015) - LOT1


LEISURE LETTER (6/10/2015) - LOT2

Takeaway: Scratch games continue to slump in China. Not good for SGMS's CSL venture.  


High-spending Chinese visitors to Japan - The government’s tourist agency vowed in a policy document to push forward its policies to ease visa requirements for foreign visitors and to improve facilities for visitors, including language services provided for travelers. Japan has proved particularly attractive to tourists from Taiwan, South Korea, mainland China and Hong Kong, who accounted for over 60% of its foreign travelers in 2014. Among them mainland Chinese tourists spent the most, splashing out 558.3 billion yen (HK$34.8 billion) in total in Japan last year.


Hengqin aims for visa-free transit for foreigners - The authorities on Hengqin Island hope to allow foreigners using the airports in neighboring Macau or Hong Kong to stay on the island for 72 hours without visas if they are going to or from somewhere else, Business Daily reports. Director of the Administrative Committee of Hengqin New Area, Niu Jing, has asked the central government for permission to do this.



Twin River (RI) - Twin River Casino will add 28 table games, including 16 poker tables, starting later this summer and into the early fall, Twin River Chairman John Taylor. The new games are a way to remain competitive, as a new slot parlor is set to open later this month in nearby Plainville, Massachusetts, Twin River spokeswoman Patti Doyle said. The gambling center in Lincoln currently offers 80 table games and more than 4,000 slot machines. The new games will be added to the facility's second-floor, a non-smoking area. Customers have requested table games in this area, Doyle said.


Takeaway: Twin River anticipating share loss in slot play from PENN's Plainridge Park's opening later this month. We're bullish on Plainridge and PENN.


Indiana SS Revs: +0.5% YoY

Missouri SS Revs: +2.6% YoY



PBoC cuts economic forecasts :

    • GDP growth 7% vs prior 7.1%
    • CPI +1.4% YoY vs prior +2.2%
    • PPI (4.2%) YoY vs prior (0.4%)
    • Retail sales +10.7% YoY vs prior +12.2%
    • Exports +2.5% YoY vs prior +6.9%
    • Imports (4.2%) YoY vs prior +5.1% 


Hedgeye Macro Team remains negative on Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.

Japan, Yields and Oil

Client Talking Points


Down Dollar (again) this morning gives you +0.9% YEN vs USD and an immediate-term TRADE oversold signal within what’s been a very bullish TREND for Japanese Stocks. The Nikkei remains our top International Equity idea here, buy more.


CEO Keith McCullough has spent the last few days in CA and very sophisticated cross asset class investors are all telling him the same thing about this Euro Yield move – it’s not about “growth expectations rising – it’s a liquidity/technical move” – Schwarzman has a decent editorial in the WSJ today on how this could perpetuate the next crisis.


Down Dollar, good for America, eh? Oil loving the USD weakness with another +2.3% ramp to the top-end of our immediate-term $58.64-61.75 immediate-term WTI risk range. We still like Down Dollar, Dovish (long Oil, Gold, etc.) into the Fed meeting next week.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Penn National Gaming is a true growth story in regional gaming, finally, ripe with catalysts, same store and new unit growth, and accelerating cash flow.  We see stability in regional gaming revenues over the next several months providing some much needed earnings visibility.  PENN maintains the best new unit growth story in domestic gaming with the opening of the Plainridge casino in Massachusetts in June and the Jamul casino in Q2 2016. PENN has a proven track record as the best regional casino operator and recently proved its prowess at successfully opening racinos (casinos at racetracks) with estimate beating Dayton and Mahoning commencing slot operations last year.


The takeaway on Purchase Activity was mixed as demand declined -3.0% sequentially but accelerated from +13.1% to +13.9% on a year-over-year basis.  More broadly, and inclusive of the latest week, purchase demand in 2Q continues to reflect both sequential and year-over-year improvement with demand growth for the quarter currently tracking +13.6% QoQ and +12.8% YoY. No major callouts in the latest week as the larger trend towards ongoing improvement in purchase activity in 2Q remains intact. 

