JCP: Covering TRADE


Keith is booking another gain covering JCP in the Hedgeye Virtual Portfolio with the stock immediate-term TRADE oversold according to his model. We remain bearish on the stock over the intermediate-term.


While still early in the quarter, August sales came in very light this morning -1.9% (vs. +1.7%E) supporting our below consensus numbers. The Street is currently expecting flat sales in the 2H on LSD comps. We’re modeling sales down -1% and -3% on comps of +1% and -1% in Q3 and Q4 respectively.


Keep in mind, the company had several new introductions last year in Q3 (LIZ excl, Mango, Modern Bride) that they have to lap in addition to catalog sales rolling off. We’re expecting sales from existing stores to be down -$180mm in addition to the negative drag from the catalog business to the tune of $200-$260mm coming out in the 2H. With pressure on growth from existing stores coupled with catalog sales coming off, JCP will be significantly challenged to meet the Street’s sales expectations over the intermediate-term.


As for the headline regarding the company selling outlet stores that just hit the tape - it's old news and inconsequential to the bigger call here.


At $1.60 for the year, we remain 10% below consensus and bearish on the stock over the intermediate-term.


For more info on our thesis, see our Black Book, “JCP: What Ackmanists Are Missing.”


JCP: Covering TRADE - JCP VP levels 9 1 11



Europe by the Charts

Positions in Europe: Short UK (EWU); Covered EUR-USD (FXE) on 8/31 in the Hedgeye Portfolio

Below we call-out four charts of the day: European Manufacturing PMI; Eurozone Confidence; Italian/German government yield spread; and the CHF vs EUR and USD.


European Manufacturing PMI Sinks

Of the countries reporting Manufacturing PMI, there’s a clear downturn in the August numbers, a trend we’ve been following for the last six months. 8 of the 15 countries recorded figures below 50, which indicates contraction (see chart below). And short of the Czech Republic, Norway, and Denmark, the remaining countries are dancing on the 50 line.  We’re convinced Eastern Europe’s growth outlook can’t improve before the core of Europe improves (due to heavy trade reliance), and we see the core dragged down by sovereign debt leverage of the periphery, banking risk, and slowing growth in the US over the intermediate to longer term durations.


Europe by the Charts - 1. PMI



Eurozone Confidence Crumbles

It follows that given sovereign debt contagion across the region confidence will erode.  We continue to highlight the threat of a French credit rating downgrade, which we’ve monitored via rising CDS spreads (up +100bps since a low in April), for its impact on the EFSF. Confidence has trended down since February of this year.  We see plenty of downside room to run from here with significant white space (= uncertainty) between now and the late September/early October decision on the terms of the EFSF, which don't include increasing its size from €750B. We think the facility needs to be expanded to at least €2T, a large order given Germany would back the lion’s share of it.


Europe by the Charts - 1. b conf



Bad Boy Berlusconi 

Italy and Spain are two countries in Europe we’re closely watching because 1.) Their economies are far larger than Greece, Ireland and Portugal and present must greater risks from a sovereign and banking perspective, 2.) Should either country need “bailout” assistance the EFSF is underfunded and there’s no indication Trichet wants the ECB to directly take on "more" region-wide balance sheet exposure.  


German yields have come in notably ytd (-79bps), and therefore the country still remains the region’s beacon of stability, while its equity market has been crushed (DAX down -19% in August alone).  Given that Merkel is pumping up against two more State elections (in September) and floundering confidence even among her party, it’s far from a foregone conclusion that Germany will sign any and all blank checks to bailout or support its neighbors. Frankly, we’re worried that the once perceived stronger peer nations (of France and Italy) may be in no shape to contribute to bailing out the region if tipping points are achieved in those countries. 


One kink in the chain came on Tuesday when Berlusconi announced that the country’s €45 Billion austerity package will be pruned. The new version removes the Solidarity tax , which placed an additional 5% tax on annual incomes above €90K, and the original proposal to cut €9B in funding to regional and local governments was trimmed by €2B. At a time when fat (debt) is expected to be reduced, pruning the austerity package heightens the risk of investor sentiment turning negative. 


Europe by the Charts - 1. c yields



Swissy Back on the Juice

With the Swiss National Bank (SNB) refraining from announcing further steps to weaken the CHF versus major currencies and today's announcement by the government of an 870 million Franc ($1.1 Billion) economic stimulus package to support tourism and exports (still to be approved by parliament in September), there looks to be more room to run  in the CHF vs the EUR and USD from here, especially as there’s no indication Europe has command of the run-away sovereign debt contagion threats that have plagued the region for the last 18 months.


It’s worth noting that there’s already much domestic consternation on the government’s stimulus package, which includes 500M CHF to protect jobs in all industry sectors, with most cash being used to extend the exiting shortened working hours scheme and 100M going to a fund that extends emergency assistance to the hotel industry.  Push-back includes the ultimate size of the package, off the original 2B CHF proposed in August, and the government’s ability to properly allocate funds, meaning some enterprises will benefit while others will not receive assistance. 


All in, we think the flight to the safety trade remains intact.


Europe by the Charts - 1. d chf


Matthew Hedrick 

Senior Analyst

TGT: Virtual Portfolio Update


Keith added Tar-gey, one of our highest conviction TAIL ideas, into the Hedgeye Virtual Portfolio. Good numbers this morning show that the company continues to execute around the Street's immediate-term concerns.


