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REPLAY | 1Q16 MACRO INVESTMENT THEMES CALL

Yesterday the Hedgeye Macro Team, led by CEO Keith McCullough, hosted its quarterly Macro Themes conference call in which it detailed the THREE MOST IMPORTANT MACRO TRENDS it has identified for 1Q16 and the associated investment implications.

 

We encourage you to check out the Video Replay (below); the Audio Replay and Presentation Materials can be accessed via the links underneath.

 

For the audio replay CLICK HERE 

To access the presentation materials CLICK HERE

 

 

Q1 2016 MACRO THEMES OVERVIEW:

 

  • U.S. #Recession?: Industrial activity and corporate profitability are already trending at recessionary levels. Meanwhile, domestic employment, consumption and income growth are all past peak and policy-driven deflationary pressures should persist in perpetuating soft external demand, EM distress, weak import pricing, HY credit risk and further flagging in corporate capex. We’ll contextualize the current macro data and handicap the probability of recession as the late-cycle U.S. economy traverses its steepest GDP base effects of the cycle.
  • #CreditCycle: An extended breakout in corporate credit spreads has preceded recessionary periods in prior cycles, and since we introduced our deflation theme in 2H14, both high yield and investment grade spreads have marched higher off all-time lows in cross-asset volatility and all-time highs in corporate credit outstanding. In effect, we are loudly reiterating our call that the unwind of ZIRP and QE will continue to deflate the easy money credit boom it fabricated in the form of continued recessionary earnings growth as the business cycle gets dangerously long in the tooth.
  • #CurrencyWar: Historically, Fed tightening cycles, #LateCycle slowdowns and #Quad3 outcomes have all been independently been bearish for the USD. As such, our expectation for a continuation of #StrongDollar commodity and asset price deflation appears misguided in the context of our dour fundamental outlook for the U.S. economy. That said, however, currencies cannot be analyzed in isolation and our proprietary analysis of the world’s top-10 economies renders the [dollar-bullish] global monetary policy divergence theme we authored well intact. 

-The Hedgeye Macro Team


RH | It’s Us vs Them

Takeaway: Here’s a detailed overview of where we’re different from the Street, by line item, in each quarter in 2016. RH needs to deliver. It will.

More than any other company/issue we've had questions on since 2016 kicked into high gear,  RH takes the cake – and more specifically, its near-term earnings trajectory. We’d peg it at roughly a dozen queries in just two days, which is very big for us. We’re not surprised, and we agree 100% with the impetus for the concern. We believe fully in the long-term call, and believe now as much as ever that there’s $11 in earnings power, and that people will actually start to believe it within a year.  But the cold hard fact remains that the tactical game changed in December due to promotional activity, perceived economic sensitivity, and timing issues around concept and new store launches.

 

We can talk all day about the 2-3 year economics of new categories ramping up sales into bigger stores at lower rents. But the fact is that if RH misses revenue and/or earnings in either of the upcoming two quarters, $11/ps in future earnings won’t mean squat, and this multiple will deflate faster than a game ball in Foxboro (sorry Patriots fans).

 

As such, in the tables and charts below, we compare where we shake out in each of the next four quarters versus consensus, with particular focus on Sales, Gross Margins, SG&A, and EPS in 1H16.  The punchline is that we’re ahead of the Street every quarter on EPS, and are coming in at $4.48 for the year vs the Street at $3.94. The good news is that this is almost entirely top line driven throughout the year, with SG&A leverage to go with it. The downside is that we’re more conservative in both 1Q and 2Q than the Street on Gross Margin.  When all is said and done, however, we think that a better comp and higher EPS will trump lower GM, given that weakness in the latter is so well telegraphed.

 

[As a point of reference, we’re going to vet every single part of the RH Bear Case across durations in a Black Book to be released on January 25th (1pm EST presentation). We won’t necessarily disprove all of it, but we will fully analyze it. Stay tuned for details.]

 

EXHIBIT 1: Hedgeye P&L Variance vs Consensus

RH | It’s Us vs Them - RH Trend 1   Summary Table

 

 

EXHIBIT 2: RH Revenue, Hedgeye vs Consensus

4Q15: To get to the streets #’s for 4Q (mid-point of guidance) need to assume a big ramp in the 2yr trend from 16% to 23%. That reacceleration = $79mm in sales. If we attribute all of that to Modern/Teen we have to make modest assumption that M/Teen books run a productivity rate of just 45% of Spring mailings. That would be what we’d consider an obscenely low performance. Plus RH guided down margins appropriately to win market share. It appears to be working. Top line should not be an issue.

1Q16: Modern/Teen not a 1-quarter event – this builds sequentially. Look at big Source Book revamp in 2Q/3Q14 for proof. Plus, vendor network is the M/T revenue bottleneck, not consumer demand. That’s not a bad position to be in.

