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Retail Callouts (7/1): Phil Knight Read Through to Ralph Lauren, KSS Off Aisle

Takeaway: Without Knight NKE won't miss a beat, read through for Ralph Lauren. First look at KSS Off Aisle concept.

Phil Knight Read Through for Ralph Lauren

 

Takeaway: Phil Knight stepping down is a complete non-event, for Nike at least. He hasn't been directly involved in the day to day operation of the company for the better part of 20 years. And, he's set up both a trust to protect his cache of stock that represents about 30% of the voting stock in the company and a management structure within the company that can continue to carry on his legacy.

 

But consider the read-thru for Ralph Lauren. Both Phil Knight and Ralph Lauren are roughly the same age (born 1938 and 1939, respectively) and started their respective businesses within three years of one another (NKE in 1964 and RL in 1967). Each had a vision for design, branding and marketing Athletic Footwear/Fashion Apparel in an outsourced manufacturing model. While Nike has been more successful, growing to a $55bn footprint globally versus Ralph's $15bn brand footprint, the success stories are unmistakable.

 

But that's where the comparison ends. Phil Knight is stepping down as Chairman, and Nike's stock won't miss a beat. As noted, his direct involvement has been minimal, but he has successfully built up a talented team and detailed HR succession planning process for the entire organization.

 

At Ralph Lauren, however, succession is a Black Hole. It's not even a topic that management will entertain, and when the question is asked you could almost hear them tense up. Succeeding Mr. Lauren is not even up for discussion.

 

From where we sit, if the company won't at least share Mr. Lauren's succession plan, they could at least instill the confidence in us that a plan does, in fact, exist. We're not so sure.

 

In the end, we think the best way out is for RL to acquire Tory Burch. They get Roger Farrah back, as well as an extremely talented and marketable potential CEO who is still in her 40s. Having Roger back would be good for a good 5 multiple points at RL. That's far better than the alternative -- which is Mr Lauren stepping down one day and the stock losing a third of its cap.

Retail Callouts (7/1): Phil Knight Read Through to Ralph Lauren, KSS Off Aisle - 7 1 chart1

Retail Callouts (7/1): Phil Knight Read Through to Ralph Lauren, KSS Off Aisle - 7 1 chart2

 

KSS - First Shots of Kohl’s New Concept

(http://www.chainstoreage.com/article/kohl%E2%80%99s-opens-new-concept)

 

These are the first snaps we've seen of the new KSS Off/Aisle concept. And it still doesn't make a whole lot of sense to us. To have an 'off price' concept, you need steady access to high quality brands to consistently offer the perception of great deals to your consumer. KSS is capable of none of this. The retailer just simply doesn't have the brands or the content to support an off-price concept. Yes, it's a test, but if M Backstage is indicative of an ugly department store environment, KSS Off Aisle is a nail in the coffin.

Retail Callouts (7/1): Phil Knight Read Through to Ralph Lauren, KSS Off Aisle - 7 1 chart3

 

 

OTHER NEWS

 

AMZN - Amazon Launching in Mexico

(http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=2063639)

(http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=2063664)

 

AMZN - Amazon Web Services Announces 2016 India Expansion

(http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=2063465)

 

MW - Men's Wearhouse Names Bruce Thorn As Chief Operating Officer

(http://ir.menswearhouse.com/press-releases/detail/1761/mens-wearhouse-names-bruce-thorn-as-chief-operating-officer)

 

FL - EVP/Former CFO Sells 32k shares

 

PBY - Pep Boys to consider sale

(http://www.chainstoreage.com/article/pep-boys-consider-sale)

 

Donna Karan Steps Down From Namesake Company

(http://footwearnews.com/2015/business/executive-moves/donna-karan-steps-down-namesake-company-41074/)

 

Jo-Ann makes executive moves

(http://www.retailingtoday.com/article/jo-ann-makes-executive-moves)

 


CHART OF THE DAY: Is #Greece Just The Tip Of Europe's Iceberg?

Editor's Note: This is an excerpt and chart from today's morning strategy note written by Hedgeye Director of Research, Daryl Jones. If you're interested in staying a step ahead of consensus, click here to subscribe. 

 

CHART OF THE DAY: Is #Greece Just The Tip Of Europe's Iceberg? - COD z EL. yields

 

...[T]he bigger issue with Greece is that it has the potential to be the tip of the iceberg in Europe.  If history over the past decade tells us anything about Europe, it is that the area’s fiscal and competitive imbalances are contained, until they are not.

