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M | “Move Along, Nothing to See Here”

Takeaway: If we were forced to craft a genuine bullish argument on M, we couldn’t. Almost nothing to like, and the print confirms that – and more.

For every reason we find to own Macy’s, we find another five against owning it. This quarter was just horrible for Macy’s, and what’s even more concerning is that it’s the best-managed name in the ‘space’. Last night Dillards printed its biggest EBIT decline in 5 yrs. What does it mean for KSS? JCP? What especially concerned us with Macy’s was the lengths it had to go to find earnings outside of what we’d consider its core business.


Things That Caught Our Attention In Macy’s Quarter

  1. Remember this print when looking at Retail for 2016. We think much of retail will look like Macy’s in 2016. After a serious guide down (and 33% draw down), the company came back with a significant headline beat. As the release hit the wires this morning we saw ‘Blowout Quarter’ by one unnamed news service. The reality is that companies are guiding down more than they have to, simply because they can’t plan the demand side of their businesses.  That’s not because of lack of competency, but simply because this is Retail (and sometimes lack of competency). Then they come in and print a horrible earnings/cash flow algorithm, but it’s viewed as being ‘better than expectations’. Our concern has been that the market will still trade these names higher. The Macy’s print – thankfully – argues against that.  
  2. What Business is M In Anyway? For the first time ever, real estate and credit were the largest part of consolidated EBIT. And that’s a big statement. On a GAAP basis, including the asset impairments/restructuring costs, credit card income and real estate transactions amounted to $1023mm for the year – that’s 50.2% of EBIT vs. $860mm or 30.7% of EBIT last year. Though we think there are risk associated with each piece (credit and real estate), the fact is that M has them and the rest of its peer group and other retailers do not.
  3. Credit profitability guided down for 2016. In FY15 we saw credit income up 7%, and +17% in the 4th quarter. The big bump in 4Q was due to the conversion of new system allowing M to reach lower in the credit standard barrel. But, Karen was very explicit that about the embedded risk to profitability in the Credit segment as we come off all-time lows in charge offs and delinquencies. For M, credit amounted to an $831mm offset to SG&A for the year or 36% of EBIT vs. 27% of EBIT last year. Put another way, that’s 94% of the FCF generated by M this year.
  4. The bigger callout here is KSS. Which, unlike M doesn’t have the benefit of taking its credit standards any lower – it already did that under the partnership agreement with CapOne as it took credit as a percent of total sales from 50%-60%. Its own credit portfolio will fall victim to the same profitability concerns expressed by M’s CFO today. Plus, we see additional credit risk because of the introduction of the Y2Y rewards program nationwide in the fall of 2014.
  5. Outlook for the first nine months of the year notably bearish. There is a mismatch here between what the company could say because of the sentiment surrounding the department store space and what it’s actual outlook is for the year. But, either way we slice it, M guided to negative comps for the first 3 quarters of the year, and we expect to see more of the same from retailers in this earnings season. Though consensus numbers don’t reflect the guidance revisions.
  6. Huge ‘Real’ Earnings Delta. We can’t remember a quarter where the difference between adjusted earnings numbers and GAAP numbers were more pronounced. We’ve never agreed with M’s adjusted financials where it sheds the bad (restructuring/store closing charges) and keeps the good (asset sales) in its calculation of adjusted EPS. Neither has proved to be one time in nature. When we boil it all down we get to an earnings growth rate of -22% in the quarter vs. -14% reported, that excludes the asset benefit and restructuring charges. SG&A growth was flat vs. -5% reported (ex. credit benefit, restructuring, and asset sales).  Neither of which provides a good omen for the rest of the space.
  7. In a Hole. We understand that business improved as the quarter progressed due to added markdowns and better weather, but why do inventories remain so out of whack? SIGMA chart below suggests that inventories are not being cleared fast enough, or that price cuts are not deep enough. This definitely puts Macy’s in a hole in 1Q.

M | “Move Along, Nothing to See Here” - 2 23 2016 chart 1

M | “Move Along, Nothing to See Here” - 2 23 2016 chart 2

M | “Move Along, Nothing to See Here” - 2 23 2016 chart 3.3

M | “Move Along, Nothing to See Here” - 2 23 2016 chart 4

M | “Move Along, Nothing to See Here” - 2 23 2016 chart 5

RTA Live: February 23, 2016


Beware The Coming Crash: An Earnings Season Reality Check

Takeaway: Fade the Wall Street storytelling.

Beware The Coming Crash: An Earnings Season Reality Check - Bubble bath 9.9.14


A lot of people out there still believe the old Wall Street storytelling that "the U.S. economy is fine" or "the stock market has bottomed."


We disagree.


Here's Hedgeye CEO Keith McCullough in a note to subscribers earlier this morning:


"With consensus staring (hoping) at oil, don’t forget that the most important relationship right now is that between profits and credits – w/ 435/500 S&P companies reporting total revs are -4.2% and EPS -6.5%; forget the “ex-Energy” thing – look at the best Sector Short (Financials) who now has EPS -8.8% y/y."


