Weekly Issue: The Changing Mood of the Market

Weekly Issue: The Changing Mood of the Market

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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

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HHGregg’s Connected Society Pivot to Appliances Hasn’t Paid Off, Will Shut 40% of Locations

HHGregg’s Connected Society Pivot to Appliances Hasn’t Paid Off, Will Shut 40% of Locations

Most tend to focus on the Connected Society headwind that is rippling through brick & mortar retail apparel companies like Macy’s and Kohl’s, but there are other retailers that are being hit. Consumer electronics retailers, like Best Buy and HHGregg, have seen their business raked over the Amazon coals and pivoted to appliances, an already competitive landscape with Lowe’s, Home Depot, Sears, Sears Hometown and Wal-Mart. While HHGregg attempted to bob and weave against the Connected Society headwind that is serving as Amazon’s tailwind, it jumped from the frying pan into the fire as it traded one competitive landscape for another.

Struggling appliance and electronics retailer HHGregg is planning to close 88 of its weakest stores as part of an effort to stay afloat.The Indianapolis-based company on Thursday announced it would shutter stores in 15 states and close three distribution centers.

The closings, which do not include any Indiana stores, will be completed by mid-April and result in about 1,500 layoffs. HHGregg has about 5,000 employees.

HHGregg’s decision to eliminate 40 percent of its stores is the latest move in an increasingly desperate attempt to right the company’s course. It comes just three days after the New York Stock Exchange delisted HHGregg for failing to meet the minimum listing requirement.

The company in recent months has tried to reinvent itself as a high-end appliance store. It’s the seventh-largest appliance retailer in the U.S. behind  according to the consumer electronics trade publication Twice.

Source: HHGregg closing 88 stores amid bankruptcy rumors

What We’re Watching This Week

What We’re Watching This Week

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As you probably know, this week is a shortened one following the 3-day holiday that was President’s Day. We still have a number of companies reporting their quarterly earnings this week, and that includes the Tematica Select List’s own Universal Display (OLED). The shares have had a strong run, up just over 28 percent year to date, and that likely has them priced near if not at perfection. Last week, Applied Materials (AMAT) gave a very bullish view when it comes to the ramping organic light emitting diode manufacturing capacity, as the industry prepares for Apple (AAPL) and others switching to this display technology. Consensus expectations for Universal’s December quarter results are EPS of $0.42 on $68.6 million in revenue. We expect a bullish outlook to be had when Universal reports its results this Thursday.

Alongside Universal Display, there will be a few hundred other companies reporting. Among those, we’ll be tuning into reports from Wal-Mart (WMT), Macy’s (M), JC Penney (JCP) and TJX (TJC) for confirming data on our Amazon (AMZN) thesis. Similarly, we’ll be looking at Cheesecake Factory’s (CAKE) for confirmation in the restaurant pain that is benefitting our McCormick & Co. (MKC) and United Natural (UNFI) shares.

On the economic data front, the calendar is a tad light, with the highlight likely to be the next iteration of the Fed’s FOMC minutes. Given Fed Chairwoman Janet Yellen’s two-day testimony on Capitol Hill that we touched on above, we’re not expecting any major surprises in those minutes. Even so, we’ll be pouring over them just the same.

This morning we received the February Flash Manufacturing PMI metrics from Markit Economics and not only did Europe crush expectations hitting a six-year high in February. Across the board, from business activity to backlogs of work and business confidence, the metrics rose month over month. One item that jumped out to us was the increase in supplier delivery times, which tends to be a harbinger of inflation — something to watch in average selling price data over the next few months. Turning to Japan, the Markit flash manufacturing PMI rose to 53.5 in February, its highest level since March 2014, with sequential strength in all key categories — output, exports, employment and new orders. but Japan hit it’s highest level since March 2014.

 


Here at home, the Flash U.S. Composite Output Index hit 54.3 in February, a downtick from 55.8 in January, but still well above the 50 line that denotes a growing economy. The month over month slip was seen in manufacturing as well as the service sector. Despite that slip, new manufacturing order growth remained faster than at any other time since March 2015 and called out greater demand from energy sector clients. No surprise, given the rising domestic rig count we keep reading about each week.

Manufacturers also called out that input cost inflation was at its highest level since September 2014 and we think this is something that will have the Fed’s ears burning.

