More retailers are pivoting to capture the “thrift shift”

More retailers are pivoting to capture the “thrift shift”

When not just one company but a growing number of them make a conscious decision to pivot the merchandise they offer to consumers, to borrow a term from the game of poker, it’s a pretty big tell. The shift we are talking about is the move to selling used clothing, which takes a page right out of the Poshmark playbook and is in tune with our Middle-class Squeeze investing theme.

The more meaningful question is the why as in why are these companies doing this and doing it now?

We at Tematica have been sharing economic and other data that points to not only the continued climb in consumer debt levels but now banks ranging from Citibank to Bank of America, JPMorgan Chase and Capital One have announced rising credit card delinquency rates. We’ve long said that rising debt levels would sap consumer disposable income as interest costs associated with that rising debt level take hold.

At the same time, retailers of apparel and especially department stores remain under attack from digital commerce as well as private label brand initiatives at not only Amazon, but also Walmart and Target.

As we like to say, a pain point generally gives rise to a solution. Sometimes that solution arises quickly and other times not so much. But in the case of the apparel and our Middle-Class Squeeze investing theme, we are seeing several solutions unfold.

Above we mentioned Poshmark, a company that sits at the intersection of our Digital Lifestyle, Digital Infrastructure and Middle-class Squeeze investing themes and while it has garnered a significant user base and following it isn’t the only company looking to attack the market for monetizing one’s wardrobe. Online marketplace Depop counts more than 15 million users that tap into its marketplace to buy and sell clothes. And for those thinking the used clothing market isn’t for higher-end and luxury items, offerings from TheRealReal (REAL) and Farfetch (FTCH) should get you to think again.

Aside from the business pivot, Macy’s, JC Penney and others could also be looking to get a valuation multiple bump by wading into the used clothing market. Shares of Farfetch are trading at more than 3x expected 2019 sales, multiples ahead of the 0.2x price to sales valuation currently accorded to Macy’s shares. And for those wondering, that valuation is even lower at JC Penney. In order to get that multiple pop, Macy’s and JC Penney will both have to cross the digital shopping chasm, something Macy’s has been far more successful at than JC Penney.

Macy’s Inc. and J.C. Penney Co. this past week unveiled partnerships with resale marketplace thredUp Inc. to sell used clothes and accessories in some of their stores. Outdoor brand Patagonia plans to open a temporary store in Boulder, Colo., this fall dedicated to selling pre-owned goods, its first such location.

Thrifting is gaining traction as shoppers have grown more bargain conscious and concerned about the environmental impact of fashion, particularly the throwaway clothing model popularized by fast-fashion chains.

“We looked deeply at Generation Z consumers, and recommerce came up over and over again,” Macy’s Chief Executive Jeff Gennette said in an interview, referring to theburgeoning resale market. “It’s not a downside that something has been preowned.”

Thorsten Weber, chief merchandising officer of Stage Stores Inc.,

Other chains, including Bloomingdale’s, which is owned by Macy’s, Urban Outfitters Inc.and Ann Taylor, are taking a slightly different approach by launching services that let shoppers rent clothes instead of buying them. Customers can even rent home décor at West Elm, which has partnered with Rent The Runway Inc. for the program.

Source: On Second Thought, Traditional Retailers Make Room for Used Clothes – WSJ

Weekly Issue: While far from booming, U.S. economy not  as bad as the headlines

Weekly Issue: While far from booming, U.S. economy not as bad as the headlines

Key points inside this issue

  • Thematic confirmation in the July Retail Sales report
  • Getting back to the global economy and that yield curve inversion
  • The week ahead
  • The Thematic Leaders and Select List
  • A painful reminder about dividend cuts

Despite Friday’s rebound, the stock market finished down week over week as it continued to grapple with the one-two punches of the slowing global economy and U.S.- China trade. There was much chatter on the recent yield-curve inversion, but as we look back at the economic data released last week, the U.S. economy continues to be on more solid footing than the Eurozone or China.

That’s not to say the domestic economy is booming. The Cass Freight Index, weekly railcar-traffic and truck-tonnage data and the July U.S. industrial-production report’s manufacturing component leave little question that America’s manufacturing economy is slowing. And as we saw last week, the U.S. consumer buoyed the economy in July with stronger-than-expected retail sales.


Thematic confirmation in the July Retail Sales report 

Last week’s July Retail Sales Report confirmed one of the key aspects of our Digital Lifestyle investment theme – the accelerating shift toward digital shopping that continues to vex brick and mortar retailers, particularly department stores. Granted, the year over year increase in non- store retail sales of 16.0%, which was several magnitudes greater than overall July Retail Sales that rose 3.4% year over year and bested sequential expectations, was aided by Thematic King Amazon’s (AMZN) 2019 Prime Day event but one month does not make a quarter. For the three months ending July, non-store retail sales rose 14.2% year over year, easily outstripping the 3.2% year over year comparison for overall retail sales. 

Clearly, the shift to digital shopping is not only underfoot, or more properly stated on a variety of keyboards, it is accelerating, and the victims continue to be department stores, electronics and appliance stores, sporting goods and bookstores, and to a lesser extent clothing and furniture. We’re seeing this play out in the results from Macy’s (M) as well as J.C. Penney (JCP), which is so strategically lost it is venturing into the used clothing market through a partnership with online consignment company thredUP. With its July quarter sales down 9% year over year, J.C. Penney is going for the “Hail Mary” pass with this move, but it’s only going to bring cheaper product in to compete with its already low-priced offering. I can almost understand the J.C. Penney is looking to double-down on our Middle-Class Squeeze investing theme, but it’s facing stiff competition from companies like Poshmark that are doing that as well as riding our Digital Lifestyle theme. 

Each of those challenged categories I mentioned above are also areas that Amazon continues to target with offerings from both third-party sellers as well as its growing private label line of products. I’ve often said Amazon shares are ones to hold, not trade, and we continue to feel that way as we approach the seasonally strongest time of the year for its business.


Getting back to the global economy and that yield curve inversion

For now, the U.S. economy remains the best house on the economic block — but it’s showing signs of wear. Of course, the fact the yield curve inverted briefly last week rang the “Recession Warning Bell.” But let’s remember that there’s historically been a lag of up to almost two years following that warning. Moreover, the Federal Reserve has already adopted a more dovish tone and will likely stand ready to add more stimulus to the economy if need be. All eyes will now on the Fed’s mid-September monetary-policy meeting.

