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WSM | 50% of Growth Slowing?

Takeaway: We don’t think WSM is a short. But with 50% of growth appearing to slow materially, we wouldn’t touch WSM ahead of the print on either side.

Despite a 35% draw down from peak-to-tough, a less than impressive performance in the ‘junk rebound rally’ we’re seen over the past six weeks, AND a generally positive predisposition toward the name longer-term, we simply can’t get excited about WSM over the near-term.

 

Yes, there are a few positive factors – let’s get those out of the way.

 

1) The RH blowup earlier this quarter was much less about macro and more about execution hiccups/burps/projectile vomiting associated with launching new concepts. The promotional fears are real, but we’d argue that’s what drove the negative bifurcation in performance between the home furnishings names and the broader retail index starting in mid-November.

 

2) Numbers printed out of LZB, PIR, KIRK, and ETH have looked better than feared – pretty much across the board. Granted, this is not the most appropriate sample (though RH is not either), but the average PM probably throws them all in the same bucket – for better or worse. 

 

3) WSM is lapping its own set of executional headwinds caused by the West Coast port delays in 1H15 which cost the company $30-$40mm on the top line and 50bps+ of margin in each of the first two quarters of 2015. Normalized product flow should allow the company to recapture a large portion of that, at least on the margin side. We’d really argue that its own complex operational structure (between e-commerce and B&M) simply could not handle the stress of an event like a Port Strike (why are there fewer than five companies in all of retail that repeatedly talked about this, despite the fact that everyone sources from the same place?). Nonetheless, an easy comp is an easy comp.

 

While all that matters, the unfortunate reality is that the growth story and stock drivers for WSM are almost entirely hinged on the West Elm concept. That might sound strange given the fact that the brand is only 17% of sales but a) it’s the only concept in the portfolio of brands actually growing square footage, and b) West Elm has accounted for ~50% of incremental growth for the better part of two years, which is evidenced by the first chart below.  We think that’s potentially at risk.

 

We triangulate several sources for every company each quarter to gauge the online sales curve vs a year ago. These sources have tracked West Elm well in the past. They’re the same sources that are suggesting to us that 50% of growth might have meaningfully decelerated, as outlined in the second chart below. The quarter might still be fine, as the Street is looking for just 4% EPS growth. But in 1Q expectations accelerate to 14%, which might lead WSM to an underwhelming guide.  Does the Street know this with short interest at a 5-year high and 10.5% of the float? Probably. But we’re not suggesting that this is a great short here. We’re simply saying that despite our temptations, our process tells us that this is absolutely not a buy before the event.

 

WSM | 50% of Growth Slowing? - 3 16 2016 Chart1 WSM growth

WSM | 50% of Growth Slowing? - 3 16 2016 Chart2


Hedgeye TV | Restaurants & Consumer Staples LIVE + Interactive Wednesday at 2:15PM ET

Catch us LIVE in the studio Wednesday at 2:15PM ET.

 

We will discuss key issues affecting investors including industry trends, recent developments and provide an overview of our best ideas, including Chipotle Mexican Grill (CMG)McDonalds (MCD)Hain Celestial Group (HAIN)Darden Restaurants (DRI) and Snyder's-Lance (LNCE).

 

***Have a question? Enter it in the chat box under the video player and we will answer them live!

 

CLICK HERE TO WATCH LIVE.

Hedgeye TV | Restaurants & Consumer Staples LIVE + Interactive Wednesday at 2:15PM ET - rest consumerstaples


Hedgeye TV | Restaurants & Consumer Staples LIVE + Interactive Wednesday at 2:15PM ET

Catch us LIVE in the studio Wednesday at 2:15PM ET.

 

We will discuss key issues affecting investors including industry trends, recent developments and provide an overview of our best ideas, including Chipotle Mexican Grill (CMG)McDonalds (MCD)Hain Celestial Group (HAIN)Darden Restaurants (DRI) and Snyder's-Lance (LNCE).

