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HIBB | The Anti-ULTA

Takeaway: Two polarizing earnings reports today…ULTA and HIBB. One should double, the other cut in half.

Two earnings reports caught our eye this morning – ULTA, one of the most defendable growth stories in retail today, and its polar opposite on the quality spectrum – Hibbett Sports.  ULTA is one of those names we’ll buy on the down days, and this certainly won’t be one of them. Hibbett, however, is uninvestable to us at any price starting with a $2 – which is 50% below current levels. We thought it was a short at $49, and perhaps even a better one at $36.

 

As for the quarter…

The company beat expectations by 3 pennies, but that hardly matters. The growth algorithm was simply horrendous. A -0.6% comp, +2.7% growth in revenue, and a 14% EBIT erosion.

HIBB threw Wall Street a bone by talking about investing in ‘omnichannel’ business platform. Mind you, HIBB is the ONLY retailer out there that does not have a dot.com platform. I’m pretty sure that the reason that HIBB does not have a dot.com platform is because Nike does not want them to. We might call that a conspiracy theory if it didn’t have so much truth to it.  As for the ‘omnichannel’ platform, isn’t that a retail buzzword that real companies stopped using about three years ago?  No matter…HIBB is severely low-balling the cost of a dot.com business. Having the ability to ship from store to home does not make up for a 10-year deficit in spending on a general growth driver.

 

The funny thing is that the omnichannel comments weren’t even the most notable part of the print… it was the fact that inventories were up 18% on a -0.6% comp and 2.7% revenue increase. This couldn’t be spelled out better than in our HIBB SIGMA below. The company took its worst turn to the lower left quadrant this entire economic cycle. So inventories are too high, sales are too weak, margins have already eroded, and capital spending is picking up (too little too late) to try to tap into e-comm.

 

HIBB just reported $2.87 a share. We think it’s more likely that it earns below $2.00 next year than over $3.00 (i.e. 32%+ downside is more likely than 3% upside).

 

All in, margins should get cut in half by 2018 at HIBB, and the stock along with it.

 

HIBB | The Anti-ULTA - 3 11 2016 chart1


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  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
1.99 1.70 1.93
SPX
S&P 500
1,934 2,021 1,990
RUT
Russell 2000
1,030 1,099 1,064
COMPQ
NASDAQ Composite
4,561 4,787 4,662
NIKK
Nikkei 225 Index
15,909 17,357 16,852
DAX
German DAX Composite
9,407 9,880 9,498
VIX
Volatility Index
16.11 22.17 18.05
USD
U.S. Dollar Index
95.75 97.92 96.12
EURUSD
Euro
1.08 1.12 1.10
USDJPY
Japanese Yen
111.49 114.63 113.14
WTIC
Light Crude Oil Spot Price
31.45 39.45 38.02
NATGAS
Natural Gas Spot Price
1.60 1.86 1.81
GOLD
Gold Spot Price
1,220 1,285 1,273
COPPER
Copper Spot Price
2.10 2.30 2.22
AAPL
Apple Inc.
96 104 101
AMZN
Amazon.com Inc.
540 589 559
MCD
McDonald's Inc.
116 121 120
XLU
Utilities Select Sector SPDR
45.90 48.69 48.10
XLF
Financials Select Sector SPDR
20.89 22.76 21.92
JPM
J.P. Morgan Chase & Co.
56.77 61.09 58.61


Euro, Italy and Oil

Client Talking Points

EURO

The belief system needs the transmission mechanism (Burning Euros) in play to “reflate” European stocks. So, “off the highs” in yesterday’s epic big bang EUR/USD ramp, Euro -0.7% gives birth to a new hope that doing whatever it takes is going to arrest an almost 3 year European economic expansion from slowing.

ITALY

If you’re still trying to day-trade the break-down in the belief system, the Italian Stock Market is where it’s at! After crashing -33% from last year’s economic cycle high to “up” then down hard into the close yesterday, bank stocks straight up (again) to lower-highs this morning – massive TREND resistance overhead for MIB index at 19,347.

OIL

Oh, right, that’s going on too. Oil up +2.1% this morning is another big-bite reason to keep reflation bulls in the game here – immediate-term risk range (dynamic) $31.66-39.45/barrel for WTI as Oil Volatility’s risk range remains surreal at 48-60. We are much more bearish on the Financials than Energy, but would love another shot (short side) closer to $40 Oil.

