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LIZ: Buying on Sale

Keith added LIZ to the Virtual Portfolio into the close on today’s high Beta pullback just above his quantitative model’s TRADE line of support.  


No change to our thesis on the name here but today’s pull back is another opportunity to get involved with our favorite sm-mid cap growth story that we expect to double in 2012. Now that LIZ is a double-digit stock, has largely shed its debt burden, and is beginning to reveal its top-line growth potential, investors are starting to take notice. We think the Street’s numbers are still too low and the stock is trading at a significant discount to the value of Kate Spade alone. Investors will start looking at $1 in earnings power in three years.


Below are links to our 2/27/12 preview to the fourth quarter as well as our take headed out of the print. We also reflect on the 3/13/12 announcement of George Carrera to replace Andy Warren as CFO.


LIZ: Much Beneath the Surface (3.13.12)


LIZ: Noise = Buying Opportunity (3.01.12)


LIZ Q4 Preview (2.27.12)


LIZ: Buying on Sale - LIZ TTT


PVH: Levers & Drivers


There is nothing that materially changes our view on PVH post call – we still like it here and beyond 2012. The earnings beat was largely in-line with our view headed into the event. In addition, with persistent uncertainty in Europe we’re also not surprised in management taking a more conservative view of Q1; However, with sales trends at both CK and Tommy running well ahead of plan quarter-to-date, we think PVH is going to pull a RL and end up coming in above the Street’s original $1.32 despite guiding to $1.20-$1.25.


With Tommy and CK continuing to drive the company’s results as it works through a turnaround in its Heritage business, it is increasingly evident that PVH’s earnings growth is more stable than most other branded retailers given the number of drivers and levers at its disposal. This doesn’t suggest that there isn’t risk in the model, but simply that PVH has cushion if needed that many others don’t. We think the upside in 2012 numbers will come from stronger (than guided) sales rather than a reduction in spending and are shaking out at $1.36 for Q1 and $6.45 for 2012. With earnings power of $8 in 2013, we think the stock is headed higher.


Here are few callouts re 2012 from the call:

  • QTD CK comps up over 10% and Tommy in the teens vs. guidance of +4%-5% growth for each so revs continue to track above plan. Wholesale is also tracking ahead of plan suggesting upside to guidance.
  • Already seeing turn in Heritage margins here in Q1 (most effected by macro factors), which is notable given our view that Heritage is not a very defendable business.
  • The Spring/Summer order book is up 13% yy in Europe quarter-to-date (~70% of sales).
  • 2012 guidance was raised by $0.10-$0.30 to $6.10-$6.20 – mostly due to tax rate coming down from ~29% to ~24-25% as more profits realized overseas from Tommy as well as more aggressive debt reduction, $300mm in 2012.
    • This is not a 1x, but permanent shift. While we’d typically point to a lower quality earnings that is not the case here, but a new reality for the company given where profits are generated i.e. Tommy.
  • At CK, royalty revenues will decelerate to MSD growth this year driven by 1) take back of CK bridge line from WRC, 2) more conservative ordering by European retailers, and 3) a planned reduction in sales to the off-price channel.
  • SG&A spending growth will be up MSD driven by higher pension expense, multiple new launches (e.g. CK Bold underwear and new fragrances), as well as continued support for Tommy’s “Meet the Hilfigers” campaign.

All in, while it is not in our list of top three, we still like the stock here. We’re shaking out at $6.45 for 2012 on 5% total revenue growth driven by 9% growth at CK, 7% at Tommy and Heritage down slightly and 50bps in margin expansion.


While PVH works to stabilize its cash flow business (Heritage), it’s doing what the best brands do that license out their brands in order to grow into international markets – it’s starting to take back control of its own content. Driving brand sales directly at higher margin was key to RL’s success through much of the last decade as the company bought in its licenses. We don’t expect PVH to be any different. With earnings power of $8 in 2013, we think the stock is headed higher.


Casey Flavin


PVH: Levers & Drivers - PVH S






Based on continuing evidence of slowing sales trends in two markets, we are turning bearish on DPZ over the TRADE (3 weeks or less) and TREND (3 months or more). 


Only three years ago, the Street was worried that DPZ’s balance sheet had too much leverage.  The liquidity crisis at the time definitely amplified those fears but the fact remains that deteriorating fundamentals for a heavily levered company can have a severe impact on the financial health, and value, of that company.  We’re not drawing any conclusion that DPZ sales are falling dramatically but industry data from Sales Trac Weekly Data suggests that pizza sales are underperforming in the U.S. for the first two months of 2012 and this morning’s release from Domino’s Pizza UK & Ireland was not encouraging for the global business.  The timing of this slowdown is also interesting given the recent recapitalization that the company undertook along with the payment of a special dividend.


Domino’s new debt structure means that the company is less levered at 5.4x debt-to-EBITDA versus 6.8x in 2007.  With respect to the company’s adherence to the terms of its debt covenants, the company said on a recent conference call regarding the recap that “we estimate our EBITDA would have to drop by over $100 million, or global retail sales would have to decrease by over $1.8 billion versus the levels that we achieved in 2011 before the covenant would be at risk of breaching its primary financial covenants.”  There is a significant amount of financial flexibility in the company’s capital structure but sales softening may heighten the standards to which investors hold the company from a leverage perspective.


