HIBB | Key Changes on the Margin

Takeaway: HIBB already preannounced this one, though it threw out guidance for the back half that is anything but a slam-dunk.

HIBB already preannounced this one, though it threw out guidance for the back half that is anything but a slam-dunk. We still think there’s earnings risk this year, but more importantly 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.


HIBB | Key Changes on the Margin - hibb financials


What We Liked

  1. It’s hard to find a lot to like in this print, but if we had to call out two positive changes on the margin it would be that a) HIBB realizes it has a merchandising problem and b) the company seems to have a timeline in place to get its e-comm business off the ground.
    • As far as merchandising is concerned, we have a hard time reconciling management’s belief that its merchandise assortment is wildly out of whack with current trends. In light of the sales growth numbers being put up by NKE and UA in the US why wouldn’t HIBB benefit? We think it’s more of an issue with sales moving to the web (where HIBB has no presence) and poor allocations.
    • We’ll characterize the e-comm launch schedule as a positive because it might ultimately help curb the market share loss by FY18. But, it’s going to be expensive to build (300-500bps of margin) before the company is even up and running and there is no guarantee that will be a destination for shoppers on the web when the selection is much better at a handful of competitive sites.


What We Didn’t Like

1. Comps were not a surprise given the preannouncement last week, but the composition of the quarter (negative comps in both June and July) leads us to believe that there is something more material going on with HIBB’s consumer group than it cares to admit.  The long term trend in monthly comps is pretty clear and over the near term HIBB has a lot of wood to chop against mid/high single digit comps in the months of September through November. A 2% comp isn’t a heroic assumption for 3Q given the HSD comp to date fueled by the tax shift and the weight of August for the quarter at 4%. But, that means the company would have to print something in the 0.5% range in 4Q to get to flat for the year and that implies a 170bps acceleration on the 2yr trend line. We’d argue that the comp trend chart below is one of the ugliest in all of retail.

HIBB | Key Changes on the Margin - hibb monthly comps


2. Gross margins have been down in 9 of the past 10 quarters and we think there is still room to move lower as the company continues to delever on the occupancy side with negative to LSD comps. The company needs at least a 3% to leverage on the gross margin line and we don’t have any confidence that the company can consistently deliver anything close to that number. Plus the inventory level is still far too high with the sales to inventory spread  at -8% with merchandise that management clearly stated hasn’t resonated with customers.


HIBB | Key Changes on the Margin - hibb sigma


WhiteWave Foods (WWAV) is on our Hedgeye Consumer Staples Best Ideas list as a LONG and Hain Celestial (HAIN) is on the Consumer Staples Best Ideas list as a SHORT.


With both stocks down roughly -11% over the past week, we wanted to give you our update.


HAIN IS STILL A SHORT. HAIN reported a soft quarter this week that saw a significant slowdown in the organic growth rate to 6%.  In addition, the quality of the HAIN’s quarter was extremely weak with a significant increase in the rate of “adjustments” to make the number and a significantly lower tax rate.  Given all that, HAIN just barley met consensus numbers. 


Both stocks are weak today given the significant slowdown in the natural channel.  On this front, HAIN has significantly more exposure to the natural channel.  In fact, as WWAV points out HAIN is not even one of the largest 25 companies in conventional channels.  While this may provide some upside for future growth, the company is facing significantly greater “better-for-you” competition in that channel. 




Another area of concern for HAIN is the UK.  The company reported flat revenue growth on a constant currency basis.  Given the maturity of the core brands in the UK, at best this business has little organic growth.  On a sum-of-the-parts basis, we believe the HAIN UK business is significantly overvalued. 


WWAV IS STILL A BUY. In our Black Book presentation we called out the fact that there were going to be short term dips in the stock price. This is one of those dips, and we view it as a Black Friday Super Sale. The stock has come down from $50/share to $44/share in just five trading days.


We feel this stock is being unfairly dinged due to its perceived high correlation with the Natural channel stores such as Whole Foods Market (WFM). In fact, Wal-Mart and its subsidiaries is their largest customer, accounting for 14.6% of total sales, with the top 10 customers together accounting for roughly 44% of sales, making them very well diversified from a customer perspective. Moreover, their brands are leaders in every category they participate; few CPG companies can make that claim, although some will try (HAIN).


Bottom-line, WWAV is still on our Hedgeye Consumer Staples Best Ideas list, and will probably be on the list until it is acquired.


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw



FL | Adding to Best Ideas List as a Short

Takeaway: We were vocal all year on this long term short (prematurely so). But the bridge between near term and long term is getting very clear.

