Consumer in a Crunch? And “The Big Short’s” Steve Eisman on How He’s Positioned for the Rest of the Year 7/25/24

0:02Live from the Nasdaq market site in the heart of New York City's Times Square, this is Fast Here's what's on tap tonight. Consumer crunch. Shares of Lululemon sinking to new multi-year lows and the discretionary sector touching its worst levels of the month. Is there relief in sight for the retail names or will this be a case of buyer's remorse? Plus, boosting profits. UnitedHealth has grown into a colossus in the insurance industry. And a new in-depth report from Stat News details how the company has cornered the market at the expense of patients. We dive in with one of the authors later this hour.

0:33And we've got part two of Big Short Week here in Fast Money. Neuberger Berman, Steve Eisman, will join us with his take on yesterday's sell-off and how he is positioning himself for the back half of the year. I'm Melissa Leak. I'm D-Lar from Studio B at the NASDAQ. On the desk tonight, Dan Nathan, Guy Dami, Tim Seymour, and Steve Grasso. We start off with shares of Lululemon in full downward dog today. Had to use that. Shares tumbling 9 % to their lowest level since May 2020 after analysts at Citigroup downgraded the stock from buy to neutral, slashing the price target by nearly 30%. The company also dealt a blow as it was forced to pull the hotly anticipated breeze-through leggings from its stores and website amid tepid reviews for the product.

1:15But it wasn't the only consumer name feeling the heat today. Analysts at Cowan cutting their targets on the slew of names from Nike and Skechers to Adidas and Ralph Lauren saying Western brands are losing their advantage over domestic names in China. While the consumer discretionary sector broadly managed to eke out a gain today, it has fallen sharply from its recent highs and is the second worst performing sector in the S &P 500 this year. Is there any reason to give this group the benefit of the doubt? Is there belief for a comeback? Can Lulu shares get off the mat, so to speak? That is clever.

1:47You did that on your own. There wasn't for you. First of all, you know, we give analysts a hard time when justified. But Randall Koenig at Jeffries on On June 6th,$240 price target. A lot of people said you're out of your mind. Look where the stock traded down. Well done by Jeffries, number one. Number two, no, not really. I mean, you haven't seen capitulation yet. And quite frankly, they are clearly challenged. And we talk about it all the time. When specialty retail, when margins start to change, and when you start to see the other side of this sort of growth curve, that's when things get really bad.

2:22So I still think there's more pain ahead. Yeah, not particularly useful call. If you think about it, the stock's down 5 % or so. Obviously, this accelerated things to the downside today. But I would actually expand it a little bit in consumer discretionary and some of the things that we've seen out of the airlines, some of these other travel stocks. If you look at Expedia, we've been talking about Starbucks. And Chipotle is down 30 % right now just in the last few weeks. So there seems to be some pressure on discretionary. And at this point, even the airlines. We're probably going to talk about them a little bit.

2:52Most of them are trading at 52-week lows. So some of the things that we're hearing out of these earnings are not great if you think about the back half of the year and really how much resilience this consumer has. That's one thing we kept on hearing all year long, how resilient the consumer is. If you look through the lens of the stock market right now, it doesn't appear to be. It's anticipating, it seems, something that is happening with the consumer, Tim. And the problems with Lulu really remind me at this point of Nike in terms of the innovation gap that it seems to be experiencing. you know, competitors out there opening up stores, just catty corner from the current stores right now.

3:25I mean, the breeze through was, you know, part of the innovation pipeline that was really touted in the first quarter conference call saying, you know, this is going to be the start of the innovation cycle for the second half of the year. And here they are pulling it. It got a 3.1 star review from 112 reviewers who bought this stuff. apparently an unseemly seam in the back. I'm going to footnote Guy Adami's joke there. I think you've got a dynamic here. As someone that's been short at different times, Nike and Lulu in the last 18 months, I just think consumer discretionary as a group had the greatest generational moment of COVID, athleisure picking up pace, innovation dynamics around the space, and I think pent up demand that we're not going to see again for a long time.