CLICK HERE to watch Housing Sector Head Josh Steiner gives a brief update on our call on ITB.


Considering we are already well passed an above average length expansion, and moving into the second half of 2015 growth and inflation comps (i.e. the base effects) become very difficult, growth is likely to continue to slow. We put the likelihood of a rate hike in 2015 as highly unlikely and continue to expect rates to move to make a series of lower-highs through the balance the year (bullish for EDV, TLT, and VNQ. When forward looking growth expectations are downwardly revised and the Fed kicks the can on rate hike expectations, rates and the dollar move lower. Gold has historically performed well in an environment of falling rates and a declining U.S. dollar and we don’t expect anything different this time around. Supporting our view, both gold (GLD) and treasuries (TLT, EDV) remain BULLISH on an intermediate-term TREND duration (3-months or more).  

Three for the Road


China cuts its economic forecasts (again) - to be clear, that is the bull case for stocks



Vision is the art of seeing the invisible.

Jonathan Swift


The cost of a dozen liquid eggs (wholesale) has jumped from $0.63 to about $1.50 since April.


The Macro Show - CLICK HERE to watch today's edition at 8:30am ET.

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.

June 10, 2015

June 10, 2015 - Slide1

CHART OF THE DAY: Small Business Compensation Plans vs. Earnings Growth

Editor's Note: The excerpt and chart below are from today's Morning Newsletter written by Hedgeye U.S. Macro Analyst Christian Drake. Click here for more info and to subscribe. 


...Further, a number of the sub-indices such as Hiring and Compensation Plans have served as solid lead indicators for the corresponding official figures reported by BLS.  For instance, as the 2nd Chart of the Day below illustrates, Small Business Compensation Plans have presaged actual compensation increases pretty well – typically leading growth in reported hourly earnings by ~3 quarters.... 


CHART OF THE DAY: Small Business Compensation Plans vs. Earnings Growth - CoD 2




3 Minutes

“If the 130,000 year period since modern humans made their first appearance were compressed into a single day, the era of modern growth would have begun only in the past 3 minutes.”

-Charles I. Jones


The 1st Chart of the Day below from Stanford Professor Chad Jones generated a fair amount of feedback after I presented it on our Morning Macro Show on Monday.  Using data from Maddison, it shows per capita GDP across a cross-section of economies all the way back to the year 1 AD.


I like the chart because it’s a simple but striking reminder that modern growth – in the form of sustained/endogenous growth and contemporary productivity functions – is still a fledgling phenomenon and central banking and monetary policy making are still very much an experiment in progress.


3 Minutes - CoD 1


Back to the Global Macro Grind…


A fundamental constraint of a daily strategy missive with a self-imposed ~900 word threshold and a finite production timeline of a couple hours is that you can’t boil the Macro ocean every morning. 


The format, however, does lend itself well to boiling the daily puddles of data and attempting to appropriately contextualizing those high-frequency macro morsels.


Yesterday we received the NFIB Small Business Confidence data for May along with the Job Opening and Labor Turnover Survey (JOLTS) data for April.   Tomorrow we’ll get the Retail Sales data for May. 


Why do people care about small business confidence?   


Small Businesses represent over 99% of total U.S. Employer firms and >60% of net private sector hiring on a monthly basis – and sentiment around the current and forward prospects for business activity are discretely related to hiring activity and labor compensation trends.


Further, a number of the sub-indices such as Hiring and Compensation Plans have served as solid lead indicators for the corresponding official figures reported by BLS.  For instance, as the 2nd Chart of the Day below illustrates, Small Business Compensation Plans have presaged actual compensation increases pretty well – typically leading growth in reported hourly earnings by ~3 quarters. 


Indeed, the strong advance in NFIB compensation plans over the last 24 months along with emergent strength in the Employment Cost Index (ECI) have backstopped consensus expectations for accelerating wage inflation for the better part of a year and a half now.  The current divergence between Compensation Plans and (lack of) actual earnings growth remains stark and whether the existent spread represents a structural dislocation or if the cycle high +2.3% growth in hourly earnings reported in May represents the beginning of a lagged convergence remains to be seen. 