 

As an example, while Portugal’s deficit is fully funded for 2015, its longer term fiscal metrics remain disconcerting.  With a public debt-as-percentage-of-GDP at 130% and a deficit-as-a-%-of-GDP still running at 4 – 5%, is far from out of the woods.  Certainly, the country, as evidenced this year, can fund via debt when times are good, but in deeper recessionary scenario when the deficit naturally broadens, that debt loan will likely give creditors pause.

 


The Castle

“Every revolution evaporates and leaves behind only the slime of a new bureaucracy.”

-Franz Kafka

 

There may not be a better literary analogy for the situation in Greece than Kafka’s classic, The Castle.  The book was inspired by the actual bureaucracy of the Habsburg Empire, which Kafka was forced to deal with during his life.  (Having just had multiple visits to the Connecticut DMV, we can certainly empathize with Kafka’s experiences.)

 

In The Castle, the narrator, K, arrives in a village governed by a mysterious bureaucracy that is operating in a nearby castle.  In seeking shelter at the town’s inn, K claims to be a land surveyor summoned by the authorities in the castle.   Very quickly he is notified that the castle contact is an official named Klamm, who informs K in a note that he will report to the Council Chairman.

 

Subsequently, the Council Chairman informs K that due to bad communication between the castle and the village he was erroneously requested.  In lieu of this, the Council Chairman offers him a position to serve as a caretaker in service of the school teacher.  Despite this generous offer, K, still unfamiliar with the processes of the village, continues to try and reach Klamm, which is considered a major taboo by villagers.

 

The villagers hold the officials and the castle in the highest regard, despite not really understanding what it is they do.  In fact, the actions of the officials are never explained.  Despite this, the villagers often provide justifications for the officials’ actions through long monologues.   In fact, everyone seems to have an explanation for the officials’ actions, despite their contradictory nature and clear ambiguity.  The villagers actually praise this ambiguity as another compelling feature of the official!

 

Kafka is describing a society in which the bureaucracy has become predominant at the expense of practicality, efficiency and all else.   In the real world of course, the rapid growth of a bureaucracy is likely to stunt growth and innovation.   If Greece sounds like a case study of this, well it should.

 

The Castle - Greek iceberg cartoon 06.30.2015

 

Back to the Global Macro Grind...

 

Distinguished economist and market practitioner Daniel Lacalle wrote a very thoughtful piece on Greece as a special Hedgeye contributor this past weekend.  In the note (a must read), he touched on this very issue of bureaucracy.

 

According to Lacalle:

 

...The real drama is that none of the measures announced will solve Greece´s real issues. No, it´s not the euro, or the austerity plans. It´s not the cost or maturity of debt. Greece pays less than 2.6% of GDP in interest and has 16.5 years of average maturity in its bonds. In fact, Greece already enjoys much better debt terms than any sovereign re-structuring seen in recent history.

 

Greece´s problem is not one of solidarity either. Greece has received the equivalent of 214% of its GDP in aid from the Eurozone, ten times more, relative to gross domestic product, than Germany after the Second World War.

 

Greece´s challenge is and has always been one of competitiveness and bureaucratic impediments to create businesses and jobs.

 

Greece ranks number 81 in the Global  Competitiveness Index, compared to Spain (35), Portugal (36) or Italy (49). In fact it has the levels of competitiveness of Algeria or Iran, not of an OECD country.  On top of that, Greece has one of the worst fiscal systems and limits job creation with a combination of agressive taxation on SMEs and high bureaucracy. Greece ranks among the poorest countries of the OECD in ease of doing business (Doing Business, World Bank) at number 61, well below Spain, Italy or Portugal.

 

Between 1976 and 2012 the number of civil servants multiplied by three while the private sector workforce grew just 25%. This, added to more than 70 loss-making public companies and a government spend to GDP figure that stands at 59%, and has averaged 49% since 2004, is the real Greek drama, and one that will not be solved easily.”

 

Greece's structural problem is bureaucracy, which is, currently at least, being arbitrarily defended by its citizens, despite broad evidence of its inefficacy. You can request a replay of the conference call he held with Keith on Monday by emailing .

 

In the most recent news from the Eurozone, Greek PM Tsipras continues to do his best to emulate officials from The Castle.  In contrasts to all standards of logical reason, according to commentary in the WSJ this morning, his most recent letter to creditors appears to actually “increase the fiscal gap”.  Leave it to a bureaucrat to believe that when your country is in economic meltdown mode, the right move is to take steps backwards!

 

As emphasized in the cartoon in the middle of this note and the Chart of the Day, the bigger issue with Greece is that it has the potential to be the tip of the iceberg in Europe.  If history over the past decade tells us anything about Europe, it is that the area’s fiscal and competitive imbalances are contained, until they are not.