Meanwhile, as economic-growth worries increased in the Eurozone and China last week, we heard about a big bazooka of stimulative measures that the European Central Bank is considering for its Sept. 12 policy meeting. China will also reportedly soon roll out a plan to boost disposable income over the coming quarters to spur its domestic consumption.

I would suggest you tune in later this week for what Tematica’s Chief Macro Strategist Lenore Hawkins has to say on this.

We’ll continue to monitor how global central bankers try to steer their respective economies in the coming weeks. While we suspect that Wall Street will likely cheer any and all dovish moves, the question remains how stimulative those policies will really be if the U.S.-China trade war continues.

U.S.-Chinese trade talks are set to resume in September, which tells us that we might get a lull in Wall Street’s recent volatility. But we should by no means think that “Elvis has left the building,” and we could very well see another round of turbulence in the coming weeks.


The Week Ahead

With two weeks to go until the Labor Day holiday weekend, we’re officially in the dog days of summer. These weeks historically see lower-than-usual trading volume, as investors and traders look to squeeze in that last bit of fun in the sun. Following last week’s full plate of economic data, this week will have a far smaller helping coming at us. Upcoming reports include July new- and existing-home sales, as well as the Index of Leading Economic Indicators.

Investors will also focus on what the latest flash PMI data from IHS Markit has to say about the global economy when that report lands on Aug. 22. I’ll be looking to see whether the U.S. economy continues to outperform Japan, China and the Eurozone following data out last week that suggested the German and Chinese economies continue to slow.

Reading those reports and the upcoming Federal Open Market Committee meeting minutes should set the stage for what we’re likely to hear when the FOMC next meets on Sept. 18. We’ll also have more data coming our way over the weeks leading up to the FOMC session, and we’re apt to get a few surprises along the way. While there’s no Fed interest-rate meeting scheduled for August, the Kansas City Fed will hold its widely watched annual Jackson Hole symposium Aug. 22-24 in Wyoming. The central bank doesn’t usually discuss monetary-policy plans at this event, but we aren’t exactly in normal times these days.

On the earnings calendar this week, the focus will continue to be on retail. If we were reminded of one thing last week in retail land, it’s that not all companies are responding the same way to retailing’s changing landscape. Just look at what we heard last week from Walmart (WMT), Macy’s (M) and JCPenney (JCP). Other key retail reports to watch this week include Home Depot (HD), Kohl’s (KSS), Lowe’s (LOW), Target (TGT), Dick’s Sporting Goods (DKS), and Foot Locker (FL). I’ll be looking for the degree to which they’re embracing digital shopping, as well as what they have to say about tariff implications and their expectations for 2019’s remainder.

We’ll also hear from Salesforce (CRM) and Toll Brothers (TOL), which should shed some light on the housing market and IT spending associated with our Disruptive Innovators and Digital Infrastructure investing themes.


The Thematic Leaders and Select List

As I noted above, last week was another choppy one for the stock market and those swings stopped out of Thematic Digital Infrastructure Leader Dycom Industries (DY) as well as Cleaner Living company International Flavors & Fragrances (IFF) shares. Given that we were stopped out, it means we took some losses in those two positions, but as I look at the live ones across the Thematic Leaders and the Select List I see an impressive array of returns with our Amazon, Costco Wholesale (COST), Chipotle Mexican Grill (CMG), McCormick & Co. (MKC), Walt Disney (DIS), Universal Display (OLED) and USA Technologies (USAT) shares. 

Wide swings in the market can present both challenging times as well as opportunities provided, we get some degree of clarity. As I touched on above, the first few weeks of September could be when we see that clarity emerge. Until then, we’ll continue to look for thematically well positioned companies at favorable risk to reward entry points. 


A painful reminder about dividend cuts

Last week I mentioned that the following – I’m focusing more on domestic-focused, inelastic business models that tend to spit off cash and drive dividends. In particular, I’m looking at companies with a track record of increasing their dividends every year for at least 10 years. And of course, they have to have vibrant thematic tailwinds at their respective back.

While I was doing just that, shares of famous lawn-mower engine maker Briggs & Stratton Corp. (BGG) — whose shares tumbled 44.5% last Thursday — presented a sharp reminder as to what can happen when a company cuts its dividend. Yes, the shares rebounded late last week along with the market, but they’ve been generally falling for a long time as the company’s dividend looked shakier and shakier.

Investors tend to think of quarterly dividends as payments in perpetuity, but these payouts are actually only declared at a company board’s discretion. When dividends are disrupted, that can lead to significant share-price pain for a stock.

In this case, Briggs & Stratton not only cut its dividend and reported a far-greater-than-expected quarterly loss, but also slashed its outlook for the balance of the year. The company now expects to earn just $0.20-$0.40 per share for the full year, which down significantly from its prior forecast of $1.30.

When matched up against its revised revenue forecast of $1.91 billion to $1.97 billion vs. a prior $2.01 billion, it’s rather evident that BGG’s cost structure has become an issue. So, it’s no little surprise that Briggs & Stratton also announced plans to close a plant that manufactures engines for the walk-behind lawn mowers you commonly find at Home Depot (HD) or Lowe’s (LOW) .

The company called out that product category in particular for weakness, which management attributed to the U.S. housing market’s current tone. I’ve previously talked about how new- and existing-home sales have been rather sluggish despite the recent mortgage-rate drop, with low rates fueling a wave of home refinancings rather than purchases.

But the biggest factor behind Thursday’s steep BGG dive was the fact that management slashed the company’s quarterly dividend by 64% to $0.05 per share from the prior $0.14. That one-two-three punch combination — bad earnings, a bad forecast and a dividend cut — sent Briggs & Stratton’s share price tumbling.

Going into Thursday morning’s earnings report, BGG shares were sporting a 6.8% dividend yield, which is on the lofty side. Investors should have interpreted that as a warning and here’s why – even before Thursday’s selloff, BGG shares had been down some 70% since January 2018, partly because the company missed analysts’ earnings expectations for the prior three quarters. In hindsight, the misses were escalating in percentage terms — a trend that continued with Thursday’s earnings report.

