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Cartoon of the Day: Whole Lotta Bull

Cartoon of the Day: Whole Lotta Bull - Usidedown bull 05.19.2016

 

The S&P 500 is flat year-to-date. That explains a lot. "There's so much whining out there... Stop it. And start winning," Hedgeye CEO Keith McCullough wrote today. In other words, get long our favorite Macro Ideas... Long Bonds (TLT), Utilities (XLU), and Gold (GLD).


DKS | We’re SO Close To Going Long

Takeaway: It’s really really hard to be bearish on DKS here. Too many things can go its way in what we’d call a ‘double transition year’.

We never bought the ‘best house on a bad street’ argument with DKS. It was a bad Street then, and it’s a bad street now.  The difference, is that competitors are dropping faster than our Presidential candidates’ credibility. With the outright failure of Sports Authority (Leonard Greene dropping all support), as well as Eastern Mountain Sports and Sports Chalet, we’re looking at a 6.8% capacity reduction in Sporting Goods Retail brick & mortar. That’s 20mm feet (accurately outlined by DKS) of a sub-sector of retail that has 295mm square feet of space.

 

The fact that these companies went under is no revelation – we’ve all known that for a while -- so there’s no reason to make noise about it today.  There are only three major new-ish pieces of information. Two are bullish for DKS. The third is a push.  

 

1) Game, Set and Match – Ed Stack. I am so rarely impressed by a management team’s poise and thought process around a given strategic initiative. Make no mistake, TSA going Ch11 is absolutely a strategic initiative for DKS rather than a lucky coin flip, and it has been for a lot longer than most people think. This team is as prepared for both the initial promotional hit and the ensuing market share gain as any retailer I’ve seen. More than Kohl’s was with JC Penney, more than Best Buy was with Circuit, and more than Bed, Bath & Beyond was with Linens ‘n Things. Actually, we could make a rather strong argument that the bigger company in each of these categories actually put the smaller/weaker one away –Dick’s and Sports Authority included.  The punchline is that DKS has every hair on TSA’s head numbered. And one thing we like about Ed Stack & Co is that they think big…they think five years out…and they don’t care if they miss a quarter or two in order to achieve these much grander goals of wealth creation.   This is like the opposite of what we’re seeing out of Target right now.

2) Vendors Are Helping. There’s no doubt in my mind that the vendors, especially Nike, UnderArmour and Adidas, are helping Dick’s out. Ed Stack absolutely played this down on the conference call in answer to what was a very fair question. But the vendors would throw a fit if Stack commented on this – especially in detail – so he just dodged it. Is Dick’s getting better product? Yes. You have not seen it yet, but you will. Is Dick’s getting a better price on existing product? Probably not. But is likely to get better terms on it, which will help its cash conversion cycle. The fact that Brands are growing faster with their own Direct business is irrelevant. They need at least one strong National retailer in this space.  In the end, this is a win/win for DKS.

3) That InterWeb Thing. We know the geographic overlap between DKS/TSA. Over 200 TSA stores within 5 miles of a Dick’s store, and 350 stores within 10 miles of a Dick’s. But there’s a region that we care about a lot more than So Cal or Texas. It’s this thing called the Internet – we heard a nasty rumor that a lot of business is conducted there.  DKS e-commerce business grew at 15% this quarter, which is ‘respectable’ but not admirable. Will we see a pick up when it takes over full operation of its site in January? Yes, almost certainly. But while it does, there are two important trends we watch – it’s online competitive overlap with TSA – and importantly, the same metric for DKS/AMZN.

  • DKS/TSA: This is interesting, to me at least. It shows that only 10.5% of Dick’s online customers currently shop online at TSA. It’s less than half the rate we expected to see – particularly given near 50% store overlap within a 5-mile radius.   This rate has been trending down as TSA has weakened. All in, it’s bullish for DKS, as it suggests that it has significant upside as it takes over not only the best stores, but also the online customer relationship. 
  • DKS/AMZN: On the flip side, between 70-80% of DKS customers shop on AMZN. That’s simply mind-blowing.  But we’re ok with that so long as DKS emerges as the best Sporting Goods-Only site and has premium product to Amazon. The only way that happens is if Dick’s maintains strict posturing with its vendors – hopefully without costing DKS much in margin or payment terms.

DKS | We’re SO Close To Going Long - DKS Sports Authority overlap

DKS | We’re SO Close To Going Long - DKS AMZN overlap

 

HERE'S A FEW MORE BASIC CALLOUTS FROM THE PRINT

 

SIGMA Made A Notable Positive Turn

Though it’s still in Quad3, this trajectory is one of the better SIGMAs we’ve seen this earnings season.  Inventory finished up 7% yy with sales up 6%.  This was significantly better on the margin vs Q4 when inventory was up 10% on a +4% sales number.  4Q was impacted by weak cold weather merchandise sales from the mild winter, and the 1Q improvement comes while DKS held onto a large portion of this cold weather inventory to sell in fall 2016.

