Takeaway: BIG targets = Very Doable. Say what you want, but the model’s changing for the better. Wouldn’t want to be a wholesaler while this occurs.

We’ll be back after the dust settles with more detailed thoughts and analysis on Nike’s Investor Day. But in seeing the presentations, we’re pleased to see that so much of it was spot on with what we outlined in our 86-page Black Book on Monday.  Here’s the LINK. This is what was most notable to us…

  1. Revenue: The $50bn target by 2020 was impressive – especially on a day where Wal-Mart told us that it won’t hit 2015 EPS again until 2020. That represents about a 10% CAGR. We think this is a slam dunk for Nike.
  2. Sounds like bold statement from us that 10% growth annually is a slam dunk. But keep in mind the P&L impact of the shift in mix to DTC/e-comm. This shift in mix alone gives Nike 200-300bps in growth per year. That means Nike needs to grow end-market demand by closer to 7% per year. This category grows globally at 4-6% per year, and Nike is a perpetual net share gainer.
    NKE  |  QUICK TAKE ON ANALYST MEETING - nike chart1 10 14 15
  3. E-comm targets of $7bn by 2020, 42% CAGR, are not just appropriate, but they are flat-out low. We think they’ll hit that level at least a year early. Why be so conservative? What message do you think it sends to Foot Locker, Finish Line, Dick’s, Hibbett, and the other retailers in the US that have a swoosh on 75% of what they sell? A really bad one. Nike set a big aggregate revenue number, but will get there by way of beating the e-comm number.
  4. The Financial Model has changed. It was our contention that Nike had to admit that the Model that has served it well for 15 years is changing. While it did not announce that broadly, the model definitely changed. It took up revenue growth, took up GM expansion to 30-50bp/year (which means it thinks it can do nearly twice that), and lowered expectations for SG&A leverage on a better sales number. Why? Aggressive shift to e-commerce (again – this hurts traditional wholesale accounts) is very sales and GM-accretive, but the cost of growth is going up by way of manufacturing innovation and athletic endorsements.
    NKE  |  QUICK TAKE ON ANALYST MEETING - nike chart2 B 10 14 2015
  5. Manufacturing Innovation? This is something we’ve been talking about for a while now – that Nike will reverse engineer how shoes are made – like what it did with FlyKnit. This will allow the company to accelerate on-site manufacturing (which it still played down today), 3-D printing, and both take capital out of its supply chain while driving ASPs higher to sell through NKE-owned distribution (retail and e-comm). The interesting thing is that Nike announced a partnership with FLEX to accelerate this initiative instead of go solo. What’s funny is that the partnership isn’t really new. Nike has been doing business with FLEX for at least 5 years. But it sounds like they’re doubling down on one another.
    A Slide From FLEX Presentation:
    NKE  |  QUICK TAKE ON ANALYST MEETING - nike chart4 10 14 2015
  6. Management: To its credit, while we’re still not thrilled with each individual member of management, this team sounded amazingly confident – more so than we’ve ever heard or seen them in 20 years. This sounded to us very much like a team that will not miss its goals come hell or high water. #respect


Takeaway: WMT’s blow-up is far from over. It’s about as late-cycle as we can fathom, and will absolutely hit those who haven’t proactively prepared.

WMT’s blow-up is far from over. It’s about as late-cycle as we can fathom, and will absolutely hit those who haven’t proactively prepared. Here are a few thoughts…


1) WMT set the bar so low with its guidance today that we have to wonder how the rest of retail is not quaking in its boots. The mid-point of the guide implies that earnings will be off 10% this year and another 6-12% in FY 17 AND we won’t see 2015 earnings levels again until at least FY19. If anyone is questioning what end of the economic cycle we’re in, it’s not the end you give a kiss at bedtime. While a struggling WMT is a terrible barometer for all of retail, it’s even more troubling when you consider what WMT is investing in. Wages and Price. That will be a significant headwind on the gross margin and cost side. Any peers (ranging from TGT to CVS to COST to KSS to Albertson’s [winner of “most poorly timed IPO of the decade”]) who think they can sidestep this reality are delusional.


2) Wages – by the end of FY17 WMT will have invested $2.7bn or $5,400 per each of its 500,000 eligible US employees. It will account for -4.5% to -9% of EPS change in FY17 or 75% of the aggregate earnings decrease. That type of deleverage for a company like WMT who in the US employs 1.4mm workers and accounts for 16.5% of workers in the Food & Beverage, Health/Personal Care, Clothing, and General Merch categories that’s a game changer. Anyone who has not proactively managed their expense line will have a tough time. It’s a good thing for KSS that it does not have to pay higher wages because it’s employees love to come to work (that statement will come back to haunt CEO Mansell).


3) Retail growth expectations are overly bullish.  The chart below says it all…it shows the consensus EPS growth rate for a basket of bellwether names in the retail sector. After bottoming in FY15 (WMT FY16) consensus has numbers accelerating to 10% and 12% in FY16 and FY17 respectively. Compare that to WMT guiding to -10% in its FY16 (calendar ‘15), -9% at the midpoint of the guide in FY17 (calendar ’16), and flat in FY 18 (calendar ’17). Bottom line…either WMT sandbagged, or growth for others will come down. Such a significant gap has not sustained itself for any more than a few quarters.



4) Can Someone Find a New Initiative or Buzzword Please? WMT came out today and spent the majority of the time in its prepared remarks talking about two pillars of its business – e-commerce and the US business. There was some talk about logistics which is unique to WMT and it should be because its best in class (at least at the brick and mortar level). But, these are the drivers the company announced at today’s analyst meeting: e-commerce, omni-channel, new apps, buy online pick up in store, new store formats/designs. That’s the same playbook we’ve seen laid out by TGT, KSS, and pretty much everyone else -- you name it. One particularly troubling piece of the puzzle is that WMT management thinks it’s ‘ahead of the curve’. 

