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Retail Callouts (12/30): Online Returns, Hong Kong Tourism, KATE, KSS, TGT, M, JCP, JWN

Takeaway: Online returns, another cost for retailers to absorb. Hong Kong traffic slows, little KATE exposure.

KSS, TGT, M, JCP, JWN - Online spending up, returns up = another cost for retailers to absorb

(http://www.bloomberg.com/news/articles/2015-12-29/online-surge-leads-to-many-not-so-happy-returns-for-retailers)

 

Merchandise returns are expected to increase 8% to $62bil over the months of November and December, and that makes sense. As online spending takes a bigger chunk of the spending pie, returns should follow in step.

With 80% of retailers offering free shipping on returns, that's a tough price tag to swallow for a lot of companies in this space -- especially those with a small average basket. We think that both sides of the fulfillment equation, shipping and returns, for things like apparel/footwear/home décor are headed to 100% free 100% of the time by the end of FY16. That started this holiday as retailers used 'free shipping' promotions as an offensive weapon (TGT, KSS, WSM, etc). Unfortunately, for almost everybody except the bullet-proof content-owners of the world (i.e. Nike), such a move will be dilutive to margins to the tune of bps. Even worse news is that if they don’t play ball, there’s risk to the top line (i.e. if either KSS or JCP opts in to the free shipping game, they both lose).

 

Of course, if free shipping is offset by more full-price selling, then this would be a saving grace. Unfortunately, we have yet to see any sign of this.  It could also be made up of more impulse purchases in the online format -- but with the exception of Amazon (the King of the impulse purchase), we've actually seen units per transaction go down for most retailers online.

 

Here is how the margin math works for 4 retailers at various ends of the department store spectrum. JWN gets up to a 1500bps higher gross margin than KSS on a straight on-line sale, 1300bps in the case of a partial return, and a both sit at a -10% margin on a full return. High end, high ticket, and solid content retailers can play online. Otherwise, it's an extremely dilutive channel with even more cost pressure as the free shipping and return threshold move towards $0.

Machine generated alternative text: KSS TGT TGTw/RC M JWN
Normal Sale
Basket
Merch Mgn
GP $
Shipping
Adjusted Margin
$75.00 $125.00 $176.50 $200.00 $300.00
35% 38% 33% 40% 45%
$26.25 $47.50 $58.25 $80.00 $135.00
$7.50 $10.00 $10.00 $13.00 $16.00
$18.75 $37.50 $48.25 $67.00 $119.00
Margin %
25.0% 30.0% 27.3% 33.5% 39.7%
Partial Return
Return
Shipping
Reversed Profit
Adjusted Margin
$37.50 $62.50 $88.25 $100.00 $150.00
$0.00 $0.00 $10.00 $13.00 $16.00
$13.13 $23.75 $29.12 $40.00 $67.50
$5.63 $13.75 $9.12 $14.00 $35.50
Margin %
15.0% 22.0% 10.3% 14.0% 23.7%
Full Return
Full Return
Shipping
Merch Profit
Adjusted Margin
$75.00 $125.00 $176.50 $200.00 $300.00
$7.50 $10.00 $20.00 $26.00 $32.00
$0.00 $0.00 $0.00 $0.00 $0.00
-$7.50 -$10.00 -$20.00 -$26.00 -$32.00
Margin %
-10.0% -8.0% -11.3% -13.0% -10.7%

Retail Callouts (12/30): Online Returns, Hong Kong Tourism, KATE, KSS, TGT, M, JCP, JWN - 12 30 2015 Ecomm Math

 

KATE - Hong Kong traffic slows, KATE little exposure

(http://www.wsj.com/articles/hong-kong-retail-slows-as-mainland-tourists-stay-away-1451368824)

 

These Hong Kong tourism numbers are just flat out bad. But as it relates to KATE, the company limited its exposure to the region when it converted its 8 doors into a JV earlier this year. Not that the company was overly exposed to the region in the first place -- at most Hong Kong was a $20mm business for KATE (the combination of Hong Kong, Macau, and Taiwan = $34mm in 2014).

