Cartoon of the Day: A Crude Reality

Cartoon of the Day: A Crude Reality - Oil cartoon 08.18.2015


From yesterday's Early Look by CEO Keith McCullough:


...[It's] rather damning for the USD to have one of its biggest down weeks of the summer and see both the commodities index and oil continue to crash/deflate (for those who remain long of them, that is).


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). 

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[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

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

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

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



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