Paired with the dividend cut, there’s little confidence any more in the current management team, which means BGG shares are likely to flounder further due to several unknowns. Some of those unknowns are company specific, like: “Will be the plant closure deliver sufficient savings?” But others are about the U.S. economy’s future vector and velocity, which Thursday’s July industrial-production report shows is continuing to cool.

And while the July U.S. retail-sales report came in better than expected, we already know that consumers aren’t buying lawnmowers. And unfortunately, that’s not likely to change any time soon as we put the summer behind us.

The bottom line — as I’ve discussed before, when a stock’s dividend yield looks too good to be true, odds are it is just that. BGG is just the latest stock to prove that. While its newly revised dividend yield (4.1%) might still look enticing, it’s not one that we should be clamoring for given the lack of thematic tailwinds for its lawnmowing business. But at a minimum, no investor should consider the shares until there is some proof that management’s turnaround plan is on the cusp of delivering. 

Weekly Issue: Trade and geopolitical issues make for a less than sleepy August 2019

Weekly Issue: Trade and geopolitical issues make for a less than sleepy August 2019

Key points inside this issue

  • Trade and geopolitical issues make for a less than sleepy August 2019
  • What to watch this week
  • Earnings this week
  • Economic data this week
  • The Thematic Aristocrats?

Uncertainty continued to grip the stock market last week as the U.S.-Chinese trade dispute once again took center stage. After the return of tariff talk week prior, the battle expanded this week to include a war of words between Washington and Beijing over the Chinese yuan’s devaluation.

The market ultimately shook that off, in part due to the renewed thought that the Federal Reserve could accelerate interest-rate cuts. But then stocks closed lower week over week after President Trump suggested Friday that trade talks with China set for next week might be canceled.

There’s also renewed geopolitical uncertainty — not just Britain’s Brexit process, but also a looming no-confidence vote against Italian Prime Minister Giuseppe Conte that’s once again plunging Italy into political turmoil. And as if that wasn’t enough, over the weekend escalating tensions between Chinese authorities and protesters in Hong Kong were added to the mix, making for one big ball of uncertainty even bigger.

Meanwhile, global economic data continue to soften. This gives some credence to the notion that the Fed could become more dovish than Chairman Jerome Powell suggested during his July 31 press conference following the Federal Open Market Committee’s decision to cut rates. While I don’t expect anything near-term, down below we have a calendar date to mark even though I don’t think it will mean much in the way of monetary policy.

We’re seeing confirming signs for the economic data in oil and copper prices, both of which have been mostly declining of late. Not exactly signs of a vibrant and growing global economy.

Odds are that as we head into summer’s final weeks, stocks will be range-bound at best as they trade based on the latest geopolitical headlines. And odds are there won’t’ be any newfound hope to be had on the earnings front. With 90% of S&P 500 stocks already reporting second-quarter results, it looks like we’ll see another year-over-year decline in quarterly average earnings. For the full year 2019 those earnings are only growing at a 2.5% annual rate, but if President Trump goes forth with the latest round of announced tariffs, odds are those expectations could come down in the coming weeks – more on that below.

All in all, barring any meaningful progress on US-China trade, which seems rather unlikely in the near-term, at best the stock market is likely to be rangebound in the coming weeks. Even though much of Wall Street will be “at the beach” the next few weeks, odds are few will be enjoying their time away given the pins and needles discussed above and further below.

What to watch this week

We have three weeks until the Labor Day holiday weekend, which means we’re entering one of the market’s historically slowest times. There’s typically lower volume than usual, as well as low conviction and wishy-washy moves in the market.

Traditionally, a more-sobering look emerges once Wall Street is “back from the beach” following the Labor Day holiday. This tends to bring a sharper picture of the economy. There are also ample investor conferences where companies update their outlooks as we head into the year’s last few months.

But as we saw this past week, geopolitical and trade tensions could make the next few weeks much more volatile than we’ve seen in the past. As we navigate these waters, we’ll continue to assess what this means for earnings — particularly given that analysts don’t expect the S&P 500 companies to see year-over-year earnings-per- share growth again until the fourth quarter. In my view that puts a lot of hope on a seasonally strong quarter that could very well be dashed by President Trump’s potential next round of tariffs. I say this because retailers now face the 10% tariffs set to go into effect on September 1, which will hit apparel and footwear, among other consumer goods.

The risk is we could very well see 2019 turn into a year with little to no EPS growth for the S&P 500, and if factor out the impact of buybacks it likely means operating profit growth had at the S&P 500 is contracting year over year. We’ll know more on that in the coming weeks, but if it turns out to be the case I suspect it will lead many an investor to question the current market multiple of 17.6x let alone those market forecasters, like the ones at Goldman Sachs, that are calling for 3,100 even as their economists cut their GDP expectations.

Earnings this week

This week will have the slowest pace of earnings releases in about a month, with only some 330 companies issuing quarterly results. That’s a sharp drop from roughly 1,200 such reports that we got last week.

Among those firms reporting numbers next week, we’ll see a sector shift toward retail stocks, including Macy’s (M), J.C. Penney (JCP) and Walmart (WMT). Given what I touched on above, I’ll be listening for their comments on the potential tariff impact as well as comments surrounding our Digital Lifestyle and Middle-class Squeeze investing themes, and initial holiday shopping expectations.

This week’s earnings reports also bring the latest from Cisco Systems (CSCO), Nvidia (NVDA), and Deere (DE). Given how much of Deere’s customer base sells commodities like U.S. soybeans (which China has hit with tariffs), we’ll carefully listen to management’s comments on the trade war. There could be some tidbits for our New Global Middle-class theme from Deere as well. With Cisco, we could hear about the demand impact being generated by 5G network buildouts as well as the incremental cyber security needs that will be needed. These make the Cisco earnings conference call one to listen to for our Digital Infrastructure and Safety & Security investing themes.