We’re adding FL to Hedgeye’s Best Ideas list as a short. Let’s be clear about something first…We’ve been actively talking about FL as one of our better short ideas since the start of the year. See our note below from March 4th. In other words, we thought it was a short $15 lower than where it is today – and were (too) early.  The long-term (TAIL) call was crystal clear to us then, as well as the risks to the business model that are not being priced in to the stock. But we were less certain on near-term drivers to bridge the TRADE call with the TAIL. Now, however, we think the intermediate-term picture is much more clear, at least from where we sit, and we think that returns will head lower by the end of this year (retail stocks rarely go up when returns go down).   All in, if we’re wrong in our analysis, we think the upside is $75 (15x $5). If we’re right, we think it can revisit $50-$55 (12-13x $4.00), at least 3 to 1 downside to upside.


The best characterization of our FL call is that the company has done everything right over this economic cycle, such that it took net margins from -2% to +7%, and drove RNOA from 5% to 28%. As such, FL is sitting today at a peak multiple on what we believe to be peak earnings (and almost certainly peak earnings growth). The problem is the lack of runway in key earnings drivers, like a) changing up store banners, closing underperforming assets, and taking Nike up to 80% (from 60%). They were all tremendous profitability and margin enhancers. Unfortunately, they are irreplicable. There are almost no more stores left to close outside of the normal course of business, asset swapping opportunities between banners (Locker, Lady, Champs…) are few and far between, and Nike shifting above 80% of sales – already an exceedingly unhealthy level – is very slim. In fact, one could argue that FL is Nike’s best off-balance sheet asset.


To own FL you need to believe that the company can a) grow square footage (capital intensive and risky), b) comp mid-single digits for multiple years (unlikely), c) drive gross margin meaningfully higher (Nike won’t allow that, and FL’s .com business is not margin accretive), d) meaningfully leverage SG&A (but its’ sub-20% SG&A ratio is already the lowest in retail), and/or e) significantly boost asset turns (but capex is rising and management noted that inventory turns are ‘tantilizingly close’ to their goal).


This went from being an average company driving 20-30% EPS growth with less capital, to one that has to spend more just to maintain a 10% earnings growth rate. We think we’re right in between those two stages now, and the ownership characteristics are probably very different as we move from one to the other. That’s probably supported by today’s price reaction – with FL trading down despite an incredibly impressive 22% EPS beat. 


FL  |  Adding to Best Ideas List as a Short - FL earn table 8 21



Our Previous Note on FL from March 4


FL - Why We Think FL Is A Short


Conclusion: The biggest pushback, by a long shot, on our FL short call is timing, and how long we have to wait for it to play out. While FL is unlikely to completely melt down this week on the print, especially 2-weeks ahead of an analyst meeting, we definitely think that the building blocks of our thesis will be incrementally evident in the quarter to be reported on Friday (as well as in the meeting on 3/16). But this is a complex call with many layers that will peel off one at a time systematically as 2015 progresses, resulting in downward revisions and revealing a down year in 2016.  Ultimately we think it will result in consensus estimates coming down meaningfully for the first time in six years, and we’ll see both lower estimates and multiple compression. We get to $20 downside, and $6 upside.


FL remains one of our top short ideas, but it is also perhaps the most complex. It’s not just about Nike, or about Ken Hick’s leaving, or about e-commerce threats. It’s about this company just having come off a six-year run that was driven by a ‘perfect storm’ (the good kind) of …


a) Margins: economic expansion and margin tailwind,

b) The Hicks Era: a new stellar CEO taking capital out of the model while simultaneously taking productivity and margins to new peaks, and adding 2,000bp to RNOA (RNOA to 25% from 5% pre-Hicks),

c) Nike Penetration: FL taking NKE to 70% of its inventory purchases from 56% – which has meaningful positive implications for gross margin,

d) ASP Cycle: Nike driving a 12-year ASP cycle which accrued to the retailers (like FL) just as much as it did NKE.

e)e-Commerce: Growth in e-commerce without meaningful brand competition.


But today, those factors have changed for the worse... (Here’s the links to our recent Black Book deck and audio presentation where we outline these factors in more detail.)

Call Replay: CLICK HERE 

Materials: CLICK HERE


a) Margins: The post-recession margin tailwind is over. We need raw top line growth and productivity improvements to boost margins.

