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Retail Callouts (7/14): RETAIL SALES SLOWING, VNCE, M

Takeaway: Yes growth is slowing. Yes we expected it. Compares throughout the rest of the summer, and fall, AND holiday, don't get any better.

Retail Sales Slowing

Expectations were definitely out of whack headed into this Retail Sales print given the big headline miss. Two things… 1) The level of sales growth relative to last year is absolutely positively decelerating. In January we saw 5.4% growth, and we've steadily decelerated to 1.9% in the following five months. 2) We're scratching our heads as to why this is a big 'surprise'. Commentary from large and small retailers alike have supported a decelerating growth rate. In addition, while the 2-year run rate in the real discretionary categories is below what we witnessed in 2H14 (4%) it is consistent with what we've seen over the past 3-months. The bottom line...Yes growth is slowing. Yes we expected it. Compares throughout the rest of the summer, and fall, AND holiday, don't get any better.

Retail Callouts (7/14): RETAIL SALES SLOWING, VNCE, M - 7 14 chart1 

 

M - Macy’s Sells Downtown Pittsburgh Building for Redevelopment; Store to Close

(http://investors.macysinc.com/phoenix.zhtml?c=84477&p=irol-newsArticle&ID=2067241)

Takeaway: The Pittsburgh store sale doesn't appear to be a deviation from the company's prior store strategy or indicate any change in management's willingness to monetize other assets through a sale leaseback transaction. Fact is Macy's didn't belong in the downtown Pittsburgh market -- the co-tenant list alone surrounding the store confirms that. This is an opportunistic move by the company to monetize a 1mm+ sq. ft. property that was much too big for the market it catered to.

 

VNCE - CEO Jill Granoff To Depart After Transition Period

(http://investors.vince.com/press-releases/press-release-details/2015/Vince-Holding-Corp-Announces-Management-Reorganization/default.aspx)

CEO out just three weeks after the CFO 'resigned immediately'.  Should this be a real surprise to anyone given that the stock is down 73% in seven months, but is 56% owned by Private Equity? With today's announcement flushing out the last of the bulls, we think the stock is starting to look pretty intriguing. The reality is that the brand remains relevant. Management did not do any damage, it just failed to execute on a brand/distribution growth plan. With a total Enterprise Value below $500mm, and an achievable EBITDA level of $125mm, we're looking at a sub-4.0x EBITDA multiple. This name might be damaged goods for the investment community for a while, but we'd be surprised if it isn't part of a bigger company in 1-2 years (or sooner if the stock drifts into the single digits).

 

Chain Store Sales - Retail Sales slowed through June, and July doesn't appear to have picked up based on this morning's ICSC reading.

Retail Callouts (7/14): RETAIL SALES SLOWING, VNCE, M - 7 14 chart2

 

 

OTHER NEWS

 

CASY - Casey’s General Stores CEO to Retire

(http://www.wsj.com/articles/caseys-general-stores-ceo-to-retire-1436819564)

 

Kate Hudson athleisure line going brick-and-mortar

(http://www.retailingtoday.com/article/kate-hudson-athleisure-line-going-brick-and-mortar)

 

World’s largest mall slated for 2016 opening

(http://www.chainstoreage.com/article/world%E2%80%99s-largest-mall-slated-2016-opening)

 

DLTR - Dollar Tree plans South Carolina distribution center

(http://www.chainstoreage.com/article/dollar-tree-plans-south-carolina-distribution-center)

 

RCII - Rent-A-Center sells 14 Canadian stores to easyhome Ltd.

(http://www.bizjournals.com/dallas/news/2015/07/13/rent-a-center-sells-14-canadian-stores-to-easyhome.html)

 

 

 


No Worries?

Client Talking Points

CHINA

They unhalted 250 names overnight (793 are still halted) and the Shanghai Composite Casino couldn’t hold it’s 3-day gains. The Sganhai Composite closed -1.2% and remains in crash mode (down -24% month-over-month) < @Hedgeye TREND resistance of 4,275. 