Cartoon of the Day: Stupid Is As Stupid Does

Cartoon of the Day: Stupid Is As Stupid Does - trust my gut cartoon 10.14.2015  2

“If you’re just reading blogs and going with your ‘gut,’ that will eventually catch up to you,” Hedgeye CEO Keith McCullough recently wrote. “Do you have an independent (and accurate) research team? Most don't - so outsource to us.”


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Short Healthcare With Impunity? | $XLV


During this brief exchange on The Macro Show earlier this week, Hedgeye Healthcare analyst Tom Tobin and CEO Keith McCullough discussed why investors should consider being “short everything” in healthcare.


Subscribe to The Macro Show today for access to this and all other episodes. 


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McCullough: Why U.S. Recession Is Closer Than You Think

On The Macro Show earlier this morning, Hedgeye Financials analyst Josh Steiner joined CEO Keith McCullough to discuss key market developments, including a granular look at the weak quarter JPMorgan (JPM) just put up.

*  *  * 

McCullough: Why U.S. Recession Is Closer Than You Think  - zzz recession


The conversation shifted gears when McCullough responded to a subscriber’s question during the interactive Q&A portion of the show regarding how far along the U.S. is in the current economic cycle.


“[The U.S. expansion] is long-in-the-tooth and slowing,” Keith said. “It’s already showing up in the cyclical and industrial sectors…You don’t have a consumption recession, yet, but the employment and consumption pieces [of the economy] are clearly rolling over as they do at the end of every cycle.”


To prove his point, Keith pulled up a thought-provoking slide from our macro team’s recent 73-page presentation of our top 3 Q4 2015 Macro Themes.


As you can see in the slide below, it shows the past 85 years of economic cycles. Our current expansion stands at 77-months. To put that in perspective, the median expansion typically lasts around 50-months.

Click image to enlarge. 

McCullough: Why U.S. Recession Is Closer Than You Think  - macro cycles chart


In other words, we’re in the twilight of U.S. economic expansion. Hence, our new macro theme #SuperLateCycle. (Please ping if you’re interested in getting access to our macro presentation.)


“What comes after the SuperLateCycle?” Keith asked rhetorically.


A recession.

Market Crash?

Client Talking Points


Two bad days back-to-back for the Nikkei, so if you are looking for follow through on the reflation trade or otherwise, the Nikkei certainly didn’t deliver it neither have other Asian equities. Japan is down 1.9% overnight, down 3% in last two days. Honk Kong was down again last night, down 1.7% for the week and China closed down .9%. Overall it was a very weak session in Asia. The down dollar is obviously not good for Japanese stocks because this is bullish for the Yen.



The DAX had its dead cat bounce #Boom and straight back down in crash mode. Germany cut its GDP forecast this morning. Believe them! It’s a good idea to listen to these governments and central planners when they are getting bearish…it must be really bearish. Europe is going to be in a recession next year, this is the call and why you should stay away from a lot of these European equities. 


While the hedge fund community continues to use S&P futures as their short selling mechanism, the Russell 2000 does not seem to have that same short interest and therefore goes down faster, currently down 11.4% from its summer highs. The Russell is more anchored to a U.S. growth slowdown as well, making it a pure play on domestic growth expectations falling. Domestic growth shorts continue to work due to an implosion in the data – PPI and Retail Sales down (which sets up a nasty-looking Holiday season).


**Watch a replay of The Macro Show with Financials Sector Head Josh Steiner giving an update on earnings - CLICK HERE


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We think that the catalyst calendar is just starting to pick up, and should be the best that Restoration Hardware has seen – perhaps ever. There are two new and significant merchandising initiatives, which are solid on their own. But to pair them with the square footage growth acceleration seems almost like a fantastic coincidence. But it’s not. This has been in the plan all along. There’ll be many more new concepts and classifications – though we’d argue that the company can go deep and add $2bn in revenue with what it has.


To be clear, there’s much more to this story than just square footage growth – like the ability to consistently merchandise product people want in quantities they need.  Without the ability to deliver on that requirement, a retailer could have the greatest store in the hottest location with the best demographics, and it will still be nothing but a liability (regardless of how low the rent might be). That’s why square footage growth is grinding to a halt for other U.S. retailers. That’s also why the growth profile at RH is so powerful, and unmatchable by anyone we see in Retail today.


As we predicted, a rise in September regional revenues would serve as a catalyst for regional gaming stocks, and in particular, Penn National Gaming. For the record, PENN is up +12% since we added it to Investing Ideas back in May, outperforming the S&P 500 which has fallen -5% since then.


We believe shares of PENN have a lot more room to run, given its strong performance in key markets like Ohio and its successful opening in Massachusetts.  A handful of states still need to report their September revenue figures, but numbers have been in line with our expectations thus far.


PENN will be reporting Q3 earnings on October 22nd.



Bottom Line: We remain 50% below Bloomberg Consensus on GDP growth. Wall Street, the IMF, World Bank and OECD are all still forecasting global growth of around 3% for 2015.  We reiterate our call for growth to come in at or below half that rate.


While most #LateCycle growth expectations in macro markets peaked in April, the US stock market peaked in July as bond yields hit the market with their last head-fake of a “breakout.” That makes this bear market in growth expectations relatively young. With that considered, sit back and relax with your TLT and EDV.

Three for the Road


Is Recession Setting Sail For #Europe?… via @KeithMcCullough #ECB #Draghi #economy #FX #euro



Never hate your enemies, it affects your judgement.

Michael Corleone


The American worker took an average of 16 vacation days last year, a 35-year low and down from 21.1 days in 1996.

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