DKS | We’re SO Close To Going Long - 5 19 2016 chart3

 

Comps Rebound Sequentially

Brick and Mortar comp was negative again for the 7th quarter in a row.  It did however improve on the margin up 360bps sequentially, returning to the rate seen in 3Q.  Perhaps DKS was able to steal some Sports Authority customers with their offer for $20 reward for SA League card members to join Dick's Scorecard. Guidance implies store comp will slow again in 2Q expecting liquidations to result in temporarily lost share.

DKS | We’re SO Close To Going Long - 5 19 2016 chart4

 

e-Commerce Needs a Jumpstart, and is Likely to Get it:

e-Commerce revenue grew 15% in the quarter, at 9.2% of sales.  This was a slight acceleration on a 1 and 2 year basis, but ultimately far below the growth rate we would consider to be healthy for DKS when competitors and key vendors are growing their online banners 30-60%.  When DKS takes its e-commerce business in house in 2017 it needs to see e-commerce growth accelerate materially – tough comps don’t matter.  Otherwise there will have been a lot of wasted investment and asset returns will continue dropping.

DKS | We’re SO Close To Going Long - 5 19 2016 chart5

 

Share Repo at the Peak?

DKS repurchased $50mm worth of stock in 1Q taking share count down 680k sequentially.  The average repo price however, was $46.81… given that the stock barely traded above $47 at all during the quarter, we have to ask why is this so high.  Perhaps there are some limitations for the buyback window, but we hope the DKS treasury department can do better than buying at quarterly highs, 7% above the average daily price.

DKS | We’re SO Close To Going Long - 5 19 2016 chart6

 

New Store Productivity Likely Still Declining

For the first time ever, management did not mention new store productivity on the conference call.  This was perhaps a clever move of using the TSA buzz to start weaning the sell-side off of a metric that is weakening and may never improve again.  Our sense is that internal productivity was sequentially worse, as our model calculation implies.  Gone are the days of straight-lined 90% NSP for the DKS retail model, and we think it could be only 3-4 years before store growth goes negative as the company focuses on growing e-commerce.

DKS | We’re SO Close To Going Long - 5 19 2016 chart7


GLD: Adding Gold to Investing Ideas (Long Side)

Takeaway: We are adding Gold to Investing Ideas today.

Editor's Note: Please note that our Macro team will send out a full report outlining our high-conviction long thesis next week. In the meantime, below is a brief summary of our thesis sent today by Hedgeye CEO Keith McCullough in Real-Time Alerts.

 

GLD: Adding Gold to Investing Ideas (Long Side) - gold bar

 

I was getting a lot of questions on why I wasn't signaling BUY more GLD at higher prices. My answer was that the USD was signaling oversold on the downside and I wanted to wait for an Up Dollar, Down Gold move.

 

Now we have that priced in.

 

What would Gold love? Same thing it always loves - Down Dollar, Down Rates. 

 

That's the call I'm making here.

 

KM


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20 Proprietary Risk Ranges

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INITIAL CLAIMS | WE HAVE GROWTH

Takeaway: Growth in the number of people filing initial unemployment claims isn't the growth you're looking for.

INITIAL CLAIMS | WE HAVE GROWTH - Claims1 normal  3

 

Below is the breakdown of this morning's labor data from Joshua Steiner and the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact 

 

WE HAVE GROWTH: The latest NSA initial claims data grew on a Y/Y basis for the first time in a long time. While the increase was small at +2%, it's the first time since 2012 this has happened. Prior to 2012, you'd have to go back to 2007 to find the last time claims were rising. Initial claims are still at a low level in absolute terms, but rate of change matters. We wrote about this dynamic in detail back in February 2015, HERE: INITIAL CLAIMS: COGNITIVE DISSONANCE & MICE.  

 

Alternatively, in the last three cycles, claims have stayed below 330k for 24, 45, and 31 months before recession set in (33 months, on average). The current sub-330k run is now in its 27th month. That puts us 3 months past the minimum, 6 months from the 33-month average, and 18 months shy of the 1990s record-setting expansion. 

