After reviewing his risk ranges for INDA (the India ETF which probably faked-out chart chasers), Hedgeye CEO Keith McCullough voices his distaste for 50-day moving averages ("the moving monkey," as he affectionately calls them).
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).
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:
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%.
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).
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:
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.
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.
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.
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[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 feedearlier 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).
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:
Growth Algorithm: This is the first quarter in six where growth in revenue<gross profit<EBIT<EPS<Cash Flow.
The company beat without showing meaningful strength in the top line – showing the leverage in the model as the business recovers.
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:
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.
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.
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:
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.
No change to our model, which is already ~10% above consensus.
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.
RTA Live: August 18, 2015
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