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JCP: Competitive

Did we change our view on JCP in the wake of the meeting? No. We wouldn't buy the stock today. But our thoughts definitely evolved.


The three biggest items are what we'll call 'Competitive' -- Bid, Landscape, and Pressure. The first one is good, the second...not so much, the third is a big tail risk.


Bid: one of the things we like best about where JCP is headed is that it is cutting its floor from 400+ brands down to 100 shop in shops. That number is fixed, and the number allocated to each consumer type men, women, kids, home, etc...) is even more limited. In effect, this will definitely get a better portfolio of product as brands compete for that space, not unlike how they do at Wal-Mart. This is the best equivalent of 'pricing power' that a retailer could have, and is the smartest thing that Johnson is bringing to the table. Keep in mind, however, that JCP will have construction crews in it's stores for the better part of five years (they say 3, I say 5 -- either way it's a long time).


Landscape: let's do some simple math here. JCP accounts for about 7% of the industry. Add on...

A. Tar-gey, who just sent a letter to vendors requiring exclusive product so they're not a showroom for AMZN.

B. SHLD who was temporarily shut off from vendor financing by CIT last week.

C. GPS who lost its head of Old Navy last week.

D. KSS, which is another 8%, certainly won't take any of this lying down.

Add 'em all up and we're looking at over half of the US apparel industry that is putting on their battle gear. Mark my words, my friends, this will not be fun for anyone.


BY FAR THE BIGGEST NEGATIVE is something that no one is focused on, and that is whether Johnson succeeds or fails, he's going to have a lot of something he's never had before...competition.



A final point on guidance...hats off to them for abandoning monthly comps and quarterly EPS guidance. But to then turn around and say [we will never miss our targets -- even if different that yours] is perhaps not the best way to kick things off.  Also, they did not announce any special charge, which I very much thought they'd do. That would give them a cookie jar to get the job done that the Street would 'look through.'


Instead JCP took the high road and plans to transform the company via internally generated cash flow. Impressive move. But one of the risks to a short position from our perspective was having a pot of gold that they can dip into each quarter to pay for change. That's no longer, and it's not bullish.


Here are some of our stream of consciousness comments (@HedgeyeRetail) over the course of the 2-day event.




The $JCP meeting is the biggest thing since that cold Nov day in 2004 when Lampert merged #SHLD and #KMart. See how that turned out?


If $FINL wins $PSS, it would be transformational. But would shock us based on what we know about FINL mgmt.


Am I imagining things, or did #Ackman just grunt at me? $JCP


The announcer just said "our show will begin in 5 min". This is the first analyst 'show' I've been to... $JCP


$JCP Johnson looks comfortable.


$JCP he's talking about how JCP today felt like $AAPL 10-yrs ago. That's what he told Steve in Jobs' living room.


He comparing Apple's growth to the opportunity at $JCP. WON'T WORK...


Thinks that the department store is the #1 oppty in retail. $JCP


Knows his numbers. An $AAPL store does $50mm. Thats in line w a $M Macy's. $JCP


Item that cost $10 in 2002 and $2011, was marked from $28 up to $48. But realized price is flattish. $JCP


72% of rev at 50% off at more. $JCP 75% of time within a 25% price band.


Discounts used to be 38%, now it's 60%. $JCP #price integrity


590 unique visits. And customer ignored them 99% of the time. $JCP 


Next week we change our price, promotion, and personality. $JCP 


Price: only 3 prices. 1 price change per month. Eliminating clearance from JCP. DISCOUNTS ON 1st and 3rd Friday of every month. $JCP 


Avg price to a consumer is $10. But by the time it. Sells it is $2 out the door. $JCP 


Ly shoe was 40 this year 32. Ultimately out the door at 15. $JCP 


Only 12 promotions per year. 12. 1 per month. $JCP 


Johnson's Word score. #Apple = 15. #Steve = 4. JC Penney = 5. $JCP 


$JCP smart move w Ellen partnership. She has great mass appeal -- especial w Oprah out of daytime limelight.


But remember $GPS deal w Madonna, etc... These don't come cheap.


These $JCP adds are vy cool. But keep in mind that JCP has ALWAYS had great advertising.


