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TJX | Takeaways From the Quarter

Takeaway: The stock is at an all-time high for a reason. At a 21x multiple, there’s higher-quality growth elsewhere at a better price.

Conclusion: The stock is at an all-time high for a reason – the company executes better than perhaps any retailer out there. That said, its ‘beat and guide down, and then beat again’ trend might come to an end sooner-than-later. Comps look fine – more than fine, actually. But the pressure on the cost side is simply unmistakable. With that staring us in the face along with a 21x multiple, we think there’s higher-quality growth elsewhere at a better price.

 

What We Liked:

  1. Tough to argue with a company that is printing accelerating comps in this environment. TJX doubled up the consensus number for the quarter at +6% which was a 150bps acceleration on the 2yr trend line. Every segment accelerated sequentially in the quarter on a 2yr basis except for Europe which held flat at 5.5%.
  2. Home Goods comps continue to rip at 9% for the quarter. While not a direct competitor to the RHs of the world, this coupled with the retail sales data which ticked up on both a 1 and 2yr basis in July gives us a lot of confidence in the strength of the home furnishings space (at least on the décor side of things).
  3. Guidance looks beatable. At least on the comp line. 3rd quarter guidance assumes a 200bps deceleration on the 2yr trend line similar to the what guidance implied in 2Q15. The company has beat guided comp numbers by a minimum of 160bps over the past 3 quarters.

What We Disliked:

  1. Cost pressures from both wage increases and incremental investments in the business led to the worst deleverage we’ve seen in a quarter since 2012. That’s just heating up for TJX and will continue to be a headwind – especially on the wage side – until it laps the $9.00 minimum wage it put into effect in June of 2015. Check out the table below – SG&A growth has gone from 3% to 11% in just 3 qtrs.  Today we saw both WMT and TJX feel a considerable amount of pressure from wages – any other retailers operating in this space were officially put on notice.
  2. Guidance for 3Q leaves a lot to be desired. The $0.07 guide down implies -3.5% to -6% EPS growth on a 2-3% comp with 13 percentage points of growth being taken out due to Fx, wage inflation, incremental investments, and pension costs. That pushes growth expectations into the toughest comp of the year in 4Q. Comp guidance is likely conservative, but costs are what they are.
  3. The SIGMA chart, which triangulates inventories, sales and margins looked a lot like the department store group with margins eroding and inventory growth ahead of sales. That’s not a great set up for TJX if we believe the 2-3% comp guidance. Especially when you consider the cost pressure on the SG&A line. We know that TJX can manage through it, but we’re more worried about what happens if the department stores become overly promotional.

TJX | Takeaways From the Quarter - TJX SIGMA

TJX | Takeaways From the Quarter - TJX table


[Quick + Dirty] Dr. Copper Checks Out (and Other Must-See Market Tweets From KM This Morning)

Below is a quick highlight reel from Hedgeye CEO Keith McCullough's Twitter feed earlier this morning. (Editor's note: Check out the timestamps on the tweets - we're talking early...)

 

***If you like what you see here, you'll really like our Early Look (morning newsletter), Investing Ideas (our analysts' top ideas curated by Keith) and The Macro Show (our live and interactive morning market show). 

*  *  *  *  *  *  *

[Quick + Dirty] Dr. Copper Checks Out (and Other Must-See Market Tweets From KM This Morning)  - z km 1

 

[Quick + Dirty] Dr. Copper Checks Out (and Other Must-See Market Tweets From KM This Morning)  - z km 2

 

[Quick + Dirty] Dr. Copper Checks Out (and Other Must-See Market Tweets From KM This Morning)  - z km 3

 

[Quick + Dirty] Dr. Copper Checks Out (and Other Must-See Market Tweets From KM This Morning)  - z km 4

 

[Quick + Dirty] Dr. Copper Checks Out (and Other Must-See Market Tweets From KM This Morning)  - z km 5

 

[Quick + Dirty] Dr. Copper Checks Out (and Other Must-See Market Tweets From KM This Morning)  - z km 6


DKS: Takeaways from the Quarter

Takeaway: Directionally, this is the best quarter DKS printed in over 2-years. There should be more to come.

