In this brief excerpt from today’s edition of The Macro Show, Hedgeye CEO Keith McCullough explains how slowing global growth has impacted Industrials and Transports stocks (and not in a good way.)
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The German DAX is broken from a trend perspective; it would have to get back above 11,741 to reverse this. Currently the DAX has immediate downside risk to 10,770.
Whether or not you believe the Greeks are going to get something done, it's important to remember that the entire free world of market participants are long the concept of the next central plan having upside as oppose to downside – but what happens if they don’t get it done?!
From here the asymmetry is to the downside. You can buy Germany, but you don’t have a lot of upside vs. downside.
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Takeaway: We don’t believe this should be a sign that times are still bad at GIS.
GIS is on the Hedgeye Best Ideas as a LONG
General Mills announced today, the approval of Project Compass, a restructuring plan designed to enable growth in the International segment, which will start in Q1 FY16. Very similar to Project Catalyst, which took place over about six months in FY15 in the U.S. based business in cutting approximately 800 positions. As part of this initiative management expects to cut 675 to 725 positions.
These restructuring actions are expected to be completed by early fiscal 2017, and will generate approximately $45 to $50 million, with approximately $25 to $30 million of cost savings being realized in fiscal 2016.
We don’t believe this should be a sign that times are still bad at GIS. With Project Catalyst recently ending in February, the organization simply needed time to digest learnings and then implement the initiatives across the broader organization. Albeit small in actual dollars, management continues to impress us with their willingness to make the tough calls that are necessary to succeed.
Next steps to a fundamental turnaround are growing the cereal category, continuing to innovate on the brands, and acquire some growth along the way.
Conclusion: Household consumption growth is carrying the U.S. economy – for now. We do not think that is sustainable and reiterate our call for the YoY rate of change in domestic economic growth to slow throughout the balance of the year.
With the advent of this morning’s personal income and spending data, the U.S. economy is suddenly looking much better than it had been trending – particularly in YoY rate-of-change terms.
Specifically, real personal consumption expenditures growth accelerated in May on a MoM, YoY and 2Y Average basis as the savings rate ticked down -30bps. These are good numbers and we’d be both remiss and intellectually dishonest to suggest otherwise.
With respect to how our predictive tracking algorithm contextualizes the data, it is now accelerating on a sequential, trending and quarterly average basis:
The inflection in real PCE, which includes spending on goods and services and accounts for 69% of GDP, confirms the positive inflection in retail sales growth that we saw two weeks ago – specifically sales growth within the omnipotent control group that accounts for 24% of GDP.
One of the reasons we contextualize data in trending YoY rate-of-change terms is to have a consistent framework for incorporating new data in our Bayesian inference [modeling] process. It’s either accelerating or decelerating on a given duration of relevance – either monthly or quarterly or some meaningful combination of the two (e.g. a three-month moving average). The charts above and table below contextualize the output of this framework in the most succinct manner we can illustrate.
What you should glean from this table is the trending divergence between the [accelerating] consumption side of the economy and the [decelerating] investment, manufacturing and export side of the economy with the former essentially playing the role of Atlas – for now.
With base effects steepening sharply in 2H15 and national retail gasoline prices up nearly +40% off their YTD lows, we question the suitability of any consumer-driven recovery in the absence of a material acceleration in wage growth.
But as the following chart shows, you DO NOT want to see a material acceleration in wage growth if you’re in the camp that a recession would be bad for the capital market cycle. Wage growth peaks EXTREMELY late cycle, so the next acceleration (if any) may essentially sound the alarm on the next bear market.
Moreover, trends in the services and composite PMI data (also released today) suggest domestic consumption growth took a material turn for the worse here in June – just as the aforementioned steepening of base effects would’ve predicted.
Broadening this discussion back to our process, the primary reason we focus on NSA YoY rate of change rather than the QoQ SAAR rate of change – besides the fact that the latter is extremely volatile and has become increasingly nonsensical – is because the YoY rate of change most closely resembles how most investors analyze companies and helps us translate what we are seeing with respect to top-down trends to what bottom-up analysts are seeing in corporate operating metrics.
Additionally, it affords us true apples-to-apples growth rate comparisons across cycles, whereas the QoQ SAAR figures are subject to ever-changing seasonal adjustment methods that distort the reliability of the data over time.
Narrowing this discussion back to this economic cycle, we expect headline (i.e. QoQ SAAR) growth to accelerate in 2Q15 to ~2.5% before bouncing around ~2% in 2H15. That sounds good when coming off a -0.2% contraction in 1Q15, but that nets out to a full-year growth rate of +2.2% YoY and nominal GDP growth of ~3% - which would be the slowest pace since 2009.
Would you hike interest rates on that? If so, please email us why.
All told, the level of mischaracterization of domestic economic growth among market participants is fast approaching all-time highs, probably second only to mid-2009 when we were ragingly bullish amid a myriad of consensus "Great Depression" storytelling. But when you apply a repeatable, quantitative analytical framework to the discussion, navigating these macro risks becomes a little bit easier.
It's still not easy though!
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.
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.
TGT - CMO Out
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.
VFC - Steven E. Rendle Named to New Position of President & Chief Operating Officer at VF Corporation
ASNA, KSS, JCP - B-t-s Warfare: Justice Dropping Prices 40%
RAD - Rite Aid Completes Acquisition of Leading Independent Pharmacy Benefit Manager (PBM) EnvisionRx
PVH - Jennifer Crawford Resigns From Calvin Klein Inc.
Wildfox CEO Talks Retail Growth, Category Expansion
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