 


Currently, our view is the next likely rate hike by the Fed will be had at the May meeting, which offers plenty of time to assess pending economic stimulus, immigration and tax cut plans from President Trump. Again, we’ll be watching the data to determine to see if that timing gets pulled forward.

Stay tuned for more this week.

January Retail Sales – Department Store Pain vs. E-tailing Gains

January Retail Sales – Department Store Pain vs. E-tailing Gains

Earlier today the Census Bureau published its report on January Retail Sales, which topped expectations with a print of +0.4 percent vs. the expected 0.1 percent. Stripping out January Auto sales and food services, Retail sales +0.2 percent month over month. To us, the more telling figure was the 5.1 percent year over year increase in Retail only sales that was fueled by the 14.5 percent increase in Nonstore retailers, the +13.9 percent increase in gasoline station sales as well as strong showings from the Health & Personal Care stores categories and Building Material & Garden stores. Lackluster categories remained General Merchandise and Department Stores as well as Furniture and Electronics & Appliance stores.

Donning our thematic hats and looking at the January report, we find continued support for the accelerating shift toward digital commerce that sits at the core of our Connected Society investing theme and benefits companies like Amazon (AMZN), a Tematica Select List holding, and eBay as well as delivery companies such as United Parcel Service (UPS). To us there is no more telling statistic for that than the year over year comparison between Nov. 2015 – Jan. 2016 and Nov. 2016 – Jan. 2017. when Nonstore retail sales rose 12.7 percent vs. 4.6 percent for overall retail sales. Talk about a share gain!

We see the strong showing by Health & Personal Care stores as rather confirming for our Aging of the Population investment theme, while the continued pain felt at department stores comes as little surprise given the post-holiday shopping comments we’ve heard from Macy’s (M), Kohl’s (KSS), JC Penney (JCP) and others, which includes a number of location closures. That loss of anchor tenants alongside announced store closings ranging from The Limited to Wet Seal and others only supports our Death of the Mall view that poses a significant headwind to mall real-estate investor trust companies like Simon Property Group (SPG), Westfield Corp. (WFGPY) and Taubman Centers (TCO).

Deloitte sees shoppers spending almost half of 2016 holiday budget online

Deloitte sees shoppers spending almost half of 2016 holiday budget online

The more data points and surveys we read, the more we find pointing to the accelerating shift toward digital commerce this holiday season. There will clearly be obvious winners, like Amazon, but we’re also seeing traditional retailers from Macy’s to Under Armour emphasize digital commerce. Like any good baseball pitcher or football quarterback knows the key to a good pitch or pass is follow through and the same holds true for investors and how they should think about the shift toward digital commerce.

 

Retailers could see record Web traffic this year, according to Deloitte’s 31st annual holiday survey of consumer spending intentions and trends.

As many as half (50%) of survey respondents plan to shop online for gifts, giving the Internet a bigger lead than ever over discount/value department stores (43%), which rank as the No. 2 destination for gift shopping. This rise in Web traffic could bring retailers more cheer from their e-commerce sales. Survey respondents anticipate they’ll spend 47% of their budget online – matching what they plan to spend at physical stores for the first time. In prior years, people planned to spend more in the stores.

Source: Deloitte study: Shoppers plan to spend almost half of holiday budget online | Chain Store Age

Remaining loyal to our disciplined and thematic approach

Remaining loyal to our disciplined and thematic approach

The market move has turned more bearish of late, and we are not surprised Wall Street has adopted the more cautious stance we’ve had these last several weeks. A headline freak out on the April CPI report shows us just how nervous the stock market is these days. We’ll continue to be disciplined when contemplating adding each new position to the Tematica Select List.

In this week’s edition of Tematica Investing:

  • Just doing it with Nike shares. We are issuing a BUY on Nike (NKE) shares with a price target of $66. Because this is an initial recommendation we are holding off with a commensurate stop loss, as we intend to build this position size over time. We would be buyers of Nike up to $59. Read More >>
  • Remaining patient with Costco Wholesale (COST) shares
  • Adding share of EPR Properties (EPR), a Content is King company to the Tematica Contender List. Read More >>
  • Quick Updates on AT&T (T), PetMeds Express (PETS), Regal Entertainment Group (RGC) and Disney (DIS). Read More >>
  • This week’s Ask Tematica focuses on choosing between two different share classes.
  • As promised Thematic Signals returns this week, and there is no shortage of confirming data points for our thematic investing themes. Read More >>

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