A few important things to note:


  1. Only 3 of 10 S&P Sectors have POSITIVE year-over-year EPS growth
  2. ENERGY (31 of 41 companies reported) has SALES -34%, EPS -74%
  3. FINANCIALS (85 of 89 companies reported) has SALES -1%, EPS -8.8%


"In other words, if your friends are still “backing out energy” and levered long US Equity beta, they’re a lot more exposed to rates crashing, Yield Spread compressing, and the Financials (XLF -11% YTD) than they’ve ever been," Hedgeye CEO Keith McCullough wrote in the Early Look this morning.


Here's the sector performance breakdown:


Beware The Coming Crash: An Earnings Season Reality Check - sector performance 2 23


Watch out for this precarious earnings setup. "Unless it’s different this time, US stocks always crash (greater than 20% decline from peak) once corporate profits go negative (on a year-over-year basis) for two consecutive quarters," McCullough writes.


Commit the chart below to memory.


Click to enlarge.

Beware The Coming Crash: An Earnings Season Reality Check - EL profits


... And get the heck out of stocks. 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%

Here's Why Now Is A 'Great Spot' To Short Oil

Takeaway: Oil prices are headed lower despite rumors of an OPEC production freeze.

Here's Why Now Is A 'Great Spot' To Short Oil - oil fallen and can t get up


"Great spot to get more aggressive on the short side of Energy (again)," Hedgeye CEO Keith McCullough wrote in a note to subscribers earlier this morning.


"Oil ripped to the top-end of my immediate-term risk range and failed (again); no immediate-term downside support in the risk range for WTIC to $25.77 as the upside in Oil’s Volatility (OVX) remains 81!"



Our Potomac Research Group colleagues Joe McMonigle and former Energy Secretary Spencer Abraham have nailed the call that oil prices are headed lower despite rumors of an OPEC production "freeze."



Here's what McMonigle wrote in a recent note to institutional subscribers:


"As the energy world gathers in Houston this week for IHS' CERA Week conference, Russia announced that talks with OPEC members on a production freeze will continue. The Russian energy minister said he expects an agreement by March 1. 


We are highly skeptical that an agreement will be reached or that it changes the outlook for oil markets. There is nothing new here."


Watch McMonigle in the 3-minute video below explaining why this will remain a 'painful' year for oil.


The Macro Show Replay | February 23, 2016


Yen, Oil and EPS

Client Talking Points


The epicenter of big bang risk resides in the #BeliefSystem breaking down – meaning that when central-market-planners tell you to short their FX and it goes up (and stocks go down). That is becoming Japan with the Yen +0.8% here testing new year-to-date highs vs. USD – this is becoming as important a live quote as U.S. High Yield Spreads.


Oil ripped to the top-end of our immediate-term risk range and failed (again). There is no immediate-term downside support in the risk range for WTIC to $25.77 as the upside in Oil’s Volatility (OVX) remains 81!


With consensus staring (hoping) at oil, don’t forget that the most important relationship right now is that between profits and credits. With 435 out of 500 S&P companies reporting total revenues are -4.2% and EPS -6.5%; forget the “ex-Energy” thing – look at the best Sector Short (Financials) who now has EPS -8.8% year-over-year.


*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Long-Term Treasuries (TLT) and Utilities (XLU) remain our two best fixed income and equity vehicles to play #Lower-For-Longer on growth and interest rates as the market gets more and more skeptical about the central bank dogma.


With market turmoil, the Junk Bond ETF (JNK) is down -4.5% vs. the defensive, growth slowing equity sector Utilities (XLU) which is up 6.7%, outperforming the S&P 500 by 12.9% on a relative basis. That’s yet more confirmation of our dour economic outlook economy (spreads widen in tumultuous market environments and Utilities are a defensive sector that outperforms when growth is slowing).


General Mills (GIS) is a large player in the Yogurt category with their Yoplait brand. Their competitors, Dannon, Chobani and Fage have been aggressive on merchandising and consumer spending, making it difficult to compete while maintaining internal margin objectives. GIS is turning on innovation with the growth of Annie’s yogurt and that should help the trajectory of the business. Yogurt being a roughly $1.4 billion business, turning it around is a top priority for management.


On the broader GIS long thesis, it's unlikely that the stock is going to go up 20% in the next year, but we do believe it will fare better than most in the consumer staples sector, especially as we head into an economic slowdown.


With the market losing faith in the central planning policy backstop, investors continue to yield to top-down market signals and the direction of the data. To be clear, the data continues to deteriorate and volatility continues to break-out.


The yield spread (10-year Treasury yield minus 2-year Treasury yield) has compressed 24 basis points this year, and TLT is up 8.6% vs. the S&P 500 which is down -5.2%. The December Federal Funds Futures contract has declined in a straight line since December’s rate hike.  

Three for the Road


WHO: You

WHAT: @HedgeyeCares Golf Challenge

WHEN: Tuesday, May 17

WHERE: Glenarbor Country Club in Bedford, NY

WHY: https://www.hedgeye.com/cares/golf



Don’t play for safety. It’s the most dangerous thing in the world.

Hugh Walpole                                                


435 of 500 S&P 500 companies have reported their respective quarters and only 3 of 10 S&P Sectors have positive year-over-year EPS growth and energy (31 of 41 companies reported) has sales down -34% and EPS -74%.

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