 

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

Asset Allocation

CASH 66% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 4%
FIXED INCOME 24% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
XLU

If you were long energy over utilities last week, nice trade! We'd remind you that Utilities (XLU) are outperforming the S&P 500 by +10% year-to-date. And that’s with the bounce. By contrast, Energy (XLE) was up 6.5% on the week but is up only 1% year-to-date.

GIS

General Mills (GIS) faces some headwinds across their portfolio, and although the 1H of FY16 was a challenge, the company has robust merchandising and consumer plans in the 2H that should improve results.

 

GIS has embarked on a mission to drive their top 450 SKUs, which represent 75-85% of their volume. Calling it their ‘Power 450’, surprisingly these 450 SKUs aren’t even in all retail locations and formats, broadening the distribution footprint of these top SKUs is priority number one for GIS’s sales team. The organization is also looking at the bottom 450, representing 1-2% of volume and making critical decisions on what products can be discontinued.

 

We continue to believe GIS is one of the best positioned consumer packaged foods companies due to its strong brands and best-in-class people and organization.

TLT

We can’t emphasize enough the bigger picture from both a data and top-down market signaling perspective. To contextualize the relief rallies and short squeezes in asset classes and instruments that are counter to our more longer-term view. Here’s what how we think the macro environment plays out from here:

  1. The market is positioned for more rate hikes into 2016
  2. The data continues to deteriorate, and market volatility ensues
  3. The expectation that “all is good” comes off the table and the market increasingly pivots to the view that, throughout 2016, the Fed is going to hike rates in methodical fashion straight into an economic slowdown
  4. The market takes in the growth slowing pivot in real-time (Treasury rates and the dollar both move lower, and inflation-leveraged assets like gold catch a bid)

 

Once the policy catalysts are out of the way in the next few weeks, our expectation is a return to outperformance in growth slowing asset classes (TLT and XLU). If you’re in for the TAIL and the TREND call, focus on the data, not the desperate attempts of central planners to arrest economic gravity. 

Three for the Road

TWEET OF THE DAY

$HIBB inventories +18% on sales growth of 2.7% and comp of (-0.6%). That's after 25%YTD gain and 13% draw-down in short interest.

#ShortMore

@HedgeyeRetail

QUOTE OF THE DAY

You know, Willie Wonka said it best: we are the makers of dreams, the dreamers of dreams.

Herb Brooks

STAT OF THE DAY

You know, Willie Wonka said it best: we are the makers of dreams, the dreamers of dreams.

Herb Brooks


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The Macro Show Replay | March 11, 2016

CLICK HERE to access the associated slides.

 

An audio-only replay is available here. 

 


Cartoon of the Day: Off To See The Wizard

Cartoon of the Day: Off To See The Wizard - ECB cartoon 03.10.2016

 

ECB head Mario Draghi pulled out all the stops today but macro markets weren't buying it. "The Central Planning Belief System is breaking down," Hedgeye CEO Keith McCullough wrote. "This is the beginning of the end."


Call Invite | Don Kohn Previews the FOMC Meeting

Takeaway: Join us next Monday, March 14 at 11:00 a.m. ET, for a call with former Fed Vice Chairman Don Kohn to preview the March 15-16 FOMC meeting.

Don Kohn Previews the FOMC Meeting

 

The Potomac Research Group - A Hedgeye company - will be hosting a call with former Fed Vice Chairman Don Kohn Monday, March 14 at 11:00 a.m. ET to preview the March 15-16 FOMC meeting. Don will offer his outlook on the labor market, inflation, consumer spending, manufacturing data, and other factors that will factor into the Fed's rate hike calculus. 

 

Participating Dialing Instructions

Toll Free:

Confirmation Number: 13630084

 

Don Kohn's Bio:

Don is an expert on monetary policy, financial regulation and macroeconomics and serves as the Senior Economic Strategist for the Potomac Research Group. He brings 40 years of experience working for the Federal Reserve, where he was a key adviser to the last three Federal Reserve chairmen and served as a member and then Vice Chairman of the Board of Governors from 2002 to 2010.  

 

Don has written and published extensively on monetary policy and its implementation and on a variety of other subjects related to central banking.  He chaired an important international committee of central bankers through the period of the recent financial crisis.  He received a B.A. in economics from the College of Wooster and a Ph.D. in economics from the University of Michigan.


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