4:10And what it meant in terms of margins, and there's no question, Lulu's been an incredible brand story, and it probably will continue to be, although there is some concern about ubiquity here. I just, it doesn't change soon. And in fact, I think what we've seen with a handful of these names, Lulu is certainly poster child. This is a third leg down. In other words, we've had two decided legs already in a bunch of these names. Very fascinating to see what Deckers is doing in the after hours and obviously really kicking it after selling off also dramatically into numbers. Dan referenced the broader consumer stuff.

4:42We've heard from a lot of different places, whether it's luxury and LVMH, whether it's Comcast and theme parks really slowing, airlines, et cetera. You name it, we've heard about it. And I think it's just beginning, even though some of these stocks had priced a dramatic amount of this in. So back to Lulu, the question really is, especially with the breeze through, is how much of a successful launch was priced in by the analyst community? I think we're going to hear about that in the next few days and what that means for margin for a company that's gone into this downtrend in terms of peak margins.

5:13And that was part of the Jeffries argument three months ago, is that they go into this period where this is a stock that's at peak margin right now. What's really going to happen when they actually have to start discounting clear inventory, whether it's breeze through or, you know, tapered leg stuff. It's all about wide bottoms these days, apparently. There I go. I think wide bottoms are now on their way out. But we'll ask the analyst. You might know more about that than I do. Steve, you know, once upon a time, we were saying that the higher end consumer, the higher income household consumer would continue spending.

5:46They have the savings. They've got everything in place here to keep on spending. And yet we have heard, as Tim had mentioned, from every sort of income cohort, from many different brands across many different industries, that these are the very consumers that are being more thoughtful about how they spend and where they spend. These are the consumers who are migrating to Walmart for deals at this point. Yeah, you know, everybody wants to save a dollar. It doesn't matter what income bracket that you're in, but they're the last ones to fall, your high income earners. And it is about, you know, just to echo some of the things that have already been said, I think it's not a matter of the consumer failing as far as what they can afford.

6:27I think it's changing styles. I think it's lack of innovation. We've seen a designer leave or whatever, whatever the chief product officer leave. And city data that I'm looking at on my computer said spending for yoga and active apparel has been down. Now that has nothing to do with income levels. It's just a changing dynamic on what we, If you look at yoga pants, they range from in Lulu, they range from one hundred dollars to one hundred and forty dollars. You go to Athleta and you you wind up seeing the same stuff there for 70 to 90 dollars. So everyone wants to be frugal and especially in an unknown world where we don't know when the recession, if the recession is going to come.

7:14You want to be a little more frugal. And I think it's just changing designs. But Lulu, the bottom, in my opinion, is not in. So I concur with the rest of the group. It's interesting. I mean, this is Lulu specific without question. But I'll broaden it out and say I actually think it is a bit of a tell on the consumer. And you say, OK, guy, tell me why you think that. Why do you think that, guy? That's a great question, Mel, because look at MasterCard and Visa since March. Our crack staff and EC put up a MasterCard chart. By the way, reversed higher today, closed lower on today. So MasterCard and Visa have been telling their own story since early spring.

7:47and the story isn't particularly good. So when you overlay that on top of some of the commentary here from some of these retailers, look at how horrible the dollar stores have been trading, and then look at the strength of Walmart, and it all starts to make sense. The consumer is not in a good spot. Yeah, let me just say one thing really quickly. This morning we got this GDP print for Q2. It was much better than expectations. It was 2.8%. Guy, what percentage of GDP comes from the U.S. consumer? 70%, approximately 70%. Now listen, you might be able to explain away a little bit of that outperformance in the GDP, but there are definitely some cross currents as it relates to consumer.

8:20We just talked about luxury. We talked about, you know, the mid-end consumer. We talked about the low end. I mean, there's definitely headwinds here, but, you know, GDP might be saying something a little different. All right. Well, despite Lulu's 51 percent drop already this year, analysts are still broadly bullish on the name. 27 of the 38 analysts covering the stock have a buy or overweight rating. The average price target is almost$400. That's about 60 % above today's close. Our next guest is one of those buy rating analysts. She just lowered her price target this afternoon to 360 from 425.