2Q16: Continued benefit from Modern & Teen, plus newest design galleries (Chicago, Denver, Tampa, Austin + LA Modern) will have more material impact to topline. Increased marketing spend in the form of source book pages.

RH | It’s Us vs Them - RH Trend 2   Rev Chart

 

 

EXHIBIT 3: RH EBIT Margins, Hedgeye vs Consensus

4Q15: Promotional environment pressure takes margins down in 4Q. Guide for -100bps on GM likely overshot to the downside. SG&A leverage from Source Book savings and scale in the model.

1Q16: Assume that promotional pressure persists, coupled with DC occupancy deleverage, and higher shipping cost – offset by one more quarter of SG&A leverage as Source Books savings amortized over 12 month window. Strong top line flows through.

2Q16: Promotional pressure eases, product flow normalizes and retail occupancy starts to kick in. Take spending up on marketing to drive top line.

RH | It’s Us vs Them - RH Trend 3   GM Chart

 

 

EXHIBIT 4: RH EPS, Hedgeye vs Consensus

4Q15: Expectations in check for 4th quarter, and RH has to deliver. Sales expectations assume a big acceleration, but product pipe, new galleries, and market share efforts will drive 35% earnings growth even with GM pressure.

1Q16: Street underestimating how long tail is on Modern/Teen product. RH will push envelope to take market share. Enough SG&A levers left to offset any GM pressure.

2Q16: New galleries + Modern/Teen + increased marketing dollars = strong top line. Modest EBIT margin leverage. Street too low by $0.10.

RH | It’s Us vs Them - RH Trend 4   EPS Chart

 

 

EXHIBIT 5: RH Peak, Mid, Trough Valuation and Sentiment Summary

Any way you cut it, RH is sitting near a trough valuation on all metrics, and within 200bps of peak short interest (currently 29%). In fairness, RH has trading history for only half of the current economic cycle – but for the stock to be anything other than egregiously cheap at $78, we need to be more wrong on the fundamentals than we’ve been on any name in a very long time.

RH | It’s Us vs Them - RH Trend 5   Valuation 2


5 Must-See Cartoons That Sum Up The Current Macro Environment

Below are five cartoons illustrating our latest thinking on current macro developments. 

 

1. Whatever it takes? The Bank of Japan’s Haruhiko Kuroda pledged (again) to do “whatever it takes” to stem-off pervasive deflation. The QE track record is clear. It hasn't worked and will not work.

5 Must-See Cartoons That Sum Up The Current Macro Environment - Kuroda cartoon 02.18.2015

 

2. See that 7% selloff in China’s Shanghai Composite yesterday? Contractionary manufacturing data reignited global slowdown fears. Note: Our #GrowthSlowing call is now 18 months old.

5 Must-See Cartoons That Sum Up The Current Macro Environment - china year of the snal

 

3. Oil is tanking, down almost 2% today. We continue to reiterate our commodities #Deflation call from Q3 2014.

5 Must-See Cartoons That Sum Up The Current Macro Environment - Oil cartoon 11.20.2015

 

4. Nope. We didn’t like small caps last year. Still don’t. The Russell 2000 plunged -2.3% yesterday. Today’s small gains won't do much for investors long small caps since June. The Russell is down over 14% since then.

5 Must-See Cartoons That Sum Up The Current Macro Environment - russell 2000

 

5. A new 12-month low for the 10-year/2-year Treasury spread at 119bps. It’s the flattest the curve has been since the last US recession. That's also been good for our Long bond (TLT) call. 

5 Must-See Cartoons That Sum Up The Current Macro Environment - TLT safewaters 10.15.14 large

 

We delivered a whole new batch of Q1 2016 Macro Themes during our quarterly themes call hosted by Hedgeye CEO Keith McCullough today. To access our macro research or any one of our other verticals please ping sales@hedgeye.com.


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McCullough: San Francisco Fed Head Is Full of Baloney

 

On CNBC yesterday, San Francisco Fed President John Williams actually said, “The dollar is not a target of FOMC policy.” In this brief, hard-hitting excerpt of The Macro Show, Hedgeye CEO Keith McCullough explains why that is just flat-out “ridiculous.”

 

 

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

 

Subscribe to Hedgeye on YouTube for all of our free video content.


Today | Q1 2016 Macro Themes Conference Call at 1:00PM ET

We will be hosting our highly-anticipated Quarterly Macro Themes conference call TODAY, January 5th at 1:00PM ET. Led by CEO Keith McCullough, the presentation will detail the THREE MOST IMPORTANT MACRO TRENDS we have identified for the quarter and the associated investment implications.

