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Capital Brief: Trump's Rockstar Performance ... & All Aboard The Boos Cruz!

Takeaway: Let's Get Ready To Ruuuumble; Boos Cruz; Trump-Nato;

Editor's Note: Below is a brief excerpt from Hedgeye Potomac Chief Political Strategist JT Taylor's Capital Brief sent to institutional clients each morning. For more information on how you can access our institutional research please email sales@hedgeye.com.

 

Capital Brief: Trump's Rockstar Performance ... & All Aboard The Boos Cruz! - JT   Potomac under 1 mb

 

"With me it is exceptionally true that the Presidency is no bed of roses."

-James Knox Polk 

LET’S GET READY TO RUUUUMBLE

Even for a master showman like Donald Trump, last night’s primetime acceptance speech was the biggest test of his life and his campaign, and he did what Donald needed to do. After three days of convention chaos, a very poised and polished Ivanka Trump introduced the softer side of her father and made the strongest appeal of the week to women while portraying her father as a fighter.

 

The pleasantries stopped there as Trump launched into an hour-long dialogue doubling-down on ideals he’s pushed for over a year, and presented himself as the leader who will bring law and order to a country victimized by corruption, illegal immigrants and terrorism. The night was Trump’s and he closed the convention the way he wanted to close it, leaving no prisoners and highlighting what he’ll do to put America first again.

 

His rockstar performance brought the Quicken crowd to their feet - and solidified his most fervent supporters viewing from their living rooms - but will it be enough to appeal to undecideds, independents and estranged Democrats?

BOOS CRUZ

Trump’s campaign tried to focus the Republican convention on party unity, but it’s apparent that Senator Ted Cruz didn’t get the memo. Most Republicans eyeing future runs for 1600 Pennsylvania Ave have already made peace with Trump, or at least ignored him altogether, and worry a failure to fall in line could backfire if the outspoken and mercurial candidate ends up placing the blame of his defeat - at their feet.

 

But for over a year now, Cruz and like-minded conservatives have made the case that Republicans will lose again if they nominate an insufficiently conservative candidate, and they’re betting that a Trump loss would prove their point. Cruz is only 45 years old and could have a long political career ahead of him – that is, if his arrogance doesn’t come back to haunt him.

TRUMP-NATO

It’s been said that foreign policy is not Trump’s strong suit, and his previous quip that he “watches the shows” to gather geopolitical information further cements that view. So we weren’t surprised when Trump stepped into it again by stating that the US would not necessarily defend new NATO members in the Baltics in the event of Russian attack.

 

Hmmm...that contradicts everything his newly-minted veep has said, not to mention that it rattles the very foundation of NATO itself, further digging himself into a deeper hole. His lack of foreign policy cred and unorthodox declarations will be on full display throughout the election, especially as his counterpart continually references her experience and steady hand.


4 Stocks Hurt By The Retail Slowdown

In this excerpt from The Macro Show, Hedgeye Retail analyst Alec Richards and Macro analyst Ben Ryan discuss the companies most vulnerable to the ongoing retail slowdown.


Existing-Home Sales: Housing Head-Fake Or Big Breakout?

Takeaway: Growth in Existing Home Sales slowed to +3.0% YoY but the main callout was that the share of sales to 1st-time buyers rose to 33%. Headfake?

Existing-Home Sales: Housing Head-Fake Or Big Breakout? - existing home sales 7 22 16

 

Another rate of change slow-down in US Existing Home Sales?

 

Yup.

 

The breakdown is as follows:

 

Decent print but no real surprises. Growth in Existing Home Sales slowed to +3.0% YoY in June but the main callout was that the share of sales to 1st-time buyers rose to 33%, marking the highest percentage since July 2012 as unit sales increased to the highest level of the cycle at 1.84M.

 

The trend here is important because any next leg higher in transaction volumes will require resurgent 1st-time and entry level buyer demand. The past 3 years have been littered with single-month breakout headfakes and false optimism so we’re interested to see if the strength can confirm next month. 

 

The more important housing release will be next week’s Pending Home Sales data for June – which will give us the lead read on sales in the existing market for July.  

 

Bottom Line: You'll be reading about the Housing slowdown in newspapers, in 3 months.


