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KATE: Removing Kate Spade from Investing Ideas

Takeaway: We are removing Kate Spade from Investing Ideas today.

Please note we are removing Kate Spade (KATE) from Investing Ideas today. According to Hedgeye CEO Keith McCullough:

 

This is a PM’s call. Our Retail Sector Head Brian McGough’s research view hasn’t changed. But I’d much rather come back to an idea like this once the style factors and macro risks to the #LateCycle consumer play out.

 

While I'm glad I didn't have you capitulate and sell last week's lows in KATE, I'll be less glad if we don't take this bounce to lower-highs as a selling opportunity. Small cap, high beta - not the Style Factors in the market I want to be chasing and/or holding onto here.

 

KATE: Removing Kate Spade from Investing Ideas - z ka

 


Three Reasons Why Howard Penney Is Now Bullish on McDonald’s

After spending almost four years being bearish on McDonald’s, Hedgeye Managing Director and Restaurants Sector Head Howard Penney has turned positive on shares of MCD.

 

Three Reasons Why Howard Penney Is Now Bullish on McDonald’s - z mcd

 

Penney recently presented his granular Best Long Idea Black Book outlining his bullish case for the company. His bullish call is predicated on three key points:

 

  1. The worst is behind us with a favorable risk/reward setup and a plan in place, now  it’s all about execution;
  2. MCD is putting the customer first by optimizing the menu, decreasing the number of items, improving products, adjusting pricing, and adding new technology to enhance the customer experience
  3. MCD is lowering the cost structure through a number of key initiatives that will start hitting the P&L in 3Q15 at the same time sales driven initiatives hit the top-line.

 

Penney sees approximately 15%-30% upside in McDonald’s from here.

 

***If you’re an institutional investor and would like to see the MCD Black Book from July 10th or any other additional research from Howard please email sales@hedgeye.com


ACA TRACKER UPDATE | PER ENROLLEE SPENDING REMAINS ELEVATED

Takeaway: Medicaid spending still strong through 2Q15, positive for earnings.

ACA Medicaid enrollment and spending

The data through 2Q15 shows a persistent positive consumption trend driven by the Medicaid expansion under the ACA.  Per enrollee spending remains elevated, which is consistent with pent-up demand of the newly insured.  Below, we forecast Medicaid enrollment through 2016 using the rate of change for the most recent months of enrollment data.  We expect growth of Medicaid enrollment to slow into 2H15 while continuing to monitor per enrollee spending for signs of a reversion to Pre-ACA levels.  Slowing enrollment and negative per enrollee spending in future periods remains a key risk for the US Medical Economy.

 

ACA TRACKER  UPDATE |  PER ENROLLEE SPENDING REMAINS ELEVATED - MCAID enrollment and spending

ACA TRACKER  UPDATE |  PER ENROLLEE SPENDING REMAINS ELEVATED - MCAID per enrollee spending

ACA TRACKER  UPDATE |  PER ENROLLEE SPENDING REMAINS ELEVATED - Medicaid enrollment

 

Please call or e-mail with questions.

 

Thomas Tobin

Managing Director 

@HedgeyeHC

 

Andrew Freedman

Analyst

@HedgeyeHIT


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Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

CALL INVITE | IS CONSENSUS RIGHT ON CHINA?

WATCH THIS PRESENTATION LIVE BELOW


 

This Thursday, July 16th at 1:00PM ET, we invite you to join us live for a conference call on China. Led by senior macro analyst Darius Dale, the call will detail our revised outlook for the Chinese economy, our expectations for monetary and fiscal policy, as well as the associated investment implications.

 

KEY DISCUSSION TOPICS:

  • Correction or Collapse?: Does the recent plunge in Chinese share prices represent an attractive buying opportunity (as several major sell-side and buy-side firms have suggested) or is it a harbinger of another leg down in the Chinese economy and a bearish phase transition across Chinese financial markets?  
  • Asset Class “Re-rotation” Risk: Our analysis is showing nascent signs of recovery throughout China’s real estate market. Will a continued positive inflection bode poorly for Chinese stocks?
  • Renminbi Internationalization Impact: What impact, if any, will China’s push to make the CNY an international reserve currency have on the country’s financial markets and how will the recent crash in Chinese equities impact this drive?

 

CALL DETAILS:

  • U.S. Toll Free:
  • U.S. Toll:
  • Confirmation Number: 13614418
  • Materials: CLICK HERE

 

As always, our prepared remarks will be followed by a live, anonymous Q&A session. Please submit your questions to .

 

Also, for those of you who cannot join us live, we will be distributing a replay video of the call shortly after it concludes.

