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Here’s Why Industrials Are Up (And Why That May Be a Bearish Omen) | $XLI

In this brief excerpt from RTA Live earlier this week, Hedgeye CEO Keith McCullough weighs in on activist investor Nelson Peltz’s move on General Electric (GE) and why that may spell trouble ahead.

 

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P: Dumb or Defeated? (Ticketfly)

Takeaway: Spending +60% of its cash to acquire an ancillary business ahead of a potentially crippling Web IV decision is a very telling statement.

KEY POINTS

  1. BRANCHING INTO TICKETING: P is acquiring Ticketfly for $450M, split equally between cash and stock.  Ticketfly generated $55M in 2014 revenue, and $35M in 1H15 revenue.  P didn't provide any info regarding Ticketfly's margin profile, but it's not likely that P will recoup the $225M cash acquisition price in Ticketfly cashflow anytime soon.  Note that this is a particularly aggressive move for a company with only $372M in cash on its balance sheet.  If P wanted exposure to ticketing, it could have done so through any number of partner agreements.  
  2. DUMB OR DEFEATED? Remember that P doesn't generate any material cash flow as it is, so spending over 60% of its remaining cash to acquire a new business ahead of a potentially crippling Web IV decision is a very telling statement either way.  P is either overconfident in the Web IV outcome to the point where it can start depleting its cash reserves, or it is getting ready to blow up its model ahead of an adverse outcome, and needs another story to pitch the street.  Either way P's financial flexibility will be considerably hampered after the close of the acquisition, so P will have even less wiggle room to absorb a rate increase.  And for those of you who think that can't happen, please read the note below. 

 

P: It's All About the Benchmarks (Web IV)

10/02/15 12:22 PM EDT
[click here]

  

Let us know if you have any questions or would like to discuss in more detail.

 

Hesham Shaaban, CFA


@HedgeyeInternet  


Retail Callouts (10/7): NKE, UA, RL, KSS, Athletic Retail Bankruptcy

Takeaway: Pockets of strength in China (NKE/UA/YUM). RL - $295 wearable tech. City Sports files for chapter 11. KSS Y2Y 1yr Anniversary.

YUM - Yum Brands cutting outlook after disappointing China results, noting the company is experiencing unexpected headwinds.

(http://www.wsj.com/articles/yum-brands-cuts-outlook-on-china-woes-1444164658)

We all know that this company has been the bellweather US Consumer name in China for well over a decade. Perhaps it still is. But we should note that just two weeks ago Nike printed 30% revenue growth in China, and 51% growth in income. In addition, UA's Kevin Plank was on the financial media this morning talking about the company's new retail stores in China (on the heels of his Pan-Asian Brand Tour with Steph Curry). This is not a NKE/UA vs YUM thing. But it certainly shows how pockets of strength can exist when the consumer appetite (no pun intended) is there.

 

RL - Ralph is launching it's POLOTECH Shirt -- basically a Smart Shirt that it says is the next generation of wearable technology.

(http://tinyurl.com/plolsrn)

We give RL props on this one. The company has really taken RLX from a low-end department store brand into something much better and consistent with the broader brand statement.  On the flip side, this shirt cost $295. Yes $295. For that amount of money, you can buy a FitBit, an UnderArmour Compression shirt, a pair of training sneakers, and a six pack of 5-Hour Energy shots. On top of that, RL is going to have to compete with everyone from Apple to Garmin, to UnderArmour, and Nike on the back-end user experience/community.

Retail Callouts (10/7): NKE, UA, RL, KSS, Athletic Retail Bankruptcy - 10 7 2015 chart1

 

City Sports in Chapter 11, Might Liquidate

(http://wwd.com/retail-news/financial/city-sports-chapter-11-might-liquidate-10254942/)

This City Sports announcement isn't surprising. This announcement coupled with the Sports Authority default rumors which were circling in the early part of the year come at an interesting time with the 'athleisure' space ripping the way it has over the past several years.

 

City Sports is a relatively small player in the athletic space with annual revenues just south of $50mm. It operates in high rent MSA's with relatively low asset turns and weak margins. Average sales per store is just $1.73mm. By comparison, a suburban retailer like Big 5 has similar sized stores but, is churning out $2.23mm per store. 

