LOL. "In general, I would not say that asset valuations are out of line with historical norms," Janet Yellen said at today's FOMC press conference.
Takeaway: Prime Minister Abe has his head in the sand on Japan's demographic trends.
Prime Minister Shinzo Abe remarked today that Japan's aging population was not a burden on its economy. It's an incentive.
When asked about the 34.6 million people aged 65 and older, or 27.3% of the population (highest proportion among advanced nations) Abe told the crowd, "I have absolutely no worries about Japan's demography."
"Japan may be aging. Japan may be losing its population," he said. "But these are incentives for us. Why? Because we will continue to be motivated to grow our productivity." The prime minister cited robots, wireless sensors, and Artificial Intelligence as among the bastions of support for future Japanese growth.
"So, Japan's demography, paradoxically, is not an onus, but a bonus," Abe said.
Here are the facts from our Macro team's 99-page 3Q16 Macro Themes deck. It all boils down to the fact that an aging country that is steadily losing its core consumption cohort, people ages 35 to 54 years old, will find itself mired in slow growth. Our Macro team has labelled Japan's dire economic circumstances over the coming ten years as "plunging into the abyss."
As you can see in the chart below, despite Abe's handwringing, the outlook isn't good.
Takeaway: With meaningful earnings miss/blowout/miss bifurcation in 2017, we’re likely to see an increase in CEOs getting sacked. Here’s the top 3.
Editor's Note: Below is a complimentary research note written by Hedgeye Retail analysts Brian McGough and Alexander Richards. To access our institutional research email firstname.lastname@example.org.
Our contention that 80% of US retailers are woefully underinvested to gain share in e-commerce should not only lead to a more concentrated and severe round of earnings misses in 2017 than we have seen since the Great Recession and dot.com bubble, but it is likely to cost several CEOs their jobs.
We’re already seeing CEOs of certain companies head for the door, like HBI’s Rich Noll (58 yrs old), who has 12 days left on the job. He sees what’s coming down the pike. Then there’s Terry Lundgren (64), who is leaving the helm of Macy’s at the end of this year. We kind of get the whole Lundgren thing. He’s been at Macy’s for two decades, and has been CEO since 2004. He’s arguably the closest thing to a Retail Ninja that’s alive today. But, the reality is that the guy would likely be hanging in for a couple more years if he thought Macy’s was prepared to gain share and/or expand margins in 2017.
Here’s Our Retail Sack List.
The Target Board might be slow, but it has a track record for admitting mistakes – like when it fired Steinhafel. We think Cornell is next, and will prove to be a short-timer. On the plus side, Cornell closed Canada and sold Rx to CVS. All good things, for sure, but also super obvious points in any new CEO's decision tree. At the same time he benefitted from the snapback from the 2013 data breach, which probably made him look better than he otherwise should have. Now he’s back to where Steinhafel was before he made the decisions that led to his demise.
At the same time, Wal-Mart is investing in employees, vendors, and most importantly e-commerce by buying assets (jet.com) it failed to put in place over a decade. Now we’re seeing the e-comm growth gap between WMT/TGT narrow meaningfully, and yet rather than invest at a rate to regain share, TGT is hinging its strat plan on cost cuts, an unrealistic 3% comp growth number, and is inadvertently buying back stock at the top ($79/$81 vs $69 today).
We think it’s as plain as day that TGT will consistently miss growth targets (pardon the pun), else wake up and invest considerably in the infrastructure to regain relevance with how the consumer increasingly shops in this country. If Cornell wants to keep his job, he’ll reset expectations, and take down margins so the company can actually grow profitably again. If he does not, we think there will be 3 CEOs in 3 years.
Let’s face it, the #GreatnessAgenda is not exactly panning out. This is a CEO who, at an analyst meeting last year, said that he really did not want to talk about financials. He is also a CEO who openly stated that the stores are about a third too big, and they have too many stores. We actually think he’s right, as 1100 stores should be 700 to sustain returns over the next 5 years – but at a much lower earnings base. Existing boxes should be 30% smaller – though it’s near impossible to execute.
So in fairness, the fact that even the best CEO in retail likely could not fix KSS is probably why Mansell has kept his job since 1999. But unfortunately, this company has failed to capitalize on the biggest sea change in retail since the advent of the Sears catalogue. Kohl’s likely won’t exist as either a retail banner or a public equity in a decade. It will be a distant memory for millennials.
