McCullough: The Call Is Clear, Raise Cash


In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough issues a stern directive to investors and explains the reasons why.

About Everything: Everything Must Go

Are department stores an endangered species?


Editor's Note: In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses why department stores are slowly fading away. "The downward arc started well over a decade ago—long before the Great Recession," Howe writes. "In fact, you need to go back to the Clinton ‘90s to find a really healthy growth year for department stores... Those days are long gone."


About Everything: Everything Must Go - department stores



Department store executives were hoping ahead of earnings season that they wouldn’t have to break more bad news to the investors who remain onboard.


No such luck.


Top players like Dillard’s, Macy’s, and Nordstrom reported their worst YOY same-store sales results since the Great Recession, with some seeing drops in the 5 percent range (or more, in Macy’s case). Forecasters at Green Street Advisors estimate that it would take closing one-fifth of the industry’s total mall floor space to get department stores back to their pre-recession sales per square foot.


The downward arc started well over a decade ago—long before the Great Recession. In fact, you need to go back to the Clinton ‘90s to find a really healthy growth year for department stores. That was back when we were still building malls and when malls were still cool in the eyes of teen “mall rats” (all Gen-Xers) who wandered around in movies like Clueless.


Those days are long gone. As a whole, department stores have only had a handful of quarters of positive sales growth since the dot-com bubble burst. Millennials, unlike Xers, equate department stores with slow extinction and think of malls as places to go not be seen (see


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It’s useful to divide department stores into three basic tiers: upscale, middle, and discount. All tiers have performed poorly over the last 15 fifteen years, but some have done better than others. Overall, the discount tier—including Target and Walmart—has done the best. These stores kept their value better during the recession, and they have dropped less since last spring.


The upscale firms like Saks Fifth Avenue, Nordstrom, and Neiman Marcus have done less well. And as for middle tier stores like JC Penney, Macy’s, Sears, and Kohl’s, well, by all accounts they’ve been getting hammered. Problem for the middle tier: they can’t beat the upper tier on quality, and they can’t beat the lower tier on price. 


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Share prices tell the story. JC Penney sits below $8, nearly the lowest price in the company’s 30-plus year history. Upper-skewing firms like Dillard’s and Macy’s (which owns Bloomingdale’s) fared better than most until the middle of last year—at which point they too tumbled down to earth. In fact, all department stores not named Walmart or Target have actually lost value since 2011, making the benchmark S&P 500 look like a star performer by comparison.


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Product lines: In April, when total retail sales posted a YOY gain of +3.0%—a good-news surprise to most analysts—department stores shared none of the bounty. Their YOY gain was -0.3%. One obvious drag is that department stores happen to be dominated by precisely those product categories where sales growth throughout the economy has been weakest in recent years: clothing and accessories (+1.3% YOY in April), electronics and appliances (-2.0%), and food and beverages (+1.9%). Quite simply, department store sales are harnessed to the weakest horses.


The product-line picture isn’t totally bleak. Many stores sell furniture and home furnishings (+3.6% YOY in April) or sporting goods, hobby, books, and music (+4.2%). Yet most of this growth has been captured by specialty stores. Department stores tend to target the nonspecialized mainstream. And here, the sharing economy rules. Shoppers who might otherwise spend hundreds on a brand-new average-looking couch at Walmart or Macy’s can now buy a slightly used one on Craigslist for a sliver of the price.


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An ever-shrinking middle class. Pew Research reported that in 2015, for the first time ever, fewer consumers lived in households earning between two-thirds and double the median income (120.8 million) than in lower- and higher-earning households (121.3 million). Another Pew study found that, between 2000 and 2014, the middle class lost ground in nearly nine out of ten U.S. metro areas.


This new “hourglass economy,” where most spending takes place at the high and low ends, threatens department stores that always relied upon middle-earning households.


Generational change. It’s not just the “middle class” as an income bracket that’s waning—but also the “middle class” as a collective self-image.


From their very origins in the late-19th century, department stores have always targeted the “middle-of -the-road” consumer with standard fare at standard prices. (Thanks to the economies of scale provided by catalogues and railroad delivery, Sears, Roebuck, and Company was the amazon-like behemoth of its day.)


After World War II, these firms enjoyed a new growth spurt with the G.I. and Silent generations, who embodied Middle America in every sense. These “Great Society” architects saw department stores as a way to infuse order and efficiency into the wild west of Mom-and-Pop retail. As consumers, they craved uniformity and mass-produced goods—stuff that would allow you to fit in happily with your suburban neighbors on a “Pleasant Valley Sunday.”