 

Economic data this week

On the economic front, we’ll get July reports for retail sales, industrial production and housing starts, as well as the August Empire Manufacturing and Philly Fed surveys. Given the importance of the consumer, the July Retail Sales will be one to watch and I for one expect it to be very bullish for our Digital Lifestyle investing theme if and only if because of Amazon’ 2019 Prime Day and all the other retailers that tried to cash in on it. I suspect, however, the report will reveal more gloom for department stores. All in all the week’s economic data points will help solidify the current quarter’s gross domestic product expectations, which are sitting at 1.6%-1.9% between the New York and Atlanta Fed.

Based on what we’ve seen of late from IHS Markit for Japan, China and the Eurozone, that still makes America the best economic house on the block. Granted, the U.S. vector and velocity are still in the down and slowing positions, but we have yet to see formal signs of a contracting domestic economy. As Tematica’s Chief Macro Strategist Lenore Hawkins pointed out in her most recent assessment of things, we’ll need to keep tabs on the dollar for “The deflationary power of a strengthening US dollar strength in the midst of slowing global trade and trade wars just may overpower anything central banks try.”

Odds are that as the latest economic figures hit, especially if they keep the economy’s recent vector and velocity intact, we will see more speculation on what the Fed might do next. While there’s no Fed interest-rate meeting scheduled for August, the Kansas City Fed will hold its widely watched annual Jackson Hole symposium Aug. 22-24 in Wyoming. The central bank doesn’t usually discuss monetary-policy plans at this event, but as noted above, we aren’t exactly in normal times these days.

 

The Thematic Aristocrats?

Given the recent market turbulence as prospects for more of the same in the coming weeks, I’m sitting back and building our shopping list for thematically well-positioned companies. Given the economic data of late and geo-political uncertainties as well as Lenore’s comments on the dollar, I’m focusing more on domestic-focused, inelastic business models that tend to spit off cash and drive dividends. In particular, I’m looking at companies with a track record of increasing their dividends every year for at least 10 years. And of course, they have to have vibrant thematic tailwinds at their respective back.

Perhaps, we can informally call these the “Thematic Aristocrats”?

I’ll have more as I refine that list.

Weekly Issue: The Changing Mood of the Market

Weekly Issue: The Changing Mood of the Market

Over the last several days, volatility in the stock market has been rampant with wide swings taking place. Part and parcel of this has been a mood change in the stock market as high-flying stocks, including a number of technology ones, have come under pressure as investors re-think their growth prospects. That continued yesterday as shares of iPhone maker Apple (AAPL) became the latest one to dip into bear market territory with last night’s close following renewed concerns over the company’s device shipments in the near-term. This, in turn, has led to a few downgrades by Wall Street analysts, that at least in my view, are being somewhat short-sighted as the company continues to morph its business into one that is more reliant on high margin services rather than just the iPhone.

The same can be said with Amazon (AMZN), which has seen its shares tumble despite there being no slowdown in the shift to digital commerce as evidenced by the October Retail Sales Report. That report showed Nonstore retail sales for the month climbing just shy of 3x as fast as overall retail sales year over year. That was certainly confirmed in the latest earnings reports this week from Macy’s (M) and Walmart (WMT).  All indications, as well as expectations, have this aspect of our Digital Lifestyle investing theme accelerating into the all-important holiday shopping season. And yes, this keeps me bullish on our shares of United Parcel Service (UPS)

Now here’s the tough part to swallow – while we and our thematic way of investing are likely to be right in the medium to long-term, the mood in the stock market tends to prevail in the short-term. And with several of the concerns I’ve talked about here as well as in Tematica Investing and on our podcast, Cocktail Investing, rearing their heads odds are the stock market will continue to be a volatile one in the very near-term. This will likely see the current expectation resetting continue, especially for the sector-based investor view of “technology” stocks. Talk about a multi-headed sector that is simply a mish-mash of things – I’ll stick to our thematic lens approach, thank you very much. That said, with “tech” being in the doghouse, I’m using the time to evaluate a number of companies for the currently open Disruptive Innovators slot in our Thematic Leaders. Some of the current contenders include cloud-focused companies Dropbox (DBX), Instructure (INST) and Okata (OKT) among others.

This week

What’s been driving the latest round of roller coaster like thrills in the stock market can be found in the intersection of the latest earnings reports, economic data, and political developments. From sector investing perspective, we continue to get mixed results as evidenced by this week’s earnings reports as JC Penney (JCP) lagged expectations while Walmart (WMT) and Macy’s (M) beat them. From a thematic one, however, we see the dichotomy in those results as strong confirmation in our Digital Lifestyle investing theme as both Macy’s and Walmart delivered strong digital shopping performance in those quarterly reports, while JC Penney continues to struggle with its brick & mortar business.

Our Living the Life investing theme was also the recipient of positive confirmation this week as high-end outerwear company Canada Goose (GOOS) simply smashed top and bottom line expectations. Similarly, profits at luxury car company Aston Martin (AML.L) soared as its sales volume doubled year over year in the September quarter.

 

Sticking with Del Frisco’s

And while the Living the Lifestyle Thematic Leader that is Del Frisco’s (DFRG) reported a sloppy quarter following the disposal of its Sullivan’s business, the company shared a vibrant outlook, including the plan to grow its revenue and EBITDA to at least $700 million and $100 million by, respectively, by 2020 from the September quarter run rates of $420 million and $74 million, respectively. The intent on average will be to roll out two to three Double Eagles, two to three Barcelona Wine Bars and six bartacos restaurants each year, which is a measured move over the coming years and one that could be scaled back quickly should the domestic economy begin to falter several quarters out.

Near-term, Del Frisco’s should benefit from a pick-up in activity quarter to date following the arrival in the third quarter of its new chief marketing officer. On the earnings conference call, management shared Double Eagle’s private dining is up almost 20% in the first few weeks of the quarter and bookings for the rest of the quarter are up more than 20% compared to last year at this time.

The company also confirmed one of the key aspects of our investment thesis, which centers on margin improvement due in part to beef deflation. As discussed on the earnings call, the company’s total cost of sales as a percentage of revenue for the quarter decreased by 60 basis points to 27.3% from 27.9% in the year-ago period due to margin improvements at Double Eagle, Barcelona, and bartaco. This improvement and the year-over-year jump in bookings certainly point to the expected holiday inflection point panning out, which is also the most seasonally profitable time of year for Double Eagle and Grille. Cost-reduction efforts put in place earlier this year at these two brands should lead to visible margin improvement versus year-ago levels as the holiday volumes take effect.