#EUROPESLOWING

If only they didn’t have to report the JUN and JUL data! Eurozone ZEW (economic sentiment) slows to 42.7 JUL vs 53.7 JUN as JUN CPI/PPIs across the board stops “recovering” – German CPI 0.3% JUN, Spain’s 0.1, Sweden slows to -0.4 vs +0.1 last.

OIL

Commodity (and Junk Debt) #Deflation = on as long as this Down Euro begging remains and Janet Yellen doesn’t get as dovish as the data is getting; WTI -1.9% with no immediate-term support to $49.08. Natutal Gas looks like a great short here too.

 

**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET with a full lineup including CEO Keith McCullough, Healthcare Sector Head Tom Tobin, Financials Sector Head Josh Steiner and Macro Analyst Darius Dale.

Asset Allocation

CASH 53% US EQUITIES 3%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 29% INTL CURRENCIES 9%

Top Long Ideas

Company Ticker Sector Duration
GIS

General Mills remains on the Hedgeye Consumer Staples Best Ideas list as a LONG. GIS has a lot of things going for it and they are going to show it in the top and bottom line this year. Over the last couple of months, the company has announced the removal of artificial colors and flavors from their cereals. More recently, they have committed to using only cage-free eggs.  Many of these small actions that management is taking are going to have a snowball effect as they go throughout FY16. Below is a list of some of the biggest things that we are looking forward to this year:

  1. Yoplait in China
  2.  Gluten-Free Cheerios
  3. No artificial colors or flavors in the cereal
  4. Granola innovation / Muesli
  5. Greek Plenti / Whips
  6. Original yogurt sugar reduction
  7. Renovation on Grain Snacks
  8. Strong push on Natural & Organic products
  9. Delivering Value to consumer on brands like Totino’s and Hamburger Helper
  10. Bringing U.S. innovation International
PENN

Gaming, Lodging and Leisure Sector Head Todd Jordan reiterates his team's bullish high-conviction thesis on Penn National Gaming. The company remains one of our favorite names on the long side and boasts the best new unit growth story in domestic gaming. Jordan further notes that with more states releasing their June gaming revenues this past week, we feel more confident in our higher than consensus Revenue, EBITDA, and EPS estimates.

TLT

Long-term Treasury rates remain the best proxy for forward-looking growth expectations. We outline three components of secular stagnation below to explain the SAVINGS/INVESTMENT GLUT that is at the heart of the academic argument for current policy measures:

  1. Negative demographic trends globally (decline in population growth and aging population)
  2. Reduced capital intensity in leading industries (think of the capital and labor required to start Facebook over U.S. Steel)
  3. Falling relative prices of capital goods       

Three for the Road

TWEET OF THE DAY

VIDEO: This Could Crash The Market  https://app.hedgeye.com/insights/45178-mccullough-this-could-crash-the-market… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Commitment is the enemy of resistance, for it is the serious promise to press on, to get up, no matter how many times you are knocked down.

David McNally

STAT OF THE DAY

Nationally, Canadian Home Prices have risen around 160% since the turn of the millennium.


CHART OF THE DAY: "New Tech" Valuation > Different This Time?

Editor's Note: This is an excerpt from today's morning strategy note to our customers written by Hedgeye CEO Keith McCullough. Click here to subscribe.

 

...As you can see in the Chart of the Day, the “New Tech” trades at, on average 149.5x earnings. So no worries there. As long as the products are cool, I’m sure this time will be different (until they miss a sales growth whisper).

 

Instead of debating why you shouldn’t sell some Netflix (NFLX) at 278x earnings this morning (why not just buy one of these names that has no earnings at all? #EasierToDebate), allow me to get back to doing what I do - risk managing growth.

 

CHART OF THE DAY: "New Tech" Valuation > Different This Time? - New Tech CoD


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Why Sell?

“Ask ourselves why we do what we do…”

-Todd Gongwer

 

That’s a pretty basic leadership and risk management question. And I sincerely hope that you ask yourself that question every day. I do. Being transparent and accountable isn’t easy; especially where it all starts – with yourself.

 

Why did we build a firm that dares recommend you actually SELL things? Whether it’s hyped up “social” cloud stocks with “TAM multiples” or Ponzi-like MLP schemes that could only be concocted by Old Wall bankers, I’m sure glad we did.