 

Q1 2016 MACRO THEMES OVERVIEW:

 

  • U.S. #Recession?: Industrial activity and corporate profitability are already trending at recessionary levels. Meanwhile, domestic employment, consumption and income growth are all past peak and policy-driven deflationary pressures should persist in perpetuating soft external demand, EM distress, weak import pricing, HY credit risk and further flagging in corporate capex. We’ll contextualize the current macro data and handicap the probability of recession as the late-cycle U.S. economy traverses its steepest GDP base effects of the cycle.
  • #CreditCycle: An extended breakout in corporate credit spreads has preceded recessionary periods in prior cycles, and since we introduced our deflation theme in 2H14, both high yield and investment grade spreads have marched higher off all-time lows in cross-asset volatility and all-time highs in corporate credit outstanding. In effect, we are loudly reiterating our call that the unwind of ZIRP and QE will continue to deflate the easy money credit boom it fabricated in the form of continued recessionary earnings growth as the business cycle gets dangerously long in the tooth.
  • #CurrencyWar: Historically, Fed tightening cycles, #LateCycle slowdowns and #Quad3 outcomes have all been independently been bearish for the USD. As such, our expectation for a continuation of #StrongDollar commodity and asset price deflation appears misguided in the context of our dour fundamental outlook for the U.S. economy. That said, however, currencies cannot be analyzed in isolation and our proprietary analysis of the world’s top-10 economies renders the [dollar-bullish] global monetary policy divergence theme we authored well intact.

 

CLICK HERE to watch Keith McCullough walk through this presentation live.

Today | Q1 2016 Macro Themes Conference Call at 1:00PM ET - q1 2016 pic

 

CALL DETAILS

 

  • Toll Free:
  • Toll:
  • Confirmation Number: 13627300
  • Materials: CLICK HERE

 

As always, our prepared remarks will be followed by a live, anonymous Q&A session. Please submit your questions to . Also, for those of you who cannot join us live, we will be distributing a replay video of the call shortly after it concludes.

 

Kind regards,

 

-The Hedgeye Macro Team


Retail Callouts (1/5) | AMZN 3rd Party, NKE Flyknit Patent

Takeaway: 2015 Amazon 3rd Party Seller Wrap Up. NKE - This is B-I-G, new Nike patent changing the manufacturing paradigm for first time in 40 yrs.

AMZN - Amazon 2015 Seller Wrap Up

(http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=2126161)

 

The interesting angle from our vantage point is the influence the AMZN network has on total e-commerce sales. The $76bn in sales the company reported over the past 12 months =  7.6% of ~1 trillion global online dollars, but when you gross up the Third Party selling fees (estimated 20% take rate) into actual retail sales the total sales at retail = $150bn, or 15% of global e-comm sales. And, consumer acceptance of 3rd party sellers just helps AMZN broaden the reach.

 

NKE - This Is B-I-G

(http://pdfaiw.uspto.gov/.aiw?Docid=20150366293&idkey=NONE)

 

Make no mistake...this is B-I-G.

 

A new patent suggests that Nike plans to give users much greater control over the customization of Flyknit sneakers, which is right in line with our contention over the past two years.

 

The implication here is that it will commercialize the ability for Nike to 'Mass Customize' its high-end product at an above-average margin without taking up price.

 

In the end, this changes up the shoe manufacturing paradigm for the first time since Phil Knight created a Futures model 40-years ago. And to be clear, no one is remotely close to where Nike is in this regard. They can catch up, but Nike has been allocating capital to this initiative as far back as 2004 (to it's 'Considered' product line). We wish competitors all the best in catching up without outsized capital spend and subsequent lower margins.

 

Link to full note: CLICK HERE

Retail Callouts (1/5) | AMZN 3rd Party, NKE Flyknit Patent - 1 5 16 chart1

 

ADS, NKE, VFC - Adidas Most Liked Brand on Instagram

(http://vampfootwear.com/what-was-the-most-liked-sneaker-brand-on-instagram-in-2015/)

Retail Callouts (1/5) | AMZN 3rd Party, NKE Flyknit Patent - 1 5 16 chart2

 

WMT - Walmart keeps online payment options open, will accept the MasterPass platform in 2016 for online purchases

(http://www.chainstoreage.com/article/walmart-keeps-online-payment-options-open)

 

RH, ULTA - Gary Friedman, Tory Burch, Ulta’s Mary Dillon Named to NRF’s List of People Shaping Retail

(http://wwd.com/retail-news/specialty-stores/tory-burch-ulta-mary-dillon-nrf-list-shaping-retail-10304285/)

 

TGT - Target executive Janna Potts becomes chief stores officer, continuing CEO Brian Cornell's makeover at the top

(http://www.startribune.com/target-s-hr-chief-janna-potts-becomes-chief-stores-officer/364121521/)

 

CAB, DKS - Firearm Background Checks Reaches Record in December

(http://www.sportsonesource.com/news/spor/spor_article.asp?section=2&Prod=1&id=58875)

 


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