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Takeaway: The 2Q miss, scant 2H guide-down, and lack of color on '16 leaves expectations wound too tight in the face of increasing headwinds.
We didn’t like TIF into the print, and we definitely don’t like it on the way out. The company lowered back half guidance, which we expected to see, but we’re not sure if $0.10 is enough off of 2H14’s $2.27 base. We’re inclined to think ‘no’. But the bigger tell for us will be how much consensus numbers come down for next year. They currently sit at $4.77. If numbers come down as far as the $4.50 vicinity, then this is still probably a good short. The only thing that makes us walk away from our positioning is if we see estimates shake out near $4.25 — but that’s unlikely. While management clearly articulated its business, as always, the reality is that there are no obvious margin levers to offset the declining growth profile in the business, especially amidst increased late cycle risks. We’re staying short this one.
Our Previous Note from Tuesday 8/25
TIF | We Don't Like It
Takeaway: 2Q looks fine. The back half is a stretch. 2016 needs to come down.
We don’t like TIF into the print as we think 1) back half numbers look too high, and 2) this model is extremely poorly positioned for the consumer climate we’re forecasting. There are definitely redeeming qualities about the name – most notably the Brand (and that’s pretty much it). But it is trading near a peak multiple (18.5x) on peak margins (21%), peak earnings ($4.24E), peak returns (18%), has the worst cash conversion cycle we’ve ever seen (490 days), while sentiment is sitting at all-time highs. It’s feast or famine – if one of those metrics breaks, then they all do.
Common perception seems to be that “just because TIF blew up earlier this year, it can’t blow up again.” We simply disagree. The environment has changed significantly, and the company’s guidance for back half growth “in the double digits” is not going to happen. Could the company grow earnings in the 4-6% range? Yes. It can. But that implies at least a $0.15 guide down. Importantly, that could/should cause the consensus to revisit its $4.75 estimate for next year, which we don’t think is achievable. We think a base case is $4.50, with downside to $4.00 as the macro environment worsens.
Historically, TIF’s multiple change has been fairly explosive. As you can see, when earnings have been revised meaningfully up or down, we’ve seen TIF’s multiple relative to the S&P move by up to 40%. The point is that a $4.00 earnings number won’t get a high-teens multiple. It will get something in the low teens while the market waits for earnings to find a bottom. Using that logic, it is not unrealistic to model a $50 stock -- $30 lower. Are we making a call right now for such severe downside? No, we’re not. But that’s where the research initially appears to be headed.
Mother Macro Could Make $4.00 (or less) A Reality?
Consider the following… Domestic economic growth is now well past-peak in rate-of-change terms for this economic expansion, with US GDP growth getting tougher in the 2nd half of 2015 vs. the 1st half. That means, if you held all other risks equal, the probability is higher that growth slows in Q3 and Q4 than Q2. And the last two cycle tops didn’t have this mother of all demographic secular slowings – and note that this isn’t just the US -- the chart below represents better than 90% of Tiffany’s earnings.
2Q: Overall, 2Q looks ok to us. Street estimates imply a slowdown in the 2 year constant currency comp by ~200bps. That seems fair. LVMH and Kering both noted rebounds in jewelry sales in their second quarters. Additionally, TIF's comp has directionally followed the organic growth of LVMH watch and jewelry sales for the past 4 quarters. A potential positive is the Tiffany T collection which could/should boost penetration of the higher margin gold/silver fashion product. TIF’s US e-commerce business implies healthy demand in 2Q – though the trends look problematic into 3Q. It’s only 6% of TIF’s business, but is a good barometer for overall demand. Furthermore, TIF’s SIGMA chart looks very bad. Inventories are out of whack with the P&L in a way that is unlikely to be a 1-quarter fix without a meaningful margin event.
Here’s where we think the problem lies. Comp estimates are reasonable against easy compares, but Q3 margin comp is toughest of the year (even worse on 2 year rate). SG&A growth was just 1% in Q4 last year, yet the street looking for SG&A leverage in this Q4 despite the company putting more capital into its new watch collection and "Will You" engagement campaign. FX pressure is likely to ease in Q4, but what helps revenue and GM will hurt SG&A. The Street has 11% EPS growth in Q3 and Q4. We see it more as flat Q3 and HSD Q4.
