Dept Stores | Gonna Happen Again in 4Q

Takeaway: Expectations suggest sequential pickup in sales w/o margin pressure. That's extremely aggressive given the circumstances.

Here's a look at key financial metrics for the four department stores that reported earnings this week. There are some really interesting takeaways. We all know sales are weak and inventories are high. By our math those two metrics are about 500bp out of whack. Our sense is that if retail CEOs could pick any two-week period of the entire year where the industry does not have excess inventories, they'd universally pick the two leading up to Thanksgiving/Black Friday. Unfortunately, the ball is not in their court.


Expectations for 4Q, as outlined below, still look too high. For the most part, expectations are for better-trending comps, without a meaningful hit to margins. There's very little chance that this comes to fruition. Base case is that we see a slowdown in sales OR in margins (negative earnings event). Worst case is erosion in comps AND margins.


The point is that there's a better chance than not that we see another round of downward earnings revisions.  Either way it's reason for the group to test lower multiples.



  • The first thing that jumped out at us is that implied fourth quarter guidance is for a sequential acceleration in the two-year comp for every retailer.
  • Expectations are highest in 4Q for the mid-tier players -- JCP and KSS -- and are lowest for the upper end (M and JWN).
  • KSS 4Q expectations look like the biggest stretch to us.

 Dept Stores | Gonna Happen Again in 4Q - 11 13 15 chart1 



  • Macy's is looking for a 4Q gross margin decline, while the others are implied to be improve sequentially.
  • JWN is banking on the biggest 4Q improvement, which we think is partially fair given that it's probably cleaner than the others due to the excessive levels of clearance in 3Q vs last year.
  • JCP Margin guidance (Gross and EBIT) seems reasonable to us, but when heading into the holidays with competitors carrying so much inventory, we don't think it’s a slam dunk by any means.

  Dept Stores | Gonna Happen Again in 4Q - 11 13 15 chart2 

  Dept Stores | Gonna Happen Again in 4Q - 11 13 15 chart3 



This chart is not pretty -- showing that inventories are growing faster than sales by about 5% for the group headed into holiday. We need to see a huge surge in underlying demand to have margins positive for the group. Our sense is that the department stores end up in Quadrant3 -- right where they started.

Dept Stores | Gonna Happen Again in 4Q - 11 13 15 chart4

Gold Update: Key Takeaways Following Our Materials Sector Launch

In this excerpt of The Macro Show earlier today, Hedgeye Materials & Commodities analyst Ben Ryan calls gold a short-term "macro trading vehicle" and lays out the longer-term thesis for why gold can "go a lot lower."




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


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Nu Skin (NUS) was recently added to our Hedgeye Consumer Staples Best Ideas list as a SHORT.


NUS released (click HERE for the release) detailed information surrounding VitaMeal sales and profitability. The new information they provided conflicted with the information they gave shareholders on the 3Q15 earnings call. 


Clearly, by putting out this new information, management is trying to calm the skeptics about the issues surrounding VitaMeal.  Unfortunately, the new information sheet provided by the company only raised more questions about VitaMeal than it answered. 


Now one of the biggest concerns we see coming out of this new information is where did all the money go?  Which is arguably a bigger issue than we saw rising out of the VitaMeal controversy originally. Now, the original concerns are still there, they are just further compounded by this additional question.


In the new document it clearly says that VitaMeal is “1.5% of sales and less than 1.5% of operating profits.” Which contradicts what they said on the 3Q15 earnings call, Truman Hunt, CEO, said “Yeah, it's a product just like priced and sort of positioned just like any other product we would sell.”


Breaking down what they said in the new document, some things just don’t add up.



Looking at what the company recently disclosed the numbers just don’t add up.

In 3Q15, the company disclosed that there were 15.34 million meals donated or 510 thousands bags sold.  Based on 1.6% (management 3Q15 guidance) of company sales ($571.3 million), VitaMeal sales in 3Q15 VitaMeal were $9.1 million.  That implies that the ASP for VitaMeal was $17.87 per bag, significantly below the retail price of $25.50.  


On the 3Q15 call CEO Hunt said “distributors purchase it for $20 to $25 depending on the market.” While the newly disclosed document specifically states that VitaMeal is sold for $25.50 per bag in the United States.



What accounts for the difference in the ASP?  In 3Q15, where did the $7.59 per bag or $3.89 million dollars go? For the nine months of 2015 (according to the company’s numbers) the average VitaMeal bag sold for $14.45, implying that there is $19.1 million dollars unaccounted for.


Given these discrepancies in their own reporting what happened to the $19.1 million that is unaccounted for over just the last nine months?