To put it into context, KATE has just 3.5% of the handbag and accessories market compared to COH at 12.5% and KORS at 9%. And the company is just in the beginning stages of growing its global footprint, expanding into new categories (mostly through licenses), and converting its share of voice into a higher share of wallet. Macro matters, but we think there are enough growth vehicles and market share opportunities for KATE to continue to drive the topline, which it has proven it is capable of doing despite serious concerns over the ‘space’.

Retail Callouts (12/30): Online Returns, Hong Kong Tourism, KATE, KSS, TGT, M, JCP, JWN - 12 30 2015 kate chart

 

Etsy Acknowledges Photo Bug on Mobile App

(http://www.ecommercebytes.com/cab/abn/y15/m12/i30/s02)

 

BBY - Fraudulent holiday returns hurt retailers

Retailers estimate that 3.5 percent of their holiday returns this year will be fraudulent, up slightly from the estimated 3 percent reported last year, according to the NRF.

(http://www.daytondailynews.com/news/news/fraudulent-holiday-returns-hurt-retailers/nps3K/)

 

FDX, UPS - Study: FedEx beats UPS in on-time deliveries

FedEx met holiday delivery guarantees 97.8% of the time in 2015, an improvement from 97.3% in 2014 and 95.4% in 2013.

UPS came in at a 95.5% success rate this year down from 98.1% in 2014 but was better than 93.9% in 2013.

(http://www.chainstoreage.com/article/study-fedex-beats-ups-time-deliveries)

 

ADS - Adidas CFO says investors are not pushing for Reebok sale, Taylormade decision expected in Q1

(http://www.ft.com/intl/cms/s/0/bd36d46e-a807-11e5-9700-2b669a5aeb83.html#axzz3veD8zu1A)

 

GME - GameStop Says We're No RadioShack as Investors' Doubts Increase

(http://www.bloomberg.com/news/articles/2015-12-30/gamestop-says-we-re-no-radioshack-as-investors-doubts-increase)

 

AMZN -  Amazon has been operating secret flights carrying thousands of packages in and out of the UK for the past six weeks as it trials setting up its own air freight business

(http://www.standard.co.uk/business/amazon-in-secret-move-to-launch-own-european-air-freight-service-a3143936.html)


INSTANT INSIGHT | No-Volume "Rallies," #Oil, and the Russell 2000

Takeaway: All is not well out there. Keep your head up.

INSTANT INSIGHT | No-Volume "Rallies," #Oil, and the Russell 2000 - emperors trading volume

 

You gotta love these no-volume paintings of the year-end tape – yesterday was the 15th up day in the last 37 for the S&P 500.

 

Here are the facts about the year-end "rally." Total US Equity Market Volume (including dark pool) was down -16% and -18% vs. their 1-month and 1-year averages on yesterday’s +1% SPY day.

 

Meanwhile, the liquidity trap in small caps (and Russell) remains obvious, looking nothing like the headline level of the S&P 500. Remember, the Russell 2000 is still in correction territory from its June high. 

 

INSTANT INSIGHT | No-Volume "Rallies," #Oil, and the Russell 2000 - rut

 

In other crashing markets news, it took Russian equities all of a month to join the Russell's correction club.

 

 

INSTANT INSIGHT | No-Volume "Rallies," #Oil, and the Russell 2000 - russia

 

The story for Russian equities is all about oil. 

 

This week, Oil has had a textbook crash, bounce, fade move in what so many pundits have hoped for in 2015 – I think they call (ed) it “reflation” – but #Deflation is still winning with WTI -2.7% after failing at the top end of the $34.83-38.29 risk range. 

 

INSTANT INSIGHT | No-Volume "Rallies," #Oil, and the Russell 2000 - Oil cartoon 12.28.2015


The Macro Show Replay | December 30, 2015

 


Daily Trading Ranges

20 Proprietary Risk Ranges

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CHART OF THE DAY: The Fed's Illusion Of Growth = Bubbles

Editor's Note: Below is a brief chart and excerpt from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.  

 

"... I’ll move along and get back to today’s tape (and apologies in advance for leaving out FANG and more than a few other bubbles), but that’s effectively what the ZIRP created – a galaxy of “unintended consequences”, that were A) intended and B) real.