Through the first two months of the year, we are seeing pizza category sales growing 3-4% (sequentially down from 4Q trends) with sales trends turning negative during the last few days of February. We are assuming that the category was negatively impacted by weather during 1Q as consumers are have been out and about more than during a typical January/February period.  We will get more data next week regarding March trends but elevated gas prices and continuing warm weather may lead to further disappointing data. 


Today, Domino’s Pizza UK & Ireland reported slightly different same-store sales at +3.5% versus 4.2% in 2011.  Importantly, management hinted at further disappointment possibly coming in the second quarter results, saying, “We may have a softer comparative for the second quarter of the year”.


There is a lot of noise within sales trends this quarter with the weather impact and various calendar shifts that have impacted some company’s reported results.  We are withholding judgment at this point until we gain further conviction but there is evidence of the underlying trend moderating, at least from the strong acceleration that was seen in 4Q11.







Howard Penney

Managing Director


Rory Green




Athletic Apparel: Underlying Trends Improving

Athletic apparel sales improved on the margin last week following 3 weeks of negative growth with the underlying two year trend accelerating. NKE and UA led the pack with notable gains in share.


Apparel Comps were incrementally more difficult last week vs. the week prior with trends getting increasingly less favorable through the end of April. The acceleration in underlying trends last week (and thus comping the comp) was driven by continued strength in Training apparel.


Overall, the 1.3% growth was driven by ASP which was up 3% (units down ~2%). In the athletic specialty channel however, both units and pricing drove the 7.2% growth. We will continue to monitor the 2 yr growth through April as well as ASP expansion given the industry just comp’d pricing being down 0.5% LY with pricing compares getting less favorable through May (see chart below), requiring unit volume to drive top line growth.  


Athletic Apparel: Underlying Trends Improving - Athletic Apparel post


Athletic Apparel: Underlying Trends Improving - apparel 2 yr


Athletic Apparel: Underlying Trends Improving - athletic apparel ASP

Bernanke's War

This note was originally published March 28, 2012 at 07:53am ET.


“The Fed has effectively declared currency war on the world.”

-James Rickards


If his Policy To Inflate persists any longer, Ben Shalom Bernanke is likely to go down in history as America’s last completely politicized head of the US Federal Reserve. When compared to Alan Greenspan, that’s saying something.


During QE1 and then, to a lesser extent, during QE2, I’d have been in the minority making a statement like that. Today, as he sheepishly pushes for QE3, 4, and 5, I have plenty of company.


In Currency Wars , Rickards ends the introduction of his book by suggesting that “in the end the reader will understand why the new currency war is the most meaningful struggle in the world today – the one struggle that determines the outcome of all others.”


The glaringly obvious part of this new American reality is that, deep down, the Fed Chairman is very insecure about this. Why else would the man be engaging in a personal PR War with Twitter and appearing with Diane Sawyer on ABC?


At George Washington University yesterday, the vaunted historian of an era that didn’t have the internet, a globally interconnected Asian economy, or Apple, continued to proclaim his mystery of faith:


“We did stop the meltdown… we avoided what would have been, I think, a collapse.”


Great. Just great. Thanks for saving us from challenging your academic textbook, Ben. Now what about today? What about Burning The Buck back towards 40-year lows  and ripping us a new one with these gas prices 3 years later?


Back to the Global Macro Grind


I’ve fought the Fed before, and won. If no one else wants to strap it on and do this, I’ll officially wear the C and stand on the front lines of this war. If the last 3 weeks of Down Dollar is the best you have Bernanke, game on.


Don’t fight the Fed.” Yep. Got it. That and Madoff’s returns are about as believable as the Hunger Games. On our Q2 Macro Themes call in early April we’ll show you a full slide deck of what fighting the Fed at intermediate-term market turns has saved you:


1.   Q1 of 2008 – when the entire construct of Old Wall Street was begging Bernanke for “shock and awe” interest rates cuts (remember that?), he delivered his constituency the goods by cutting to 0% (but had to scare the hell out of The People to do it).  Easy money then delivered the world’s consumers $150 oil, and one heck of a Consumption Crash.


2.   Q1 of 2011 – after QE1 stocked commodity inflation … and more of that (QE2) perpetuated a huge slow-down in real (inflation adjusted) consumption growth (Q1 2011 US GDP 0.36%), fighting the Fed in Q1 of last year was one of the best Global Macro calls, ever. From Q1 of 2011 to the lows of October, Asia, Europe, US Small Caps, Commodities crashed.


3.   Q1 of 2012 – if you’re selling the hope of Growth’s Slope (slowing), you are in the middle of fighting Bernanke’s War right now.


From America’s perspective, it’s a war on savers and consumers. It’s a war on our Constitution. It’s a war against objectivity, flexibility, and gravity. And, most importantly, it’s a war against Free Market Capitalism.