 

***Have a question? Enter it in the chat box under the video player and we will answer them live!

 

CLICK HERE to watch live.

Hedgeye TV | Restaurants & Consumer Staples LIVE + Interactive Wednesday at 2:15PM ET - rest consumerstaples


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What To Watch Ahead Of Hawkish Fed Day

Takeaway: What if the dollar falls post-Fed Day? What should you buy on US economic #GrowthSlowing?

What To Watch Ahead Of Hawkish Fed Day - rate hike cartoon 11.17.2015

 

Remember what happened last time the Fed tightened into a slow-down (DEC)?

 

"The market expects a relatively hawkish Fed today," writes Hedgeye CEO Keith McCullough in a note sent to subscribers this morning:

 

"Not surprisingly, USD is up (this wk) into the “relatively hawkish” #LateCycle Employment Fed statement – but how much USD (and rates) upside is there? Not much for now, as both the Japanese and European #BeliefSystem of FX devaluation continues to break-down, pressuring USD inasmuch as slowing housing and consumption data does."

 

 

So get ready ahead of a hawkish Fed Day:

 

"Right there with the Financials (XLF -6.0% YTD) as Best Ideas Shorts in 2016 YTD is the Russell 2000 (down -1.6% yesterday to -6.1% YTD) as both are much purer plays on the short side of the US economy slowing than the global one. I know that doesn’t fit the permabull narrative. But it does fit yesterday’s US Retail Sales and Housing (NAHB) data! #slowing."

 

 

Which gets us back to what happened after the December rate hike. Well, stocks tumbled and bond yields fell.

 

Hmmm...


The Macro Show Replay | March 16, 2016

CLICK HERE to access the associated slides.

 


Call Today | Is This a Generational Buying Opportunity in Emerging Markets?

Please join us today at 1:00pm EST for a conference call highlighting our latest thoughts on emerging markets. Recall that the globally-interconnected, rigorously quantitative nature of our research led us to be appropriately bearish on the structural outlook for EM economies and their financial markets as far back as early 2013, ultimately reiterating that view on a subsequent conference call in late 2014. Now, we are keen to apply a similarly rigorous framework in the process of kicking the tires on the long side of emerging markets.

 

CLICK HERE to watch this presentation live.

Call Today | Is This a Generational Buying Opportunity in Emerging Markets? - EM playnew

 

KEY TOPICS OF DISCUSSION

 

  • Have emerging market financial assets bottomed? Despite a broad-based rebound in EM asset prices throughout the YTD, the belief that many EM asset markets remain at/near trough valuations has some merit. In this presentation we identify and vet potential catalysts for a sustained recovery and/or another material leg down for EM capital and currency markets.
  • Are the Chinese economy, its banking system and the yuan as vulnerable to collapse as investor consensus believes? Many investors seem to be of the view that China requires a material devaluation of the RMB to stave off banking crisis and/or outright economic collapse. Some investors actually believe each of those outcomes are inevitable. In this presentation, we offer our well-researched thoughts on the viability of these views.
  • Which countries will outperform from here? The latest refresh of our proprietary EM Crisis Risk Index will offer valuable insights as to which countries investors should overweight and underweight from here.

 

Call Today | Is This a Generational Buying Opportunity in Emerging Markets? - DXY Fibonacci Retracement Analysis

 

Call Today | Is This a Generational Buying Opportunity in Emerging Markets? - Asian Financial Crisis Currency Devaluations

 

Call Today | Is This a Generational Buying Opportunity in Emerging Markets? - Contextualizing  PhaseIII

 

CALL DETAILS

 

  • Toll Free:
  • Toll:
  • UK: 0 -
  • Confirmation Number: 13631753
  • Materials: CLICK HERE
  • Video Access: CLICK HERE

 

As always, our prepared remarks will be followed by a live, anonymous Q&A session. Please submit your questions to . Also, for those of you who cannot join us live, we will be distributing a replay video of the call shortly after it concludes.

 

Kind regards,

 

DD

 

Darius Dale

Director


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