Hedgeye's Early Look | #EXTRACHEESE

Takeaway: “You better cut the pizza in four pieces because I'm not hungry enough to eat six.” -Yogi Berra

We’re late in the cycle. So late. Do we trust our Macro analytical process to tell us so? Damn straight we do. But we also look for external validation from the hundreds of companies we analyze on a day to day basis at Hedgeye.

 

Sometimes they flip us the occasional third standard-deviation move in a given operating metric. Sometimes deviations from the mean are less significant, but vary massively from expectations. And sometimes…just once in a blue moon, a management team’s sheer unadulterated stupidity gives us all the ammo we need to remain confident that we are, in fact, #LateCycle.

 

Welcome to the playground we call Retail.

 

Back to the Global Macro Grind

 

#GrowthSlowing

Let’s look at some of the more painfully obvious datapoints handed to us by the US Retail Supply Chain this earnings season.

  • ICON - Pre-announed $0.09 vs $0.33 and restates historicals, driving the stock down 57% in a day.
  • JWN – Comp sales slowed 400bps with gross margin down 160bps.  "It appears that there has been a slowdown in overall demand from the customer who is purchasing what we sell."
  • M – 2015 EPS Guidance is now 23% below the original guide (excluding asset sales). "We believe that the retail industry is going through a tough period, that we seem to experience something like this every five to seven years or so, and this one feels familiar in that regard."
  • SKX - The 2nd largest athletic shoe brand in the US saw its domestic wholesale business slow by 20 points sequentially. The stock subsequently lost $1.8bn in market value.
  • URBN - Missed revenue estimates for a 3rd straight quarter, this time by 5%.
  • WMT - At October Investor Day gave number that suggests last year’s EPS results won't be matched again until 2020.
  • MW – Jos. A Bank (Just acquired in a late-cycle transaction in itself) puts up a negative 15% comp, MW guided EPS in the upcoming quarter 50% below the street, and the stock dropped 40%.
  • Estimate Revisions - In the retail sector we have had 75 companies report 3Q.  20% saw 4Q estimates rise by avg of 5%. 80% saw estimates cut by average of 12%.

 

#GoHome

It’s not all bad, though. Keep in mind that many of the ugly datapoints outlined above are in the apparel, footwear and accessories space. While a very important component of retail, it accounts for only $500bn. That’s 11% of total retail sales and 30% of discretionary retail.

 

A part of the retail economy that’s offered up much better results is the Home category. In fact, with few exceptions, anything related to home-related durables and softlines has shown extremely solid trends in the quarter.

  • LZB - "With sales trends accelerating throughout the period, we are pleased to enter Q3 with momentum.”
  • Macy’s - "Our furniture and mattress business also continued very strong. And soft home -- categories like textiles, tabletop, et cetera -- strengthened in the third quarter."
  • Anthropologie (URBN) -  "I mentioned the home category in Anthropologie, which has been really off the charts."
  • HD / LOW - Home Depot and Lowe's both put up bullet-proof quarters this week, beating on every line of the P&L. HD was the particular standout.
  • TJX – Its HomeGoods division comped +6%.
  • RH – we won’t hear from RH for another few weeks. But we’re highly confident that the business is at or above plan. Yet the stock is off 15% in 18 days. We’d buy ahead of the quarter – and after the quarter. We think it’s going to $300.

Hedgeye's Early Look  |  #EXTRACHEESE - Home Furn Sales EL

 

#ExtraCheese

Sometimes it’s not what a company reports that gives a #LateCycle signal, but rather what it does with shareholders’ hard-earned capital. Consider the following.

  • FOSL – Bought Misfit (wearable tech) for $260mm. This is a category where FitBit has 85% marketshare, and Apple, Nike and UnderArmour are making a push. If you can’t get the best, or make the best…buy the 5th best?? Management on the call said that it didn’t have tech capabilities and was particular headwind to the category. Huge admission of missing the ball on a major trend. Stock off 40% in a day.
  • M Backstage – Starts Off-Price Concept ‘because TJX makes it work’.  "First of all, I will tell you it is still early days in the evaluation process for Backstage. But our belief is that the model has certainly been proven by others…. So, it is more of a bet on the fact that the category has been proven, mostly by others.
  • KSS Off Aisle – Ditto. But at least Macy’s has access to high quality brands. What’s KSS gonna do, sell Juicy Couture, Dockers and Candies at discounted prices? It already does and no one wants them. #fail
  • But the biggest callout here belongs to URBN. In what we view to be one of the most ridiculous “strategic” moves by a retailer in over 20 years, Urban Outfitters acquired the Vetri Family group. Yes, a Pizza chain. This company missed on the top line three quarters in a row, and simply can’t grow. The CEO thinks that Casual Dining is a growth business – even though it is in a secular decline – so he bought a Pizza business. Not just any Pizza business, but a local Philly company who’s CEO he’s known personally, as best we can tell, for about a decade. This is a tiny investment that should have been made out of his pocket…not shareholders’.

 

We all know that investors tend to shoot first and think second, and with the XRT (S&P Retail ETF) down 15.4% since last earnings season, compared to just a 2.6% decline for everything that is not Retail, it’s clear that the market has spoken. When we’re late in an economic cycle, that’s probably what should happen.

 

But we’d argue that some names have not been punished nearly enough, and should be shorted accordingly. We’d point to KSS, FL, M, TGT, LULU, TIF, GPS, W, HBI, COLM. Others have been thrown out with the bathwater, and should be bought outright - RH, KATE, NKE, PIR, RL.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.18-2.30%

SPX 2020-2110
RUT 1135--1190

VIX 14.11-20.83
USD 98.47-100.08

Copper 2.05-2.17

 

Keep Calm and Win,

 

Brian McGough

& Hedgeye Retail Team 


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