There’s no take-out play here – no real estate optionality whatsoever. KSS has a lease duration of close to 20 years. That means that management made an egregious bet that the stores will be relevant 20-years down the road in order to secure low rent expense. This is a company that needs a 1-1.5% comp to leverage occupancy. That’s so low because of aggressive leases. And yet it’s only comped that rate 1 quarter in four years at the store level. For real?
This is the worst management in the industry, but we’d argue that the story is so terminal that it can’t even be fixed by a team of ‘retail ninjas’.
While Target is a good brand with poor management, and KSS is a bad company of an increasingly irrelevant concept with weak content and complacent management, Lululemon is an outstanding brand run by a management team too unsophisticated to carry itself beyond strength in a killer category.
There’s no viable strategic plan. Seriously. Unit growth in North America is slowing dramatically. Incremental square footage is coming in the form of bigger stores with unproductive footage, and unit growth in places like Albany instead of Orange County, NYC or Buckhead. Growing overseas in more expensive markets at margins that are still and will be dilutive for the foreseeable future. Ivviva (lulu for tweens) is good, but the costs associated with the brand are the same (real estate, marketing and product development) and yet the prices are 20% less than lululemon. Men’s business is definitely viable, but again, carving space away from the women’s business only can go so far.
LULU is in desperate need of a wholesale model, as they need to sell product where people shop. Believe it or not, people do actually shop at multi-line stores. That will be expensive as LULU is not invested in making that work. It will take far more sophisticated product differentiation, including sub brands – which will require new development and design and marketing triads inside the organization. Focusing on delivering on a low-50s gross margin won’t get shareholders or this management team paid.
Again, this is a stellar brand, and it’s a shame that the team running it did not have a better vision and the ability to execute. There’s easily $4 in EPS power, which could make this a $100+ stock. We just don’t think we’ll ever see it without taking EPS below $2 and changing up management first. Remember that Chip bargained away his Chairman title to get Potdevin in the CEO role.
It’s more likely than not that the Board was not bowled over by the guy – but saw it as a way to get Chip out. The real boss right now is Stuart Haselden. We expected more out of him in his first year. Maybe he’ll get more active after Potdevin is shown the door.
Takeaway: Big bang theories on what the BOJ “could do” didn’t pay out overnight.
...is doing the same thing over and over again,
but expecting different results.”
On that note, the Bank of Japan (BOJ) went ahead and implemented the “QQE with Yield Curve Control” plan (i.e. a -0.1% policy rate and a centrally planned 0.00% 10yr Yield rate).
Here's a quick breakdown of the BOJ's policy announcementt:
#Riveting, eh? Yep. A whole lot of nothingness emerged from the latest central-market-plan to literally not let the Japanese 10yr Yield move from 0.00%. With a policy rate of -0.1%, you’re going to need a microscope to see that Bad Sushi Yield Spread.
For more insight on Japan, take a look at our Senior Macro analyst Darius Dale's "The BOJ's Stench of Desperation."
Macro markets doing a big yawn post the BOJ event and I have to admit that some of the “rates are gonna rip” theories are quite clever at this point; not as P&L practical as simply getting #GrowthSlowing right in 2016, but definitely clever! US Treasury 10yr Yield immediate-term risk range = 1.55-1.75%. I’m a buyer of long-term bonds on any move > 1.70%
Editor's Note: The note above is from this morning's Early Look written by Hedgeye CEO Keith McCullough. Click here to subscribe.
Takeaway: TGT will probably survive, but we don't like companies that simply survive.
The Hedgeye Retail Team, led by Sector Head Brian McGough, will host a Black Book conference call today (at 11 a.m. ET) to review their SHORT thesis on Target Corporation.
Target has historically been largely a macro call, as has Wal-Mart. But it's increasingly clear that this is no longer the case. We think what is missing in the minds of investors is the duration over which this sub-par performance will take its toll on the stock. Our estimates are 15% below consensus next year, and 30% by 2019.
Ultimately, TGT will probably survive, as long as management avoids egregious mistakes. But we don't like companies that simply survive - especially without recognizing the precarious position we believe they're in today. The company will likely ultimately do the right thing, but we think the road to survival will be a costly one.
Attendance on this call is limited. Please note if you are not a current subscriber to our Retail research there will be a fee associated with this call. Ping email@example.com for more information.
Hedgeye Risk Management is a leading independent provider of real-time investment research. Focused exclusively on generating and delivering investment ideas, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing.
The Hedgeye team features some of the world's most regarded research analysts - united around a vision of independent, uncompromised real-time investment research as a service.
This is a complimentary research note originally published September 15, 2016 by our Financials team. If you would like more info on how you can access our institutional research please email firstname.lastname@example.org.
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