Great product sells itself (RL, LULU, NKE). Same for great distribution ($AMZN $JWN). But sub average product ($JCP) needs great mktg.$$$


There's no way in my right mind that I can argue that $JCP is not exciting. BUT I want to know how much all these initiatives cost!


I can double the size and value of my house, but I have to spend the capital to make it happen. Capital comes first, which hits the P&L.


Revenue comes later -- if capital deployment is successful. That's awesome, and will turn $JCP into a big big idea. But not for 2-3 yrs out.


Remember, Ron gets paid POST 2016. He purposely missed targets in early days of Apple for the benefit of LT profitability. $JCP.


He'll do the same thing at $JCP. But there will be a lot of reinvestment along the way -- and all of it front-loaded. It's not in numbers.


Last yr 590 promos Spent 2mm /promo = $1.18Bn/yr Will spend $80mm/mo in 2012 = $960mm =$220mm in savings


Will transfer 2/3 shops by month over 2-3 years. Done in 2015. These will be smaller shops within shops. $JCP.


In Feb, eliminating non-performing brands. Boosting private brands. And reinvesting heavily in content. WORTHINGTON, ST JOHN'S BAY. $JCP


$JCP Stafford will be a focus. JFK Collection. Will be repositioned.


Sounds like $JCP is definitely making a focus on upper end.


$Very positive on $LIZ. 600 stores in Aug 2012.


#L'amour Nanette lepore will be new to $JCP.


#Arizona Jeans also will be repositioned.


#Izod big focus. Admits it is broadly distributed, but should be a focus. Likes working w $PVH.


Hyping up $MSO Martha Stewart living.


$JCP Martha just took the stage in her black leather pants and white cashmere sweater. Presents well tho better if she ditched index cards.


With the #Martha and #Ellen they're clearly targeting the female consumer -- and the two audiences are not identical.


Everyone can be all hyped up on this story for 22 hrs. There will be a press release tomorrow am outlining the cost. $JCP


Bumped into #Cindy Crawford at $JCP. She's so marketable. Olsen twins too. But not quite in the same ballpark.


$JCP #EDLP I guess that Every Day Low Price now means Every Day Low Pay


Day 2 of $JCP starting. Yesterday -- the dream. Today -- financial reality. No Martha, Cindy Crawford and Olsens today. Just accountants.


$JCP I know they said this yesterday, but the impact of going from 400 brands to 100 shops in a HUGE impact to the competitive landscape.


$JCP wants the simplification to lead to lower costs and no more 'false precision'


$CFO SG&A spread w $KSS is $1.5bn on an apples to apples basis.


By 2013, SGA down to 30% by 2013, and 27% by 2015. $JCP


$JCP 900mm in cost cuts at stores and corporate.


Going from 2 promo packets per week to 1 per month. That means fewer people to re-sticker product. Saves $50mm. $JCP.


$JCP has 9 cash registers that are in stores, but not used. They're out...more selling space is in. This labor saves $100mm.


Is it me, or are $JCP employees scared out of their wits watching this?


$JCP flat org...not fat. Other retailers have avg span of control is 8 direct reports. $JCP has 4.


If $JCP succeeds, it will be scary for the industry.


How does $JCP account for the fact there will be construction crews in its stores pretty much forever.


Costs are $800mm in 2012. $JCP


I like the fact that they're actually acknowledging that bringing in revs are part of the SGA ratio. $JCP


I'm tired of hearing about Sephora. I love the place, but sephora.com, $M, the new specialty shop in local outlet mall. Real estate matters.


$KSS is watching this now. And I'm SURE they're thinking 'Cool, let's roll over and let a company with bad real estate get more competitive'


No more quarterly guidance. $JCP


No more monthly sales on NRF day. $JCP


"In 2012 will have EPS of better than 2010." Go get 'em! $JCP


Ron just tripped up the stairs. $JCP


Bill Perez fell into the fountain on his first day as $NKE Nike's CEO. He was gone a year later. $JCP


No that's no cheap shot. It's simply stating a fact. I think RJ is in this for the long haul. At $JCP he's not afraid to trip. That's good.


Most of merchandise has been at new pricing strategy for 4 weeks. They'll know initial results on Feb 1.