But this all changed with Boomers, who wanted authentic products made just for them, as unique individuals. Today, Boomer and Gen-X shoppers are either “trading up” for better quality or “trading down” for better price. Department stores check neither box.


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In response to Boomers and Xers, department stores have been gradually ramping up on the diversity of its style and brand selection—until all the diversity practically pours out of the shelves onto the floors. But here’s the irony. Most Millennials no longer want what department stores have lately been emphasizing: more choice. Plenty would rather shop at a specialty store that effectively chooses the right product for them than at a sprawling department store that offers forty different brands of handbags scattered down three separate aisles.


The rise of e-commerce. Online platforms allow consumers to get exactly what they want without ever leaving the couch. E-commerce sales now make up nearly 70 cents for every dollar spent at brick-and-mortar stores, up from around 30 cents per dollar back in 2000. The gap between e-tail revenue growth and department store revenue growth is on the order of 15 to 20 percentage points annually. It’s not even close. 


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E-commerce transactions are not just convenient, but fast: Why trek out to the mall when Amazon Prime will deliver what you need within the day—or even the hour?



Upper- and middle-tier firms are going cheap. In a grab for consumers with less purchasing power, Macy’s is experimenting with “Backstage,” an outlet store built into a handful of its existing retail locations. (Macy’s experiment with no sales and no promotions was a disaster, which should have told them something about who their customers are.)


Luxury firms are no strangers to this strategy, either. At Saks Off 5th, shoppers can get Saks quality for a modest price. As for Nordstrom, the company’s Nordstrom Rack discount outposts now outnumber its legacy stores. Who can blame them? While Nordstrom’s full-priced sales recently dropped 4.3 percent YOY, its discount business grew 4.6 percent.


Goodbye, soft goods. Department stores are branching out into hard goods to escape the doldrums of apparel sales. JC Penney announced earlier this year that it would start selling appliances again for the first time in decades. Macy’s recently added consumer electronics in some of its stores through a partnership with Best Buy.


Sears is taking it one step further: The firm has opened a 10,000-square-foot outpost in Colorado packed only with appliances.


Investing in private labels. At a time when bestsellers are hard to come by, department stores are hanging onto their homegrown cash cows for dear life.


Kohl’s offers 20 exclusive private labels, three of which generate more than $1 billion annually—including its star-performing Sonoma brand.


Under new CEO Marvin Ellison, JC Penney has gotten back into in-house labels as well—a strategy that has provided a 6.6 percentage-point boost to the company’s gross margins over the past three years.


Emulating e-commerce giants. Macy’s, Bloomingdale’s, and Nordstrom have taken a page out of Amazon’s playbook by rolling out same-day delivery in select locations.


That’s a good start, sure, but these firms should go a step further by exploiting things that brock-and-mortar does better than e-commerce: high-touch customer service, perhaps, or maybe specializing in large, complex purchases that beg for a knowledgeable salesperson. With in-store analytics married to Big Data, physical retail can at last know as much about its customers as digital retail.



Not yet—but the industry still has hope. Despite the runaway success of e-commerce, there may be room for one or two traditional department stores that play their cards right. As for the rest, some will disappear (receivership, merger) and others will exit the genre by becoming high-end specialty stores or big-box category killers.


So which firms have the best shot of surviving and prospering?


It’s hard to say for certain, of course. But I would bet heavily against today’s middle-tier firms. It will be tough for any of them to turn the tide without completely reinventing themselves to compete with either the Nordstroms of the world on quality or the Walmarts on price. High- and low-end firms are better positioned to exploit what they do best and maybe, just maybe, stop the bleeding.


Many of the high-end stores will survive by specializing in fewer product lines. Most discount stores don’t have that option—and will be hardest pressed by e-tailers. Yet precisely because they have no alternative, these discount stores will be most likely to figure out how to grow their bottom line while still maintaining their department store identity.


They will do so in part on the strength of their brand connection with the fast-growing share of Americans (40% in 2014, up from only 25% in 2008 according to Pew Research) who self-identify as “lower” or “lower-middle” class. The generation most responsible for this shift is today’s Millennials, who also happen to be tomorrow’s middle class. Hip young Gen-Xers flocked to edgy boutiques. Hip young Millennials flock to one-size-fits-all thrift shops.


Already, a couple of the big discount brands are aligning themselves well. Just look at Target, one of the few firms investors haven’t yet given up on. It has combined a bright, upmarket atmosphere with basics-first selection and downmarket prices—in other words, Target offers what Millennials want. Walmart, meanwhile, beats everyone on price, an identity in itself. That’s why the two companies rank among the top ten favorite Millennial brands.


