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RH | Black Book Before The Print

Takeaway: On Tues Dec 8th at 1:00 pm ET we're hosting a Black Book call on RH.

We're issuing an updated Black Book and will be hosting a call on Tuesday December 8th at 1pm EST to discuss how our thinking on RH has evolved since the company’s last print and what our thoughts are headed into Thursday’s earnings. A lot has happened in 13 weeks... not the least of which is the stock underperforming not only the market by 16%, but Retail as well (by 7%) – despite RH being more insulated from some of the issues that are clipping earnings today for retailers more broadly.  Over this time period, RH meaningfully accelerated square footage growth, launched two new concepts. Some say it’s bad timing. We disagree.

 

Nonetheless, we’re going to go through the puts and takes on a TRADE, TREND and TAIL duration. We’ll present our incremental insight, vet our case to see where we could be wrong, and share some of the pushback we’ve generally received in the meetings we’ve done in the past month.

 

Call details and full topic outline to come on Monday


Eye On China: Our Outlook for the Yuan

 

Could the Chinese government devalue the Yuan 15-20%? Hedgeye Senior Macro analyst Darius Dale responds to this subscriber question in this excerpt of The Macro Show.   


Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII

Takeaway: People aren’t bearish enough on where GPS’ P&L could go. | 15 SIGMAs this wk. ULTA, EXPR only pos setups. AEO is the big negative one to us.

GPS - Lousy November Comp

Our Take: "Just another lousy month for Gap, Inc." At least that's what we think the sentiment on the stock is saying. There's definite complacency in its persistent ability to underperform.

But make no mistake...this story can, and likely will, get a lot worse.  Sales productivity today (blended) is in excess of $400/foot. In past recessions it's dropped down closer to $360/foot. And on a go-forward basis, with increasing competition from Uniqlo, H&M, and not to mention little ol' Primark, we think that GPS is just structurally unable to compete -- especially at a 12%+ margin structure when we're late in the economic cycle.

We're fully aware that the stock is down 40% year to date, and it looks "cheap" (whatever that means) at 10x earnings. But take sales productivity down by 15%-20% and the fixed cost deleverage takes EPS negative. Not so "cheap" on those numbers.

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart1

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart2

 

15 Retail SIGMAs This Week

We’ll have our full book of 125+ SIGMAs out shortly. But this week’s data offered up far more bad than good. And we’re not talking about what the numbers reported as much as we are what the sales/inventory/GM triangulation suggests about 1H16. Bottom line, estimates remain too high. We’re at peak margins, and there are too few dollars chasing too much inventory.

Winners: The BIG winners, where the setup augers quite well for estimate revisions even above what we just saw, are ULTA, EXPR, and that’s pretty much it.

Losers: Here’s the inverse – inventory/sales/margin setup is changing negative on the margin. Biggest Losers are: AEO (adding to our short bench), DG, PVH, FIVE, LE, GIII

 

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart3

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart4

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart8

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart5

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart6

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart7

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart16

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart9

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart10

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart11

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart12

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart13

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart14

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart15

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart17

 

AMZN - After key Amazon representatives no-showed a meeting with Robbinsville, NJ officials Wednesday, the mayor vowed to take the online retail giant to court demanding the shutdown of its 1.2 million-square-foot warehouse if the traffic problems remain unresolved.

(http://www.ecommercebytes.com/cab/abn/y15/m12/i03/s03)

 

DG - Dollar General Names John W. Garratt as Chief Financial Officer

(http://investor.shareholder.com/dollar/releasedetail.cfm?ReleaseID=945346)

 

Rossignol in Talks to Buy French Bike Maker

(http://www.sportsonesource.com/news/article_home.asp?Prod=1&section=8&id=58573)

 


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Where We Stand On Macau Right Now

Editor's Note: Below is a brief excerpt from a research note sent to institutional subscribers earlier this week written by our Gaming Lodging & Leisure team. 

 

Where We Stand On Macau Right Now - macau yesterday

 

We remain generally negative on the Macau stocks but acknowledge that the December optics (-25% YoY GGR decline vs November’s 32% decline) could favorably impact sentiment.

 

However, there is still no indication that fundamentals are improving – November was worse than October from a seasonally adjusted GGR perspective. Low hold wasn’t responsible for the sequential degradation but VIP volumes were ugly and, importantly, Mass revenues were below expectations.

 

Going forward, we are concerned with 2016 where our -9% GGR forecast is below the Street. Same store revenue will look worse, down 19%. Non-gaming will look bad with room rates down in the mid-teens heading into a period of 20%+ room supply growth.