Conclusion: The reason we turned bullish on DKS earlier this year came through in these numbers. No major changes to our model, or our thesis. While the model has its challenges long term, it has more EPS power to recoup near-term than people think. When $4+ EPS becomes a reality, this stock should be in the $60s, at least.

 

What We Liked:

  1. Growth Algorithm: This is the first quarter in six where growth in revenue<gross profit<EBIT<EPS<Cash Flow.
  2. The company beat without showing meaningful strength in the top line – showing the leverage in the model as the business recovers.
  3. Gross margin +47 bps despite e-comm (dilutive) accounting for all the growth. DKS also likely starting to recoup margin lost last year due to golf/hunting categories.  We estimate about 160bps hit to gross margin from these categories in 2014, almost all of which is recoverable.

 

What We Disliked:

  1. Store comp improved sequentially, but it was still negative which now makes 4 quarters in a row that the stores comped negative, and 9 out of the last 11.
  2. Implied New Store Productivity came in at 83%, a good number compared to most retailers but was the worst number at DKS since 2Q 2010. We would note that DKS opened 6 new locations in the south from Texas to Virginia during the quarter, including a dual format Dick's/Field & Stream in Hibbett's back yard Mobile, Alabama. 
  3. Inventory up 14% with sales up 8%, the worst spread in 7 quarters.  Management noting earlier receipts of BTS product and planned support of outdoor business as the reason for the increase – but that’s what they all say.

 

Change In Our View:

  1. More Bullish: We’ve been saying for four months that estimates are too low. This growth algorithm on trough-ish sales sets DKS up nicely when the business turns – which we think it will.
  2. No change to our model, which is already ~10% above consensus.
  3. Within 6 months, it’s more likely than not that the dialogue will evolve into the potential for DKS to hit ‘17E EPS a year early.

 

DKS: Takeaways from the Quarter - DKS Comp chart

 

DKS: Takeaways from the Quarter - DKS IS Table B

DKS: Takeaways from the Quarter - DKS BSCF tables B

DKS: Takeaways from the Quarter - DKS algo chart

 

DKS: Takeaways from the Quarter - DKS sigma


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RTA Live: August 18, 2015

 

 


Starts | The Hangover and the Cure

Takeaway: The -74% M/M drop in Northeast MF Permits (NY Tax-fueled) was overshadowed by a fresh 8-yr high in Single Family Starts.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

 

Starts | The Hangover and the Cure - Compendium 081815 

 

 

Today’s Focus:  July Housing Starts & Permits and August NAHB HMI (Builder Confidence Survey)

 

The hangover in permits in July following the NY tax exemption pull-forward was acute.  The notable gain in SF Starts offset the MF disappointment, continuing the trend of organic improvement and further supporting the crawling but durable nature of the recovery 

 

The 10-year high in builder confidence recorded in yesterday’s HMI print for August found positive confirmation in the July Starts data with single-family starts rising +12.8% MoM to +782K – the strongest level of new SF construction activity since December 2007.  Permits were less remarkable, declining -1.9% MoM (+6% YoY).

 

On the multi-family side, Starts and Permits declined -17% and -32%, respectively, as the hangover from the May/June pull-forward in MF permitting in New York State ahead of the impending tax exemption expiry was fully manifest in the July figures.  State level permits data is released on a 1-month lag but the NY impact is reflected in the regional data which is released alongside the headline figures.  Indeed, Multi-family Permits in the Northeast declined -74% sequentially, falling from 234K in June to 61K in July.    

 

On net, today’s release was a positive for the housing complex as the upside strength in single-family starts probably trumps the decline in permits which the market had begun to (under) discount the last couple weeks (consensus had ratcheted down permit expectations to 1217K, -9% MoM).   Looking ahead to the Existing Market - where mean reversion back to average levels of activity has already occurred - we’ll get the EHS data for July on Thursday where weakness in Pending Sales in the latest month and flat-to-down trends in Purchase Application activity augur  sequential softness in existing sales.  We’d view the consensus expectation for a -1.2% retreat in EHS as ballpark correct. 