FL  |  Adding to Best Ideas List as a Short - FL Margin Upcyle


b) The Hicks Era:

1. Ken Hicks is gone. His team is still there. But we think that one of the highlights of the analyst meeting on March 16 will be how the company will be spending to grow. That’s fine, but keep in mind, it has just come off a period where it grew without spending and boosted returns by 2,000bps.  Big difference – especially when it’s still sitting at a peak 15x p/e. 

FL  |  Adding to Best Ideas List as a Short - FL HIcks Era

2. Also, there’s no more capital to pull away from this model. We outlined in our Black Book how the fleet is largely optimized, and perhaps with the exception of some Lady Foot Locker stores, there’s little left to close or ‘rebanner’.

FL  |  Adding to Best Ideas List as a Short - FL Store concept


c) Nike Penetration: Is the next move in Nike as a percent of total higher, or lower? It’s lower. And, quite frankly, it’s HEALTHY for Nike to be a smaller percentage. It’s just probably less profitable. We actually have people tell us “I called Nike and they said the Foot Locker is a really important customer – and that your thesis is wrong’. That’s what Nike HAS TO say. They fight their battles in private, and win where it matters -- on the P&L and the balance sheet. At a minimum, Nike not going higher as a percent of total sales is a negative, as the tailwind that’s existed for half a decade has been underappreciated.

FL  |  Adding to Best Ideas List as a Short - FL NKE Penetration


d)ASP Cycle: We’re in a 12-year ASP cycle. Chances are, there will be a year 13. And probably a year 14. This is a space where the tail wags the dog. As the brands spend up in R&D, they drive prices higher. But the difference is that we’re at a point where the higher prices will start to accrue disproportionately to the brands. They (especially Nike) finally have the infrastructure and the product tiers in place to grow their DTC businesses aggressively.

FL  |  Adding to Best Ideas List as a Short - ASP cycle


e)e-Commerce: And we’re already seeing this part of the story play out. The charts below show the yy change in reach for FL vs NKE (reach spread is defined as the percent of people using the internet that are using today versus last year). This will accelerate. What this does is maintains the mid-upper price business for the retailers, but allows Nike to dominate the $160-$225 business on its own site. That’s a problem for FL as its ASP increase has not been broad based. It has been because the retailer added a better mix of shoes at extreme price points.


The biggest pushback we get on any of this is “yeah that’s great guys, but am I going to have to wait another three years before seeing this? Show me the near-term catalyst and roadmap.” Fair question (and trust us, it comes from 80% of the people we talk to). When all is said and done, though FL is unlikely to melt down this week, we definitely think that parts of our thesis will be evident in the quarter to be reported on Friday. But this call has many layers that will peel off (usually) one at a time systematically as 2015 progresses, and ultimately result in consensus estimates coming down meaningfully for the first time in six years.


We’re about in line for the quarter at $0.91 and 6% comp, but are 5% below the consensus for 2015. And by the time we look toward 2016, we’re at $3.46, 17% below the Street.  


So what’s this worth? Not 15x earnings, we’d argue. But we’re not going to make a multiple contraction call. But the call we will make is one for lower earnings and growth, and once that is apparent to the Street, the multiple will follow. We think that 12-13x $3.60 in EPS by year end 2015 is realistic as the story plays out, or a $45 stock (20% downside). Looking into 2016, and the likelihood of a down year ($3.46 despite the Street's $4.17) we think we're looking at 11-12x $3.46, or a stock in the high $30s. All in, we're looking at about $20 downside over the next two years, with about $10 per year.


That's about 4.9x EBITDA and a 8% FCF yield, which seem fair for a zero square footage growth retailer with earnings that are shrinking. If we're wrong, we're looking at about $4.25 in EPS power. Keeping today's peak 15x p/e, that suggests a $64 stock.  That's about $6 upside versus $20 downside. We think the path of least resistance is on the downside.

FL  |  Adding to Best Ideas List as a Short - FL Sent 8 21




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FLASHBACK: 'This Is a Very Dangerous Market'

In this prescient clip from earlier this month, Hedgeye CEO Keith McCullough sounded a rather cautionary (and animated) note on market risk.


I have never in my career seen more monkeys than at the top of every cycle. At every cycle top, there are more monkeys, there's more people running money, but the monkeys are never the same. Because once you get shot, you're dead...Momentum chasing is so dangerous at the end of an economic cycle.


This clip is from RTA Live (our Real-Time Alerts product). Click here to subscribe.