 

City Sports cited 'a competitive market for athletic apparel' for its profitability declines, which began in earnest in August of 2014. No question that City Sports core market is becoming increasingly more difficult as the LULU and LULU imitators build out capacity in key trade areas like NYC, Boston, DC, etc. But our sense is that it’s the brands within the 4-walls that are really putting the screws to City Sports with direct/e-commerce growth in excess of 40%.

 

KSS - 1 Year Anniversary of nationwide Yes2You rollout.

Prior to the nationwide rollout the program had 10mm members in its beta test. Within a month of the launch that number was up to 15mm, by years end it was 25mm, and in the most recent quarter that number was in excess of 30mm. The company had to launch its Y2Y rewards program because it needed to solve 2 of its biggest problems a) brick and mortar traffic levels and b) its inability to attract new customers. It's credit portfolio is tapped in the sense that its current partner CapOne won't go any lower on the FICO ladder, by that we mean KSS extended credit terms to nearly all credit worthy customers who wanted a card as it took credit sales as % of total sales from 50% to 60% from 2011-2014. The problem is that the tender agnostic Y2Y rewards program puts credit income (25% of EBIT) at risk now that customers can go into a store and pay with an Amex, Visa, etc. and get double points. That plus the fact that KSS has reached a pivotal point in its maturation cycle where it has already captured 75%-80% of all customers that could potentially shop in a Kohl’s store makes this an underappreciated risk. For a full rundown on our thesis see our most recent KSS Black Book: Putting Credit To The Test (Link CLICK HERE)

Retail Callouts (10/7): NKE, UA, RL, KSS, Athletic Retail Bankruptcy - 10 7 2015 chart2

 

NKE - Bob Hurley to Retire as CEO of Hurley, will now "focus on building and cultivating the community and extending Nike’s relationships with elite athletes."

(http://wwd.com/business-news/human-resources/bob-hurley-retire-ceo-nike-surf-10256537/)

 

DLTH - Duluth Trading Files S-1

(http://wwd.com/business-news/financial/duluth-trading-ipo-10256452/>

 

OXM - Terry R. Pillow retiring as CEO of Tommy Bahama Group on January 30, 2016

(http://www.chainstoreage.com/article/change-leadership-coming-tommy-bahama)

 


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Purchase Demand Is Good, But Not That Good | TRID Juices The #s

Takeaway: This week's Mortgage moonshot will prove short-lived as TRID pullforward will give way to TRID vaccuum, but the organic trend remains solid.

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.

 

Purchase Demand Is Good, But Not That Good | TRID Juices The #s - Compendium 100715

 

Today's Focus: MBA Mortgage Applications

 

Purchase Applications rose a moonshot +27.4% week-over-week while accelerating to +49% YoY!  Volume Trends are good, but not that good. 

 

Strength in the latest week can be attributed to a pre-TRID implementation pull-forward in demand. 

 

Redux: What’s TRID Again?  As a reminder, TRID (TILA-RESPA INTEGRATED DISCLOSURE) replaces the current federal disclosure forms with two new forms (Loan Estimate & Closing Disclosure) with the goal of reducing paperwork, simplifying & clarifying language and improving consumer comprehension of loan terms and requirements.  While there is general agreement that, once implemented, the changes will be broadly positive there has been considerable stakeholder angst over the collective ability to effectively integrate and comply with the required changes given the breadth of adjustment to both  internal operations and technology platforms mandated under the Act.  

 

SPEED BUMP or SPIKE STRIP?  The Y2K experience is an apt analog as no one really knows if systems/processes are truly compliant until the switch gets flipped. There is a good chance for a modest speedbump in reported activity following initial implementation (i.e. closing activity lagged 6-8 wks from the Oct 3rd implementation date), but there also exists the possibility for lagged choppiness alongside the seasonal spring pick-up in 2016 – particularly if lenders misestimate staffing levels needed to adequately manage prevailing volume flow.  