@herbgreenberg plus a -15pt spread between sales/inv gr. That's about in line w 2q. But margins turned positive. +mgns and -inv is bearish


"Capital support from vendors to help with transformation. The vendors are excited to be a part of this." $JCP


That's because they vendors better be excited, or they get booted. $JCP


Only 100 shops, so will have each of them be on a competitive bid trading quality vs price -- both in favor of $JCP. Makes sense to me.

As you hear this management team, recall they they account for about 7-8% of industry. $KSS is another 8%. Competition heating up boys!


"Absolutely no way we will ever give guidance and miss it." RJ


[If ratings agencies want better balance sheet, then will need to consider that as it relates to self-funding plan.]


Q: who is current customer. A: {circular dance around not answering the question} $JCP


RJ gives sensible answer... The customer matches up the merchandise. But then adds a confusing one 'we can be a store for everybody'


It's impossible to be a store for 'everybody' unless you sell non-discretionary items.


Does not want to have to ask vendor for markdowns. RJ thinks current relationship w vendors/dept stores is dysfunctional. $JCP


$JCP analyst just tried to trip up RJ on questions about markdowns. He handled it like a pro -- unlike a typical retail CEO.


Hired Kristin Bloom, who they they honk is smartest in the world at retail technology. $JCP


Eliminating 'task work' employees. Hiring 'service work' employees. Smart, but expensive. $JCP


New categories are possible if not probable. Electronics, appliances, whatever. Not sure how I feel about that. $JCP


Q: Would consider allowing brands to rent space, own inventory, and own service EEs? A: [Prob not] $JCP


@herbgreenberg agreed that guidance is downright unhealthy. saying 'we'll never miss OUR targets even if different from yours' is dangerous!


$JCP Great job Ron. But prob should not have ended with 'cross your fingers, we'll see you in 3 months.' Crossing fingers is not a process.


Our Sentiment Scorecard, below, incorporates both sell-side and buy-side sentiment.  Below are some of our thoughts.


As the table, below, indicates MCD and YUM as still loved by the investment community.  It will be interesting to see if there is any change in MCD’s score as the short interest post earnings is factored in.  We expect MCD to continue to perform well from a fundamental perspective at least through 1Q12.


EAT remains hated by the investment community but we would highlight that, even after the top-line miss that spurred a sell-off in the stock on Tuesday, analysts raised their FY12 estimates.  The stock gained too much too fast but the fundamental turnaround of the Chili’s concept is far from over.




BWLD remains our favorite stock on the short side.  Short interest is not low but there are others with significantly higher levels of short interest in the casual dining space.  What we believe will change more meaningfully for BWLD, however, as our thesis plays out, is sell-side sentiment.  The analyst community has zero sell ratings on the stock.  We expect that to be revised in the next few weeks.




SBUX reports today and remains very well-liked by the investment community.  The pressure is on for the company to perform at a very high level and there is plenty of room for sentiment to turn.  We will be watching the top line and CPG margins particularly closely.





EAT, MCD, YUM, BWLD, SBUX: SENTIMENT TAKEAWAYS - short interest historical



Howard Penney

Managing Director


Rory Green



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Re-Shorting India: INP Trade Update

Conclusion: Policies designed to inflate are particularly bearish for emerging market economies like India. While the short thesis may be changing, our outlook for Indian equities remains lower over the intermediate term.


Position: Short Indian equities (INP)


Late yesterday, Keith used strength in the iPath MSCI India ETN to re-short Indian equities in our Virtual Portfolio. Since JAN 9, been caught on the wrong side of one of the largest short-squeezes across Asian equity and currency markets in the YTD (SENSEX +10.9%; INR/USD +5.8%).


Since that initial position (partially a hedge against being naked long of Chinese equities), the fundamental outlook for the Indian economy has changed direction not once, but twice. Recall that in our 1/9 note titled “Awful Fundamentals: Our Updated Thoughts on Indian and Shorting INP Trade Update”, we thought Indian monetary and fiscal policy – particularly on a relative basis to its EM peers – would remain a headwind to India’s equity market multiple and fund flows.


Specifically, we thought that inflation would not slow substantially enough relative to policymakers’ expectations to warrant a major inflection point in monetary policy, which would, in turn exacerbate India’s already-woeful debt/deficit dynamics by allowing growth to slow further.