 

Creating the illusion of growth that is inflation expectations – i.e. the belief system that prices cannot go down – gave birth to every centrally-planned bubble I’ve ever attacked with live ammo from the short side."

 

CHART OF THE DAY: The Fed's Illusion Of Growth = Bubbles - 12.30.15 EL chart


The Resistance

“It’s true. All of it. The Dark Side, the Jedi. They’re real.”

-Han Solo

 

I’m at a hockey tournament in Simsbury, CT this week and after yesterday’s game I took my son Jack to see Star Wars. Oh boy, am I glad I did! There’s nothing more important than teaching our children about truth, character, and principles.

 

Don’t worry, I’m not going to spoil the movie for those of you who haven’t seen it. I do, however, think it’s a great time of the year to reflect upon why something like “The Resistance” against The Establishment has always mattered in America.

 

I came to this country in the 1990s fundamentally believing in free-markets, liberty, and The American Dream. I know many of you still believe. And while we may feel like we’re outnumbered, The Force is strengthening in all of us. We can be the light. It’s real.

 

Back to the Global Macro Grind

 

“How do we blow it up? There’s always a way to do that.”

-Hans Solo

 

Yep. While the Fed is just one component of the dark side of central-market-planning, they’ve been causal in perpetuating the asset price bubbles that have been blowing up during my entire career.

 

The Resistance - Yellen Yoda cartoon 12.01.2015

 

#Bubbles, Jedi? “Transitory, they are supposed to be.”

 

Yep. Internet Bubble, Real-Estate Bubble, LBO Bubble, “Emerging Market” Bubble, Commodity Bubble, Credit Bubble, M&A Bubble… all “transitory.” Absolutely. I am certain they are certain about that.

 

I’ll move along and get back to today’s tape (and apologies in advance for leaving out FANG and more than a few other bubbles), but that’s effectively what the ZIRP created – a galaxy of “unintended consequences”, that were A) intended and B) real.

 

Creating the illusion of growth that is inflation expectations – i.e. the belief system that prices cannot go down – gave birth to every centrally-planned bubble I’ve ever attacked with live ammo from the short side.

 

The Resistance to Yield Chasing and Kinder Morgan, Hedgeye was.

 

Understanding what ideology underpinned many of these asset bubbles has been as critical in not trying to call “bottoms” and/or “reflations” of them inasmuch as mapping the economic cycle has been.

 

That’s why my (and Mr. Macro Market’s) main resistance to the perma-bull narratives this year has been where we are in the cycle. Until we get through at least Q2 of 2016, there is both a profit cycle and credit cycle to continue to price in.

 

If you think yesterday’s +1% no-volume “rally” changes our cycle call, think again. That was only the 15th up day in the last 37 and on total US Equity Market Volume (including dark pool) that was down -16% and -18% vs. the 1-month and 1-year averages.

 

Moreover, Jedi Signals this morning remind us that:

 

  1. #StrongDollar remains firmly intact (China has devalued Yuans -1.4% in the last month to a 5yr low)
  2. #Deflation in both Commodity and Credit Markets remains obvious (Oil -2.3% breaking $37, again)
  3. Russia is down another -1.5% (down -10% in the last month) after printing a recessionary PMI of 48.7 for DEC
  4. Dr. KOSPI (South Korea) is closing out DEC on a down note (-1.5% for the month) and remains bearish TREND
  5. Yield Spread (10yr Treasury Yield minus 2yr) just flattened to its YTD low

 

In the universe of correlating mathematical truths, there are few more consistent than the rate of change in the Yield Curve (flattening or steepening) that reflect the rate of change in the US economy.

 

It’s true. And it’s measurable. All of it.