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CALL INVITE | Brexit Implications – A 360° Analysis

Takeaway: TODAY at 11:00 AM Est

Hedgeye Potomac, in conjunction with the international law firm of Squire Patton Boggs, will be hosting a series of calls on Brexit and will first examine the legal and procedural implications.  

 

With Prime Minister Theresa May now formally installed at 10 Downing Street, we will discuss with Squire’s Brexit Task Force the events following the UK’s exit vote from the EU and what the outcome of the vote spells for the UK and the rest of the world.

 

The call will take place TODAY at 11:00AM EST with prepared remarks followed by Q&A. A link to slides and dial-in information is included below.

 

KEY TOPICS ON THE CALL WILL INCLUDE

  • The timing and procedure of the withdrawal, and future negotiations between the UK and the EU
  • The consequences for UK, EU and US companies arising from the end of the application of EU Freedoms, Mutual Recognition, Passports and other privileges
  • Consequences under the domestic laws of the UK and the remaining 27 Member States
  • What happens to International Agreements entered into by the EU
  • What you need to know when entering into new contracts after June 23, 2016 and what you should do with respect to existing contracts
  • Labor, Employment and Immigration
  • What alternatives are available to the UK, including WTO, EFTA, EEA, Swiss-Style, Free Trade Agreements

 

ABOUT SQUIRE PATTON BOGGS

Squire Patton Boggs is a full service global law firm that provides insight at the point where law, business and government meet. Squire Patton Boggs consists of over 1,500 lawyers in 45 offices across 21 countries.

 

Squire Patton Boggs’ Brexit Task Force is a multi-disciplinary team of lawyers and policy advisers who are uniquely placed to support clients from across the globe on the effects Brexit will have on business.

 

The Public Policy teams, particularly in Brussels and Washington, D.C., consist of top tier lawyers with considerable public policy experience - which helps them provide seamless and coordinated discussions with the relevant authorities.

 

 

CALL DETAILS

Toll Free:

Toll:

UK: 0

Confirmation Number: 13641782

Materials: CLICK HERE

 


Correction: NKE/FL | The 10k Disclosure That Matters

Takeaway: Nike's 10k offered up a host of data that, when analyzed alongside others in the space, are bearish for FL.

Here's an unabridged review Richards sent me last night after going through the numbers in Nike's 10k that we think matters as it relates to the central themes (mainly share shift in distribution and pressure on legacy retailers) in the Nike ecosystem.

 

The punchline is that I'd give anything to NOT be an executive running FL, FINL, HIBB, or any other retailer that disproportionately relies on Nike as we head into calendar year-end.

 

1) DTC at NKE added an incremental $1.2bn in Fiscal 2016, that was paced by 51% e-commerce growth. The composition of that growth adds important context, we think, to the relationship with the company’s traditional wholesale partners primarily in the US. One of the key points of pushback we received when we laid out our $11bn in e-comm by 2020 thesis for Nike was that the lion’s share of direct growth was going to come in Global markets. That’s not been the case to date, and this dynamic will continue to pressure the likes of FL and FINL. For the year – NA accounted for ~50% of NKE’s DTC growth. Tack on China and that comprises ¾ of the growth for the year.

Correction: NKE/FL | The 10k Disclosure That Matters - NKE chart1

 

2) If we breakdown that Nike NA growth into channel specific segments over a longer time series it becomes strikingly evident where the next leg of growth is coming from. All in we saw an incremental $1bn in sales for the year taking Nike on this continent to $15bn with DTC accounting for 58% of the incremental dollars. Yea, the fact that NKE DTC accelerated to 17% growth in the year is notable, but what we think is  far more important to the dynamic between NKE and its traditional wholesale accounts is that the incremental wholesale dollars recognized on the P&L was about half as much as the worst year we’ve seen over the past 5 at just $431. $431 (north of $700mm at end retail) translates to 4%, again half the trough year we’d seen from 2012-2015. That’s a much smaller pie for the content distributors to fight over, and we expect it goes to something starting with a 2 in the next Fiscal year.

Correction: NKE/FL | The 10k Disclosure That Matters - NKE chart2

 

3) At retail – NKE’s NA wholesale business was up $737mm dollars. Of that $700+mm, FL captured 29%. That’s up from previous years when NKE was growing like a weed, but in line with the prior two years. All in that’s an incremental $215mm to FL, good for 4% growth in its US business. That’s about half the average growth rate (8%) NKE wholesale handed to FL on a silver platter over the past 4 years.  Going forward, assuming FL still gets the same allocations from Nike (despite the fact that FL was as bearish as it’s ever been on the brand in its most recent call) we think the NKE benefit gets cut in half again in 2017. ***Methodology note: we adjusted FL’s Fiscal year to more closely match NKE’s calendar.