 

Despite the integration uncertainty, the current setup probably represents a best-case implementation scenario as the October implementation date with the subsequent enforcement grace period will allow stakeholders to integrate the changes during a seasonally slow period while providing nearly 6 months of ‘live prep’ ahead of the 2016 spring selling season

 

Enforcement Grace Period:  Notably, its expected that the House will consider the Homebuyer Assistance Act this afternoon which would create a formal and defined grace period lasting through the end of the year.  Previously, the CFPB indicated they would provide an enforcement grace period following the Oct. 3rd implementation, but the bureau fell short of providing discrete terms or a defined duration for that grace period.  We reviewed the TRID regulatory issue in our 2Q/3Q themes decks and our summary review slide is below.

 

Short-Term Positive?  While TRID implementation may perpetuate volatility in the data over the intermediate-term its unlikely to catalyze a permanent shift in the demand curve and may, in fact, serve to juice both the New and Pending Home Sales figures for September as the bolus of pre-TRID demand flows through the reported volume figures.  

 

Other Quick Thoughts:  While its likely we give back all of this weeks rise in purchase demand in the coming weeks, the trend has been steady and well above the pace observed in 2H in recent years.  The lower volatility and higher level of demand reflects ongoing organic improvement and the slow march to market normalization with conventional borrowers increasingly taking back share.  Further, rates breached 4.0% to the downside for the first time since May in the latest week and, at current levels, remain a tailwind to both affordability and HPI.  

 

 

 

Purchase Demand Is Good, But Not That Good | TRID Juices The #s - Purchase YoY  

 

Purchase Demand Is Good, But Not That Good | TRID Juices The #s - Purchase 2013v14v15

 

Purchase Demand Is Good, But Not That Good | TRID Juices The #s - Purchase   Refi YoY

 

Purchase Demand Is Good, But Not That Good | TRID Juices The #s - Purchase index   YoY Qtrly

 

Purchase Demand Is Good, But Not That Good | TRID Juices The #s - Purchase LT

 

Purchase Demand Is Good, But Not That Good | TRID Juices The #s - 30Y FRM

 

Purchase Demand Is Good, But Not That Good | TRID Juices The #s - TRID Review

 

 

 

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. 

 

Frequency:

The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.

 

 

Joshua Steiner, CFA

 

Christian B. Drake

 


LEISURE LETTER (10/7/2015)

TICKERS: MPEL, MAR, HLT, CCL

EVENTS     

  • Oct 8: Hedgeye Macau call 2:30pm
  • Oct 8: Tigre de Cristal opens

headline news

MPEL -  Rumors are circulating that MPEL’s Studio City could be allocated 250 tables versus generally accepted consensus of 150. We had been hearing that the floor was configured for 110 mass and 40 Premium/Direct tables but MPEL will no doubt welcome the additional capacity.

Takeaway: This is good news for Studio City and likely WYNN and MGM who will also open large Cotai facilities. The additional table supply may not be welcomed by Galaxy, LVS, and SJM.

COMPANY NEWS 

MPEL -  Melco Crown announced that it is set to offer a pre-­opening promotional package to Studio City visitors called the “Star Experience.” Package includes:

  • An overnight stay for two in the Star Tower, two tickets to ride the iconic figure-­of-eight Ferris wheel. 
  • A pair of tickets to the Batman Dark Flight Adventure. 
  • The package also includes a buffet breakfast and access to the pools and gym at the resort.
  • Prices for the promotional package start from HKD1,698, and the package will remain available until the official launch of Studio City on Oct. 27.

ARTICLE HERE

Takeaway: And they may have a 250 table allocation to work with versus expectations of 150. Stay tuned...

 

MAR -  Announced yesterday Marriott expects to increase its Caribbean and Latin American distribution between by 75% between 2015 and 2018 including a tripling of the company's presence in Brazil with the addition of 11 new hotels in that market.  

  • Marriott has 93 hotels open today and more than 60 hotels under development in the Caribbean and Latin America, including 11 new hotels across 6 cities in Brazil.  
  • Marriott has plans to invest approximately $400 million Brazilian Reals ($100 million) in Brazil to launch 4 of its modern essential brands: Courtyard by Marriott, Residence Inn by Marriott and Fairfield Inn by Marriott and AC by Marriott.  
  • Seven of these eleven planned hotels are already under construction, which will be owned by Marriott or Brazilian partners.  Over time, Marriott expects to sell its owned hotel assets, retaining long term management agreements.

