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KATE | Quick Thought on EPS

Takeaway: All-in, enough to stop the bleeding. When people start to look at ‘16 numbers, KATE looks downright cheap -- 90% growth and 17x pe.

While not a blowout quarter, KATE did not need one. The 10% comp was solid against a 7% consensus. Just as important to us is that EBITDA margins were +300bp, in-line with our model and double the consensus. Inventories up only 5.6% on 20% adjusted sales growth. The company took up EBITDA guidance by $5mm with a $2.8mm beat on the quarter. Similarly, comp guidance for the year was taken up from HSD to 9-11%, which implies 12% in the back half to get to the top end of the range – a number we think KATE can, and will beat.

 

One concern people might have is that e-comm was flat vs last year. But we were looking for a sequential slowdown due to the significant pull-back in FLASH sales. Also note that store comps accelerated from 6% to 12%, and on a 2-year basis from 14% to 22%. Not many retail stores are putting up a meaningfully accelerating comp trend these days.

 

Is this print enough to get KATE back up to where it was ($32) before the precipitous KORS-inflicted sell-off started in May? Definitely not. But it shows a level of consistency in sequentially improving results at a time when ‘perceived’ competitors are falling apart (note Coach put up a -19% comp yesterday, and threw KORS under the bus on its conference call by implying that it was driving down the category).

 

We think that at a minimum, these results should put a floor on KATE, which otherwise couldn’t seem to find a bottom. Its continued bifurcation in results between KORS and COH should make this much tougher to short, and when people turn the clock forward and look at 2016 numbers, KATE begins to look downright cheap relative to its growth – i.e. 90% growth and a 17x p/e.

 


USD, UST 2YR and China

Client Talking Points

USD

In the end, Americans should like our long-term #StrongDollar theme, but not all macro markets and corporates will in the meantime – this is the tug-of-war and #deflation is winning it. That said the USD is signaling immediate-term TRADE overbought at $1.08 vs Euro today, so be careful with grossed up Energy/Metals shorts.

UST 2YR

This is the 4th time the chartists have called for a “breakout” in the 2YR at 0.73-0.75% (since March) and every time that’s been wrong as both growth and inflation data slowing continue to back Fed Fund Futures off the SEP rate hike – we’re one bad jobs report away from rates breaking down faster (again).  

CHINA

Slower-for-longer (pretty obvious from a bottom up or top down research perspective)? But how about lower-for-longer for the propped up A-Shares? Couldn’t hold anything more than a 1-day gain with the Shanghai Composite down another -1.7% overnight, continues to signal bearish TREND in our model with no support to 3,441.

Asset Allocation

CASH 50% US EQUITIES 6%
INTL EQUITIES 10% COMMODITIES 0%
FIXED INCOME 22% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
HOLX

HOLX’s earnings release were as good as we expected, and in some spots, much better than our optimistic view. Given the move in the price, we did begin to do some work on Hologic’s Diagnostic segment. We touched base with a lab Director who currently does his testing on Hologic/Gen-Probe’s Panther system. During the call management made some positive comments about uptake of the systems and rising utilization per box. Our contact suggested the benefit from the Affordable Care Act was substantial  over the last 12 months, pushing volume up to a mid-teens growth rate, but that trends were flattening. But on the positive side Qiagen continues to cede share with an out of date test and the alternatives are primarily Roche and Hologic, but not Cepheid’s system. The bottom line is that we may be too conservative with our estimates for Diagnostics, which we’ve been assuming treads water from here.  However, we’re starting to think there is some incremental acceleration that’s possible, which would be welcome news indeed.  

PENN

After attending PENN’s analyst day at the Plainridge Casino in Massachusetts our Gaming, Lodging & Leisure Team struggled to find any negative takeaways. The property opened very strong in late June, and the strength continued in July. We are now raising our win per day per slot assumption to $500 from $400. Terrific highway access, a lower gaming tax rate and garage parking provide a competitive advantage in what seems to be a deeper market than the consensus view. Our 2015 and 2016 estimates are materially above the Street for EBITDA and EPS. Most importantly, we think PENN should generate an ROI of 28% on Plainridge, much higher than the Street anticipates.

TLT

As largely expected a sequential acceleration in GDP from Q1 to Q2 on a seasonally adjusted annual basis pulled forward the market’s expectation for a rate hike which = USD strength. The USD finished positive on the week (+0.50% on Thursday’s print alone).

  • U.S. GDP reported Thursday for Q2 came in at +2.3% on a Q/Q seasonally-adjusted annual rate and the market took it as a positive print à rate hike expectations pulled forward.
  •  Remember that 1) Consensus focuses on this SAAR number and 2) The GDP acceleration came off of an awful Q1 print (Q1 revised to a measly +0.60% for Q1 vs. initially reported -0.20%)
  • On a Y/Y basis (crazy Hedgeye speak) GDP for Q2 actually decelerated to +2.3% YY vs. 2.9% prior
  • With very difficult base effects in our model for 2H 2015 GDP we expect Q2 data (especially the GDP print) to provide support for the USD
  • Our expectation for Y/Y GDP in Q3/Q4 are +1.6% Y/Y (+1.4% Q/Q SAAR) and +1.5% Y/Y (+1.7% Q/Q SAAR) respectively; These prints (Q3 will come in October) will stoke a relatively more dovish FED for a short time (USD headwind) but until then we’ll ride the Q2 data train.   

