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Takeaway: Nike thoughts into the print. FL's first concept with UA. BBBY sentiment at 4 year lows. Target CMO out.

NKE - Key Issues Into The Print - To see our full note CLICK HERE

FL, UA - Foot Locker's First Concept Partnership with Under Armour


One of the core growth initiatives presented at Foot Locker's March Investor Meeting was to test and expand it's vendor partnership concepts. This won't make a dent in the company's dependence on NKE which accounts for 73% of purchases and close to 80% of sales. But it's at least a step in the right direction. FL has co-developed 5 shop-in-shop concepts with Nike (House of Hoops, Kicks Lounge, Yardline, Flight 23, Fly Zone), 2 with Adidas (a-Standard, Collective), and 1 with Puma (Puma Lab). This concept with Under Armour called The Armoury is its first with the brand. Unlike other partnerships this should have a much heavier apparel weighting. This will be a big tell for us. On one hand this syncs with one of the company's core growth pillars, but if history tells us anything its that FL doesn't do apparel well.

For FL specifically, this is another example of the shift in its capital allocation plans as much of the model was driven during Hick's tenure by asset rationalization. That took RNOA up to 30% from 5.5% over a 6 year time period. Now the plan is to reinvest capital by growing the store base, expanding new concepts (like The Armoury), and investing in digital, women's, and apparel. That means returns are coming down. If the company achieves its financial goals, it will be growing EPS in the low double digits, that is a mere quarter of the 45% CAGR it has printed over the past five years when it saw its’ multiple go from 11.5x trough margins/earnings, to 15.5x peak margins/earnings AND it will take increased capital spending to get there.

Retail Callouts (6/25): NKE, UA, FL, BBBY, TGT - 6 25 chart1

BBBY - Sentiment At 4 Year Lows, Still No Bottom On Margins

1) The print was more or less in line, but that doesn’t mean that the growth algorithm was good. Flat earnings on 3% revenue growth with the share count down 31mm or 15% percent and CFFO down 16% -- leaves a lot to be desired. The change in EBIT margins has been in negative territory in each of the past 12 quarters and BBBY hasn't hit the bottom yet as e-commerce costs will continue to weigh on both the gross margin (shipping expense) and SG&A (IT investments) lines.

2) Valuation at 13x P/E and 7.2x EBITDA seems so cheap at face value for what was once such a high quality company -- especially with sentiment at 4 year lows (usually a bullish indicator). But, in order to get more positive on this name we'd need much more confidence that BBBY could reaccelerate the top line organically and that margins will simply find a bottom. With sq. ft. growth mostly tapped that means BBBY needs to rely on taking market share in its existing stores (i.e. comping) or significantly accelerating growth in e-commerce in a profitable way. We'll be exploring the market dynamics in much more detail when we release the results of our Home Furnishings survey and 'Launch' on the space on July 29th.

Retail Callouts (6/25): NKE, UA, FL, BBBY, TGT - 6 25 chart2

Retail Callouts (6/25): NKE, UA, FL, BBBY, TGT - 6 25 chart3


Takeaway: Nothing is safe at TGT. Tesija is just 51 years old an still has a lot of good years in her in the retail business. Which leads us to believe that this was a Cornell decision. We've seen a lot of moves since Cornell took the reigns 10 months ago: Canada closure, 20% HQ workforce reduction, Pharmacy business sale to CVS. But, we've yet to see any turnover in the C-Suite. And this appears to be Cornell making room for his own lieutenant, i.e. an outside hire. While that seems like it’d be good news in the long run, the reality is that merchandise is not a problem for Target – it never has been.


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PVH - Jennifer Crawford Resigns From Calvin Klein Inc.


Wildfox CEO Talks Retail Growth, Category Expansion