 

Kind regards,

 

The Hedgeye Macro Team

 

CALL INVITE | IS CONSENSUS RIGHT ON CHINA? - 1



Retail Callouts (7/13): Evidence Building Around 2H Margin Pressures

Takeaway: Higher inventories + higher wages + 'free shipping' = lower margins.

Evidence Building Around 2H Margin Pressures

We've been vocal about our view that retail EPS growth will decelerate sharply throughout 2015, and that consensus estimates are largely too high.

 

1) Specifically, inventories are too high -- especially on the softline side of retail -- which creates a bearish gross margin setup into summer.

Retail Callouts (7/13): Evidence Building Around 2H Margin Pressures - 7 13 chart1

 

2) Wage pressure builds materially for the companies that were not proactive enough to announce meaningful pay hikes for employees (like WMT, TGT, TJX, MCD). Remember that Softline retailers (department stores, most notably) flex their employee base by 10-20% around back-to-school, and then buy 20-30% around holiday to satisfy seasonal demand. If you're wondering why we have not seen a wage increase out of KSS, M, or JCP yet, it's because they simply have not felt the pressure yet. We think they'll either have to raise wages or leave revenue on the table in 2H.

Retail Callouts (7/13): Evidence Building Around 2H Margin Pressures - 7 13 chart2

Note that WMT just announced headcount cuts at Sam's. WMT has definitely stepped up its pressure on its vendor base to help pay for its wages for some 500,000 employees, but now it's looking internally as well.

 

3) The third margin pressure, we think, will come from retailers using 'free shipping' as a promotional weapon. Many people are in denial about this, because the companies all say they won't do it. But ultimately, they're going to have to. Retail is headed to a 'free shipping all the time' model. It won't be a linear path, and will take a few years to get there. Also, we could argue that with more full price selling, free shipping could possibly be margin bullish -- but we're a long way off from answering that question. In the interim, in a world where retailers have stretched the calendar for keeping the stores open around the holiday season, they're going to need a new weapon. That's free shipping, and we think we'll see several negative surprises from retailers in 2H.

In fact, just this weekend, WMT announced that it will be taking its free shipping minimum down from $50 to $35 for a minimum of 30 days -- in line with AMZN and 40% higher than TGT. These are the types of offensive moves (in this case, perhaps it's defensive given that it is WMT's answer to Prime Day) we believe we will continue to see as the threshold for free shipping marches closer to $0. That will have big repercussions across the industry as online sales carry a gross margin bps below Brick and Mortar.

Retail Callouts (7/13): Evidence Building Around 2H Margin Pressures - 7 13 chart3

  

WMT - Walmart, Sam's Club expected to make job cuts

(http://www.katv.com/story/29524004/walmart-sams-club-expected-to-make-job-cuts)

 

WMT, AMZN - Walmart launches rival sale to Amazon's Prime Day

(http://www.usatoday.com/story/money/2015/07/13/walmart-sale-against-amazon-prime-day/29973997/)

 

ASNA - Ascena Retail Group, Inc. Provides Updated Fiscal 2015 Financial Outlook

(http://phx.corporate-ir.net/phoenix.zhtml?c=81419&p=irol-newsArticle&ID=2066992)

 

 

OTHER NEWS

 

J. Crew Launching New Division

(http://wwd.com/retail-news/specialty-stores/j-crew-launching-new-division-10182134/)

 

WMT - Walmart Canada looks into possible credit card data breach

(http://www.theglobeandmail.com/report-on-business/walmart-looks-into-possible-credit-card-data-breach/article25422632/)

 

WSM - PBTeen targets Gen Z with ‘awesome’ video campaign

(http://www.chainstoreage.com/article/pbteen-targets-gen-z-%E2%80%98awesome%E2%80%99-video-campaign)

 

UA - Under Armour Seeks to Expand Reach in Sports Bra Space

(http://wwd.com/markets-news/intimates-activewear/under-armour-sports-bra-collection-10181792/)

 

SKX - Skechers’ Mariano Rivera Ad To Air During MLB All-Star Game

(http://footwearnews.com/2015/focus/athletic-outdoor/mariano-rivera-skechers-mlb-all-star-game-43287/)

 

LULU, GPS - YogaSmoga Sees a Well-Balanced Empire

(http://wwd.com/retail-news/specialty-stores/yogasmoga-activewear-growth-10181815/)

 

MIK - Michaels financial future unfolds as big investors exit

(http://www.retailingtoday.com/article/michaels-financial-future-unfolds-big-investors-exit)

 

Search for Ever Cheaper Garment Factories Leads to Africa

(http://www.wsj.com/articles/search-for-ever-cheaper-garment-factories-leads-to-africa-1436347982)

 

Rakuten Buys Fits.me

(http://wwd.com/business-news/mergers-acquisitions/rakuten-buys-fits-me-10183077/)


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