 

How about the simpler market SELL calls, like the ones you should have heeded every time the SP500 is up +2-3% for 2015 YTD? The US stock market has mean reverted to DOWN YTD multiple times. I wonder if both growth and earnings slowing have had anything to do with it? Ask yourself. And be honest. Did you buy stocks expecting earnings to be down in 2015?

 

Back to the Global Macro Grind

 

When top-down GDP growth slows, consensus needs central-planning to reflate markets. And when bottom-up earnings slow, we definitely need to beg the company to “buy back the stock.” This happens at the end of every economic cycle, fyi.

 

Another way to look at growth (when both US and Global growth are slowing) is to buck up for the growth that you can find. Our buddies at Morgan Stanley call this “New Tech” and, oh boy, are the chart chasers loving that stuff.

Why Sell? - bubble cartoon 09.30.2014

As you can see in the Chart of the Day, the “New Tech” trades at, on average 149.5x earnings. So no worries there. As long as the products are cool, I’m sure this time will be different (until they miss a sales growth whisper).

 

Instead of debating why you shouldn’t sell some Netflix (NFLX) at 278x earnings this morning (why not just buy one of these names that has no earnings at all? #EasierToDebate), allow me to get back to doing what I do - risk managing growth.

 

Let’s do #EuropeSlowing because, unfortunately post Greek Gong Show, they still had to report their data this morning:

 

  1. Eurozone ZEW (economic sentiment) slows again in JUL to 42.7 from 53.7 in JUN
  2. German and Spanish inflation (CPI) stalled at +0.3% and +0.1% year-over-year, respectively
  3. Swedish and Finnish  #deflation came back online with year-over-year prints of -0.4% and -0.1%, respectively
  4. Swiss Producer Prices (PPI) maintained #deflation at -6.1% year-over-year
  5. UK CPI of 0.0% y/y (JUN) and PPI of -1.5% y/y were pretty much flat with where the data was in MAY

 

In bottom-up-stock-picker speak:

 

  1. If you are a producer and you have no pricing power, that is bad
  2. If you are a consumer and you get lower-prices, that is good

 

The problem is that corporate profits lose during the #Deflation inasmuch as the consumer takes that spread. Now that would be a great thing for US and Global consumption demand, if only we were at the beginning (not the end) of a cycle.

 

NEWSFLASH: you can’t centrally plan economic cycles, age, and/or time

 

But you can squeeze the poor hedgie who chases high and shorts low. And, to a degree, I think that was the main driver of yesterday’s global stock market ramp to lower-all-time-highs. Here are 3 nuts to consider within that thought:

 

  1. CFTC non-commercial futures/options data showed a net SHORT position of -162,467 SP500 contracts
  2. Thursday’s front-month VIX close of 19.97 was at the top-end of my 13.52-20.63 risk range
  3. High Beta Stocks (in SP500 Style Factor terms) were -5.1% (vs. Low Beta +0.5%) on a 1-month duration

 

Oh, and Total US Equity market Volume (including dark pool) was -16% and -17% yesterday vs. its 1-month and 1-year averages, respectively. We former hedgie guys call that a no-volume squeeze.

 

So what do you do today? You sell.

 

Yep. That’s it. That’s my “call.” You look at everything you own and ask yourself whether or not what you own is at the top-end of its immediate-term risk range or not. And if it is (like SBUX is for example), you sell some.

 

If I’m the bad guy for thinking that way, so be it. Where I was bred in this business, when both top-down growth and bottom-up profit cycle earnings started to go from good to bad, I was taught to sell.

 

That’s what I did at the end of the 2000 cycle. That’s what I did at the end of the 2007 cycle. And that’s what I am telling you to do now at the end of the 2015 cycle. That’s what I do. Ask yourself what you did/do.