Inflation did, however, come in far, far more dovish (in DEC) than even our most aggressive downside scenario, which dramatically pulled-forward India’s scope for monetary easing, as evidenced by the RBI’s -50bps cut to the cash reserve ratio two days ago. The prospect of further easing has been quite positive for both India’s equity and fixed-income net foreign inflows, which is the largest factor supporting rupee strength in recent weeks (equities: +306.7% YoY in the YTD; fixed income: a record +$3.9B in DEC).


Looking forward, we can glean from recent data that our long-held view that policies designed to deflate the market value of the world’s reserve currency are implicitly policies to inflate assets priced in dollars – which certainly include energy and agricultural resources, the prices of which carry large weightings in EM inflation indices.


That’s negative for Indian (and other EM) growth, particularly if today’s trading pattern (dollar DOWN; commodities UP) develops into a sustained trend. Recall that this emerging Growth Slows as Inflation Accelerates theme was exactly the same thesis that had us make the contrarian call to get aggressively bearish on emerging markets (particularly India and Brazil) in 4Q10 and hold that conviction largely through 3Q11.


Quite ironically, as EM growth slowed throughout 2011, Chairman Bernanke repeatedly attributed the sudden and dramatic ascent of commodity prices largely to “rapid emerging market demand”.


While we aren’t sure what to make of that, we are sure that we aren’t afraid to pull out the ol’ bearish playbook if the quantitative signals tell us to. For now we’ll continue to manage the immediate-term risk of Big Government Intervention.


Darius Dale

Senior Analyst


Re-Shorting India: INP Trade Update - 1


Thinking Through the Implications of Where We Are on Jobless Claims

The headline initial claims number rose 25k WoW to 377k (up 21k after a 4k upward revision to last week’s data).  Rolling claims fell 2.5k to 378k. On a non-seasonally-adjusted basis, reported claims fell 113k WoW to 414k.


Claims have been making solid progress YTD in spite of what is a seasonal-adjustment headwind tracing to the 2008/2009 move. This suggests that once we move beyond the early months of 2012, we could see claims continue to move lower as that seasonal-adjustment headwind changes to tailwind. This should happen around the end of February. It's also important to understand the ramifications of what's happening. We've noted in the past that 375-400k on initial jobless claims is a Rubicon of sorts. As you cross below that threshold, the unemployment rate starts to show steady, ongoing improvement. Why does the unemployment rate matter when it is (a) a lagging indicator and (b) a made up number (i.e. labor force participation rates)? We think it matters to the average American as a sign of confidence in the economy. If Americans hear that the unemployment rate is falling, month in, month out, we think that resonates in greater confidence. All this puts the economy on a virtuous path. Remember that the economy is very autocorrelated, so once you get the jobs engine below the 375-400k level on claims the economy will gain a level of momentum on its own. This is what seems like a growing probability at this point, based on the trend in jobless claims. 


If there's a wrinkle, it's that our Macro team has, just this morning, reversed its call on the US dollar from bullish to bearish. The thinking had been that the dollar was poised to rise as the strengthening economy alleviated the need for further monetary or fiscal stimulus. However, in light of the FOMC decision to extend zero rates through YE14 and President Obama's State of the Union Address, their view has shifted towards bearish dollar. On the margin, this is negative to our call and thoughts around jobless claims, as a weak dollar stokes inflation at the pump and the grocery store, among other places - effectively, a tax on the middle class and the poor. Beyond this, there is clearly new pressure placed at the long end of the yield curve, an additional negative for the sector. It's a balancing act weighing the prospects of job improvement against the tax created by weak dollar-induced inflation. 


Another thing we are calling out is the large divergence between jobless claims and the market has narrowed considerably in recent weeks with the straight-up move in the market, and today the implications of full mean reversion are a much more modest S&P index level around ~1370. Alternatively, claims would need to rise to ~397k to meet the market where the market is. Neither of these are excessively removed from where they are relative to the magnitude of the dislocation we saw roughly a month ago.  












2-10 Spread

The 2-10 spread widened 10 bps versus last week to 178 bps as of yesterday.  The ten-year bond yield increased 10 bps to 200 bps.






Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 




Joshua Steiner, CFA


Allison Kaptur


Robert Belsky


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