 

As an example, while Portugal’s deficit is fully funded for 2015, its longer term fiscal metrics remain disconcerting.  With a public debt-as-percentage-of-GDP at 130% and a deficit-as-a-%-of-GDP still running at 4 – 5%, is far from out of the woods.  Certainly, the country, as evidenced this year, can fund via debt when times are good, but in deeper recessionary scenario when the deficit naturally broadens, that debt loan will likely give creditors pause.

 

Luckily for me, I’m back home celebrating Canada Day and shielded, at least for a day or two, from the dysfunction from the Eurozone.  Although in Canada, there is this little thing called a housing bubble to consider...

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.19-2.49%

SPX 2052-2093 
Nikkei 19
VIX 14.21-19.01
USD 94.01-96.41 
Oil (WTI) 57.80-61.20

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

The Castle - COD z EL. yields


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

July 1, 2015

July 1, 2015 - Slide1

 

BULLISH TRENDS

July 1, 2015 - Slide2

July 1, 2015 - Slide3

July 1, 2015 - Slide4

 

 

BEARISH TRENDS

July 1, 2015 - Slide5

July 1, 2015 - Slide6 

July 1, 2015 - Slide7

July 1, 2015 - Slide8


Mr. Volatility

Client Talking Points

VIX

If you took down both your gross/net exposure to U.S. equity beta pre this breakout in volatility, you might feel better than most right now. Bullish breakouts in volatility rarely feel good for anyone; unless they can crack 14.21 on front-month VIX, this central planning panic continues to signal #on – don’t forget it’s #LateCycle U.S. please. 

CHINA

Chinese central-market-planners did not like the market’s reaction to a 49.4 PMI (June) so they tried to jawbone it (again) and this time it did not work. The Shanghai Composite is down -5.2% (down -16.1% month-over-month) and below @Hedgeye TREND resistance.

EUROPE

+1.4%-2.4% bounce in the FTSE and CAC and +1.7%-2.1% for the IBEX and DAX, but not one of the bounces were above @Hedgeye TREND resistance. Liquidity and levels matter here – so we would be in wait/watch mode; chasing high and freaking out low hasn’t worked; buying on the low-end and selling on the top-end of the risk ranges has.

 

 

**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET with Macro Analysts Darius Dale and Ben Ryan and CEO Keith McCullough.

Asset Allocation

CASH 48% US EQUITIES 6%
INTL EQUITIES 12% COMMODITIES 7%
FIXED INCOME 27% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
ZOES

We came out of the earnings report being very positive about management doing all the little things right. They continue to prove that they are some of the best operators in the industry. Importantly, many small cap restaurant companies with an undisciplined unit growth strategy experience significant labor inefficiencies as they expand. ZOES is in a different class of companies.  In a quarter where ZOES opened 12 new company-owned restaurants they managed to decrease both COGS and labor. We view ZOES as one of the best small cap growth names.  The company is set-up for long-term success for the following reasons:

  1. Superior brand positioning
  2. Management philosophy and execution
  3. Unit opening geographic profile
  4. Early-stage average unit volumes and returns
PENN

PENN’s new property, Plainridge Park in Massachusetts, had a strong opening. We expect slot win per day of $400, above Street expectations. In addition, June state gaming revenues will begin to roll out in 1-2 weeks. We expect June to be as strong as May, setting up Q2 to be estimate-beating quarter for PENN.

TLT

After a Fed-fueled week of strength in slow-growth, yield-chasing asset classes and long duration fixed income, both the Dollar and interest rates re-couped their losses from Fed Week. The dollar declined, rates increased, and as a result, those long of gold took some pain. Will this continue? Will a long, sustained rate liftoff ensue? We don’t think so. We continue to repeat that the chance of further downward revisions to forward looking growth estimates from the Federal Reserve and consensus macro is much more likely than not. The attempted suspension of economic gravity from policy makers weakens the currency and puts pressure on bond yields. We remain long of this set-up with gold and long-duration fixed income.

Three for the Road

TWEET OF THE DAY

Every European Equity market remains bearish TREND @Hedgeye - waiting & watching, not chasing

@KeithMcCullough

QUOTE OF THE DAY

Concentration is the secret of strengths in politics, in war, in trade, in short in all management of human affairs.

Ralph Waldo Emerson

STAT OF THE DAY

700 million pounds of chicken is purchased and 190 million pounds of red meat/pork purchased in the week leading up to July 4th.

 

 


The Macro Show Replay | July 1, 2015

 


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