  • For now, we’ll keep our long-term price target of $14 for Del Frisco’s (DFRG) shares intact, revisiting as needed should the company’s rollouts begin to slip.

 

Several headwinds remain in place

Despite these positive signals and happenings, we have to remember there are several headwinds blowing on the overall stock market. These include Italy standing firm with its latest budget, which puts it at odds with the European Union; Brexit limping forward; inflationary readings in both the October Producer Price Index and Consumer Price Index that will more than likely keep the Fed’s rate hike path intact, a looming concern for consumer debt and high levels of corporate debt; and the pending trade talks between the US and China at a time when more data shows a cooling in the global economy.

On a positive note, the NFIB Small Business Index’s October reading continued the near-two year string of record highs with more small businesses than not citing a bullish attitude toward the economy and expanding their businesses. A note of caution here as most businesses tend to exude such sentiment at or near the economic peak – few see the looming the downside. The NFIB’s report once again called out the lack of skilled workers with 53% of those surveyed reporting few or no qualified applicants.

This signals potential wage pressures ahead, however, the sharp fall in oil prices, which follows the notion of the slowing global economy and rising inventory levels, is poised to give some relief to both businesses and consumers as we head into the holiday shopping season. Yes, average gas prices have fallen to $2.68 per gallon from $2.89 a month ago, but they are still up vs. $2.56 per gallon this time last year. When it comes to gas prices, most consumers think sequentially, which means they are recognizing the drop in recent weeks, which in their minds offers some relief.

Noticed, I said some relief – consumers still face high debt levels with larger servicing costs vs. the year-ago levels. And let’s be honest, a consumer with a 12-gallon gas tank in his or her car that fills up twice a week is saving all of $4.80 per week compared to this time last month. In today’s world, that’s about enough to buy one pizza with some toppings a month. In other words, it will take more pronounced declines in gas prices to make a meaningful difference for those investors that resonate with our Middle-Class Squeeze investing theme.

 

What to watch next week

In looking at the calendar for next week, we have the Thanksgiving holiday, which long-time subscribers know is one of my favorites. While the stock market is only closed for that holiday, we do have shortened trading hours next Friday – better known as Black Friday – and that will kick off the race for holiday shopping. That means we can expect the litany of headlines over initial holiday shopping sales over the post-holiday weekend as we ease into Cyber Monday. And yes, I will be paying close attention to those results given our positions in Amazon and UPS.

Before we get to share our thankfulness with family and friends, we will have a few economic reports to chew through including October Housing Starts, Durable Orders and Existing Home Sales. This week even Fed Chair Powell recognized the softening housing market as a headwind to the economy, and in my view that sets the stage for yet another lackluster housing report next week. Inside the Durable Orders report, we’ll be watching the all-important core capital goods line, a proxy for business investment. The stronger that number, the better the prospects for the current quarter, which tends to benefit from “use it or lose it” capital spending budgets.

On the earnings front next week, we will continue to hear from retailers, such as Best Buy (BBY), Kohl’s (KSS), Ross Stores (ROST) and TJX Companies (TJX). With regard to our own Costco Wholesale (COST) shares, we’ll be paying close attention to results from competitor BJ Wholesale (BJ). Outside of those retailers, I’ll be listening to what Nuance Communications (NUAN) has to say about the adoption of voice interfaces and digital assistants next week.

Growing focus on Amazon’s private label potential

Growing focus on Amazon’s private label potential

During the summer, we here at Tematica spoke at length on the growing number of private label products and brands at Amazon (AMZN). Having seen the strategy work at a number of other retailers, like Costco Wholesale (COST), Kohl’s (KSS), Wal-Mart (WMT) and even JC Penny (JCP), we see it as “expected” that Amazon would seek to grab a greater slice of profits to be had by offering its own products.

Today, Amazon boasts 34 private label brands in nine categories, and more across Wall Street are starting to realize this is bound to be something far greater than small potatoes or a rounding error for Amazon. Now we’re wondering how long until they realize our Connected Society, Cash-Strapped Consumer and Rise & Fall of the Middle-Class themes are some of the meaningful tailwinds behind this?

 

In recent Amazon news, an analyst from financial firm Morgan Stanley has predicted the eCommerce platform’s private label retail sales could provide an added boost to its bottom lines.

According to a Barrons.com article published Tuesday (Oct. 10), analyst Brian Nowak has speculated that Amazon’s private label merchandise sales could add $1 billion to Amazon’s bottom line, making up 5 percent of retail sales by 2019.“… for Amazon, it’s all about gross profit dollars: advertising, subscriptions, services … and now private label …” Brian Nowak said.

“We believe it is increasingly important to focus on Amazon’s gross profit dollar drivers. A deepening gross profit pool gives Amazon more dollars to invest and [eventually] allows [funds] to flow down to P&L for shareholders.

”Amazon’s private label goods first launched in 2009 and include thousands of products in a wide range of categories, such as clothing, electronics, industrial supplies and more, the Barrons.com article reported.

“Private label is likely to be the next driver … as our sensitivity shows that even if private label could grow to 5 percent of Amazon’s retail sales by 2019, it would add almost $1 billion of gross profit,” the Morgan Stanley analyst said.

Amazon currently boasts 34 private label brands in nine categories. Private label products are responsible for 0.15 percent of its global merchandise sales. Other major retailers see an average of 18 percent of gross merchandise sales coming from private label profits, Barrons.com reported. For example, Costco gets 20 percent of its revenue from private labels, JCPenney sees 44 percent, Kohl’s gets 46 percent and Walmart sees 15 percent, the article noted.

Source: Private Label Boosts Amazon’s Retail Sales | PYMNTS.com

Off-price retailers – another thorn in the side of department stores

Off-price retailers – another thorn in the side of department stores

A new report from Moody’s reinforces the negativity surrounding department stores like Macy’s (M), JC Penny (JCP) and Nordstrom (JWN). Unlike most that focus on the shift to digital commerce that is part of our Connected Society theme, Moody’s adds a perspective that meshes extremely well with our Cash-Strapped Consumer and Rise & Fall of the Middle Class investing themes — consumers embracing off-price retailers such as TJ Maxx, Marshalls, and HomeGoods all of which are part of TJX Companies (TJX) as well as Ross Stores (ROST).

