Adding MGM Calls to the Equation

In yesterday’s edition of Tematica Investing we added a new Guilty Pleasure position on the Tematica Select List in MGM Resorts International (MGM) with a $37 price target. Our thesis behind making the move on MGM shares now is primarily due to the rebound in gaming volumes in China at the Macau gaming city. We discussed that in detail, and with findings from Bernstein and others pointing to a more pronounced improvement in Macau gaming volumes in May and June, we’re adding the MGM July 2017 $33 calls (MGM170721C00033000) that closed last night at $1.06. We would be buyers of these MGM calls up to $1.50, and because this is a new position we are holding off implementing a stop loss for this position at this time.

• We are adding MGM Resort International (MGM) July 2017 $33 calls (MGM170721C00033000) that closed last night at $1.06 with a Buy rating.
• We would be buyers of these MGM calls up to $1.50; because this is a new position we are holding off implementing a stop loss for this position at this time.

 

 

Connecting the Dots on Amazon’s Apparel Potential and More Mall Pain

Earlier this week, Macy’s (M) warned that its gross margins are likely to come under pressure in the balance of 2017, which in our view serves as a reminder of the more than challenging retail environment that is a direct fallout of our Connected Society and Cash-Strapped Consumer investing themes. With many households living paycheck to paycheck, consumers want the best price possible and the Connected Society makes price comparison easier than ever, leaving retailers with less and less pricing power while at the same time minimum wage hikes shrink margins even further.

We’ve had other reminders in the last few days of the profound impact of these themes, including Sears (SHLD) closing an additional 72 locations on top of the 180 it announced earlier this year. In sum, these closures will shrink the Sears footprint to roughly 1,200 locations compared to 2,073 five years ago. One-time high flying Affordable Luxury investment theme retailer Michael Kors (KORS) not only recently shared it would shut 125 full-price locations over the next two years, but it guided same-store comps and revenues lower for the coming quarters due to decreased mall traffic and increased promotional activity.

These are just the latest in a series of data points that confirm the current bout of “retail-megaddon” has legs into the all-important holiday-filled second half of the year. Those same data points also confirm our short position thesis in Simon Property Group (SPG). Over the last few years, we’ve seen shoppers increasingly switch to digital commerce, with both online and mobile shopping, at the expense of brick & mortar retailers. While many will rightfully jump to Amazon and its Prime service that has compressed delivery time to customer significantly, other retailers ranging from Nike (NKE) to Under Armour (UA), Williams Sonoma (WSM) and Nordstrom (JWN) are embracing the direct to consumer (DTC) model — some with more success than others.

We expect to see a continued shift in retailers from brick & mortar to digital, much like we’ve seen at Macy’s and others, but here’s the thing that is likely to hit apparel retailers – Amazon flexing its muscles as it moves into apparel. Even though Amazon has cancelled its Style Code Live show, which served to tout products for shoppers to buy on Amazon, in 2016 it registered the most apparel sales of any online retailer in the US for the 18–34 demographic with more than double the market share of second place Nordstrom.

Clearly, Amazon is looking to leverage the reasons cited by shoppers for switching to Amazon – Prime, convenience, customer service, and reviews – and earlier this year it launched several private label apparel brands with products in men’s accessories, women’s dresses, and handbags followed by its own line of lingerie in April. The company’s latest effort to goose its apparel position can be found in its latest Alexa powered device, the Echo Look, which is, “a gadget with a built-in camera that is being marketed as a way to photograph, organize and get recommendations on outfits.” As part of its recommendation services, no doubt the Echo Look will recommend not only brands that can be bought on Amazon, but more than likely it will include its private label products as well.

To us, the question is not will Amazon succeed in apparel, but rather, is it tracking ahead of expectations? Research firm Cowen & Co. shared its expectations for Amazon apparel sales to account for 8.2 percent of the domestic apparel market this year, up from 6.6 percent in 2016, and 16.2 percent by 2021. To help put some context in and around those percentages, apparel is one of the biggest US retail categories with estimates sizing it up as high as $300 billion. Each market share point gain by Amazon equates to an additional $3 billion in annual revenue for the company — yes, that’s billion with a b.

