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COH | When ‘Horrible’ is ‘Awesome’

Takeaway: We think that ‘The Space Stinks’ argument is drying up. The biggest winner here might be KATE.

Let’s face facts…these Coach numbers stunk something awful. Sales were +4%, but down 3% excluding the addition of Stuart Wietzman. Even including the deal, gross profit was down 2%, EBIT was down 5%, and EPS down 7% -- and this was on top of a 31% EPS decline last year, and 14% decline the year before. Terrible numbers for any company that actually cares about driving a basic financial model.

 

But we’re not talking about one of those companies. We’re talking about Coach – a company that has not grown sales organically since the debut of the iPhone 5. When we added Coach to our Long bench (after being short for over 2-years) in December all we were looking for was incremental lack of weakness on the margin. We definitely got that.

 

So what would make us get full-on bullish? It would be confidence that this company can actually grow it’s top-line sustainably. From a modeling perspective, we can move the 69% gross margin or the 50% SG&A ratio around by a few points here or there. But the only thing that makes this clock tick is revenue growth. Our confidence on that one still needs some work.

 

But until then, there are a few metrics that keep us in the game with a positive bias.

1. The first is the raw earnings algorithm. For two years it’s been terrible, and for two quarters it’s been…well, better. The chart below suggests that earnings are hitting a trough – and we’d point out that that this is the same time other companies will see increased downward revisions as the economy weakens.

COH  |  When ‘Horrible’ is ‘Awesome’ - 1 25 2016 COH Algo

 

 

2. The SIGMA chart for COH looks outstanding. Coach has not been this clean with its inventory position since 4Q10 (iPhone 4…to stick with that metaphor). This is an extremely positive gross margin setup for COH. Stocks usually don’t (almost never) go down when the picture looks like what you see below.

COH  |  When ‘Horrible’ is ‘Awesome’ - 1 25 2016 COH SIGMA 

 

3. The last thing that keeps us positive is not a metric, but a group attribute. Since August 2014 ‘The Space’ has been a disaster. Not necessarily the business trends, but definitely the stocks. This hit KATE the hardest, as it continued to deliver but had its multiple cut in half while Kors and Coach put up horrific numbers. But now Coach is stabilizing. We’re pretty sure that KATE is performing well. That just leaves Kors as the lone brand hemorrhaging share. It’s tough to make the case that ‘The Space’ is broken when only one brand is on the decline. In this scenario, COH and KATE (which have a dramatically different customer, by the way – see graphic at the bottom of the note) help each other, allowing Kors to shoot itself in the foot – in the US, at least – all by its lonesome.

COH  |  When ‘Horrible’ is ‘Awesome’ - 1 25 2016 COH Customer 


#HOUSTON...We Have A Problem

Client Talking Points

#HOUSTON

We Have (an accelerating) Problem:  The 4th largest metro in the country is ground zero for energy deflation and the negative data flow keeps flowing.  Goods Producing jobs in Houston are -2.9% YoY, births are tracking -12% YoY, Existing Home inventory is up +28%, Housing demand is down -11% and prices are starting to roll.  Yesterday, the Dallas Fed manufacturing index printed at a remarkable -34.6 with production crashing 23 points (largest decline in 11 years) and the index dropping to the worst level since 2009.  Don’t try to catch the knife on #DeflationsDominoes or homebuilders with Houston leverage – it’s going to get worse.  

EUROPE

While data continues to slow across the region, expect the ‘issues’ around the refugee ‘crisis’ to remain a drag. Winter may limit movement across borders but there’s a long TAIL ahead to deal with large movements of people. The newest development on this front comes from The Times reporting that the EU is set to suspend its passport-free travel zone, Schengen. 

#NOTCHRISK

With large impairment charges and write-downs foreshadowed by many large producers, credit markets are front-running balance sheet contraction to reflect lower short and long-term commodity price assumptions. Moody's disclosed Friday morning it was putting the ratings of 120 Oil & Gas companies and 55 mining companies on watch.

Asset Allocation

CASH 64% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 21% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
XLU

Utilities (XLU) continue to be the bright spot in the equity markets for 2016. XLU is up 1% this year, having edged out all other S&P 500 subsectors by a wide margin. Last week, XLU was down marginally but was still second best among the subsectors, beating all but Healthcare (XLV). Essentially, it's paying off to own low-beta XLU in a crashing market.

GIS

General Mills (GIS) has turned on its advertising for no artificial colors and flavors in its cereal, as well as an increased effort for its gluten free campaign. Click here to view the 30 second spot TV commercial.