 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:

 

UST 10yr Yield 2.16-2.32% (bearish)

SPX 2001-2093 (bearish)
RUT 1108--1169 (bearish)

NASDAQ 4 (neutral)

Nikkei 182 (neutral)

DAX 105 (neutral)

VIX 14.30-21.71 (bullish)
USD 97.41-99.40 (bullish)
EUR/USD 1.07-1.10 (bearish)
YEN 119.84-121.52 (neutral)
Oil (WTI) 34.83-38.29 (bearish)

Nat Gas 1.69-2.36 (bearish)

Gold 1049-1081 (bearish)
Copper 2.03-2.15 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Resistance - 12.30.15 EL chart


Volume, Oil and #Recession

Client Talking Points

VOLUME

Total U.S. Equity Market Volume (including dark pool) is down -16% and -18% vs. their 1-month and 1-year averages on yesterday’s +1% SPY day. The Liquidity Trap in small caps (and Russell) remains obvious, looking nothing like the headline level of the S&P 500.

OIL

Oil experienced a textbook crash, bounce, fade move in what so many pundits have hoped for in 2015 – we think they call (ed) it “reflation” – but #Deflation is still winning with WTI down -2.3% (Russia -1.5%) after failing at the top end of the $34.83-38.29 risk range.

RECESSION

The probability of a recession continues to rise as we head into 2016. The Yield Spread (10YR minus 2YR) just flattened to a year-to-date low of 121 basis points and its rarely seen this level during the Bernanke/Yellen regime. If they (Fed) keep tightening into the slow-down, they’ll perpetuate it.

 

*Tune into The Macro Show at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 63% US EQUITIES 2%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 21% INTL CURRENCIES 14%

Top Long Ideas

Company Ticker Sector Duration
FII

Federated Investors (FII) profitability got a boost as the Fed boosted short term rates for the first time in 7 years. Even the slight 25 basis point hike improves profitability in the firm’s leading money fund business by +30% into the New Year.

 

In essence, the firm rolls 30-day paper throughout the short term fixed income curves and the new higher yields forthcoming into 2016 will allow the company to claw back some of the waived fees it has extended to its client base in money funds. Year-to-date the company has waived over $300 million in fees. With that firmly in the rearview, it becomes an opportunity set as FII gets higher yield from cash products next year.

 

In the financial sector, FII is the most asset sensitive name we cover, meaning it benefits most from even marginal interest rate hikes.

RH

We have to give Restoration Hardware Chairman and CEO Gary Friedman props for his approximately nine minute segment on Cramer 2 weeks. Let's face it, him going on what's arguably the most volatile and biased financial media platform, unscripted, is not what we wanted to see. The risk of fireworks was high.

 

But he capped off a successful day RH (CFO and IR) had on the investor conference circuit by focusing on the real value drivers at Restoration Hardware (RH) -- growth in product concepts, and RH's real estate transformation. The appearance was planned well before the earnings release, by the way, coinciding with a business-focused trip to NYC. All-in, it was a positive event for the stock.

  

TLT

In case you were looking for Style Factors that crushed it last week – the Top 3 gainers were the Top 3 #Deflations of 2015!

  • High Beta Stocks were +3.5% last week to -12.0% YTD
  • High Debt (to EV) Stocks were +2.9% last week to -10.9% YTD
  • Small Cap Stocks were +3.2% last week to -12.4% YTD
  • *Mean performance of Top Quartile vs. Bottom Quartile (SP500 Companies)

 

In other words, the no-volume squeeze had the smaller cap Russell 2000 outperform the large cap Dow at +3.0% week-over-week vs. 2.5%. Heading into the final week of the year, the Dow and Russell are down -1.5% and -4.1%, respectively.

 

In a slower-for-longer secular growth world, you should pay more for the organic growth that you can find. But, more importantly, you should realize that “cheap” has the illusion of “cheap” because the U.S. economic cycle is slowing alongside the secular. 

Three for the Road

TWEET OF THE DAY

Darius Dale: This Is the 'Biggest Risk Heading Into 2016’

https://app.hedgeye.com/insights/48295-dale-this-is-the-biggest-risk-heading-into-2016… via @HedgeyeDDale

@Hedgeye

QUOTE OF THE DAY

If you lose an hour in the morning, you have to hunt for it the rest of the day.

Chinese Proverb

STAT OF THE DAY

The 20 retail companies in the Fortune 500 recognize an average of $6,300 in annual profit per employee. The minimum wage decisions being discussed at WMT would take annual profit per employee down by 38% for a hike to $9 and 71% for a hike to $10.10.


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