One interesting observation is the expanding footprint of these off-price retailers beyond apparel and into home products, which offers additional challenges to Macy’s and other department stores that have home products and furnishings. This move also means additional challenges for Pottery Barn (owned by William-Sonoma (WSM)), privately held Crate and Barrell and Bed Bath & Beyond (BBBY).

Off-price retailers will remain among the top performers in the U.S. retail industry during the next 12 to 18 months.

That’s according to a new report from Moody’s Investors Service. The outlook is not as positive for department stores, which will continue to struggle as they seek to level the playing field with both off-price and online vendors.

Moody’s expects operating income in the off-price sector to grow 6.9% in 2017 and 5.4% in 2018. Department stores will see operating income decline 9.3% this year and 2.7% in 2018.

“Off-price retailers continue to outperform other sectors of the U.S. retail industry largely because they offer the kind of lower-cost, higher-value products and shopping experience many consumers are looking for,” said Moody’s analyst, Christina Boni. “Off-price stores are far outstripping department stores, which in contrast are still struggling with outmoded formats and supply chains that can’t keep pace with customer demand.”

Despite their lack of e-commerce penetration, off-price retailers have succeeded where department stores have foundered due to their focus on delivering major label brands at significant discounts to value-hungry consumers, Moody’s said. Off-price vendors also outperform the broader universe of U.S. apparel-focused retailers.

While apparel sales make up the bulk of their sales, off-price retailers have been increasing their product mix in the higher-growth and less competitive home products category. Moody’s estimates that home product sales at off-price stores grew 9.9% in 2016, compared with 7.8% for the off-price sectors overall growth.

Source: Moody’s: No letup in sight to off-price growth |Chain Store Age

How much time will Wegmans new store buy mall operators?

How much time will Wegmans new store buy mall operators?

Over the last few quarters, we’ve been rather vocal here at Tematica about the “transformation” at malls across the U.S. as part of the headwind that many brick & mortar retailers are facing “thanks” to our Connected Society theme. The move by Wegmans is a new one, but it also underscores the types of changes that we’ll be seeing as mall operators, such as Simon Property Group (SPG) reposition their assets from shopping focused to a different kind of destination focus be it dining, entertainment or in this case grocery shopping. That said, we are well aware of efforts by Amazon (AMZN) and Instacart to leverage Connected Society developments to flip the grocery model by bringing them to the shopper. We’ll see how much time the move by Wegmans buys companies like Simon Property Group as they look to fill what is likely to be a growing number of retail stores.

In a first for the 101-year-old grocer, Wegmans said it will open a two-level store, at Natick Mall, Natick, Mass., with direct access to the shopping center. The 134,000-sq.-ft. store will be located in a building that formerly housed one of the mall’s anchors, J.C. Penney.   The new Wegmans, scheduled to open in spring 2018, will devote 12,500 sq. ft. on the second floor to two restaurant concepts. The grocer is seeking a complementary tenant for the 45,000-sq.-ft. third floor of the building.

Source: Upcoming store will be a first for Wegmans | Chain Store Age

May Data From ADP and Challenger Offer Confirmation for Several Tematica Select List Positions

May Data From ADP and Challenger Offer Confirmation for Several Tematica Select List Positions

This morning we received the Challenger Job Cuts Report as well as ADP’s view on May job creation for the private sector. While ADP’s take that 253,000 jobs were created during the month, a nice boost from April and more in line with 1Q 2017 levels, we were reminded that all is not peachy keen with Challenger’s May findings. That report showed just under 52,000 jobs were cut during the month, a large step up from 36,600 in April, with the bulk of the increase due unsurprisingly to retail and auto companies.

As Challenger noted in the report, nearly 40% of the May layoffs were due to Ford (F), but the balance was wide across the retail landscape with big cuts at Macy’s (M), The Limited, Sears (SHLD), JC Penney (JCP) and Lowe’s (LOW) as well as others like Hhgregg and Wet Seal that have announced bankruptcy. In total, retailers continued to announce the most job cuts this year with just under 56,000 for the first five months of 2017. With yesterday’s news that Michael Kors (KORS) will shut 100 full-price retail locations over the next two years, we continue to see more pain ahead at the mall and fewer retail jobs to be had.

Sticking with the Challenger report, one of the items that jumped out to us was the call out that,

“Grocery stores are no longer immune from online shopping. Meal delivery services and Amazon are competing with traditional grocers, and Amazon announced it is opening its first ever brick-and mortar store in Seattle. Amazon Go, which mixes online technology and the in-store experience, is something to keep an eye on since it may potentially change the grocery store shopping experience considerably, “

 

In our view, this means the creative destruction that has plagued print media and retail brought on by Amazon (AMZN) is set to disrupt yet another industry, and it’s one of the reasons we’ve opted out of both grocery and retail stocks. The likely question on subscriber minds is what does this mean for our Amplify Snack Brands (BETR) position? In our view, we see little threat to Amplify’s business; if anything we see it’s mix of shipments skewing more toward online over time. Not a bad thing from a cost perspective. We’d also note that United Natural Foods (UNFI) is a partner with Amazon as well.

  • Our price target on Amazon (AMZN) remains $1,100 and offers more than 10% upside from current levels.
  • Amplify Snack Brands (BETR) has an $11 price target and is a Buy at current levels.
  • Our target on United Natual Foods (UNFI) is $65, and the recent pullback over the last six weeks enhances the long-term upside to be had.

We’d also note comments from Chipotle Mexican Grill (CMG) that its recent cybersecurity attack hit most Chipotle restaurants allowing hackers to steal credit card information from customers. In a recent blog post, Chipotle copped to the fact the malware that it was hit with infected cash registers, capturing information stored on the magnetic strip on credit cards. Chipotle said that “track data” sometimes includes the cardholder’s name, card number, expiration date and internal verification code. We see this as another reminder of the down side of what we call both our increasingly connected society and the shift toward cashless consumption. It also serves as a reminder of the long-tail demand associated with cyber security, and a nice confirmation point for the position PureFunds ISE Cyber Security ETF (HACK) shares on the Tematica Select List.