 

These steps taken on cereal, coupled with improved merchandise planning across their portfolio in the second half should bode well for the company’s future performance. Additionally, General Mills fits neatly into the style factors that we like from a macro point of view, large cap, low beta and liquidity.

TLT

Rating agency S&P disclosed on Thursday three concerning stats as it relates to the wellness of credit oustanding:

  • More companies were at risk of having their credit ratings cut at the end of December than at the close of any other year since 2009
  • The number of potential downgrades was at 655, compared with 824 reported by the finish of 2009
  • The year-end total for 2015 was "exceptionally" higher than a yearly average of 613

 

Then on Friday, S&P followed with additional action:

  • Disclosure that oil-exporting countries face fresh downgrades as crude prices fall further and that it could repeat last year's move when it made a big group of cuts all at once
  • S&P currently has Azerbaijan, Bahrain, Kazakhstan, Oman, Russia, and Saudi Arabia on negative outlook in its Europe, Middle East and Africa region, as well as Brazil and Venezuela in Latin America

Moody’s echoed the shaky state of credit markets by announcing it was putting the ratings of 120 oil and gas companies on watch Friday.

 

Strap on your seatbelts as we expect that credit spreads will continue to widen. If the Fed pivots on its “4 rate hikes” in 2016 as the data continues to slow, Treasury bond yields get pushed lower and high-yield spreads widen into a late cycle deleveraging. This should continue to generate alpha in a Short JNK, Long TLT trade.

Three for the Road

TWEET OF THE DAY

$MCD is taking share from $CMG!

@HowardHWP

QUOTE OF THE DAY

Good is not good when better is expected.

Vin Scully                                

STAT OF THE DAY

In Norway - oil has fallen so low and salmon risen so high that one standard, 4.5 kilogram fish costs more than a barrel of crude (measured in kroner).


[UNLOCKED] Fund Flow Survey | Unloading Equity

Takeaway: Investors pulled -$10.7 billion from equity mutual funds and ETFs as markets continued their rout.

Editor's Note: This is a complimentary research note which was originally published January 21, 2016 by our Financials team. If you would like more info on how you can access our institutional research please email sales@hedgeye.com.

 

* * * 

 

Investment Company Institute Mutual Fund Data and ETF Money Flow:

Investors continued to unload equity from their portfolios in the 5 days ending January 13th as markets continued their rout, although active international mandates held up with a +$3.2 billion inflow. Domestic equity, however, continued its losing streak with another -$4.8 billion outflow. Even passive equity ETFs were hit with a -$9.1 billion outflow, -$4.9 billion of which came from the SPY. Fixed income mandates fared slightly better with a total inflow of +$574 million into mutual funds and ETFs, although the preference was for municipal bonds and passive fixed income ETFs. Lastly, investors shored up +$8 billion of cash in money funds during the week.

 


[UNLOCKED] Fund Flow Survey | Unloading Equity - ICI1 normal 1 26

 

In the most recent 5-day period ending January 13th, total equity mutual funds put up net outflows of -$1.6 billion, outpacing the year-to-date weekly average outflow of -$2.0 billion but trailing the 2015 average outflow of -$1.5 billion. The outflow was composed of international stock fund contributions of +$3.2 billion and domestic stock fund withdrawals of -$4.8 billion. International equity funds have had positive flows in 41 of the last 52 weeks while domestic equity funds have had only 8 weeks of positive flows over the same time period.

 

Fixed income mutual funds put up net outflows of -$526 million, trailing the year-to-date weekly average outflow of -$236 million and the 2015 average outflow of -$463 million. The outflow was composed of tax-free or municipal bond funds contributions of +$1.3 billion and taxable bond funds withdrawals of -$1.8 billion.

 

Equity ETFs had net redemptions of -$9.1 billion, trailing the year-to-date weekly average outflow of -$9.1 billion and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$1.1 billion, trailing the year-to-date weekly average inflow of +$1.2 billion but outpacing the 2015 average inflow of +$1.0 billion.

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.



Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2015 and the weekly year-to-date average for 2016:

 

[UNLOCKED] Fund Flow Survey | Unloading Equity - ICI2

 

[UNLOCKED] Fund Flow Survey | Unloading Equity - ICI3

 

[UNLOCKED] Fund Flow Survey | Unloading Equity - ICI4

 

[UNLOCKED] Fund Flow Survey | Unloading Equity - ICI5

 

[UNLOCKED] Fund Flow Survey | Unloading Equity - ICI6



Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.