The company also said that VitaMeal contributes just under 1.5% of operating margins. It's incomprehensible in our eyes that VitaMeal has similar input costs to high end creams and nutritional supplements. Additionally, there are no distribution costs for Nu Skin given the charities take care of delivery. We strongly believe that VitaMeal holds a much larger percentage of operating profit than it does of sales.




Managements inconsistencies continue, below is an excerpt from the recently disclosed document stating that the margins on VitaMeal are “lower than its typical margin.” Directly contradicting what CFO Ritch Wood said during the 3Q15 earnings call when asked about VitaMeal margins, “it’s a product just liked priced and sort of positioned just like any other product we would sell.”



In 3Q15 we have VitaMeal sales representing 2.28% of total revenue via their Smile reports, which is 68bps above managements commentary of 1.6%. Accounting for distributor commission of 19% and COGS of 4% that would equate to roughly 39.7% of GAAP EPS or roughly 14.5%% of adjusted EPS.


One thing we would also like to point out, SAFI or Napoleon Dzombe are not mentioned once in this document. A troubling fact given only just two years ago SAFI was the largest recipient of funds from Force for Good, instead they mention Feed the Children.


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw



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FMHQ (Friday Morning Housing Quant)

Takeaway: The builders, under pressure for the last 3-4 weeks, are now roughly flat QTD, while the housing ETFs remain up 3-4% QTD.

Our FMHQ (Friday Morning Housing Quant) tables present the state of the publicly traded homebuilders in a visually-friendly, quantitative format that takes about 60 seconds to consume. 



  • Housing Macro | Rates:  Alongside the labor supply consternation coming out of 3Q builder earnings and some incremental softening in the demand data over the last month, the primary macro factor impacting the space has been the rise in rates.  Rates on the 10Y TSY are up +34bps over the last 20 trading days as the market priced in a rising probability of movement in the policy rate out of the Fed in December.  The shift in 30Y Mortgage Rates has been notably more muted, rising just +11bps over the same period.  Outside of (what have become) recurrent bouts of rate volatility, our late-cycle macro expectation on rates remains lower-for-longer – a view finding some further confirmation this morning with domestic retail sales disappointing and wholesale price inflation missing expectations and accelerating further into the negative at -1.6% YoY. 
  • Performance Roundup: It's safe to say that the housing stock complex has been weak of late. Interestingly, in spite of a spate of weak earnings prints and subdued outlooks, the average builder stock remains roughly flat QTD. QTD absolute returns for ITB and XHB stand at +3.9% and +3.1% vs the S&P 500 +6.6%. Meanwhile, the average builder from our tables below is -0.9% QTD. Our preferred four horsemen of 4Q among builders are NVR, LEN, BZH & KBH, which are +6.9%, +1.2%, +5.3%, -3.5% QTD. The three best performing builders thus far this quarter are NVR, DHI (+5.6%) and BZH. The three worst performing builders are TMHC (-13.6%), PHM (-5.0%) and MTH (-4.2%).

  • Insider Buying: A Director at Hovnanian (HOV) purchased 20k shares (~$45k) in late October. Outside of that, there's been no recent insider buying in the sector.
  • Beta: The highest beta names (1YR) remain HOV (1.51), KBH and BZH which are at 1.34 and 1.36, respectively. At the other end of the spectrum, the lowest beta plays are NVR (0.60), MDC (0.92) and TOL (0.99).
  • Short Interest: CAA, KBH and DHI have seen SI creep higher, rising as a % of SO by 5.0%, 4.2% and 1.5%, respectively in the latest month. TMHC, HOV & MTH have seen SI fall by 2.3%, 2.0% and 1.8%, respectively.
  • Sell Side Sentiment: MTH has seen the largest drop in sell side support (-10.1% 1M change), while BZH has seen the largest bump in support (+9.1% 1M change).
  • Valuation: The cheapest names in the group currently are BZH (7.4x), TPH (9.3x) and TMHC (8.7x), while the most expensive are NVR (15.0x), LEN (12.5x), and TOL (13.1x).


FMHQ (Friday Morning Housing Quant) - BQ 1

FMHQ (Friday Morning Housing Quant) - BQ 2


FMHQ (Friday Morning Housing Quant) - BQ 3


FMHQ (Friday Morning Housing Quant) - BQ 4




Joshua Steiner, CFA


Christian B. Drake

Commodities, Europe and Retail Sales

Client Talking Points


The CRB does NOT like rising rate hike expectations vs. Draghi who said “downside risks are now clearly visible … and inflation dynamics have weakened.” The CRB Index is down -6.5% on a 1-month window. The USD ended lower yesterday but the move from the mid-October Fed meeting and jobs report remains one of deflation. We re-iterate the slower for longer deflation view.    


