On today's edition of The Macro Show, Capital Markets analyst Jonathan Casteleyn spoke with CEO Keith McCullough about changes occurring in the hedge fund industry, which companies stand to benefit and why.
Takeaway: Today, WWAV announced that it has agreed to acquire Vega for $550 million.
VEGA deal summary and WWAV Black Book date announcement
On Thursday June 18, 2015 at 3:00PM we will be releasing a Black Book video presentation on WWAV. The VEGA acquisition is a great fit for the company and is an example of why WWAV is a long-term winner in the organic category!
Today, WWAV announced that it has agreed to acquire Vega for $550 million. Strategically, this is a natural fit for WWAV’s portfolio that strengthens their plant-based foods & beverages portfolio. Vega is the leader in plant-based nutrition products, further bolstering WWAV’s stable of #1 brands.
This marks WWAV’s third acquisition since spinning off from Dean Foods, starting with Earthbound in 2013, So Delicious in 2014 and now Vega. There is an obvious acquisition trend of diary-free and plant-based, better-for-you companies. These are very on-trend categories that are rapidly growing, making them very attractive pockets of growth for large CPG companies.
From looking at the sales multiple of 5.5x, it appears that WWAV may have had to beat out some competition for this asset. We believe that this is money well spent, Vega has been growing at a 30% clip and we believe this can accelerate further as they leverage WWAV’s supply chain in the U.S. and U.K. This is the right home for Vega, the partnership between the Vega and WWAV teams will allow for learning and best practices between both sides.
Below is a one page summary of the deal:
Longer term there are many way you can win with WWAV:
- Growth of the base business ― distribution growth & category expansions
- Growth through acquisitions ― string of pearls approach
- Sell the company ― many large CPG companies are looking for growth
Takeaway: When a Consumer story is this explosive and disruptive, every quarter is an event. Fortunately, this story is very much on track.
We remain convinced that Restoration Hardware (RH) is one of the unique TAIL* opportunities in Consumer/Retail as the company disrupts a large fragmented space of localized high-cost competitors, and changes the paradigm for how people shop for Home Furnishings.
This story is, at most, in the second inning and the types of changes we’ll see to product classification, consumer type, purchasing experience and ensuing financial characteristics are neither in Consumers’ sights, or Wall Street’s models.
When all is said and done, we still think that this company has $11 in earnings power 4-years out, which is nearly double the consensus. We remain convinced that the debate should not be ‘if or when’ the stock hits $115 (22% upside -- the highest sell-side price target out there), but rather when we all have to adjust estimates for last year’s convert, which becomes mildly dilutive at $172 (83% upside).
At that point, we’ll be looking at an earnings CAGR of 40-50% over five years. What kind of multiple does that deserve? 20x? 25x? 30x? We’d argue the higher end, but regardless, we’re talking a stock between $225 and $325. We won’t bicker which one it is with the stock at $94 today. So there’s our TAIL call.
And despite our confidence in where it’s headed long-term, we have to respect the near-term volatility in the market, and in particular, such dynamic transformational stories like RH.
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*Note: There are three durations over which we analyze investment ideas and themes here at Hedgeye. We created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.
"Trade" is a duration of 3 weeks or less
"Trend" is a duration of 3 months or more
"Tail" is a duration of 3 years or less
Interested in accessing our Retail research? Ping email@example.com.
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Takeaway: The negative trend in domestic equity flows continued and a new trend of negative muni fund flows has appeared.
This note was originally published June 04, 2015. Click here for more info on how you can subscribe to our investing products.
Investment Company Institute Mutual Fund Data and ETF Money Flow:
Investors continue to pull funds from active domestic equity mutual fund mandates, withdrawing -$2.9 billion in the 5-day period ending May 27th according to the latest ICI survey. This marks the 13th consecutive week of withdrawals from the category. Another trend that has appeared recently is withdrawals from tax-free or municipal bond funds. Last week, investors withdrew -$170 million from munis, marking the 4th consecutive week of withdrawals. Fund flows for the entire bond category in general were weak last week with investors only contributing +$98 million to total bond mutual funds and ETFs. Conversely, equities via international mutual funds and passive ETFs won support with a +$2.1 billion contribution.
In the most recent 5-day period ending May 27th, total equity mutual funds put up net outflows of -$223 million, trailing the year-to-date weekly average inflow of +$670 million and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund contributions of +$2.6 billion and domestic stock fund withdrawals of -$2.9 billion. International equity funds have had positive flows in 48 of the last 52 weeks while domestic equity funds have had only 10 weeks of positive flows over the same time period.
Fixed income mutual funds put up net inflows of +$627 million, trailing the year-to-date weekly average inflow of +$2.2 billion and the 2014 average inflow of +$929 million. The inflow was composed of tax-free or municipal bond funds withdrawals of -$170 million and taxable bond funds contributions of +$797 million.
Equity ETFs had net subscriptions of +$2.3 billion, outpacing the year-to-date weekly average inflow of +$1.6 billion but trailing the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net outflows of -$529 million, trailing the year-to-date weekly average inflow of +$1.1 billion and the 2014 average inflow of +$1.0 billion.
Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.
Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2014 and the weekly year-to-date average for 2015:
Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2014, and the weekly year-to-date average for 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:
Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors resumed withdrawals from the long treasury TLT ETF, redeeming -$328 million or -7% last week.
The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$2.0 billion spread for the week (+$2.1 billion of total equity inflow net of the +$98 million inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$1.5 billion (more positive money flow to equities) with a 52-week high of +$27.9 billion (more positive money flow to equities) and a 52-week low of -$13.1 billion (negative numbers imply more positive money flow to bonds for the week.)
Exposures: The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
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.
- 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.
- 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.
- 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.
- 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.
- 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.
FRAN - 1Q15 Earnings
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
Tickers: LVS, WYNN, G13.SI
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.
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.