ARTICLE HERE

Takeaway: Despite this move, MAR will still have over 70% of its room count based in the U.S.  MAR is one of our best ideas (LONG) heading into the end of 2015 and into 2016. 

 

HLT - Announced that eight new hotels will join Canopy by Hilton’s portfolio of more than 20 neighborhoods in various stages of development. Launched last October, Canopy by Hilton is Hilton’s newest hotel brand.  The Canopy by Hilton neighborhood additions include:  

  • Canopy West Palm Beach
  • Canopy Denver | Downtown
  • Canopy Washington, D.C. | Southwest Waterfront
  • Canopy New Orleans
  • Canopy Dallas | Uptown
  • Canopy Baltimore | Harbor Point
  • Canopy Minneapolis | Mill District
  • Canopy Chicago | The Loop

ARTICLE HERE

  

CCL - Fathom, a new Carnival Corp. cruise line focusing on voluntourism, has released the full pricing structure for its fares, which initially went on sale in June.

  • Sailings include itineraries to both Cuba and the Dominican Republic on a single ship -- P&O's Adonia -- feature four cabin types: insides, outsides, balconies and suites. Prices range from $974 per person for an inside cabin in low season in the DR to $8,250 per person for a suite during peak season in Cuba.
  • Fathom is also offering a Single Traveler Share program, which will match solo cruisers with potential roommates so they can share double-occupancy rooms without having to pay singles supplements.

ARTICLE HERE

INDUSTRY NEWS    

Macau Smoking Bill - Secretary of Social Affairs and Culture Alexis Tam Chon Weng has said casino employees must give their consent if the government is to allow any exception to the forthcoming ban on smoking in casinos, Business Daily reports.  

  • “The industry and the operators said it is possible to create a very good smoking lounge. We don’t know. It will be depend upon the conditions. If they really have good proposals, if the workers agree with it, it will be fine,” the newspaper quotes Mr Tam as saying in an interview.  
  • But he said no casino operator had yet proposed to him that it be allowed to have smoking rooms in its premises.

ARTICLE HERE

 

Macau Tourism Strategy - Secretary of Social Affairs and Culture Alexis Tam Chon Weng’s tourism strategy is to make the flow of visitors to Macau more even, instead of peaking at certain times of the year, and to get visitors to stay longer.  The newspaper quotes Mr Tam as saying in an interview that he would present to the Legislative Assembly this month his plans for more enticements for tourists.   “For example, we would build more museums or themed buildings to attract more tourists to stay in Macau for longer,” Mr. Tam said.

ARTICLE HERE

Takeaway: We're still not sure what the government can do to increase near term visitation

 

Macau Airport Traffic - Macau International Airport (MIA) recorded 6% YoY in passenger traffic volume during the first three quarters of the year, to 4.30 million from around 4.06 million.  MIA also revealed that Korean companies Jeju Air and T’Way Airlines are considering launching flights to the territory. During this period, visitors from the Mainland China market decreased by 1% although MIA did not disclose the precise number. Passengers from Southeast Asia increased 14%, while travellers from Taiwan increased 4%.

ARTICLE HERE

  

REGIONAL REVENUES (SEPT):

 

Maryland (SS GGR): +6% YoY

Takeaway: Consistent with our thesis of a strong September rebound from August. We still like BYD and PENN on the long side


CHART OF THE DAY: Early Innings of a #LateCycle Slowdown

Editor's Note: Below is a chart and brief excerpt from today's Early Look written by Hedgeye macro analyst Darius Dale. Click here if you're interested in learning more and getting ahead of consensus.

 

CHART OF THE DAY: Early Innings of a #LateCycle Slowdown - Chart of the Day

 

"...With respect to the current economic and financial market cycle, our Macro Team’s most differentiated view remains that the U.S. economy is in the early innings of a #LateCycle Slowdown, which implies domestic economic growth has moved past peak and is likely to decelerate on a trending basis into an eventual recession – likely commencing in mid-to-late 2016. Our #EuropeSlowing theme – whereby our models are forecasting a sustained deceleration from cycle-peak rates of European economic growth toward a likely recession as early as 1H16 – continues to register as fairly non-consensus as well."

 


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