 

[UNLOCKED] Fund Flow Survey | Unloading Equity - ICI12

 

[UNLOCKED] Fund Flow Survey | Unloading Equity - ICI13

 

[UNLOCKED] Fund Flow Survey | Unloading Equity - ICI14

 

[UNLOCKED] Fund Flow Survey | Unloading Equity - ICI15

 

[UNLOCKED] Fund Flow Survey | Unloading Equity - ICI16



Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2015, and the weekly year-to-date average for 2016. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

[UNLOCKED] Fund Flow Survey | Unloading Equity - ICI7

 

[UNLOCKED] Fund Flow Survey | Unloading Equity - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors pulled -$4.9 billion or -3% from the SPY as investors retreated from the broader domestic equity market.

 

[UNLOCKED] Fund Flow Survey | Unloading Equity - ICI9



Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.

 

[UNLOCKED] Fund Flow Survey | Unloading Equity - ICI17

 

[UNLOCKED] Fund Flow Survey | Unloading Equity - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$11.3 billion spread for the week (-$10.7 billion of total equity outflow net of the +$574 million inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$578 million (more positive money flow to equities) with a 52-week high of +$20.5 billion (more positive money flow to equities) and a 52-week low of -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)

  

[UNLOCKED] Fund Flow Survey | Unloading Equity - ICI10

 


Exposures:
The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

 

[UNLOCKED] Fund Flow Survey | Unloading Equity - ICI11 


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POTOMAC INSIGHT | Why Iran Is More Bearish For Oil Than People Think

 

Here’s a brief excerpt from an institutional call Hedgeye hosted with our new Potomac Research Group teammates – former Energy Secretary Spencer Abraham and Senior Energy analyst Joe McMonigle, co-founders of the Abraham Group, LLC. With the U.S. and E.U. lifting Iranian sanctions, Abraham and McMonigle offer non-consensus insight on what lies ahead for the price of oil.

 

The Honorable Spencer Abraham, Senior Energy Analyst

 

Secretary Spencer Abraham serves as Senior Energy Analyst and is Chairman and CEO of The Abraham Group, an international strategic consulting firm focused on the energy sector and based in Washington, DC.

 

Secretary Abraham served as the tenth Secretary of Energy in United States history from 2001-2005.  He helped President Bush devise America's first national energy plan in over a decade and oversaw its implementation. As part of this plan, he led efforts to broaden America's international energy partnerships as well as forge closer ties to key oil producing nations.

 

Prior to being named a Cabinet Member, Secretary Abraham served as an effective and highly productive U.S. Senator from Michigan for six years, where he was the author of 22 pieces of legislation signed into law. He served on the Judiciary, Budget and Commerce Committees.  In addition, he was chairman of two subcommittees: Manufacturing and Competitiveness, and Immigration.

 

Secretary Abraham is a member of the Board of Directors of Occidental Petroleum, NRG Energy and PBF Energy.  In addition, he is a frequent commentator on FOX News, CNN and Bloomberg TV as well as a periodic contributor of op-ed articles to the Financial Times, The Wall Street Journal, The Washington Post, The Weekly Standard and other publications.

 

Secretary Abraham and his wife, Jane, are the parents of three children. He holds a law degree from Harvard University, where he co-founded the Federalist Society, and is a native of East Lansing, Michigan.

 

Joseph McMonigle, Senior Energy Analyst

 

Joseph McMonigle serves as Senior Energy Analyst and is president and co-founder of The Abraham Group LLC, an international strategic consulting firm focused on the energy sector and based in Washington, D.C.

 

Mr. McMonigle is the former Vice Chairman of the Paris-based International Energy Agency, an international organization of oil consuming countries, whose core mission is to work for stable energy markets and respond with joint measures to meet oil supply emergencies.  He also served concurrently as U.S. Representative to the IEA (2003-2005).

 

In addition, Mr. McMonigle served as Chief of Staff at the U.S. Department of Energy, a cabinet department with a $23 billion budget and over 100,000 federal and contractor employees (2001-2005).  Mr. McMonigle also served as the American co-chair of the U.S.-China Energy Cooperation Working Group and led DOE’s bilateral activities and engagement with China.

 

Before joining the Bush Administration, Mr. McMonigle was the administrative assistant and general counsel to a United States Senator.  He is also an attorney and member of the Energy Bar Association as well as the Pennsylvania and District of Columbia bars.


NOTCH RISK

Commodity-leveraged credit, which moved on a lag to top-down commodity deflation, is now FAST on the move.