 

Three for the Road

TWEET OF THE DAY

VIDEO: This is What Deflation Leads You To $TLT https://app.hedgeye.com/insights/45640-mccullough-this-is-what-deflation-leads-you-to… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Only the wisest and stupidest of men never change.

Confucius

STAT OF THE DAY

The average American spends about 70 hours a year on lawn and garden care, according to the American Time Use Survey.



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Big Summer Blowout!

“Hoo-hoo! Big summer blowout!”

-Oaken

 

Forget the blowout in #Deflation-linked currencies, commodities, stocks, bonds, etc. this morning and focus your mind on the old-new bull case that didn’t work. “Gas prices are low” is back. Everyone who loved US growth with high gas prices loves a big summer blowout!

 

Disney (DIS) reported blowout earnings last night (sort of), but everyone and their brother’s sister owns the Low-Beta-Big-Cap-Chart (Style Factors that are working) at this stage of the game, so the stock is indicated down -6% on that. Stocks do correct.

 

I have (going on) 3 daughters  (1 son), so I’m a big Frozen fan (sort of). Sadly, my son and I both know every word to some of your favorite Frozen songs. To commemorate our wedding anniversary today, I used my wife Laura’s favorite movie scene as my opening quote.

 

Big Summer Blowout! - 08.05.15 chart2

 

Back to the Global Macro Grind

 

Big summer blowout in Oil, Russian Rubles, Linn Energy (LINE) – and Apple! And while I wasn’t brave enough to signal buy on “valuation” in any of the #Deflation-links, yesterday I did dip a toe in the water in AAPL as it was signaling immediate-term TRADE oversold.

 

Hoo-hoo!

 

Don’t worry, I’m going to keep the most over-owned stock in human history (that’s what I called it when it broke the @Hedgeye TREND risk line of $126) on as short a leash as my man Oaken did his cabin inventory. Being long AAPL from here isn’t going to be easy.

 

Since the bull case for AAPL is efficiently “covered” by the Old Wall, let’s apply some Style Factoring to the analysis this morning:

 

  1. LOW-BETA – yes, relatively speaking to DIS at 1.1, it has a 0.9 Beta
  2. SIZE – does the mother of all market caps have “Big Cap”? obviously, yes
  3. SECTOR – oops, Tech (XLK) is bearish TRADE and TREND @Hedgeye (mainly because AAPL is)

 

AAPL is the heaviest weight in the XLK (Tech Sector ETF promoted on the inside cover page of Barron’s this weekend) and it’s bearish TRADE and TREND right now whereas MSFT and GOOGL are bullish on both of those risk management durations.

 

In other words, that’s why I said being long AAPL for anything more than a Real-Time Alert TRADE signal isn’t going to be easy. It’s always easier for me to be long companies like GOOGL (Low-Beta at 1.0, Big Cap, #NiceChart!) whose recent earnings release was a good thing.

 

When a company’s most recent report was a bad thing, then “longer-term” investors are hostage to all of the other bad macro things that could affect the price/volume/volatility of the stock (until they report their next quarter).

 

Moving along to that darn China thing (yep, it’s a Style Factor in your portfolio too), the Chinese dudes who have been trying to ban everyone from selling saw more selling overnight. This puts the Shanghai Composite in the following multi-duration @Hedgeye frame:

 

  1. CONTEXT: down -1.7% overnight (post a +3.7% up day prior, but a down -10.1% week prior to that)
  2. TRADE = bearish, with no immediate-term support to 3441 (closed at 3694)
  3. TREND = bearish, with intermediate-term resistance up at 4271

 

This is another major reason why owning AAPL is less easy than it was when the chart “looked good.” China is a very “bad macro thing” affecting the emotional break-downs of moving monkeys chasing AAPL’s “200-day.”

 

How bad is that thing btw? China, I mean. Since these dudes make up the numbers, can you have any confidence that you know the answer to that risk management question? Why can’t China be to 2015 what Lehman was to world markets in 2008?

 

Back to the big summer blowout in “gas prices” thing. As you can see in today’s Chart of The Day, back by popular client demand is the refreshed Hedgeye Squeeze Index, which reminds you that gas prices are only 6% of the median US consumer’s expenditures.

 

If you want US consumers (the median, who only makes < $50,000/year – no that’s probably not you) to accelerate real (inflation adjusted) spending, what you really need is a big generational blowout in their #1 cost-of-living (hint: shelter = 26%).

 

Oaken, bro – give me a price check on that. CoreLogic’s report on US Home Prices was +1.7% month-over-month (reported yesterday), taking year-over-year US #HousingInflation to +6.5%. That’s the 4th straight month of acceleration, in rate of change terms.

 

Sure, my boys reiterated our bullish 2015 housing call on that data point. But you can’t climb this mountain and come out of the US cost-of-living cabin feeling like everything was on sale. Boo-hoo!

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.14-2.29%

SPX 2068-2119
RUT 1
VIX 11.86-15.24
USD 96.99-98.34
EUR/USD 1.08-1.10
Oil (WTI) 45.01-47.54

 

Best of luck out there today,

KM

 

Big Summer Blowout! - 08.05.15 chart1

 

 

 


The Macro Show Replay | August 5, 2015

 


August 5, 2015

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BULLISH TRENDS

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BEARISH TRENDS

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