 

Relative to sentiment, LVS could be most at risk in 2016 given its sizeable valuation multiple and the fact that the new supply will target Sands sweet spot – non-gaming and the Mass segment.

 

 

To read the more detailed research note ping sales@hedgeye.com.


#RateHike Expectations, #Deflation’sDominoes, EUR/USD

Client Talking Points

#RateHike Expectations

Expectations play-out every day in markets. The consensus expectation was a short commodity long USD view moving into this week (Euro-QE and a Fed funds rate cut). If and when that doesn’t happen, the currency move looks about like yesterday, a -2.2% move in the USD. With this morning’s uneventful jobs report, those expectations remain. USD consensus longs don’t capitulate on their long positioning in a day.

#Deflation’sDominoes

It’s a long road to the bottom. Low cost producers with endless reserves don’t volunteer to fight deflation. We don’t expect a bullish catalyst out of OPEC today with a production cut. Any catalyst to the end of a deflation trade looks policy driven at this point. If this morning’s NFP number was a go for Janet, the market will continue to deflate the fed-inflated commodity bubble.     

EUR/USD

One day post Draghi Disappointment Day that sent the cross rocketing higher, it’s trading -0.50% to $1.0885. Over the more immediate term we’ll take our cues on the USD from U.S. data and Fed policy (meeting Dec. 15-16) and over the intermediate term we maintain a bearish bias as we think there’s an increased likelihood that the ECB has to act (as growth and inflation disappoint to the downside) by expanding the size of its QE program (to €75-95B/month), likely within the first quarter of 2016.

Asset Allocation

CASH 69% US EQUITIES 3%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 14% INTL CURRENCIES 8%

Top Long Ideas

Company Ticker Sector Duration
MCD

We added McDonald's to Investing Ideas on August 11th. Since then shares of McDonald's have risen over 16% compared to a 0.2% return for the S&P 500.

 

As Restaurants Sector Head Howard Penney wrote right around the time we added McDonald's (MCD), "We continue to get more bullish every time we talk to the company, franchisees and/or customers which we have polled via conducting surveys. We are going to be looking at a much different company 1-3 years from now. Urgency has been instilled from the top down by new CEO Steve Easterbrook," according to Penney. "This ship is in gear and headed north. 2015 will be the last time this stock is below $100."

RH

We believe that RH is to Home Furnishings what Ralph Lauren is to Apparel and what Nike is to Athletic Shoes. That’s a meaningful statement given that RH has only 3% share of a $140 billion relevant market.

 

RH is the preeminent brand in the space. We think that RH is in second inning of a game that may ultimately prove to be a double header. We believe the company will add $3 billion in sales over 3-years and climb to $11 in EPS. The earnings growth and cash flow characteristics to get to that kind of number would support a 30+ multiple. In the end, we see a stock in excess of $300.

TLT

The consumption side of the economy is arguably the most important, as its 69% of U.S. GDP. From a rate-of-change perspective, consumption growth decelerated in October, and consumer confidence is waning along-side it. That's why we would like to reiterate our Growth Slowing=Long TLT call.

 

To be clear, the consumption side of the economy had been a point of strength over the last several months. We’re not calling for a crash in household consumption, but the comps (comparison vs. prior reporting period) are important in rate-of-change analysis. The next four quarters of comps for Real PCE growth are the most difficult since Q3 2008 while the next four quarters of comps for CPI are the easiest since the four quarters ended in 4Q11. Simply put, both are headwinds for the consumer and we expect that the consumption component of the economic equation will continue to decelerate.

Three for the Road

TWEET OF THE DAY

The US Stock market has only been up 6 days in the last 21 - it was oversold yesterday, that is all

@KeithMcCullough

QUOTE OF THE DAY

“Whoever said, ‘it’s not whether you win or lose that counts,’ probably lost."

 -Martina Navratilova                   

STAT OF THE DAY

Wade Boggs had a career batting average of .328.


CHART OF THE DAY: The Harbinger Of Future Defaults | $JNK

 

CHART OF THE DAY: The Harbinger Of Future Defaults | $JNK - Image 1

 

Editor's Note: Below is a brief excerpt from today's Early Look written by Hedgeye Director of Research Daryl Jones. Click here to subscribe.

 

"... In the Chart of the Day, we look at the true harbinger of future defaults, which is comparing shares of company losing money versus the default rate. Going back to 1985, these two metrics have moved basically in lockstep (until recently). This is no surprise since corporate profits are what companies use to make payments on their debt. So fewer profits, lead to a lower likelihood of re-payment.

 

The combination higher of rates in the short term, declining corporate profitability, and accelerating downgrades is not a great fundamental mix heading into 2016."


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