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JT Taylor: The Vulnerables Take Aim At Rubio ... Paul Ryan Channels William Wallace

Takeaway: Paul Ryan channels his inner William Wallace and Republicans take aim at Marco Rubio.

Editor's Note: Below is a brief excerpt from Potomac Research Group Senior Analyst JT Taylor's Morning Bullets sent to institutional clients each morning. 

CHANNELING HIS INNER WILLIAM WALLACE

JT Taylor: The Vulnerables Take Aim At Rubio ...  Paul Ryan Channels William Wallace  - braveheart

 

House Speaker Paul Ryan reiterated his vision for a 'Confident America' yesterday, exhorting Republicans to "Unite the clans!" a la Braveheart. He aims to channel the spirit of his mentor Jack Kemp and move the party towards a bold, aspirational, and above all positive image for the future of the country. He denounced the anger and disillusionment that has been a campaign staple, and is providing a striking counter-narrative. It's what gave Reagan his mandate, Ryan said, and we think that maybe Rubio has picked up on the message, with his recent shift away from the "doom and gloom."

BULLSEYE ON MARCO  

JT Taylor: The Vulnerables Take Aim At Rubio ...  Paul Ryan Channels William Wallace  - republican take aim

 

Marco Rubio has lacked boots on the ground, but it's Governors Bush, Kasich, and Christie who are all at risk of being trampled in NH. Combined, the three governors have held more than 460 events in the state, all outstripping Rubio who has only held 76 events. Historically, NH has rewarded candidates who have put in more time on the ground; the governors have opened a new line of attack on Rubio -- that he hasn't made the effort and is trying to parachute in at the last minute.  

 

New polls out this morning have Rubio surging to second place or a close third behind Cruz. Third place won't be good enough for Rubio -- he has to show continued progress and run the table on the three governors who have all placed big bets here. The nervous party establishment is looking to pick its candidate quickly, and there's lots of chatter about donors and endorsements on hold until after Rubio demonstrates a clear lead.  He's got to win big enough to undercut the rationale behind his rivals' campaigns; and the sooner he can make this a three-way race, the better his chances. 


Does It Make Sense Being Long Gold Now?

 

In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough responds to a subscriber’s question on whether it makes sense being long gold right now. In particular, whether what’s been a good “trade” recently, will ultimately manifest into a longer term “trend.”

 

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

 

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Why The Likelihood of Recession Is Rising

Takeaway: Our Macro team's U.S. #GrowthSlowing call gets stronger each day...

Why The Likelihood of Recession Is Rising - recession cartoon 12.22.2015

 

Still unconvinced of the increasing likelihood the U.S. economy slips into outright recession in 2016? What follows is a wrap-up of the latest economic data that's rolling over.

 

Here's analysis Hedgeye CEO Keith McCullough emailed customers yesterday after the latest ISM services and manufacturing data: 

 

"Yet another rate-of-change slow-down today on the #LateCycle segments of the US economy (Consumption and Employment). Our call remains that the GDP, Corporate Profits, Employment, and Consumption data all peaked in 1H of 2015. Now the world has to comp that for another 5-6 months. That’s why US #Recession probability (not certainty) is rising and Bond Yields are crashing."

 

Why The Likelihood of Recession Is Rising - ISM data serv

 

While we're at it... here are a few other (lackluster) data points that caught our eye this week...

 

Evolving profit recession...

 

u.s. CEOs Are Concerned ACCORDING TO REUTERS

 

"So far this year, the number of companies whose executives have mentioned recession concerns to analysts and investors is up 33 percent from the same period a year ago; the first such increase since 2009. Some 92 companies have discussed a U.S. recession in their earnings calls, according to Thomson Reuters data."

 

Latest Challenger job cuts data? not pretty 

 

 

More cause for concern from mccullough below

 

It's a lot to take in. And while a U.S. #Recession is not a certainty, the daily economic data coming in continues to bolster our call.

 

We're sticking with it.


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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 normal

 

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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