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RL | Uninvestable at Almost Any Price

Takeaway: This company needs a lot of help and is likely to restructure – again. This is uninvestable for a good/bad 18 months.

I’ve participated in roughly 70 Ralph Lauren conference calls over the years. This one was the worst. Seriously…it’s not even close. It was even worse than the one in 2013 when Jackie Nemerov discussed RL’s initiative to host a fashion show for dogs.   

 

The reaction in the stock is nothing short of violent. But quite frankly, it’s probably deserved.  Why, you ask? We heard one thing repeatedly – very clearly – throughout the call. And that’s that this company will almost certainly go through another major restructuring. Yes, that’s restructuring #3. It will likely be announced in either May or August, and it will probably take 1-2 years. That was really the only message we took away, and is also the only one that really matters. Unless you’re really patient, this story is arguably uninvestable for another 12-18 months at a minimum.

 

So…what else did we hear on the call? On one hand, we heard new CEO Stefan Larsson (who is actually quite good – and could be impactful if given enough runway) talk about how he loves the brand and is learning the organization. Ok – not sure what to do with that. On the other hand we heard Chris Petersen, who on some level is probably wondering why he is not CEO, discuss his effort to ‘P&G’ Ralph Lauren (that’s our term, not his). Basically, it is the initiative to turn the one RL silo into six separate operating groups, and align in a way to accelerate growth globally. We’re a fan of this. But it takes a looong time to be impactful.

 

But who we didn’t hear, as usual, was Mr. Lauren, who is the one really calling the shots anyway. On Macy’s latest call, when it had to deliver a tough message to the Street about real estate plans (or lack thereof), CEO Terry Lundgren got on the call for the first time in eight years to ease concerns and show accountability. Mr. Lauren controls 81% of the voting stock at RL…do you think that just maybe he has a vested interest in helping out with the messaging? I know this sounds petty, and an unsolicited jab. But given the $3.8bn in equity value destroyed over the past 90 days, and the $7.7bn that vanished since the start of last year, we think it’s a fair expectation for Mr. Lauren to grace us with his presence for an hour.  If he does not think it’s necessary, then it shows a disturbing lack of respect for his fellow shareholders.

 

Though there are a lot of moving parts with the financials, we heard two things as it relates to the quarter that struck us as especially noteworthy.

  1. Comps Tell A Huge Story. We don’t care a ton about a single quarter of comp. This is retail, and it’s a volatile place to be. But RL has comped down in each of the past five quarters (i.e. it comped down against a negative number last year). More importantly, it’s been 11 quarters since RL ceased to be a story based on taking back and consolidating licenses. During those 11 quarters, the company only surprised on the upside once. When it was taking back licenses, the comp trend was the exact opposite. Could we be talking late cycle now vs early cycle then? Perhaps. But it’s tough to argue that this company still has not figured out how to grow organically. The chart below tells a clear story.
  2. Markdown Money. Peterson mentioned ‘increased markdown money’ to wholesale accounts (department stores) in order to clear excess inventory headed into Spring. Let’s be clear – RL absolutely NEVER discusses ‘markdown money.’ This brand has always been above that. Clearly, it pays for markdowns behind the scenes, but to a far less degree than its competitors. Search back as far as you want – the last time the words ‘markdown’ and ‘money’ were uttered in a RL call, it is when I asked them about it in 2008. In any other print, this might have been a non-event. But with the management/culture/operational changes we’re seeing with RL and are likely to continue to see for the next two years (not to mention investor concerns about the Brand), we think this matters.

RL  |  Uninvestable at Almost Any Price - 2 4 16 RL chart1

 

RL  |  Uninvestable at Almost Any Price - 2 4 16 RL chart2

 

RL  |  Uninvestable at Almost Any Price - 2 4 16 RL chart4

 

RL  |  Uninvestable at Almost Any Price - 2 4 16 RL chart3


Steer Clear of Kohl's (This Is Only The Beginning) | $KSS

Takeaway: This is the 1st Stage of KSS EPS permanently being held below $4.00. Stage 2 goes to $3.25. Stage 3 = $2.50 and dividend cut.

Editor's Note: Below is a brief excerpt from an institutional research note on Kohl's (KSS) written by Hedgeye Retail analysts Brian McGough and Alec Richards. As of this writing, shares of KSS are down over 17%. To access our research please email sales@hedgeye.com

 

Steer Clear of Kohl's (This Is Only The Beginning) | $KSS - kss image

 

All along we’ve been saying Kohl's would never earn $4.00 again.

 

While today’s rather dramatic guide-down will make this premise seem a reality for some doubters, what we find most interesting is that this is only midway through Stage 1 of what we think is a Three Stage process to KSS cutting its dividend. Here’s our thinking…

 

Stage 1: Weak sales results as a result of the fact that KSS sells less and less of what consumers want to buy. Sounds overly simple – but it’s reality. That flows through to the gross margin line as online sales cannibalize brick and mortar, and come at a gross margin 1000bps below the company average. True SG&A growth becomes apparent as credit income stops going up as newly emphasized non-credit/loyalty shoppers become a bigger mix of the pie due to launch of Yes2You rewards program.