And while that $ 3 billion in revenue equates to 1.5 to 1.8 percent of expected 2017-2018 revenue for Amazon, it also equates to:

• 12 percent of Macy’s (M) total expected revenue this year
• Roughly half of what Wall Street expects Dillard’s (DDS) to generate in revenue this year
• More revenue than Bon-Ton Stores (BONT) is forecasted to collect this entire year across is 270 stores and 25 million square feet.
• Again, that’s each market share point, and Cowen’s forecast calls for Amazon to gain more than 1.5 percentage points in 2017 alone. To paraphrase one time presidential candidate Ross Perot, that giant sucking sound you are hearing is brick & mortar retailers going down the drain.

Back to the topic at hand, the bottom line is Amazon’s apparel market share gains, revenues and profits as part of our Connected Society and Cash-Strapped Consumer investing themes will only exacerbate retail-meggadon, likely leading to even more vacant retail space in malls across the U.S. Spurring this along is a consumer that is increasingly strapped with high and likely raising debt levels combined with little in the way of wage gains. This one-two combination of our Cash-strapped Consumer and Connected Society investing themes paints a not so pleasant picture of fewer retailers and empty storefronts with potentially more people unemployed.

This is obviously very bad news for companies like Simon Property Group (SPG), but very good news for our short position in SPG shares. From a technical perspective, SPG shares continue to set lower highs and lower lows – not a good sign as any chartist will tell you. Against this backdrop, we will continue to keep our short position on SPG shares in play as the retail-meggadon plays out further.

• We continue to have a $150 price target on our remaining SPG shares and buy stop order is still set at $163.

 

Don’t Hang Up On Dycom Calls After Last Week’s Quick Move

Last week we added the Dycom Industries (DY) September 2017 $90 calls (DY170915C00090000) that closed last night at $6.10, a nice move of nearly 15 percent over the last week from our $5.30 entry point. With carriers grappling with capacity constraints and approaching 5G beta rollouts, we continue to see Dycom well positioned as those network additions are adding over the coming months.

• With DY calls past the $5.75 buy limit we shared last week, we’ll continue to hold the calls for further appreciation.
• As we do this, we’ll boost our protective stop-loss to $5 from $2.

 

Rising Incentives in May Auto Sales Keep Us Bearish on General Motors Shares

Late last week we learned that May auto sales rose to 16.58 million on a seasonally adjusted annual rate (SAAR) basis with car sales falling more than 9 percent year over year, and single-digit gains in light duty trucks, SUVs and Cross-overs vs. year ago levels. Let’s keep in mind the May holiday weekend, which is always a promotional bonanza when it comes to car and truck sales, but this year the use of discounts was exceptionally high. General Motors (GM) dealers were offering discounts of up to $12,000 on the full-size Chevrolet Silverado pickup, while some dealer discounts on Ford’s (F) F-series pickups were more than $10,000 on 2017 models and more than $14,000 on leftover 2016 models. Considering the 2017 model year started eight months ago, we’d argue that level of discounting is rather aggressive.

We’re not surprised by the strong use of incentives given rising auto dealer inventories over the last several months. The downside of such aggressive promotional activity will be had when the automotive companies report their June quarter results soon after the July 4^th holiday. As we noted recently the other option to be had is for these same companies to cut production levels and let inventories thin out over time. In our humble opinion, both options simply mean a different kind of financial pain.

With roughly 101 days of supply, GM’s unsold vehicle inventory is rather bloated compared to 59 days for Ford. The fact that GM’s May sales fell 1.3 percent in May to 237,265 units is not encouraging, but it does help us sleep better at night with our short position in GM shares. We’ll continue to watch the data, but so far it has been rather confirming for our negative bias.

• We are sticking with our short position on GM shares. Our price target remains $30.