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Retail Callouts (10/19): Retail Idea List, UPS Raising Rates, DLTR, PIR

Takeaway: Idea List Changes - DLTR, PIR. UPS raising shipping rates again -- And retail margin expectations are STILL too high.

Hedgeye Retail Idea List

Retail Callouts (10/19): Retail Idea List, UPS Raising Rates, DLTR, PIR - 10 19 2015 chart1 B

 

This Week's Changes

DLTR: Graduated to the top spot on our Long Bench. Seemingly not the kind of name we'd like at this point of the economic cycle. But we think there's an asymmetric setup here in the wake of the Family Dollar acquisition that works even in a slowing economy.  Stay tuned for more on this as our vetting continues.

 

PIR: We turned the TRADE indicator from negative to positive -- now positive on all three durations.  We had been concerned heading into the latest quarter, but think that expectations for the next quarter and FY are very much in check.

 

UPS raising shipping rates again -- And retail margin expectations are STILL too high.

(http://www.wsj.com/articles/ups-targets-discount-sharing-with-new-fee-on-retailers-1445035798)

 

There is a lot going on with UPS and Fed Ex pricing with fuel surcharges (going into effect in Nov), ground rate hikes (December), and 3rd party fulfillment surcharges -- the squeeze is on for retailers as free shipping thresholds come down to $0. Both UPS, FedEx, and even USPS have been vocal about the dilutive impact from growing e-commerce sales which are more expensive to fulfill because of neighborhood deliveries. But unlike retailers who we think will more and more use free shipping (and returns) as an offensive weapon to try to hold onto market share, the shipping duopoly has the clout to pass on increasing costs to its retail partners.

 

If this were a different part of the economic cycle, we wouldn't make much noise about this. But the fact of the matter is that without higher freight costs, retail EPS growth is decelerating from a mid-teens rate earlier this year to zero in 4Q/1Q.  The problem is that the consensus has EPS growth reaccelerating from a lsd rate to 10%. The consensus is wrong.

Retail Callouts (10/19): Retail Idea List, UPS Raising Rates, DLTR, PIR - 10 19 2015 chart2

Retail Callouts (10/19): Retail Idea List, UPS Raising Rates, DLTR, PIR - 10 19 2015 chart3

Image Source: E-commerce Bytes

 

WMT - Federal probe into Wal-Mart operations in Mexico has found minimal offenses. The case and fines are likely to be much smaller than initially expected.

(http://www.wsj.com/articles/wal-mart-bribery-probe-finds-little-misconduct-in-mexico-1445215737)

 

TFM - The Fresh Market is working with Apollo Global Management to explore a buyout.

(http://www.bloomberg.com/news/articles/2015-10-16/fresh-market-founder-said-to-work-with-apollo-on-buyout)

 

KATE - EJ Victor to launch Kate Spade New York furniture collection

(http://www.furnituretoday.com/article/524851-ej-victor-launch-kate-spade-new-york-collection)

 

RetailNext forecasts Holiday sales at +2.8%

(http://www.retailingtoday.com/article/retailnext-holiday-sales-expected-climb-only-)

 

AMZN - Amazon looking to buy stake in India on demand home services company Housejoy 

(http://economictimes.indiatimes.com/small-biz/startups/amazon-in-advanced-talks-to-buy-stake-in-home-services-company-housejoy/articleshow/49397892.cms)

 

H&M Opens First Store in South Africa

(http://wwd.com/retail-news/mass-off-price/hm-opens-first-store-in-south-africa-10264590/)


Earnings Season: So Far, No Good

Earnings Season: So Far, No Good - earnings cartoon 01.27.2015

 

"EPS ex-Energy" is a joke - Industrials and Cyclicals are already in a profit recession - Financials & Banks next.

Click image to enlarge. 

Earnings Season: So Far, No Good - 10 19 2015 Earnings

 

EPS growth slowing, combined with US consumer confidence falling (from cycle peak) are 2 of the Top 3 leading indicators for a US recession.