 

Steer Clear of Kohl's (This Is Only The Beginning) | $KSS - kss stage 2

 

Steer Clear of Kohl's (This Is Only The Beginning) | $KSS - kss stage 3

 

Other Notables on The Release

The comp in this quarter missed, and believe it or not, the comps from here get much more difficult. This pre-announced $0.30 (7%) earnings miss for a fiscal year is monstrous. The last time a company with the cap and sales base that KSS owned (pre-blowup) missed at this magnitude in a fiscal year was back in 2012 at JCP under RonJon. Prior to that, we have to go all the way back to 2003 when TGT and KSS printed a miss of 11% and 8%, respectively.  

 

This is now the 5th straight quarter of positive SSS comps for a company that hasn’t put a string like this together since 3Q10 – 3Q11. By our math, given that e-commerce sales grew at 30%, brick and mortar comps were down 4% in the quarter. Gross margins were down to the magnitude of 100bps+ assuming SG&A growth of 3-4%.


INITIAL CLAIMS | THE LABOR MARKET IS GETTING CHALLENGED

Takeaway: January Challenger job cuts rose +42% Y/Y. While job cuts continue in energy, they've also emerged in retail.

INITIAL CLAIMS | THE LABOR MARKET IS GETTING CHALLENGED - Claims1 normal  1

 

Challenger Job Cut announcements moved up notably in January, as the below chart from our Macro Team shows. Energy jobs cut popped to 20,103 which is in-line with the fastest rates of job loss in Energy we've seen since the beginning of Energy's decline. While the energy sector's woes have been ongoing for some time, the newer development is the deterioration of non-energy labor conditions. Announced job cuts ex-energy were 55,011 in January, which brings the total announced cuts to 75,114, which is the highest level by far in the post crisis period, notwithstanding the one-off military related labor adjustment in July 2015. To put this in perspective, that brings total announced layoffs to +42% Y/Y in January with no underlying distortions present in the data. Outside of Energy, Retail was the second biggest loser with job cuts rising 15.5k Y/Y.

 

This emergent trend of worsening labor conditions is also manifest in the initial jobless claims data. Seasonally adjusted claims continued their upward trend last week, rising by 8k from the revised 277k to 285k, and the year-over-year rate of change in rolling NSA claims has essentially converged to zero, deteriorating from -3.2% in the previous week to just -0.8% in the latest week.

 

INITIAL CLAIMS | THE LABOR MARKET IS GETTING CHALLENGED - challenger

 

The Data

Prior to revision, initial jobless claims rose 7k to 285k from 278k WoW, as the prior week's number was revised down by -1k to 277k.

 

The headline (unrevised) number shows claims were higher by 8k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 2k WoW to 284.75k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -0.8% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -3.2%

 

INITIAL CLAIMS | THE LABOR MARKET IS GETTING CHALLENGED - Claims2 normal  1

 

INITIAL CLAIMS | THE LABOR MARKET IS GETTING CHALLENGED - Claims3 normal  1

 

INITIAL CLAIMS | THE LABOR MARKET IS GETTING CHALLENGED - Claims4 normal  1

 

INITIAL CLAIMS | THE LABOR MARKET IS GETTING CHALLENGED - Claims5 normal  1

 

INITIAL CLAIMS | THE LABOR MARKET IS GETTING CHALLENGED - Claims6 normal  1

 

INITIAL CLAIMS | THE LABOR MARKET IS GETTING CHALLENGED - Claims7 normal  1

 

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


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FII: We Are Removing Federated Investors From Investing Ideas

Takeaway: Please note we are removing Federated Investors (FII) from Investing Ideas

We don’t win them all.

 

Here's a brief note from Hedgeye CEO Keith McCullough on removing Federated Investors from Investing Ideas:

 

“I've had to learn the hard lesson of letting losers run way too many times in my career to allow it to happen with my one obvious loser in 2016. So, on the bounce that I thought we'd get off of yesterday's US Equity Beta low of the day (where we covered SPY and bought Federated for a trade in Real-Time Alerts), I will say goodbye to the FII.

 

As a Sector Style Factor, Mr. Macro Market does not like the Financials (XLF). And neither do I.

 

Bottom line: Staying with this one has obviously been a mistake. And while I don't think our Financials analyst Jonathan Casteleyn is wrong on the idea that Money Market Fund Flows continue (great for Federated) as the stock market crashes, being long this (or any US Financial in 2016) has been wrong.”

 

FII: We Are Removing Federated Investors From Investing Ideas - federated


OIL INSIGHT | McMonigle: Saudi Arabia's Strategy? Ignore The Noise, Follow The Data

Takeaway: Saudi Arabia is winning as headline risk of emergency meetings overshadows market realities.