Correction: NKE/FL | The 10k Disclosure That Matters - nke chart3

 

4) Below is a year by year breakdown of the NKE/FL relationship. We think it’s incredibly important to understand the historical context in order to understand how the relationship evolves in the coming years. The punchline on all this is that we know the emphasis NKE is placing internally to grow its DTC business (mainly e-comm), and we can do the math to see what the risk is to FL. But, what are the options for the retailer? It can either a) take a larger share of NKE’s incremental wholesale business, or b) spend to grow the less relevant footwear brands like UA and AdiBok. The first ain’t going to happen as FL has hit it’s limit with Nike and the 2nd requires both additional investment and something we haven’t seen in a long time which is NKE losing market share.

 

Based on our math for FY17 (that’s 2Q-1Q for FL), using the Street’s estimates, FL needs to add an incremental $330+mm to its US business to hit numbers. We think about $130mm comes from NKE, meaning we need to see an incremental $200mm from other brands. Hint – it’s not a slam dunk. See below for a brief description of our key assumptions.

  • We assume that NKE adds $1bn in NA sales in FY 17, good for a 7% growth rate.
  • NKE DTC carries the weight accelerating to 20% bringing it to almost $5bn. The remainder goes to wholesale which sums up to a retail equivalent = $10.9bn up $440mm vs. $737mm in FY16.
  • We assume FL captures 30% of those dollars, which = $132mm vs. $213mm in FY16.
  • NKE share inside FL goes from 76% down to 74% in the US.
  • That means FL needs an incremental $200mm from the likes of UA and AdiBok to hit current Consensus Estimates.

Correction: NKE/FL | The 10k Disclosure That Matters - NKE chart4

 

5) So what does that mean for the likes of UA and AdiBok? This scenario analysis walks through the possible options FL has to get to its 2017 numbers without the NKE benefit. Essentially anything in green (one purple) works for FL. Some brief background info: current UA NA FW sales = ~$1bn, current AdiBok NA FW sales = $2bn

One example: We’ll take the $201 number highlighted in purple. This says that: UA would need to grow FW 60% and AdiBok 20% with 50% of that growth coming from wholesale with the over arching assumption in all the calculations that FL captures 40% of the incremental share from each of the brands.

Correction: NKE/FL | The 10k Disclosure That Matters - NKE chart5

 

6) The only problem with those type of growth and channel assumptions is that Nike isn’t the only brand navigating around its wholesale partners. AdiBok is the worst offender with 70% of its incremental growth over the past 4 years coming from the direct channel. UA is at 32%, and we think FW growth for UA is more heavily weighted to the DTC channel. That means from here, the likes of AdiBok and Under Armour would need to take share from NKE, allocate over 40% of its wholesale growth to FL, and (not or) redirect a portion of its more profitable retail growth to the wholesale channel. A lot has to go right for that to happen.

Correction: NKE/FL | The 10k Disclosure That Matters - NKE chart6

 

 

**Note Correction = Grammatical Typo


Are Old Wall Consenseless Earnings Expectations Out To Lunch?

Takeaway: The S&P 500 hit all-time highs on cycle-high buyback activity and a new cycle high (overly-optimistic) forward multiple.

The current S&P 500 forward multiple is at a new cycle peak on earnings expectations that assume positive earnings growth by Q3 2016, +9% in Q4 2016, and +16% and +14% by Q1 and Q2 2017 respectively. Starting in Q4 of this year, positive earnings growth expectations are baked in for every sector for three quarters through Q2 of 2017.

 

Are Old Wall Consenseless Earnings Expectations Out To Lunch? - earnings expec

 

In other words, the S&P 500 hit all-time highs on cycle-high buyback activity and a new cycle high forward multiple. Note the optimism embedded in those earnings expectations as seen in the chart above.

 

Estimates too high? You decide.

 

Emblematic of the ongoing earnings recession, here's how Q2 2016 earnings are shaking out so far. Still bullish?

 

Are Old Wall Consenseless Earnings Expectations Out To Lunch? - earnings q2 7 22


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