 

Earnings Season: So Far, No Good - 10 19 2015 eps inflecting


Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

10/19/15 CMG | MOVING IT TO THE SHORT BENCH

10/16/15 YUM | THE LEAVES ARE CHANGING AND SO IS YUM

10/16/15 REPLAY | THOUGHT LEADER CALL | LOOMING CRASH IN BEEF

10/14/15 DFRG | WHEN UGLY TURNS BEAUTIFUL

10/7/15 YUM | HOLDING ONTO THE PAST

 

UPCOMING EVENTS

Monday Mashup - CHART 2

 

RECENT NEWS FLOW

Friday, October 16

Beef | A 50% decline in beef prices back to historical averages is well within the realm of possibilities. (HEDGEYE NOTE)

 

Thursday, October 15

YUM | Appointed Corvex’s Keith Meister to the Board of Directors, additionally, YUM announced that they are near the conclusion of a strategic review (ARTICLE HERE)

MCD | Per an interview conducted by The Wall Street Journal with board member Miles White, Mr. White spoke about the review of the possibility of a REIT were going on but that no definitive decision has been made (ARTICLE HERE)

 

Tuesday, October 13

DFRG | Reported 3Q16 earnings that were not good, but the worst is now behind us (HEDGEYE NOTE)

SBUX | Introduced delivery service inside the Empire State Building (ARTICLE HERE)

 

SECTOR PERFORMANCE

Casual Dining and Quick Service stocks that we follow widely underperformed the XLY last week. The XLY was up +0.7%, top performers on a relative basis from casual dining were BLMN and BBRG posting an increase of +3.2% and +0.9%, respectively, while HABT and ARCO led the quick service group this week up +6.8% and +3.4%, respectively.

Monday Mashup - CHART 3

Monday Mashup - CHART 4

 

XLY VERSUS THE MARKET

The XLY has fared better than most other sectors in the YTD time period but as of late has been lagging slightly. In the last five trading days the SPX was up +0.9% and the XLY was up just +0.7%.

Monday Mashup - CHART 5

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLY looks BULLISH from a TRADE and TREND perspective, TREND support is 76.01.

Monday Mashup - CHART 6

 

CASUAL DINING RESTAURANTS

Monday Mashup - CHART 7

Monday Mashup - CHART 8

Monday Mashup - CHART 9

 

QUICK SERVICE RESTAURANTS

Monday Mashup - CHART 10

Monday Mashup - CHART 11

Monday Mashup - CHART 12

 

Keith’s Three Morning Bullets

So far, no good = 58/500 S&P names have reported = Revs -2.7%, EPS -7.9% - bull market, in storytelling (and Long-Term Bonds):

 

  1. USD – down for the 3rd straight week (post that terrible US jobs report) gave the SPX short squeeze what it needed (up, on decelerating volume, to lower-highs) but USD appears to be stabilizing this morning = Oil (-1.1%), Gold (-0.4%), and the “reflation” trade no likey
  2. NIKKEI – Japanese stocks no likey Down Dollar = Up Yen either; after closing -0.8% last week, Japan didn’t believe the China “news” and sold off -0.9% into the close, taking Nikkei -12% in the last 3 months (with USD -3.2% in the last 3 months)
  3. CHINA – look on the bright side of their storytelling, they didn’t stick a 7.0 this time and made-up “6.9%” GDP instead. Lol. Even the locals (who are paid to think a certain way) didn’t buy Chinese stocks on that – Shanghai Comp closes -0.14%

 

SPX immediate-term risk range = 1; UST 10yr 1.98-2.07%

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


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CMG | MOVING IT TO THE SHORT BENCH

We are becoming increasingly concerned about Chipotle (CMG) and the headwinds that it will face in the coming quarters.

 

We took CMG off the Hedgeye Restaurants Best Ideas list as a LONG and moved it to the LONG bench on 9/30/15 see our note HERE.