Got #GrowthSlowing? Europe does! We reiterate our Q3 2015 macro theme of #EuropeSlowing (published on July 7, 2015). Today, Eurostat released Q3 2015 flash estimates:The Eurozone and Germany both slowed to 0.3% Q/Q (vs 0.4% Q/Q prior), while France surprisingly gained steam to 0.3% Q/Q vs 0.0% in the prior quarter. As a classic lagging indicator, the GDP data confirms our proprietary GIP (growth, inflation, policy) model that suggests the Eurozone sits squarely in Quad 3, equating to growth slowing as inflation accelerates, into the end of the year. 


Headline Retail Sales and all the sub-aggregates missed consensus estimates with growth decelerating modestly year-over-year as the new cycle high in auto sales (18.12MM) in October failed to offset disappointing growth elsewhere.  The “control-group” - which feeds into the GDP calculation - was up +0.2% MoM (vs +0.4% est) while decelerating -30bps sequentially to +2.9% year-over-year.  In short, the #late-cycle consumer continues to disappoint as the data continues to confirm the dour commentary out of softline retail in 3Q EPS season.   


**Watch The Macro Show replay (special Gold edition) - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Post earnings, the next catalyst for McDonald’s (MCD) is going to be next week's November 10th analyst meeting. The meeting will be an opportunity for management to shed more light on the progress of all day breakfast, additional G&A cuts and the potential of doing a REIT.


Our Restaurants team remains bullish on the name, and they look forward to giving you some material updates after the meeting.


Restoration Hardware (RH) hit all-time highs this week, but this story is far from over. We think RH will earn close to $11 per share in 3 years, which compares to the consensus estimate of just over $6. We estimate that the stock is worth $300.


The square footage component is well known, but we think people are missing…

  1. The productivity and market share that we’re likely to see from each new store,
  2. How scalable this business model is without commensurate capital investment,
  3. The leverage we’re likely to see is below-market real-estate deals being struck today and that should begin to impact the P&L. 

Current policy makers remain fixated on the jobs market, and this Friday’s report was good on the surface. Here’s the rundown:

  • The U.S. added +271K to non-Farm payrolls in October which blew out the expectation for +185K additions (last month’s awful print was revised even lower to +137K additions). Remember that the estimates are useless as the number is near impossible to predict. Keep that in mind.
  • Unemployment Rate moved lower to 5.0% for October from 5.1% in September
  • Wage growth was a positive surprise as Avg. hourly earnings printed a +2.5% growth rate for October vs. an expectation of +2.3%. The growth rate in September was +2.2%

So, again, on the surface it was a positive report. However, as we’ve emphasized, consumption and labor market strength are staples of an economy that is late cycle.

Growth continues to slow, and a rate hike has the potential to pull-forward a recession and flatten the yield curve. In the event this happens, you’ll be happy you held onto your long-bond position. If you haven’t bought into the #slower-for-longer view, the market is giving you the chance to buy bonds at another lower high… For the 5th time this year.

Three for the Road


VIDEO: Ponzi Policy? The Incestuous Mechanics of Quantitative Easing… via @hedgeye



Great spirits have always encountered violent opposition from mediocre minds.

Albert Einstein


Demand for Chinese steel is down 8.9% compared to a year ago and the country’s rail freight volume is down 10.1% compared to last year.

This One Picture (Still) Captures Everything Wrong With Wall Street (Nothing's Changed) | $VRX

We took Wall Street analysts to task last week for suggesting beleaguered Valeant Pharmaceuticals (VRX) shares still had 150% upside. Sadly, not much has changed.


This One Picture (Still) Captures Everything Wrong With Wall Street (Nothing's Changed) | $VRX - VRX consensus update


VRX is trading around $74. Shares are down almost 72% from its August high. Here's the current breakdown of the 25 Wall Street analysts covering the stock:

  • 65% currently rate VRX a Buy (unchanged from last week)
  • The average analyst price target is $180 (versus $199)
  • That implies approximately 144% upside (down from 150%)



To be clear, the negativity surrounding Valeant is worse today than it was when last we checked in on Old Wall. Concerns about insider selling, no update from management on VRX's longer-term outlook, and the legal question mark surrounding its partnership with pharmacy Philidor loom large over the stock. 


Hedgeye's Healthcare analysts released a research note to institutional subscribers last week outlining why we think shares are worth $20. To be clear, we’ve long been skeptical.


CLICK HERE to read their original Short thesis on VRX from 7/22/14.



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