Editor's Note: Below is a research note on the oil industry and ongoing OPEC developments from Potomac Research Group Senior Energy analyst Joseph McMonigle.

 

OIL INSIGHT | McMonigle: Saudi Arabia's Strategy? Ignore The Noise, Follow The Data - oil image 2

 

Headline risks of an emergency OPEC meeting or consultations between OPEC and Non-OPEC producers have eclipsed market realities and resulted in recent volatility in oil prices.

 

Our message to investors? Ignore the noise and follow the data because that is exactly what Saudi Arabia is doing.

 

First, other OPEC members, namely Nigeria, Venezuela and Algeria, have been pushing for an emergency OPEC meeting to address low oil prices. The Gulf producers (Saudi, UAE, Kuwait) are opposed to such a meeting and would like to head off any special meetings before the regular OPEC meeting scheduled for June. We think the chance of an emergency meeting is slim. If there is a meeting, it will be just to talk. There is zero chance of a change in production.

 

Second, Russia has been pushing for a separate OPEC/non-OPEC meeting to discuss oil prices for some time. There is nothing new here. Saudi Arabia has been pretty consistent in their view: if there is a cut, everyone should participate. By everyone, they mean OPEC and non-OPEC. There may be a meeting – and we give it slightly better odds than an OPEC emergency meeting – but we think it is highly unlikely that an OPEC/Non-OPEC coordinated production cut results.

 

From Saudi Arabia’s viewpoint, their market share policy is winning. US production is slowing and forecast to drop by 700k to 1M bpd by year end. Except for Russia, other non-OPEC production is also affected. You could hear the cheers in Riyadh after ExxonMobil quarterly results were released: a 25% cap-ex cut, a hold on share buybacks and now facing a possible S&P credit rating downgrade. This is the type of data the Saudi’s are following.

 

Therefore, it's still too soon - all a production cut would do at this point is to throw a lifeline to US shale and other non-OPEC producers to increase production.

*  *  *

To read the full version of the client note, including our look ahead forecast for Saudi policy for 2016 and the outlook for the June and December OPEC meetings, please click here.

 

Click below to watch recent interview with McMonigle .

OIL INSIGHT | McMonigle: Saudi Arabia's Strategy? Ignore The Noise, Follow The Data - mcmonigle


ICI Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16

Takeaway: In continued risk aversion, investors are piling into tax-free municipal bonds.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

In the 5-day period ending January 27th, investors returned to making contributions to equity ETFs with a +$2.0 billion net subscription and international equity funds also saw some interest with a +$1.3 billion inflow. However, the exodus from domestic equity funds continued with a -$6.2 billion outflow last week, negating total net inflows to the total equity category. Additionally, taxable bond funds continued to give up AUM, losing -$1.8 billion to withdrawals. The category has been taking it on the chin recently and has had only 23 weeks of positive inflows in the last 52 weeks. However, investor interest continues in tax-free bonds with investors making a positive contribution of +$856 million. Weekly average contributions in tax-free bonds are up over +200% in 2016, with a mean weekly contribution of +$1.1 billion thus far in the New Year versus the 2015 weekly average of +$314 million. Money funds saw a +$14 billion inflow during the week as investors also shored up cash.


ICI Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI1

 

In the most recent 5-day period ending January 27th, total equity mutual funds put up net outflows of -$4.9 billion, trailing the year-to-date weekly average outflow of -$3.2 billion and the 2015 average outflow of -$1.5 billion. The outflow was composed of international stock fund contributions of +$1.3 billion and domestic stock fund withdrawals of -$6.2 billion. International equity funds have had positive flows in 41 of the last 52 weeks while domestic equity funds have had only 6 weeks of positive flows over the same time period.

 

Fixed income mutual funds put up net outflows of -$917 million, trailing the year-to-date weekly average outflow of -$834 million and the 2015 average outflow of -$463 million. The outflow was composed of tax-free or municipal bond funds contributions of +$856 million and taxable bond funds withdrawals of -$1.8 billion.

 

Equity ETFs had net subscriptions of +$2.0 billion, outpacing the year-to-date weekly average outflow of -$4.8 billion but trailing the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$5.3 billion, outpacing the year-to-date weekly average inflow of +$2.7 billion and 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:

 

ICI Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI2

 

ICI Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI3

 

ICI Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI4

 

ICI Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI5

 

ICI Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - 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.

 

ICI Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI12

 

ICI Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI13

 

ICI Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI14

 

ICI Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI15

 

ICI Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - 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:

 

ICI Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI7

 

ICI Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, the defensive utilities XLU and long treasuries TLT ETFs experienced the largest percentage inflows last week of +3% or +$180 million to the XLU and +3% or +$226 million to the TLT.

 

ICI Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - 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.

 

ICI Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI17

 

ICI Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$7.3 billion spread for the week (-$2.9 billion of total equity outflow net of the +$4.4 billion 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 +$437 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.)

  

ICI Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - 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:

 

ICI Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA







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