 

In the note we suggested that CMG is getting long in the tooth and that it will experience some growing pains in the near future.

  1. Quality real estate is getting harder and more expensive to get
  2. Are the 2015 supply chain issues a one off experience?
  3. Slowing sales trends might not end in 3Q15

 

Ahead of the earnings announcement on this Tuesday, October 20th after market close, we are adding it to the short bench.  The table below summarizes what the street is looking for:

CMG | MOVING IT TO THE SHORT BENCH - CHART 1 

 

In addition to our original concerns, we believe the company may post below trend same store sales due to a number of macroeconomic factors.

 

1) The consumer is rolling over

 

A) Jobs

CMG | MOVING IT TO THE SHORT BENCH - CHART 2

CMG | MOVING IT TO THE SHORT BENCH - CHART 3

 

B) Consumption

CMG | MOVING IT TO THE SHORT BENCH - CHART 4

 

C) Consumer Confidence

CMG | MOVING IT TO THE SHORT BENCH - CHART 4a

 

D) Industry Sales Slowing

CMG | MOVING IT TO THE SHORT BENCH - CHART 5

CMG | MOVING IT TO THE SHORT BENCH - CHART 6

 

2) Deflation is bad for Restaurants in general and CMG is not immune.

 

A) Beef, Chicken and Pork prices are all trending lower, taking away Chipotle’s ability to price effectively.

 

B) An added problem is significant labor inflation that we are starting to see in major metropolitan areas. This will begin to trickle through the nation and really begin to affect margins.

 

C) CMG same-store sales versus CPI Pork YoY % change.

CMG | MOVING IT TO THE SHORT BENCH - CHART 7

 

3) Street estimates call for a recovery in sales – this looks to be aggressive. Additionally the company is running up against very difficult YoY comparisons.

 

Hedgeye estimates are below street estimates

CMG | MOVING IT TO THE SHORT BENCH - CHART 8

 

4) CMG needs 3% same-store sales to leverage labor costs.  With slowing same-store sales and accelerating labor inflation, current margin estimates look to be aggressive.

CMG | MOVING IT TO THE SHORT BENCH - CHART 9

 

5) A multiple contraction is likely, given the current macro environment.  And could get worse if sales miss current expectations.

CMG | MOVING IT TO THE SHORT BENCH - CHART 10

 

Hedgeye Restaurants Best Ideas List

CMG | MOVING IT TO THE SHORT BENCH - CHART 11

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 

 


CHART OF THE DAY: Long Stocks? Which Ones? (It Matters)

Editor's Note: Below is a chart and brief excerpt from this morning's Early Look written by Hedgeye CEO Keith McCullough. Click here for more information about how you can subscribe.

CHART OF THE DAY: Long Stocks? Which Ones? (It Matters) - 10.19.15 chart

 

What did “stocks” do?

  1. Utilities (XLU) +2.3% week-over-week were the BEST sub-sector exposure to be long (+2.3% in the last 3 months)
  2. REITS (MSCI Index) +1.2% week-over-week and +1.4% in the last 3 months (vs. SP500 down -4.3% in the last 3 months)
  3. Industrials (XLI) deflated another -1.6% last week and have lost -4.4% in the last 3 months

 


Look Out, Bulls!

“The enemy, of course, is the resistance of the water.”

-George Yeoman Pocock

 

For me, of course, the resistance isn’t that of a swimmer or a rower. Hockey players play above the water. Our resistance is the wall.

 

Without the Old Wall (and its legacy print + NJ cable media) how would we save or make any money? The Cover Story in the oldest of wallpapers this weekend pitched Bears against Bulls on a tightrope. The header of the article read:

 

“Look Out, Bears”

 

And it cited Barron’s latest “money manager survey” that found that “55% of managers are bullish and 16% bearish.” I was a little offended by the whole thing. After all, I’m sensitive. And I’m the bull of all bulls this year, in #GrowthSlowing and Long Bond terms!

