Takeaway: We have a hard time modeling a scenario where HIBB does not get cut in half. $1.50 in EPS vs Street at $3.85. Still one of our top 3 shorts.
HIBB, one of our top Retail Shorts, preannounced a miss after the close. There’s a number of things that concern us.
1) Comps came in at -1.1% for the quarter. The company was +low double digits through the first 21 days of May. That suggests that June and July were horrible.
2) This is the first time in 23 quarters where the 2-year comp trend for HIBB went negative.
3) Even worse is that management notes ‘underlying business softness’ as one of the factors. That’s actually pretty unusual for HIBB. Whether business is good or bad, the company usually has a firm grasp on what’s driving its sales. This time, there’s a notable lack of rationale or understanding for such a significant turn in trends.
4) There was also no guidance provided beyond the quarter. In the past, HIBB would usually provide a full-year update as well.
5) Our sense on this is that HIBB is feeling the brunt of why we’re bearish…
a) It has no e-commerce business, and that’s where the incremental growth in the industry is coming from. Simply put, HIBB is finally starting to lose share to dot.com.
b) It is feeling the pain of overlap with Dick’s, Academy, and Sports Authority as HIBB grows outside of the Bible Belt (bad idea) and as those other retailers grow in HIBB’s home turf.
6) Nike is absolutely killing it just about everywhere in the US -- except at Hibbett? That makes zero sense to us as Nike is about 60% of Hibbett’s footwear wall.
7) The question for us at this point is whether this turn of events will finally cause HIBB to accelerate its decision to start up an e-commerce business.
a) If the answer is Yes, then we think there’ll be about a 3-5 point hit in margins for 2-years before we see any notable revenue benefit.
b) It the answer is no, then expect continued ‘unexpected’ top line weakness and earnings misses.
From where we sit, both outcomes are bad. But knowing this management team, we think they need to get one or two more black eyes before stepping up and making the big investment in e-comm.
Either way, we think that the end-game is margins getting cut in half, and about $1.50 in earnings in three years. That’s a pretty massive statement given that the consensus is at $3.85. What kind of multiple do you put on a name with shrinking earnings and 60% downside to consensus? Even if we generously say 15x a trough-ish EPS number, we’re talking about a $22 stock. The stock is trading after-hours at $43. If you’re tempted to cover – don’t.
Black Box Sales, Traffic
Black Box released same-restaurant sales and traffic estimates for the month of July last week that showed decelerating growth versus a strong performance in the month of June. Same-restaurant sales grew to +1.6% down 50 basis points (bps) sequentially, but up 110bps YoY and same-restaurant traffic decreased -1.2%, an 30bps sequential improvement, and up 50 bps YoY.
Restaurant price increases are beginning to taper off, after the nearly 12-months of increases. Not surprising after the last three months of flat price increases (~+3%), traffic has started to accelerate slightly. As you can see from the chart below, there is still a clear divergence between the operators taking price and a decline in traffic. In July there was a continuation of the uptick in traffic we saw in June, this trend bodes well for the industry, although we are still skeptical it will last long term.
Knapp July Sales Trends
Knapp reported that comparable restaurant sales in July 2015 were +0.5% for same-store sales and -1.1% for guest counts. July comparable restaurant sales represent a sequential slowdown of -100bps, while traffic is flat sequentially for the month. On a 2-year basis, sales decelerated to -0.3% and traffic matched June’s 2-year average, down -2.1%.
Employment Growth Slowing
The month of July was a mixed bag of results for employment. We saw the second month in a row of sequential employment declines for the 25-34 YOA cohort, and a -42bps YoY decline in the 20-24 YOA cohort. The 55-64 YOA cohort led the growth in the month, up 2.52% YoY, and 31bps sequentially. The downward trend is concerning, especially given that a large portion of the growth is in the 55-64 YOA cohort, with a considerable amount of that employment being part time.
July Employment Growth Data:
Thoughts from our macro team on July Employment
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Takeaway: Fade the CAT bounce. We see another +25% relative downside in the name.
We’ve been negative on Caterpillar (CAT) since mid-2012 when we launched on CAT. Our Industrials Sector Head Jay Van Sciver has been out in front of the name and followed up the company’s Q2 results with a note titled, “CAT: It Gets Worse From Here.” That pretty much says it all.
* * * * *
Over the weekend, Barron’s ran an article suggesting hope for the stock. We disagree. There was a lack of proper historical context (e.g. resources-related capital investment cycles are closer to thirty years, not three) as well as complete disregard for what we see as one of the key risks – Cat Financial, where margins are in decline and loan loss reserves on the rise, as well as building used equipment in several key product categories.
On a related note, one of the best visuals Van Sciver highlighted in his June 17th Black Book is the list of Cat Financials’ major mining accounts – it’s not exactly a picture of health.
Bottom line: We see another +25% relative downside in the name and suggest taking advantage of any bounce (like today’s Barron’s “pop”) as an opportunity to move out of the name.
**If you would like to view our research on CAT (including Jay Van Sciver’s recent Black Book) or are interested in learning more about Hedgeye’s institutional research, please send an email to firstname.lastname@example.org.
Takeaway: Investors continue to favor international equity funds, which took in +$3.8 billion last week maintaining a perfect inflow streak for 2015.
This note was originally published August 06, 2015. Click here for more information on how you can begin your Hedgeye subscription today.
Investment Company Institute Mutual Fund Data and ETF Money Flow:
In the 5-day period ending July 29th, investors made net withdrawals from most asset classes but continued to allocate to international equity funds with a +$3.8 billion contribution. Investors have made positive subscriptions to international stock funds every week so far in 2015 aggregating to +$88.5 billion year-to-date. The source of funds continues to be domestic equities, with redemptions in 24 of 30 weeks so far in 2015. Year-to-date withdrawals in domestic stock funds now total -$83.5 billion, the worst 30 week start to any year this cycle. Additionally, investors have been backing off fixed income recently with fund flows to total fixed income mutual funds and ETFs having been negative in 6 out of the past 8 weeks.
In the most recent 5-day period ending July 29th, total equity mutual funds put up net outflows of -$1.4 billion, trailing the year-to-date weekly average inflow of +$166 million and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund contributions of +$3.8 billion and domestic stock fund withdrawals of -$5.2 billion. International equity funds have had positive flows in 48 of the last 52 weeks while domestic equity funds have had only 10 weeks of positive flows over the same time period.
Fixed income mutual funds put up net outflows of -$4.7 billion, trailing the year-to-date weekly average inflow of +$1.7 billion and the 2014 average inflow of +$929 million. The outflow was composed of tax-free or municipal bond funds withdrawals of -$88 million and taxable bond funds withdrawals of -$4.6 billion.
Equity ETFs had net redemptions of -$1.9 billion, trailing the year-to-date weekly average inflow of +$2.3 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net inflows of +$384 million, trailing the year-to-date weekly average inflow of +$916 million and the 2014 average inflow of +$1.0 billion.
Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.
Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2014 and the weekly year-to-date average for 2015:
Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.
Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2014, and the weekly year-to-date average for 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:
Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, the materials XLB ETF saw the highest percentage net withdrawal last week of -3% or -$65 million.
Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.
The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$998 million spread for the week (-$3.3 billion of total equity outflow net of the -$4.3 billion outflow from fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$1.7 billion (more positive money flow to equities) with a 52-week high of +$27.9 billion (more positive money flow to equities) and a 52-week low of -$18.1 billion (negative numbers imply more positive money flow to bonds for the week.)
Exposures: The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
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