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  • Department stores are hurting. Their once-reliable middle-class customer base is dwindling, and today’s consumers are either splurging for better goods or going elsewhere for lower prices.
  • Companies are trying everything to turn the tide, from offering lower-priced goods to investing in private labels. But in the end, middle-tier firms may be too far behind already to make up the distance. Bet on the discount tier to become the future core of this retail category.

A Look At How Yellen Is Moving Markets This Morning

Takeaway: Fed head Janet Yellen's speech Friday had key investment implications for Copper, Gold and Long Bonds.

A Look At How Yellen Is Moving Markets This Morning - Yellen cartoon 04.06.2016


Fed head Janet Yellen spoke at Harvard University on Friday and supplied her latest thinking on Fed policy. 


“It’s appropriate, and I’ve said this in the past I think, for the Fed to gradually and cautiously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate," Yellen said.


Here's analysis via Hedgeye CEO Keith McCullough in a note sent to subscribers this morning.


"Friday’s Yellen QA @Harvard was easily her most hawkish of the year – she said she’s “probably” going to raise in June or July based on her forecast. Since her forecast has always been the risk, there’s not a lot I can own into her making another policy mistake (tightening into a slow-down like she did in DEC); hence my sell signals in Treasuries, Utes, etc. Friday."


Look at the falling 10-year Treasury yield despite the Fed's December rate hike:


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Meanwhile in commodities...


"Copper is down -0.6% this morning => Dollar Up, Rates Up deflates the “reflation” – Gold gets this too. Come June/July I can’t see why markets won’t look like they did by the end of DEC and through JAN. If you have Hedgeye’s GDP and profit cycle forecasts (Q2 will be the worst – Q1 was not the “bottom”), you might have our view of 1-3 month risk here."



As for Gold...



The risk to macro markets is that Janet Yellen makes her second rate hike mistake. 


Remember Yellen is a labor economist so ahead of Friday's non-farm payroll report, here's her favorite labor market indicator. Note: It's deteriorated for the fourth straight month:


A Look At How Yellen Is Moving Markets This Morning - yellen favorite indicator


More to be revealed.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Daily Market Data Dump: Tuesday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products




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CHART OF THE DAY: Fed Forecast Versus #TheCycle

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.


"... And now, markets are “gonna rip” based on a low-probability scenario that the Fed’s forecast for growth to magically re-accelerate (into peak of #TheCyclecompares in Q2) is accurate? #Cool. Good luck with that.


We’re sticking with our forecast of GDP sub 1% for Q2 and the worst profits of #TheCycle in Q2 and Q3. Alongside #EmploymentSlowing, we remain The Bears on #EarningsSlowing. We expect The Financials (XLF) to lead on the downside of earnings with the Yield Spread (10yr minus 2yr) not budging last week (still at YTD lows of 94 basis points wide)."


CHART OF THE DAY: Fed Forecast Versus #TheCycle - 05.31.16 Chart

REPLAY! This Week On HedgeyeTV

Our deep bench of analysts take to HedgeyeTV every weekday to update subscribers on Hedgeye's high conviction stock ideas and evolving macro trends. Whether it's on The Macro ShowReal-Time Alerts Live or other exclusive live events, HedgeyeTV is always chock full of insight.


Below is a taste of the most recent week in HedgeyeTV. (Like what you see? Click here to subscribe for free to our YouTube channel.)




1. Steiner: ‘China Is An Enormous Systemic Risk’ (5/26/16)




In this brief excerpt from The Macro Show, Hedgeye Financials analyst Josh Steiner discusses why the “unbelievable rate of credit growth” in China is now slowing and why it could pose risks for investors long the stock market.


2. McGough: 10 Reasons Why I Don’t Like Hanesbrands | $HBI (5/25/16)



Retail analyst Brian McGough hosted a Black Book presentation earlier this week to update his short call on Hanesbrands (HBI). In this brief video excerpt, McGough lays out the ten reasons HBI shares are headed lower.


3. McCullough: Stop Whining, Stick With The Process (5/25/2016)



During the live Q&A section of The Macro Show earlier today, Hedgeye CEO Keith McCullough provides a “stick with the process” pep talk for a subscriber worried about his short positions.


4. Why We Remain Bearish On Junk Bonds (5/24/2016)



In this brief excerpt from The Macro Show earlier today, Hedgeye Macro analysts Darius Dale and Ben Ryan respond to a subscriber’s question about our views on the credit cycle and high-yield debt.


5. What The Yield Spread Reveals About Growth (5/23/2016)



In this brief excerpt from The Macro Show this morning, Hedgeye Senior Macro analyst Darius Dale provides an in-depth, granular look at why investors should pay close attention to the yield curve and what it says about growth.

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