 

Our immediate-term Global Macro Risk Ranges (and intermediate-term TREND views in brackets) are now:

 

UST 10yr Yield 2.19-2.47% (bearish)

SPX 2041-2105 (bearish)
RUT 1 (bearish)
Nikkei 191 (bullish)
VIX 13.52-20.63 (bullish)
USD 95.61-97.42 (bullish)
EUR/USD 1.09-1.12 (bearish)
YEN 122.14-124.10 (bearish)
Oil (WTI) 49.08-53.14 (bearish)

Nat Gas 2.65-2.89 (bearish)

Gold 1148-1165 (bearish)
Copper 2.43-2.62 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Why Sell? - New Tech CoD

 

****Join Keith LIVE this morning at 8:30am ET for The Macro ShowClick here.


LNKD: New Best Idea (Long)

Takeaway: The 1Q15 hiccup was largely due to a big investment into an accelerating macro tailwind. Rebased expectations + discount = entry point

INTRODUCTION

This is a summary of the main points behind our thesis.  As usual, we will be publishing follow-up notes with incremental analysis, and hosting a call to run through the detail.  In the interim, let us know if you have any questions or would like to discuss in more detail.

 

KEY POINTS

  1. REAL PLATFORM, REAL CASH: LNKD is a professional networking site, but its core value comes from its database of professionals profiles, which we believe can't be replicated at comparable scale.  That competitive moat has led to a premium-priced product portfolio that produces the margins/cash flow necessary to consistently reinvest in its business and expand its TAM. 
  2. EMPLOYEE’S MARKET = GROWING OPPORTUNITY: We see LNKD’s Talent Solutions segment as the swing factor; the bulk of that TAM is not in account volume (LCS customers), but in up-selling those accounts (ARPA).  Historically, that up-sell becomes much easier for LNKD as the burden to fill open positions intensifies, which the current macroeconomic backdrop suggests is the case (see tracker below). 
  3. TRANSITION = INVESTMENT: Mgmt didn't really emphasive what caused the salesforce account transition that pressured 1Q15 results.  LNKD ramped its salesforce by 51% (largest increase since 3Q13).  We see the ramp as an as investment given the improving selling environment mentioned above.  LNKD's 2015 guidance cut captured the transitory impact from the transition, but more importantly, rebased consensus expectations that were tracking above initial guidance.
  4. BUT NOT A SLEEPY LONG: Everything we discussed in point 2 above also means that we are late cycle in terms of employment, which makes us somewhat uneasy in terms of the holding period.  The other major risk is consensus upping estimates too much on a good print and pushing us out of the name.  In short, we may only be in this position for 1-2 quarters.  

 

REAL PLATFORM, REAL Cash

LNKD is a professional networking site, but its core value comes from its database of professional profiles.  Many of LNKD’s core services are essentially paywalls, predicated on various degrees of access (search & outreach) to these profiles.  LNKD's flagship & highest-priced product (Recruiter) allows employers/recruiters access to every profile in LNKD’s database, while its lower-priced products naturally offer less functionality, with 3rd-degree search and fewer InMails (solicitation emails).

 

LNKD: New Best Idea (Long) - LNKD   Products

 

We believe LNKD is one of those rare cases where the first-mover advantage really means something.  The profiles in LNKD's databases are user-generated, and the content within them is generally more extensive than that of other social media sites.  We doubt many of LNKD's existing users would be willing to recreate their profiles elsewhere given the time/effort necessary to do so (at least at any meaningful scale).  In short, LNKD has a virtual moat around its content.  

 

There may not be another platform that can offer a professional search capability comparable to the LinkedIn platform.  In turn, LNKD's product portfolio garners premium pricing, which has produced the margins/cash flow necessary to consistently reinvest in its business, and expand its TAM.  

 

LNKD: New Best Idea (Long) - LNKD   Rev Cash

 

EMPLOYEe’S MARKET = GROWING opportunity

We're going to break down LNKD's overall TAM in greater detail in a follow-up note, and within our upcoming deck.  Below, we're going to focus primarily on LNKD's current opportunity, i.e. the selling environment, which we define as the size of LNKD's TAM at different points in the economic cycle.  

 

We view LNKD's US Talent Solutions segment (primarily Recruiter & Job Postings) as the swing factor; not only because its the largest segment (~60% of revenue), but the one most sensitive to economic cycles.  There are two key considerations when dissecting LNKD's US Talent Solutions TAM, and its current opportunity.     