8:51Let's brand BTIGs. Janine Stickter. Janine, great to have you with us. Thanks for having me. How do you view the breeze through, you know, rollback? I mean, on one hand, you can say, you know, Lulu wants to be very attentive to consumers. They want to learn from their mistakes and continue to innovate. And so it's a good thing. Or you can say, you know what? that just shows that Lulu has an execution problem. It's lacking in the innovation pipeline. It's pushing through products that consumers don't want. I think Lulu has an execution problem. And I think that's part of the reason why we believe this can be fixed.

9:24The bear narrative for this stock has been there's too much competition. We have Ollo and Viore and they're killing Lulu. What we think is actually happening is that Lulu is getting in their own way. When we initiated on this stock about two months ago, we conducted a survey and what we saw was there was really high purchasing intent for Lulu. And even with this breeze through launch, we saw that there was a really high anticipation of this launch. The consumer came out to buy it. The problem was when they actually tried it on. For the vast majority of people who tried this pant on, it did not look good on them, and they had to send it back.

9:52So this says that the consumer is there. They're willing to buy when the product is right, even at a high price, which we know is a high-priced product. But the company has to execute, and they've kind of been getting in their own way this whole time. So whose fault is it? I mean, how do we rectify the situation? Does it require a new CEO? I mean, How do we fix this problem? Yeah, I think if we look back, you know, when Sancho announced her departure a few months ago, that was viewed as a negative. Now we look back on that and say this was product that was conceived under her watch and potentially it was time for a change in leadership at the product level.

10:24What they've done there is they've actually removed that chief product officer role and they've taken out that bridge between creative, between merchandising and between the CEO. And the hope there is that it will just create better agility and allow them to execute more quickly, be a bit more nimble, and maybe remove some of these execution errors that it seems like are really uncharacteristic for the company, but seem to keep coming up time and time again. Janine, with your price target and your EPS outlook, I mean, you're basically slapping a growth multiple on a company seemingly that's on the other side of the growth narrative.

10:53Is that accurate, or do you think you're going to see that reacceleration? We're not assuming they get back to anywhere like they were even six months ago. If you think about the start of the year before we had this slowdown that we think was execution caused, this company was trading at over 30 times P.E. Now it's trading at, depending on what numbers you're looking at, a high team speed multiple. We're arguing that it can get back into kind of the low 20s range, which would be well below historical averages, well below what was just to start the year, but a recovery multiple that still says that there's growth and that this isn't a North American business that is going into perpetual decline.

11:25For Lulu to regain sales, Janine, where do those dollars come from? Do they come directly from aloe and viore in your view or elsewhere? I mean, I'm just trying to figure out how much of it is that competitive dynamic. And once a consumer goes across the street and falls in love with aloe, how likely are they to go back to Lulu when they've been missing on the fashion front for so long now? Yeah. And this is one interesting thing that we found in our initiation when we surveyed consumers and we looked at customer overlap data. Certainly aloe and viore are nibbling at the edges of growth. But what we found is that the overlap's a lot less than we expected.

11:57We think really where the share can come from is from the bigger players. You have Nike, who we know is struggling and has been struggling for a long time. And it seems like right now they're more focused on fixing their footwear than anything else. Under Armour, which is a multibillion-dollar women's business, they're going through a complete reset right now and kind of walking away from that business temporarily. Athleta, another billion-dollar business where it's gotten a little bit better in Q1 but still in general has been floundering. So there's bigger companies where they can take share from, even if you have smaller upstarts like Ollo and you are starting to nibble at the edges of growth.

12:27All right, Janine, going to leave it there. Thanks so much for your time. Of course. Thank you. Janine Stickter of BTIG. Tim, she just gave you a laundry list of these athletic wearmakers that are all having issues at this point. And I think there will be a time and it's not going to be when the economy is kicking it. There's going to be an opportunity where the multiples have gotten pretty cheap. And there are brands in here that are extraordinary brands. They are leaders. They are best in class. I worry a little bit about that Lulu brand. I don't think it's ever going to be as hot as it was and as exclusive as it was.

13:00But it really does get down to where you put that multiple. And as she said, now in kind of the low to mid 20s on a multiple, you've put a massive discount on where it was. I think they get cheaper, and I think they get cheaper because I think the consumer has stopped going as hard into some of these areas as we know. We've already heard that. The trends over the last couple months, and even if you bring it back to CMG and some of the restaurant stocks, they talked about how the trends for the last two months. We may be seeing this, and Bill Dudley, who was out there saying the Fed's behind the curve.