 

With large impairment charges and write-downs foreshadowed by many large producers, credit markets are front-running balance sheet contraction to reflect lower short and long-term commodity price assumptions:

  • BHP made a pre-earnings announcement of a $7.2 Bn pre-tax impairment charge on U.S. shale assets.
  • Australia’s Woodside Petroleum said it expects to take an ~$1 Bn pre-tax impairment hit due to lower long-term oil price assumptions when it announces its full-year 2015 results in mid-February.

As we flagged in a recent note PRODUCER LEVERAGE , much of the spread risk lies with what are current IG credits.

 

Two important points we would make with respect to the more recent moves in credit markets:

 

1) Both high-yield AND investment grade have historically moved together when spreads widen (all corporate credit is at risk), and there is a large amount of IG credit that could move high-yield in 2016 in the current price environment.

 

2) A good chunk of low-notch IG commodity credit trades like it’s going high yield, but there is also a large chunk that is 1-2 notches off lowest IG-Notch that has just started moving in the last couple of months – These issues are worth a look if you are behind our pending recession call. 

 

NOTCH RISK - Energy and Materials IG Yield

 

NOTCH RISK - Chart2 JNK and HYG

 

NOTCH RISK - Energy and Materials Spreads

 

NOTCH RISK - Energy   Materials HY Index

 

To consolidate concerning commentary from S&P & Moody’s on the shift in credit quality at the end of last week:

  • S&P: More companies were at risk of having their credit ratings cut at the end of December than at the close of any other year since 2009
  • S&P: The number of potential downgrades was at 655, compared with 824 reported by the finish of 2009
  • S&P: The year-end total for 2015 was "exceptionally" higher than a yearly average of 613
  • S&P: Oil-exporting countries face fresh downgrades as crude prices fall further. The agency currently has Azerbaijan, Bahrain, Kazakhstan, Oman, Russia, Saudi Arabia, Brazil, and Venezuela on negative watch.
  • Moody’s: Friday morning, Moody's disclosed it was putting the ratings of 120 Oil & Gas companies and 55 mining companies on watch.
  • S&P: Revised 2016 and 2017 metals price assumptions late Friday night, following on its recent reduction in 2017 oil price forecasts from $US65 a barrel to $US45. (expected but meaningful):

-        Iron Ore: Cut to $65/MT for 2015-16 vs. $85/MT back in October

-        Copper: $2.70/lb. for 2015 through 2017, down from its previous forecast of $3.10/lb. for 2015-2016

-        Gold: Forecasts remain flat at $1,200 per ounce for the period from 2015-2017.

-        Nickel: Lowered from $8.00/lb. in 2015-2016 to $6.50/lb. this year and $7.25/lb. in 2016

-        Zinc: Lowered from $1/lb. this year to $0.95, but maintained its $1/lb. forecast for 2016

 

In the table below, we have pegged a significant amount of investment grade credit from commodity producers that could get downgraded to high-yield ($227Bn) -- some credits much more at risk near-term than others.

 

A move to HY from IG should perpetuate spread risk with forced selling from institutional money.  As mentioned above and with regards to our short JNK position, the insurance on low-IG credit in the commodities space that hasn’t moved as much (YET) is worth a look into a potential recession as a way to play our short JNK view outlined in the Q1 Themes deck.   

 

NOTCH RISK - chart1 IG to HY

 

NOTCH RISK - chart3 credit outstanding vs. HY YTM

 

One of the bubbliest charts we’ve put together alongside the above slide as it relates to commodity producer balance sheet leverage is one that shows interest expense skyrocketing despite unprecedented lows in financing expense. We continue to think the deleveraging here is in the early innings.

 

NOTCH RISK - Interest Expense

 

Ben Ryan

Analyst  

 

 


CHART OF THE DAY: An Early Look At The Q4 Earnings Scorecard

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

 

CHART OF THE DAY: An Early Look At The Q4 Earnings Scorecard - 01.26.16 chart

 

"... A cyclical #Recession morphing into a revenue recession is a serious catalyst (for multiple compression).

 

It’s early, but for Q4 Earnings Season to-date:

  1. Energy Revenues (for the 4 out of 40 Energy companies in the SP500 who have reported) are -24.4% so far
  2. Industrial Revenues (for the 20 out of 60 companies in the SP500 who have reported) are -9.1% so far
  3. Financials Revenues (for the 28 out of 88 companies in the SP500 who have reported) are 0.1% so far" 

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