  1. TAM favors ARPA: The bulk of LNKD's TAM is not in account volume (LCS customers), but in up-selling those accounts (Average Revenue per Account or ARPA) via additional licenses/job postings.  
  2. Macro drives ARPA: Historically, that up-sell becomes much easier for LNKD as the burden to fill open positions intensifies (tracker below). 

 

We're attempting to illustrate both points in the below analysis.  We are calculating LNKD's TAM and current opportunity specifically for its flagship Recruiter product.  

 

We are basing our analysis on historical hiring needs (peak, trough, and current hiring rates by firm size according BLS data since 2001).  Note that hiring needs are based off of gross hiring (rather than net) since firms must replace open positions due to employee churn (i.e. terminations, quits and retirement).  More importantly, we're using rather restrictive assumptions to both simplify the analysis, and to err on the side of being conservative (see notes in table below for detail).

 

LNKD: New Best Idea (Long) - LNKD   Recruiter TAM condensed

 

Regarding the selling environment, note that current hiring rates are elevated, but not at historical peak levels; suggesting a healthy selling environment with room for improvement.  Historically, it becomes much easier for LNKD's salesforce to up-sell its existing customer base as the burden to fill open positions intensifies, which both the analysis above and our tracker below suggests is the case.  

 

LNKD: New Best Idea (Long) - LNKD   ARPA vs. JOLTS Tracker q q

 

TRANSITION = INVESTMENT

Management didn't really emphasive what caused the salesforce account transition that pressured 1Q15 results.  LNKD made a massive investment in its salesforce (up 51% y/y), which is what we want to see given the improving selling environment mentioned above.  

 

That said, we're not reading too much into the 2015 guidance cut on the 1Q15 release, especially since 1Q15 results came in above quarterly guidance.  We suspect management used the 1Q15 consensus miss to rebase full-year expectations, which were tracking ahead of guidance at the time.  

 

LNKD cut its full-year revenue guidance by ~$50M, which management attributed to the following:

  • +$20M-$25M: Lynda Acquisition Revenue (net deferred revenue write-off)
  • -$50M: Heightened Fx headwinds (EUR/USD)
  • -$30M: Operational issues, primarily in Marketing Solutions (display advertising) and Talent Solutions (salesforce account transitions)

Regarding the account transition, management stated that ~60% of its customer accounts now have a new sales rep, but implied the transition will be a temporary headwind.  We're inclined to take management's word on the latter only because the transition was due to the aforementioned investment in its salesforce, which grew at its highest rate since 3Q13.  Given the current macro backdrop mentioned above, we see the ramp in its salesforce as a coiled spring. 

 

LNKD: New Best Idea (Long) - LNKD   Sales Headcount 1Q15

 

As we mentioned above, we see the Talent Solutions segment as the swing factor, especially now that consensus appears to have concentrated their estimate reductions into the other two segments.  In the scenario analysis below, we're flexing LNKD's two core drivers for its Talent Solutions segment: LCS Accounts & ARPA.  

 

LNKD should have no problem exceeding consensus Talent Solutions estimates barring a notable deceleration in BOTH of these two factors from 1Q15 levels, which were depresssed by the account transition mentioned above, and heightened Fx pressure that should abate in 2H15 on easier comps.  

 

LNKD: New Best Idea (Long) - LNKD   Consensus 1Q15

LNKD: New Best Idea (Long) - LNKD   TS Scen 2015

 

BUT NOT A SLEEPY LONG

Everything we discussed regarding the strength of the job market also means that we are late cycle, which makes us somewhat uneasy in terms of the holding period.  The other main risk is consensus upping estimates too much on a good print and pushing us out of the name.  In short, we may only be in this position for 1-2 quarters. 

 

 

We will be publishing follow-up notes with incremental analysis, and hosting a call to run through the detail.  In the interim, let us know if you have any questions, or would like to discuss in more detail.

 

Hesham Shaaban, CFA

@HedgeyeInternet 


The Macro Show Replay | July 14, 2015

 


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