HEDGEYE Exchange Tracker | Despite Negative Price Action, A Slower Week for Exchange Volume

Takeaway: Cash equity volume Y/Y growth decelerated but remains strong at +19%. Futures activity slowed but OI growth since Jan 2014 increased to 25%.

Weekly Activity Wrap Up

U.S. cash equity volume growth for the third quarter remains strong but decelerated slightly last week to +19% year-over-year from +20% in the prior week. Equities are maintaining their lead among the major product categories with U.S. equity options activity putting +11% Y/Y growth currently. U.S. futures trading has been in a summer lull for the third quarter with this week's average volume coming in at 16.1 million, lower than the third-quarter average of 17.2 million. That represents a -5% year-over-year contraction. The important open interest tally continues to favor our Best Idea's long view on CME Group (CME), with the big Chicago exchange's trading backlog now up +25% since the beginning of 2014. (It was up +24% last week.)


HEDGEYE Exchange Tracker | Despite Negative Price Action, A Slower Week for Exchange Volume - XMon1 2


U.S. Cash Equity Detail

U.S. cash equity trading finished the week at 6.3 billion shares traded which is blending to a 6.7 billion daily average thus far for the 3rd quarter of 2015. This is +19% year-over-year growth for U.S. stock activity. The market share battle for volume is mixed, with the New York Stock Exchange/ICE standing pat at 24% market share but with NASDAQ's still sporting market share 200 bps lower than last year, a -6% decline.


HEDGEYE Exchange Tracker | Despite Negative Price Action, A Slower Week for Exchange Volume - XMon2 2


HEDGEYE Exchange Tracker | Despite Negative Price Action, A Slower Week for Exchange Volume - XMon3 2


U.S. Options Detail

U.S. options activity remains significantly higher, both quarter-over-quarter and year-over-year. 17.9 million contracts traded this week which is blending 3Q15 activity to 17.5 million contracts per day, up +16% quarter-over-quarter and +11% year-over-year. The market share battle amongst venues continues to be one of losses at both the NYSE/ICE and NASDAQ. NYSE has lost 400 basis points of share year-over-year settling at just 18% of options trading currently. NASDAQ has shed 300 basis points of share, good for a -14% loss from last year as ISE/Deutsche Boerse and BATS mop up volume and share.


HEDGEYE Exchange Tracker | Despite Negative Price Action, A Slower Week for Exchange Volume - XMon4


HEDGEYE Exchange Tracker | Despite Negative Price Action, A Slower Week for Exchange Volume - XMon5


U.S. Futures Detail

CME Group volume came in this week at 12.1 million contracts. That blends 3Q15 volume to a 12.9 million average level, a -4% year-over-year decline. CME open interest, the most important beacon of forward activity, continues in strong fashion with 105.1 million contracts pending, good for +25% growth over the 84.1 million pending at the beginning of 2014. That marks further improvement from the prior week's +24%.


Activity levels on the futures side at ICE hit 4.0 million contracts this week, with 3Q15 blending to a 4.3 million daily average. That is a -6% year-over-year decline. ICE open interest this week tallied 73.9 million contracts, a -2% contraction versus the 75.2 million contracts open at the beginning of 2014. That marks an improvement versus the prior week's -3% level.


HEDGEYE Exchange Tracker | Despite Negative Price Action, A Slower Week for Exchange Volume - XMon6


HEDGEYE Exchange Tracker | Despite Negative Price Action, A Slower Week for Exchange Volume - XMon8


HEDGEYE Exchange Tracker | Despite Negative Price Action, A Slower Week for Exchange Volume - XMon7


HEDGEYE Exchange Tracker | Despite Negative Price Action, A Slower Week for Exchange Volume - XMon9


Monthly Historical View

Monthly activity levels give a broader perspective of exchange based trends. As volatility levels, measured by the VIX, MOVE, and FX Vol should rise to normal levels after the drastic compression this cycle, we expect all marketplaces to experience higher activity levels.


HEDGEYE Exchange Tracker | Despite Negative Price Action, A Slower Week for Exchange Volume - XMon10 2


HEDGEYE Exchange Tracker | Despite Negative Price Action, A Slower Week for Exchange Volume - XMon11


HEDGEYE Exchange Tracker | Despite Negative Price Action, A Slower Week for Exchange Volume - XMon12


HEDGEYE Exchange Tracker | Despite Negative Price Action, A Slower Week for Exchange Volume - XMon13


HEDGEYE Exchange Tracker | Despite Negative Price Action, A Slower Week for Exchange Volume - XMon14


HEDGEYE Exchange Tracker | Despite Negative Price Action, A Slower Week for Exchange Volume - XMon15