  • Our price target on PureFunds ISE Cyber Security ETF (HACK) shares remains $35.

 

As earnings move into the fast lane, things are likely to get bumpier

As earnings move into the fast lane, things are likely to get bumpier

Key Points from this Alert

  • With market volatility picking up as earnings velocity takes off, we are keeping our inverse ETF position intact.
  • Recent data confirms our short bias on General Motors (GM) and Simon Property Group (SPG).
  • Today we are using a lackluster developer conference to scale into Facebook (FB) May 2017 $150 calls (FB170519C00150000) as we drop our stop loss to $0.75 from $1.00.

Over the last two weeks, we’ve seen the stock market bounce up and down with both oil and gold prices doing the same. The latest blow in oil prices comes following a report on Tuesday that “U.S. crude stockpiles fell less than expected in the latest week while gasoline stockpiles grew unseasonably” — not exactly something we want to hear as economists and others trim back their GDP forecasts.

Peering below the headlines, we saw the first dip in the manufacturing component of the monthly Industrial Production report in March. Even if we exclude the step-down in the production of motor vehicles and parts, March manufacturing output still declined. Furthermore, revisions to January and February meant manufacturing activity was weaker than previously thought.

Yes, we realize that we have been talking about this for several weeks, and while we take solace in knowing that once again the herd is catching up to us, we’re not exactly thrilled the latest data suggests there is more revising to be done. As this is happening, we are also seeing a drop in Fed interest rate hike expectations. Just a few weeks ago, 57 percent of traders expected the Fed to boost interest rates two more times this year. As of last night, that expectation fell to 36 percent according to CME Group’s FedWatch program.

Tracing back the market’s up and downs over the past month or so tells us investors continue to look for some direction, and in our view, the coming days are likely to offer the road map. The issue is, the road ahead may not be the one that most are hoping to take and its guide will be the plethora of earnings reports we get not just this week, but increasing pace over the next two weeks. Compared to some 300 reports this week — the vast majority of which will hit after tonight’s market close — next week has more than 990 companies reporting followed by another 1,269 during the first week of May.

As this pace picks up, we’re seeing more political drama unfold in Washington, and when we put it all together it tells us there is more risk to be had in the near-term than reward. While we recognize we are likely preaching to the choir at this point, the simple truth is corporate expectations needs to be reset given the economic climate and as that happens we are likely to see more wind taken out of the stock market’s sales.

 


In looking at the recent move in the Volatility Index (VIX), which recently hit its highest level since before the November election, the market is on edge as earnings ramp up. Adding to this is some new findings from the Bank of America Merrill Lynch monthly fund manager survey that shows some 83 percent of fund managers believe U.S. stocks are overvalued. As always we try to put data like this into perspective, and in doing so we find that 83 percent is a record number for data that reach back to 1999.

Now that certainly tells several things, but the one we are zeroing in on is the simple fact that in a nervous market, investors are likely to shoot first and ask questions later when faced with a barrage of earnings reports.

  • For these reasons, we will continue to stick with all of our inverse stock market ETFs — the ProShares Short S&P500 (SH), ProShares Short Russell 2000 (RWM) and ProShares Short Dow30 (DOG), all of which climbed higher over the last two weeks — for at least the next several weeks. 

 


 

Turning to Our Short Positions in
General Motors (GM) and Simon Property Group (SPG)

The March Retail Sales report confirmed our concern over the consumer’s ability and willingness to spend. The fact that 1Q 2017 was the worst quarter for restaurant traffic in three years is yet another confirming sign of that fact. As earnings reports roll in, we’ll take stock in what Visa (V) and MasterCard (MA)have to say about consumer spending, but with more than $1 trillion in consumer credit card debt, we are inclined to keep our short position in GM and SPG shares intact.

  • We continue to have a Sell rating on GM shares with a price target of $30. 
  • Our buy stop order on GM remains at $40. As the shares continue to move lower, we’ll look to revisit our buy-stop loss further with a goal of using it to lock in position profits.
  • With retail pain likely to intensify, we continue to have a bearish view on SPG shares. Our price target on SPG remains $150 and our buy stop order remains at $190.
  • As SPG shares move lower, we’ll continue to ratchet down this buy stop order as well. 

 


 

That Brings Us to Our One Long Position — Facebook

The Facebook (FB) May 2017 $150 calls (FB170519C00150000), closed last night at $1.10, modestly above our $1.00 stop loss level. The calls have traded off over the last two days and we can understand why. We have to say we were somewhat underwhelmed by this year’s annual developer conference, better known as F8, that spanned the last two days. CEO Mark Zuckerberg has announced a series of new features covering augmented reality, artificial intelligence bots, and more far-fetched plans to close the gap between humans and machines. In particular, Zuckerberg wants Facebook users to be able to “type with their brains and hear with their skin.”

If you thought you heard our eyes roll, you were correct.

Each of these announced initiatives will take Facebook time to develop and then, in turn, it will be even more time for them to have a meaningful impact on the company’s business model — far more time than we have with our May calls.

That said, given Alphabet’s (GOOGL) recent snafu with YouTube and advertisers, we suspect Facebook saw a bump in advertising that should help it keep its earnings beating track record intact. With the company set to report its 1Q 2017 earnings on May 3, we’ll use the recent pullback in the calls to scale into the position, reducing our cost basis along the way. As we do this, we will drop our protective stop loss to $0.75 as well.

The Data Says Steady as She Goes

The Data Says Steady as She Goes

Key Points from this Alert

  • With market volatility expected to pick up as we head into earnings, we’re keeping our inverse ETF positions in tact.
  • March auto sales data, as well as the growing concern over the consumer, have us keeping our short positions on both General Motors (GM) and Simon Property Group (SPG) shares.
  • While the Facebook (FB) May 2017 $150 calls (FB170519C00150000) calls dipped week over week, the two major catalysts behind the trade remain ahead of us. We continue to rate the calls a Buy.

We’re slowing inching our way closer toward 1Q 2017 earnings season, which, as we shared earlier this week, we think could bring a return of volatility to the stock market. We’ve read a lot of bullish commentary, with many pointing to the robust inflow of funds into ETFs during 1Q 2017 — $134.7 billion vs. 29.6 billion in inflows in 1Q 2016 – but we have to remember individual investors tend to stay on sidelines only to return to the market near the top.