TGT: Virtual Portfolio Update - TGT levels 9 1 11


TGT: Virtual Portfolio Update - TGT 8 11 comps





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Retail: Get Ready for Q3


This morning’s sales reports were choppy as was expected with the concoction of BTS, Irene, and the start of more challenging 2H compares all taking hold. Not surprisingly, with only one month of Q3 now in the books there was little color on any change to internal full-year outlooks, or margins, but the same number of companies beat on the sales line as missed and sales decelerated on both a 1yr and 2yr basis for the second consecutive month. This is not good for one of retail’s most crucial selling seasons and suggests early confirmation of our view that Q3 earnings season is setting up to be the worst in two-years.


On the whole, BTS commentary was unremarkable (TGT good, JCP poor) while surprisingly few retailers highlighted Irene among the key reasons for lighter sales (JCP was one of them). That said, most retailers noted anywhere from a 0.5%-3% impact to comps from the storm. Interestingly, TGT noted a positive +0.5% benefit from the storm adding that the shift is likely to impact September by a like amount.


Our sense is that many retailers - especially on the discretionary side - are underestimating the percent of sales that are lost forever vs. pushed into September.


A few additional callouts in August:

  • High/Low-end performance bifurcation persists. Within department stores,  JWN +6.7%, SKS +6.1%, M +5% outperformed while TJX +1%, SSI -1.7%, KSS -1.9%, JCP -1.7% all underperformed.
  • Discounters continue to be the strongest performing segment of retail. This is likely due to greater grocery exposure, which continues to be a key category. Retailers with exposure there (TGT up mid-teen, COST up LDD, & BJ) all came in well above expectations.
  • JCP was a clear negative callout again. The most notable callout in its report was e-commerce down -8%. The rate of underperformance in this category appears to be accelerating to the downside making it increasingly more difficult to meet top-line expectations. This is hardly a business that should be down for anybody - ever.
  • GPS was another negative callout with both domestic and international business down HSD. International was down 9% - this is supposedly their growth engine?
  • Lastly embedded in LTD’s solid sales report was La Senza (their higher end concept) coming in down -8% reflecting a sharp deceleration at the high end.

Shorts: JCP, JCP, and JCP. HBI, GIL, UA and COH




Retail: Get Ready for Q3 - SSS Total 8 11


Retail: Get Ready for Q3 - SSS 1 yr 8 11


Retail: Get Ready for Q3 - SSS 2 yr 8 11



Casey Flavin




Wendy’s announced this morning that Roland Smith will be retiring and making way, effective September 12th, for Emil Brolick, COO at Yum Brands.


This morning’s announcement has a number of implications for Wendy’s that range from positive to negative with, we believe, more of the former than the latter.


Emil Brolick is joining a company with which he is very familiar; from 1988 to 2000, he held a variety of marketing positions at Wendy’s and worked closely with founder Dave Thomas.  He was viewed favorably by the investor community during his time at Wendy’s.  At the time of his departure, the company was performing very well.  From there he joined Taco Bell, where he helped improve sales and profits through new products and remodeling restaurants. 


Roland Smith retiring is certainly not a good concurrent indicator of the performance of the company.  The recent news that WEN is suing significant franchisees Lewis Topper and Jeffrey Coughlan and their WendPartners Franchise Group is concerning.  The disagreement seems to be anchored on the purchasing of new equipment key to the rollout of the new burgers (WEN – A SMOOTH TRANSITION FOR THE NEW BURGER, 8/1/2011).   As we wrote on August 1st, the rollout of the new product is crucial to the Wendy’s turnaround story.  Roland Smith leaving does not convince us that Wendy’s is on the precipice of a turnaround, nor does it convince us that the relationship with the franchise-base is as good as it needs to be during this phase.


A month ago, our takeaway was that we view the stock favorably over the longer term but see the turnaround taking longer than expected, leading us to take a negative view over the near term.  While the company’s most formidable competitor, MCD, marches on with its own remodel program, a change in CEO is only going to further push out the timetable for the WEN turnaround.  While the transition should be smooth, given Mr. Brolick’s familiarity with the company, he will likely examine the initiatives that are being pushed through and make adjustments where necessary.  In our view, he is likely to let some initiatives, like the new food items, proceed as planned but may cast a more critical eye on other plans that have been more cumbersome, like the remodel program. 


Over the longer term, we believe that Mr. Brolick joining Wendy’s will be a positive for the company given his proven track record at the company, his understanding of the company’s core principles, and the probability that his tenure will likely serve as an opportunity for the relationship with franchisees to be improved. 


The stock faces several headwinds at present, such as high beef prices, and we believe that near-term guidance could come down.  Ultimately, Roland Smith’s departure signals that business at Wendy’s has not been strong but perhaps the most expedient path to achieving the turnaround is via new leadership.



Howard Penney

Managing Director


Rory Green





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Initial Claims Drop 8k (9k after revision)

Initial jobless claims fell 8k (9k net of last week's revision) to 409k.  Last week, the Department of Labor noted that at least 8,500 claims were due to the Verizon strike, so this week's claims are flat WoW excluding the VZ contribution.  Our analysis has shown that a level of 375-400k is necessary to move unemployment lower, so today's print represents yet another week of the labor market treading water.


We have been noting for several weeks that jobless claims and the S&P - which usually track closely together - have diverged recently.  If all the mean reversion comes from claims moving higher, that implies a coming claims level of 450-475. 


Challenger announced job cuts for August were released yesterday.  The level fell to 51k from 66k in July.  On a YoY basis, August is 47% higher than last year, compared to +60% YoY in July. 














2-10 Spread Remains Under Pressure

The 2-10 spread hit a level of 2.02 yesterday and is currently running at an average level of 2.30 for the quarter.  This is dramatically tighter than 2Q, which saw an average level of 2.64.  






Subsector Performance

The chart below shows the performance of financial stocks by subsector.





Joshua Steiner, CFA




Allison Kaptur



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