Look Out, Bulls! - Bull and bear extra cartoon

 

Back to the Global Macro Grind

 

No offense to Barron’s and their Old Wall boys, but having not called for a slow-down and/or a down stock market (and down bond yields) 9-10 months ago, they have no credibility in calling for an end to what they didn’t realize was starting.

 

That said, while consensus macro has been many times wrong, it rarely seems in doubt. So what is it that is driving the “stocks can never go down” mentality, all over again?

  1. Is it that they were so wrong on growth that bad news about being wrong is obviously good?
  2. Is it that bad/good news of Down Dollar is the best path to US inequality and asset reflation?
  3. Or is it that no matter what happens, Treasuries are always too “expensive” and stocks are “cheap”?

You can waste your time answering those questions this morning. I’m getting back to work.

 

Let’s start with what contextualizing last week’s moves within the 3 month @Hedgeye TREND:

  1. US Dollar Index down for the 3rd straight week, taking Down Dollar to -3.2% in the last 3 months
  2. Japanese Yen was up another +0.7% last week, and is +3.9% vs. Down Dollar in the last 3 months
  3. Russian Rubles were +0.9% last week taking their 1-month gain to +6.9% vs. -7.1% in the last 3 months
  4. Russell 2000 was DOWN -0.3% last week, taking it back to -8.7% in the last 3 months
  5. Nikkei 225 (Japanese Stocks) dropped another -0.7% last week, taking its 3 month loss to -11.2%
  6. Spanish Stocks (IBEX) deflated another -0.8% last week, taking their 3 month loss to -11.1%

Oh no you didn’t.

 

You didn’t call both the broadest measure of the US domestic revenue outlook (80% of Russell 2000 revs are USA) and the other joints that did the devaluation thing (it didn’t work in Japan or Spain) as being down in a week that the Old Wall called “up”?

 

Yes I did.

 

And you can do this too. Just get up an hour earlier each day and watch what happens to your brain. This is not your brain on consensus. This is your brain, thinking for itself – crushing consensus:

  1. US 10yr Treasury Yield down another 5 basis points last week to 2.05% = down 32 basis points in the last 3 months
  2. UST 5yr Breakevens (inflation expectations) down another -5bps last wk (-41bps in the last 3 months) to 1.16%

Oh boy. I better stop there. Barron’s doesn’t do cross-asset class or bond market read-throughs!

 

Back to “stocks”, Mucker. What did “stocks” do?

  1. Utilities (XLU) +2.3% week-over-week were the BEST sub-sector exposure to be long (+2.3% in the last 3 months)
  2. REITS (MSCI Index) +1.2% week-over-week and +1.4% in the last 3 months (vs. SP500 down -4.3% in the last 3 months)
  3. Industrials (XLI) deflated another -1.6% last week and have lost -4.4% in the last 3 months

Yep. In an “up” market for US stocks, both the Russell 2000 (IWM) and Industrials (XLI) were down on the week. As long as your Old Wall broadcaster doesn’t have to explain those details, they’ll never have Draft Kings for billionaire “stock pickers.” #TooMuchDetail

 

Finally, for the “folks” who still think “stocks” tell you about a globally interconnected macro marketplace, here are some hard-core US Equity Style Factors:

  1. SP500 High Beta Stocks were -1.1% last week vs. their Low-Beta brethren +0.7%
  2. SP500 Smaller Caps (bottom 25% cap) were -1.3% last week vs. their Big Cap brethren +1.0%

In other words. Size matters. And so does beta chasing.

 

Just think about it – little Hedgeye continues to be long Treasuries, Utilities, Gold, Low-Beta and Big Cap Liquidity… and the US growth/beta bulls continue to be underweight what we like. Look out, consensus bulls!

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.98-2.07%

SPX 1
RUT 1130-1178
EUR/USD 1.11-1.14

Gold 1145-1195

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Look Out, Bulls! - 10.19.15 chart


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