Part of what’s to blame is the overly bullish talking heads, and in my readings, I found a great example of this. Financial firm LPL published the following commentary about 1Q 2017:

Although the S&P 500 Index just missed out on a five-month winning streak in March with a 0.04% loss, the good news is it still gained 5.5% in the first quarter.|

“This came out to the best quarter overall since the fourth quarter of 2015, and it was the best first quarter gain since 2013! Going back to 1950, this was the 25th time the S&P 500 gained 5% or more during the first quarter. The good news for the bulls is the returns after a big first quarter have been broadly stronger across the board.”

Now let’s dig into this…. there have been 67 years between 1950 and 2017, and doing some basic math we find 25/67 equals 37 percent. This means the “good news” for the bulls happens a little more than one-third the time. This also means that nearly two-thirds of the time, it doesn’t happen.

Just another example that we need to really dig into the data with context and perspective to understand what is really going on vs. what is being said. In doing so with this LPL commentary, we’ll be generous and say it has an overly bullish slant given the data. With the herd taking a bullish view despite the hard data we’ve been getting that calls for a rest in expectations for both 2017 earnings and GDP forecasts, we’ll continue to keep all three of our inverse ETFs in the Pro Select List.


Housekeeping!

Before we get to recapping our existing positions, we have a quick housekeeping reminder. As we mentioned in yesterday’s Tematica Investing, we’ll be using the market holiday next week to take a breather to get ready for the explosion in earnings reports that will begin the day after Easter. As such, your next regular issue of Tematica Pro will be April 20.

Rest assured that is something important comes along, we’ll be sure to issue a special alert.

 


March Auto Sales Confirm our Bearish View on GM 

March was supposed to be the month US auto sales rebounded from decreases in January and February. Instead, ample discounts were unable to spur demand for at the biggest automakers such as Ford (F), Fiat, and Toyota (TMC), and Honda (HMC), which all posted year over year declines. Sales incentives rose 13.4 percent in March, compared to a year earlier, to an average of $3,511 per vehicle, according to ALG. Making matters even worse, production is outpacing sales, which means auto dealers getting stuck with too many vehicles. Inventory levels hit 4.1 million units entering the month, the highest level since June 2004, according to Edmunds analysis based on Ward’s Auto figures.

General Motors faired a little better, with its US sales rising 2 percent year over year in March, but that was well below the consensus forecast that called for a +9.6 percent increase year over year.

As we look around us and see consumers saving more while others are grappling with rising bank card and subprime auto loan delinquencies, we continue to question the degree of new car demand. Adding to our concern is a new report from the Mortgage Bankers Association that showed the average size of a home loan was the largest in the history of its survey, which dates back to 1990. Another data point that points to Cash-strapped Consumers at a time when auto loan costs are ticking higher following the Fed’s two recent interest rate hikes.

GM will report its 1Q 2017 earnings on Friday, April 28 and as important as the rear view mirror quarterly results are, it will be the guidance that sets the tone for GM shares in 2Q 2017.

  • We continue to have a Sell rating on GM shares with a price target of $30. 
  • Our buy stop order on GM remains at $40. As the shares continue to move lower, we’ll look to revisit our buy-stop loss further with a goal of using it to lock in position profits. 

 


More Retail Pain Adds to Bearish Resolve on Simon Properties 

Next week will bring the March Retail Sales report, and based on what we’ve heard from retailers over the last few weeks paired with the data we’ve been sharing of late that shows our Cash-Strapped Consumer theme remains in full force, odds are it won’t be a pretty report. With Payless (PSS) and Bebe (BEBE) filing for bankruptcy and hhgregg (HGG) likely headed for liquidation, these are just the latest retailers that are dying on the vine. As we have learned this week, others are wounded including Urban Outfitters (URBN), shared its quarter to date sales are down in the mid-single digits, and Saks owner Hudson Bay (TSE:HBC) reported a drop in overall consolidated sales.

While Simon Property Group (SPG) rose modestly over the last week, we continue to be concerned over the shrinking customer landscape. We are also mindful that we will soon begin to see store closings from anchor tenants like Macy’s (M), JC Penney (JCP) and others. As those closings progress, we suspect investor sentiment will weigh on SPG shares.

  • With retail pain likely to intensify, we continue to have a bearish view on SPG shares. Our price target on SPG remains $150 and our buy stop order remains at $190.
  • As SPG shares move lower, we’ll continue to ratchet down this buy stop order as well.

 


Facebook continues to expand its footprint;
All eyes on April 18-19

Shares of this Connected Society investment theme social media company that is morphing into much more dipped modestly over the last several days, which reflected a similar move in the Nasdaq Composite Index. While Facebook lost out on its bid to stream the NFL’s Thursday Night Football package, we continue to see it benefitting from YouTube’s recent advertising snafu as branded companies ranging from AT&T (T) to Johnson & Johnson (JNJ) pull advertising spend.

That’s a nice development for FB shares as well as our Facebook (FB) May 2017 $150 calls (FB170519C00150000) calls, but we still have the two major factors ahead of us that led to our adding the call position to the select list. First, on April 18-19 is Facebook’s annual F8 Developer Conference at which we expect a number of updates and announcements from new monetization strategies to its plans for virtual as well as augmented reality and now payments.

That’s right, we said payments. Through its WhatsApp business, Facebook is launching digital payments in India, which happens to be WhatsApp’s largest market with more than 200 million users. Given the November 2017 ban on high-value currency notes in India as well as the country’s push into digital payments, we see WhatsApp as extremely well positioned for this. Forecasts have mobile payments growing to $2.57 billion in India by 2021, up from just $79 million this year, which would be awesome if it happened. Even if it falls short of that target, there is still phenomenal growth ahead that bodes well for our Facebook shares as well as the Facebook (FB) May 2017 $150 calls (FB170519C00150000) calls.

The second date to watch will be Facebook’s 1Q 2017 quarterly earnings that will be reported on May 3. Given its focus on monetization and mobile, Facebook has been handily beating expectations, and given the growing adoption of its platforms across the globe we see the company continuing that trend once again.