 

INITIAL CLAIMS | WE HAVE GROWTH - Claims17 2

 

The Data

Initial jobless claims fell 16k to 278k from 294k WoW. The prior week's number was not revised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 7.5k WoW to 275.75k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was 2.2% higher YoY, which is a sequential deterioration versus the previous week's YoY change of -1.7%

 

INITIAL CLAIMS | WE HAVE GROWTH - Claims2 normal  5

 

INITIAL CLAIMS | WE HAVE GROWTH - Claims3 normal  5

 

INITIAL CLAIMS | WE HAVE GROWTH - Claims4 normal  5

 

INITIAL CLAIMS | WE HAVE GROWTH - Claims5 normal  5

 

INITIAL CLAIMS | WE HAVE GROWTH - Claims6 normal  5

 

INITIAL CLAIMS | WE HAVE GROWTH - Claims7 normal  5

 

INITIAL CLAIMS | WE HAVE GROWTH - Claims11

 

INITIAL CLAIMS | WE HAVE GROWTH - Claims15 normal  3

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


Initial Claims | We Have Growth

Takeaway: Growth in the number of people filing initial unemployment claims isn't the growth you're looking for.

Initial Claims | We Have Growth - Claims1

 

 

The latest NSA initial claims data grew on a Y/Y basis for the first time in a long time. While the incease was small at +2%, it's the first time since 2012 this has happened. Prior to 2012, you'd have to go back to 2007 to find the last time claims were rising. Initial claims are still at a low level in absolute terms, but rate of change matters. We wrote about this dynamic in detail back in February 2015, HERE: INITIAL CLAIMS: COGNITIVE DISSONANCE & MICE.  

 

Alternatively, in the last three cycles, claims have stayed below 330k for 24, 45, and 31 months before recession set in (33 months, on average). The current sub-330k run is now in its 27th month. That puts us 3 months past the minimum, 6 months from the 33-month average, and 18 months shy of the 1990s record-setting expansion. 

 

 

Initial Claims | We Have Growth - Claims17 2

 

 

The Data

Initial jobless claims fell 16k to 278k from 294k WoW. The prior week's number was not revised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 7.5k WoW to 275.75k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was 2.2% higher YoY, which is a sequential deterioration versus the previous week's YoY change of -1.7%

 

Initial Claims | We Have Growth - Claims2

 

Initial Claims | We Have Growth - Claims3

 

Initial Claims | We Have Growth - Claims4

 

Initial Claims | We Have Growth - Claims5

 

Initial Claims | We Have Growth - Claims6

 

Initial Claims | We Have Growth - Claims7

 

Initial Claims | We Have Growth - Claims8

 

Initial Claims | We Have Growth - Claims9

 

Initial Claims | We Have Growth - Claims10

 

Initial Claims | We Have Growth - Claims11

 

Initial Claims | We Have Growth - Claims19

Yield Spreads

The 2-10 spread fell -4 basis points WoW to 96 bps. 2Q16TD, the 2-10 spread is averaging 103 bps, which is lower by -5 bps relative to 1Q15.

 

Initial Claims | We Have Growth - Claims15

 

Initial Claims | We Have Growth - Claims16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Dear Fed, It's Better To Remain Silent and Be Thought a Fool...

Takeaway: America's unelected central planners look more and more manic with each passing day.

Dear Fed, It's Better To Remain Silent and Be Thought a Fool... - Yellen data dependent cartoon 11.18.2015

 

"The 2nd worst thing to happen to capitalism (behind ZIRP and QE) is the Fed's decision to constantly think out loud," Hedgeye Senior Macro analyst Darius Dale wrote earlier today.

 

It's been shocking to watch the market confusion as the Fed pivots between hawkish and dovish (sometimes in just a matter of days).

 

The latest from the Fed, between the meeting minutes yesterday and the parade of regional Fed heads today, is that a June hike is a "live possibility." Meanwhile, the market doesn't know what to make of the Fed's "thinking out loud." Below is the market-implied rate hike probability yesterday at 1:44pm ET, right before the Fed minutes were released.

 

Dear Fed, It's Better To Remain Silent and Be Thought a Fool... - rate hike 5 18 1.44

 

Now look at the probability today...

 

Dear Fed, It's Better To Remain Silent and Be Thought a Fool... - rate hike prob 5 19

 

In other words, the probability of a June rate hike doubled in less than 24 hours. Despite all the hawkish tough talk, the market is reluctant to accept the flippant Fed's words as gospel. The current probability of a rate hike is just 28%. 

 

Just to underscore how truly manic these market reactions have been to each and every word out of the Fed, here's the implied rate hike probability at the start of the year, on January 1. Notice the near certitude of rate hikes throughout 2016.

 

Clearly, the Fed has a credibility problem.

 

Dear Fed, It's Better To Remain Silent and Be Thought a Fool... - rate hike 1 1

 

If all of this leaves you a bit befuddled, here's what you need to know via Hedgeye CEO Keith McCullough in today's Early Look:

 

"If the Fed hikes in June into the face of this economic slowdown it will perpetuate deflation (down yields)."

 

That's why we're reiterating our big macro call...

Long the Long Bond (TLT).


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 80.33%
  • SHORT SIGNALS 78.49%
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