13:32I mean, we have this debate every night on this show. There certainly has been an extended period of resilience. it does appear from this earnings season based upon real and current trends that we've seen from companies that it's happening faster. I don't think you need to chase any of these names here. And I think even Decker's, which had good numbers, is going to trickle lower again. I mean, to your point, Dan, in terms of putting together all the data points, the consumer is also slowing down their spending and experiences. At one point, it was a tradeoff, right, between stuff and experiences.

14:00And now it's just, you know what, I'm just not going to buy as much period across the board. Well, that was the thing during COVID, right? It went from goods and then after COVID, it went to services. So we're seeing a little bit of a hangover. We saw that in goods maybe a year, year and a half ago. But I would also mention that, you know, Royal Caribbean, you know, they gave slightly disappointing earnings. So the parks business, you know, we heard it from Comcast. I think we're probably going to hear it from Disney in the next few weeks. So it just kind of speaks to a consumer that is probably getting a little tapped at a time where credit got a lot harder to come by.

14:29And we know that some of those credit numbers, we've seen it in auto delinquencies, which are ticking up. So you put all that together and you say you see a consumer that's strained. And you can just throw a dart at the different companies that are suggesting that the back half of the year, again, is going to be more difficult than the first half. All right. Meantime, Alphabet shares taking another leg lower this afternoon after news OpenAI is launching its own search engine. Steve Kovac is here on set to break it all down for us. Hey, Steve. Hey, Mel. Yeah. So OpenAI is getting into the search business, and that sent Google shares down about 3 % today.

14:59And look, here's what the announcement is. It's called SearchGPT, brilliant name there, search engine, powered by OpenAI's AI models. They're calling it a prototype for now. It's not really launching yet, but you can sign up for a wait list to try it. OpenAI says it's partnering with publishers to give them proper credit in searches, also partnering with outlets like The Wall Street Journal and The Atlantic. And it's very similar to the popular search engine Perplexity. That's another hot AI startup backed by names like Jeff Bezos. By the way, OpenAI CEO Sam Altman, he tweeted that this will eventually integrate into the main ChatGPT app.

15:35So this is an experiment right now. They're going to learn from it and then eventually incorporate it into their main product. And the reaction to Alphabet shares that we saw, well, look, put that in context here, because Microsoft's Bing chat, which was announced, oh, I don't know, 18 months or so ago, really failed to gain share from Google. Despite the fact Microsoft said, you know, for every point of market share we gain against Google, we're going to make a billion dollars in ad revenue. That never happens. So it's way too early to tell guys if this is much of a threat to Google. But the market seems to think at least it's time to take three points off of Alphabet.

16:08I mean, it is amazing how the market assumes that whatever competitor comes in. So in terms of Microsoft and the failure of Bing to gain traction, do you think it's just because people didn't like Bing to begin with? And people didn't want to go back to Bing because they thought, you know, that wasn't a good search engine to begin with. There's part of it. But also just think of the distribution power Google has. It is the default search engine on the iPhone on pretty much every browser you get, Firefox, whatever, obviously Chrome. So they have that. They pay gazillions of dollars every quarter just to have that right to be right front and center.

16:40And Bing doesn't necessarily do that. They would like to be in that position, but they're not. And that is a huge barrier that a company like OpenAI would have to, if it is going to take on search. I think this is different, though, not a pure search play, because hearing Altman say we're going to incorporate this into the main ChatGPT app, this is just adding to what ChatGPT can do. It can pull from the web. It can tell you more current information. ChatGPT can't really do that now. Yeah, it's interesting. So I read what you read, Steve, and the idea that it will be integrated in ChatGPT that is a subscription product.

17:13You pay$20 a month for that. A few months ago, we had the CEO of Perplexity on here, and he's calling what they do an answer engine. And when you think about this, and I pay for it, I really like it, they give you the opportunity to use ChatGPT if you want, Claude from Anthropic, Llama from Meta. And then they're building their own large language model. And as I think about these, they're all becoming commoditized. Some of the smartest people in the business are suggesting that. So perplexity offers a lot more options, let's say, if you're doing it from a subscription standpoint. So I think it's less of a challenge to Google right now.