Sector Revenue Exposure

The exchange sector has broadly diversified its revenue exposure over 10 years as public entities with varying top line sensitivity to the enclosed trading volume data. The table below highlights how trading volumes will flow through the various operating models at NASDAQ, CME Group, ICE, and Virtu:


HEDGEYE Exchange Tracker | Despite Negative Price Action, A Slower Week for Exchange Volume - XMon19 3




 We recently presented our investment thesis on the Exchanges. To summarize,

  • Long CME:  Financially oriented CME Group (CME) is enjoying a long awaited boom in activity, as trader counts and open interest in Treasuries, Eurodollars, and FX products are swelling. The decade long concentration on trading energy and commodities is over and with steeply shaped forward curves and more profitable opportunities, financial products are seeing rapid adoption. 
  • Short ICE: We see collateral damage from the ongoing rapid price decline in energy and commodity markets. As a result, these important products at ICE will be less active than the Street expects, as commercial hedging and speculative energy trading dries up.

We think CME has $5 per share in earnings power in the out year and the stock will revisit near $140. As outlined in our presentation deck and replay below, a CME long position can also be paired with a short ICE position, with favorable fundamental exposures on each side of the trade.


Separately, recent IPO Virtu (VIRT) is being valued incorrectly by the market. Our main qualm is that the company takes intraday prop risk, but has no tangible equity capital to cover any potential trading losses. Shares of VIRT are currently on our Best Ideas list as a short with a fair value in the mid-teens (30-40% downside).


Hedgeye Exchange Black Book Replay HERE

Hedgeye Exchanges Black Book Materials HERE


HEDGEYE Exchange Tracker | Despite Negative Price Action, A Slower Week for Exchange Volume - XMon20


 Please let us know of any questions,


Jonathan Casteleyn, CFA, CMT 




 Joshua Steiner, CFA





VIX, Stocks and Asian Contagion

Client Talking Points


+60% in less than 2 weeks and front-month has resistance at 19.94 – if we’ve said this 100x this year, we’ve said it 1000x – do not buy equity beta when the VIX is < 12; the inverse of that 19.94 resistance level in the SPX cash = 2027 support – if these levels don’t hold up, we’ll start to recommend prayer.


Globally, have been correcting now for 3-6 months; navel gazing at the S&P 500 proved to be as shortsighted as it was at both the 2000 and 2007 cycle tops; drawdown in the Russell 2000 is now -9.5% and most major global equity markets are down -7-15%, in a month = #oversold.


So China devalues and everything comes unglued, eh? Japan’s Nikkei closed down 3%, the Hang Seng closed down 1.5%, the KOSPI closed down 2%, but, of course, China’s remained the pace horse, dropping another -4.3% overnight to closed down -11.5% on the week. The dour read-throughs for regional and global growth are obvious, but what’s not so obvious is where do we go from here. Specifically, we need to study Japan on the bounce next week to decide whether or not to book the gain on the long side.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

"We are very bullish on McDonald’s," says Restaurants Sector Head Howard Penney. "We like where this company is going. We like the new CEO and the changes they’re making."


Penney notes that there are a lot of things going on inside the company which we can’t see that are extremely meaningful to where this company will be in 12-18 months.


"I’ve said this a dozen times recently, but 2015 will be the last year McDonald’s trades at an average price below $100," he says.


"As we predicted, regional gaming revenues surged in July which gives us confidence in our Q3 EPS estimate of $0.23, which is $0.04 above the Street," writes Hedgeye Gaming, Lodging & Leisure Sector Head Todd Jordan. "We continue to like Penn National Gaming here due to stable regional gaming trends, better than expected quarterly and annual earnings, and the Plainridge and Jamul contribution to PENN’s two-year growth story."


The set-up for the September FOMC meeting is as follows:

  1. The Fed runs the risk of tightening into a late-cycle slowdown which could ultimately flatten the yield curve (BULLISH for TLT, EDV, VNQ).
  2. Slower growth and deflationary headwinds are acknowledged and the can is kicked on a rate hike which should also be good for bonds. Until growth inflects positively, you’ll see TLT in our investment conclusions as the yield curve is the best proxy for forward looking growth expectations. 

Three for the Road


VIDEO (1min) Do You Own The Hillary Clinton Portfolio?

… @MariaBartiromo


Nothing grows well without space and air.

Patricia Monaghan


The United Arab Emirates has the biggest gender imbalance in the world, with 274 men for every 100 women.

Early Look

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