 

Starts | The Hangover and the Cure - SF Starts   permits TTM

 

Starts | The Hangover and the Cure - Permits Northeast MF

 

Starts | The Hangover and the Cure - MF Starts   permits TTM

 

Starts | The Hangover and the Cure - Starts LT

 

Starts | The Hangover and the Cure - Starts SF   Total Trend

 

Starts | The Hangover and the Cure - NAHB LT

 

Starts | The Hangover and the Cure - NAHB Regional

 

Starts | The Hangover and the Cure - NAHB Indicator 

 

 

About Housing Starts & Permits:

The US Census Bureau records the number of new housing units that have obtained permits for construction and those that have begun construction. This data includes new buildings intended primarily as residential units. The US Census Bureau defines a start as, “Start of construction occurs when excavation begins for the footings or foundation of a building.” 

 

About the NAHB HMI:

The Housing Market Index (HMI) is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The monthly survey has been conducted for 30 years. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next 6 months as well as the traffic of prospective buyers of new homes. The HMI is a weighted average of separate diffusion indices for these three key single-family series. The HMI can range from 0 to 100, where a value over 50 implies conditions are, on average, improving, a value below 50 implies conditions are worsening, and an index value of 50 indicates that the housing market is neither improving nor worsening.

 

 

Joshua Steiner, CFA

 

Christian B. Drake

 

 


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks

This note was originally published August 13, 2015. If you're interested in learning more about how you can subscribe to our institutional research email sales@hedgeye.com

Investment Company Institute Mutual Fund Data and ETF Money Flow:
Investors continued to pull money from financial markets last week. All asset classes experienced redemptions except for international equity funds, which took in +$3.5 billion, and equity ETFs which were only slightly above break-even at +$85 million in contributions. While an exodus from domestic equity has been in progress since 2014, a newer trend of fixed income outflows has developed. So far this year, domestic equity mutual funds have lost a cumulative -$90.8 billion in withdrawals, including a massive -$7.3 billion outflow last week (the worst start to the first 31 weeks to any year this cycle running at over -$18.0 billion worse than 2012, the prior softest start to an annual period). Meanwhile, total fixed income mutual funds and ETFs have experienced negative flows in 7 of the last 9 weeks, including a -$5.0 billion outflow last week.

 

Investors appear to be using a significant portion of domestic equity withdrawals for their contributions to international equity funds, as international equity has experienced an almost mirror inflow of +$92.0 billion. Additionally, the chart below displays the generally inverse relationship between domestic stock outflows and international equity inflows. Our preferred proxy for these growing domestic redemptions is shorting T. Rowe Price (TROW) stock with over 60% of its assets-under-management in mutual funds (see our TROW report HERE).


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI20

 


In the most recent 5-day period ending August 5th, total equity mutual funds put up net outflows of -$3.8 billion, trailing the year-to-date weekly average inflow of +$36 million and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund contributions of +$3.5 billion and domestic stock fund withdrawals of -$7.3 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 -$4.4 billion, trailing the year-to-date weekly average inflow of +$1.5 billion and the 2014 average inflow of +$929 million. The outflow was composed of tax-free or municipal bond funds withdrawals of -$106 million and taxable bond funds withdrawals of -$4.3 billion.


Equity ETFs had net subscriptions of +$85 million, 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 outflows of -$582 million, trailing the year-to-date weekly average inflow of +$868 million and the 2014 average inflow of +$1.0 billion.

 

ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI1


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:


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI2


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI3


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI4


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI5


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI6



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.

 

ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI12


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI13


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI14


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI15


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI16



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:


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI7


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors continued to make significant withdrawals from the long treasury TLT ETF given worries over a possible rate hike by the Fed. The TLT lost -$365 million or -7% in redemptions last week. Meanwhile, the XLB materials ETF experienced the largest inflow last week on both a percentage and dollar basis. Investors contributed +$122 million or +5% to the XLB.


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI9



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.


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI17


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$1.2 billion spread for the week (-$3.8 billion of total equity outflow net of the -$5.0 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 +$1.9 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.)

  

ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI10



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:


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI11 



Jonathan Casteleyn, CFA, CMT 

203-562-6500 

jcasteleyn@hedgeye.com 


Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com







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