Wage inflation is a canonical late cycle indicator so it certainly wouldn’t be surprising to (finally) see some degree of acceleration as the payroll expansion reaches its 63rd month off the February 2010 employment trough.  At the same time, with the profit cycle past peak, the prospect of incremental margin pressure via acceleration in labor line costs does not argue for a step function increase in corporate capex spending – particularly with aggregate global demand flagging and the worlds core consumption demographic of 35-54 year olds remaining in secular retreat.   


Why do people care about the JOLTS Data?


#Churn Baby!


While the NFP data offers the official read on net hiring, the JOLTS data provides the internals on the gross flow of both hirings and separations.  A hallmark of an efficient and well functioning labor market is a fluid flow of workers – job openings and the creation of new positions is a direct measure of the economy’s health (or perceived health), and the more that companies are hiring and creating new positions, the easier it is for job-seekers to find work and for skill and need to find their most productive match. 


On a gross basis, 5.007 million people were hired in May (kind of surprising relative to the NFP figures of 100-200K we’re used to hearing, right?) while 1.8 million were laid off or fired and 2.7 million people quit their job.  Job Openings, meanwhile, made a new all-time high of 5.38MM while the Quits Rate continued to approach prior cycle highs. 


Granted, the historical data only go back to 2000 so it’s hard to take an overly convicted view as far as a conclusion.  But as it stands, the domestic labor market remains solid with many metrics at or approaching prior cycle highs – which is probably the larger point.   As we summarized in an institutional note last week: 


Tops are processes & “late-cycle” is not some discrete peak on a Macro sine curve. Move while the music plays but don't be willfully blind to the #LateCycle reality of it all. 


Why do people care about Retail Sales?


A better first question may be:  What is Retail Sales?


It’s a trivial, but not an insignificant question.


In casual conversations with investors, particularly those who aren’t Macro centric, I’d say a majority don’t technically know what Retail Sales encompasses.   Superficially, the term “Retail Sales” kind of connotes that it’s a broad measure of the 70% of the economy that is consumer spending – and most people take it that way.  


In fact, Retail Sales is an estimate of spending at department stores, food service providers, auto dealers, and gas stations.  In other words, it is largely an estimate of spending on goods. 


In other, other words, while it’s a timely, insightful barometer of the prevailing state of domestic consumerism, it doesn’t include spending on services, which comprises the lion’s share of consumption at ~2/3 of household spending and ~45% of GDP


The numbers are also volatile on a month-to-month basis, subject to significant revision and reported on a nominal basis – making it difficult at times to distinguish whether sales trend changes are due to prices or volumes.  What it offers in terms of timeliness, it lacks in terms of precision and magnitude.


Anyhow, the May figures should be markedly better sequentially.  The acceleration in auto sales to 17.7MM (annualized) in May vs. 16.5MM in April will buttress the monthly figures.  Further, consumer revolving credit growth (i.e. credit cards) and spending on durables goods tend to move in directional tandem and with revolving credit rising +11.6% month-over-month annualized in April, it wouldn’t be surprising to see some measure of that show up in the May Retail Sales figures or in a positive revision to the April data.  


Also, it’s worth highlighting that realized improvement in May would only serve to take the year-over-year growth rate up to something like +1-2% - a sequential improvement but a far cry from the cycle peak of +5% growth observed mid-year last year. 


…Having exceeding my character count threshold, I’ll abruptly/awkwardly end the macro miscellany there.  With Keith on the road, you’ll have sufficient opportunity to suffer my pedestrian attempts at dazzling distillations of domestic eco data over the balance of the next two weeks.   


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.06-2.52%

SPX 2072-2100
Nikkei 20006-20469
VIX 13.76-15.40
Oil (WTI) 58.64-61.75 

Gold 1170-1199 


To historical context and the profitable boiling of puddles,


Christian B. Drake

U.S. Macro Analyst


3 Minutes - CoD 2

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