Takeaway: Summer doldrums have set in with July PHS +0.5% M/M, but decelerating Y/Y for the third consecutive month. Aug MBA #s show more of the same.
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.
Today's Focus: July Pending Home Sales & MBA Mortgage Applications
Pending Home Sales rose +0.5% sequentially in July following last month’s notable -1.7% retreat off the post-crisis highs recorded in May. On a year-over-year basis growth decelerated -100 bps sequentially to +7.4% YoY, marking a 3rd consecutive month of 2nd derivative slowing.
The takeaways are pretty straightforward:
- From Great to Good: In rate-of-change terms, growth in activity is slowing and that trend should continue as comps steepen considerably through the balance of the year (see charts 2/3 below).
- EHS Downside: PHS is a strong leading indicator for EHS and the prevailing tendency has been for EHS to re-couple in favor of PHS following short-term dislocations. PHS softness in June and today’s uninspiring print for July suggest downside risk to reported EHS over the next month or two (see 1st chart below).
- Purchase App Corroboration: The recent trend in Purchase Applications has been similarly lackluster. Inclusive of the +1.7% gain in the latest week, Purchase Demand is tracking -2.4% MoM in August and -1.6% QoQ for 3Q.
- New vs Existing: New and Existing Sales face similar (i.e. tougher) comp dynamics over 2H15 but, given where each is in their respective cycle, the MT/LT opportunity for new construction activity remains more compelling. The mean reversion opportunity to average levels of activity in the new home market is ~20% while it's modestly negative in the existing market. Upside to 6.0MM or greater in EHS is reachable (from 5.59MM last) but would require full market normalization and full resurgence in 1st-time buyer share to average historical levels.
- Rates: Rates remain the lead swing factor for the complex and while rampant rate volatility has characterized most of the YTD, the expedited rate retreat over the last month has supported the relative case for domestic housing leverage. At 3.83% on the 30Y FRM, affordability remains +4.5% better than the 2014 average and sits as a modest tailwind for HPI.
About Pending Home Sales:
The Pending Home Sales Index is a monthly data release from the National Association of Realtors (NAR) and is considered a leading indicator for housing activity in the US. It is a leading indicator for Existing Home Sales, not New Home Sales. A pending home sale reflects the signing of a contract, but not the closing of the transaction, which occurs 1-2 months later. The NAR uses data from the MLS and large brokers to calculate the Pending Home Sales index. An index value of 100 corresponds to the average level of activity during 2001.
The NAR Pending Home Sales index is released between the 25th and the 31st of each month and covers data from the prior month.
About MBA Mortgage Applications:
The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis.
The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.
Joshua Steiner, CFA
Christian B. Drake
Takeaway: Claims persist below the 300k Maginot Line, but, like Taleb's Turkey approaching Thanksgiving, real risk rises while perceived risk falls.
Below is the breakdown of this morning's labor data from Joshua Steiner and the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact
Consider a turkey that is fed every day. Every single feeding will firm up the bird's belief that it is the general rule of life to be fed every day by friendly members of the human race 'looking out for its best interests,' as a politician would say. On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief.
- Nassim Taleb, The Black Swan
Just like Taleb's Turkey, initial jobless claims appear on solid footing below 300k and the longer they stay there, the more comfortable/complacent markets tend to get. After all, the bull market is now six and half years old and we're at/near full employment with an accommodative Fed. The reality, however, is that we're drawing inevitably closer to Thanksgiving day ... and the market is, of course, the Turkey.
Initial jobless claims came in at 271k last week, falling for the first time since hitting a 42-year low in the week ending July 18. Meanwhile, the year-over-year change in NSA claims continues to trend towards zero. That figure deteriorated slightly last week from -9.9% to -9.5%.
In energy states, initial jobless claims maintained their position versus the country as a whole in the week ending August 15. The spread between those two indexed series in the chart below remained stable at 11. With the price of oil hitting new lows, we expect this spread to widen going forward.
Initial jobless claims fell 6k to 271k from 277k WoW as the prior week's number was not revised.
The 4-week rolling average of seasonally-adjusted claims rose 1k WoW to 272.5k.
The 4-week rolling average of NSA claims, another way of evaluating the data, was -9.5% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -9.9%
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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