17:45Does that make some sense? It absolutely makes sense. I don't see this as a pure search play. Perplexity is more of a straight up, we want to be, I know they call it an answer engine, but it is more directly going at Google. We have not seen perplexity eaten to Google's market share. It doesn't mean it won't. But look, Google has that dominant position just by being front and center in pretty much every web browser by default. That is their key moat right now. Right. Steve, thank you. Thanks. Steve Kovach. It's nice having Steve here. It's nice having people visit us. We like people. We like speaking to people.

18:16Anytime. He can't invite himself back. I mean, you can't invite yourself back. Oh, so now he's bored? I mean, but no, that's all right. I'll come the day you're not here. How about that? Alphabet was in a vulnerable spot after its earnings. With this news, it's even worse. We talked about that in the earnings. The setup did not look particularly good, turned out to be right. But we also pointed out, to go back to December and January, stock traded from 155 down to 130, pretty much in a straight line. That provided an opportunity. By the way, it happened in the fall as well. And you're on the verge of the same thing happening now.

18:47So you're looking for a place to buy Google here, not sell it. It's one of the few stocks in that universe you can still make a case on valuation. All right. Coming up, investors feeling the love for Southwest, even as the airline announced a major overhaul to the way it does business. Has the name been cleared for takeoff? Next. Plus, Eli Lilly losing ground. What is behind the recent weakness as the recently red-hot shares enter a technical correction? More Fast Money right after this. This is Fast Money with Melissa Lee. Right here on CNBC.

19:30Welcome back to Fast Money. Two airlines topping the tape today after earnings before the bell, American and Southwest, both beating EPS estimates. Southwest also announcing big changes to its business model. The company long known for its open boarding policy, which was terrible. We'll now assign seats and offer pricier options with extra legroom. The changes will require new cabin layouts that will need FAA approval. Southwest also launching overnight flights in the coming year. And in the last hour, activist investor Elliott Management, which announced a stake in the company earlier this month, said these initiatives are not enough and are still calling for a change in management.

20:06Tim, some interesting news out of the airline sector today. Yeah, 50 years with that seeding policy and one that I've never enjoyed either. I mean, it really does require someone sharpen their elbows a little bit as they're getting through there. I look at airline stocks. I consider them the best trading stocks in the market. You look at the Jets ETF, it's down about 14 percent. This was a very, very negatively revised guide coming into this. So this bar was as low as you could go. Therefore, I'm not all that impressed. I think they've guided for effectively the markets expecting third quarter losses.

20:41I think across the airline industry, we've had some pretty dour outlook, both in terms of pricing power and where third quarter volume will go. So that's a signal to me that at least it's not yet time to dip in, even though I don't think the market's going to give you that head sign that it's time to start buying airlines again. They will get oversold before they are worth stepping back in for. Yeah, oversold in Delta comes in a form like high thirds, 38.5, 39. That's been support a couple times. So, you know, we've come off from 54 or so, but it feels like there's still some room. And I'll just throw this out there.

21:14Is this about the seating? Yeah. Yeah. Because I went to the college in the 1980s, and there was an airline called People's Express, and it was the same stuff. You didn't get to see this. I mean, it was a full mad rush into the plane. It's like a bus, right? I mean, what are they? Seriously, this is what year is this? This Southwest airline, these people think that's a good idea? You should applaud them for finally abandoning this. No, no, no. Johnson move. Johnson? What does that mean? Look it up. We're up to go to the Urban Dictionary there. Steve Grasso, do you have a trade on airlines? Yeah, if you look at Southwest, let's forget the fundamentals for a second.

21:52If you look at the chart on it, a tremendous bullish engulfing candle. We've been talking about this in a lot of other names. It's an outside reversal day. As a matter of fact, every airlines, with the exception of United, had a outside reversal day. And the most impressive one on a chart was Southwest. So could they stagger a little bit here? Of course. But it looks like a defined trend line that is probably going to be broken and start moving higher. Wait, so you think they should stick with this open? No, no, no. They should have never had it in the first place. I mean, seriously, somebody thinks, you know what, that sounds like a good idea.