From the rest of the world’s perspective, let me start with 1 very simple fact – we are talking about the World’s Reserve Currency. That is a privilege, not a political weapon to be abused by an un-elected bureaucrat. That’s what China, India, and Japan have to deal with when they import oil. Food and Energy is what the world actually consumes. And commodities are largely priced in US Dollars.


That’s why every time Bernanke Debauches The Dollar, Global Growth Slows. I don’t know how much more evidence you need of this simple fact – COMMODITY INFLATION SLOWS GROWTH!


Look around you. Away from Apple going up, this is what’s going on in the world this morning:

  1. Asian and European stocks are falling (China and India stopped going up in FEB; Spain is getting smoked, etc.)
  2. Pro-cyclical Stocks and Commodities (Energy stocks, Copper, etc.) are mapping Asian stock market declines
  3. Treasury Bond Yields are falling, again (10-year yield is down -8% in a straight line to 2.20%)

As David Einhorn reminds us, on Wall Street fooling some of the people some of the time happens. But you can’t fool all of the world’s people, all of the time, that rising commodity prices have nothing to do with the world’s currency price in which they are sold. The #1 story on Reuters this morning: “Americans Angry With Obama Over Gas Prices” – they should be angry with Bernanke.


Sorry David Axelrod, you’re not going to solve the world’s anger by “tapping the SPR.” The most obvious way to get oil prices down is by the Fed raising interest rates. Don’t buy that? Or your inflated stock and commodity portfolio can’t afford that? I dare you to buy Oil and/or Gold Futures after you get the inside looksy that Bernanke is going to raise rates on a Sunday night on 60 Minutes.


If you can’t tell, I’ve had it with these conflicted central planners. Politicians in Washington and the halls of Western Academic Dogma that advise their career risk on economic matters can tell stories to students and whoever in the media is gullible enough at this point to believe them – but that will not end this war.


Bernanke’s War is on. And the rest of the world is watching.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Japanese Yen (vs USD), Spain’s IBEX, and the SP500 are now $1661-1689, $122.41-124.67, $78.83-79.37, $82.67-84.12, 8101-8395, and 1404-1418, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bernanke's War - Screen Shot 2012 03 28 at 10.02.38 AM









The newly-created Bloomberg U.S. Employment Services Index, comprising the shares of 17 staffing and recruiting companies, has risen 48% since 9/22/11 versus a 31% gain in the Russell 2000.  This follows almost nine months of underperformance, when stocks of these businesses lagged behind the Russell by 28%, according to Bloomberg.



The phasing out of crates from the pork industry, under pressure from animal rights activists, by several major pork producers, could lead to higher prices.


Commentary from CEO Keith McCullough


So, Mr Bernanke, you’re saying you’re still saving us from Great Depression; great… just great – thanks for the gas prices:

  1. ASIA – oil up, growth slows – US Policy to Inflate continues to wreak havoc on the rest of the living world – while the SP500 hasn’t snapped yet, Asian stock markets are starting to (they stopped going up in Feb fyi); China down hard (-2.65%) last night and India down another -0.8%, taking its draw-down to -7.2% on the Sensex since Feb 21
  2. BOND YIELDS – the one bull case I could actually buy into is Strong Dollar + Rising Treasury Yields (at the same time); that would mean #GrowthSlowing is off the table. Not now, not at $106 oil. The US Dollar Index is down for the 3rd consec wk thanks to daily talk show appearances from the Bernank and the 10yr failed, hard, at long-term TAIL resistance of 2.47%
  3. SENTIMENT – literally ever metric I track is bombing out the bears; hedge fund short interest hitting new lows, VIX 14, and now my Spread in the II Bull/Bear survey hits its widest to the bullish side since Q1 of last year at +2900 basis points wide! With only 22.6% admitting to be bearish (new low), I’m happy to go Lone Wolf.

Intermediate-term tops are processes, not points.







THE HBM: YUM, WEN, DIN - subsector





YUM: Yum Brands CEO David Novak is leaving the board of JPMorgan Chase in order to “singularly focus on the continued growth of Yum Brands”, according to a news release from Mr. Novak. 


WEN: Wendy’s has named Craig Bahner as CMO, effective April 2. Previously, Mr. Bahner spent 20 years at Procter & Gamble.




TAST: Carrols Restaurant Group gained 9.4% on accelerating volume.  Yesterday’s gain was on top of a 12% move

Monday on news that the company has agreed to acquire 278 company-owned Burger King restaurants through an asset purchase agreement with Burger King Corp.





DIN: DineEquity, Inc., parent of the Applebee’s and IHOP chains, has confirmed the departure of several top executives in recent weeks, according to nrn.com.  Shannon Johnson, former VP of culinary and menu strategy has left the company as has Petrick Lenow, former executive director of communications at IHOP, and Jim Peros, former senior VP of operations at IHOP, who retired earlier this month.  DineEquity is looking to fill all three positions.


DIN: On a loan conference webcast, DinEquity said that roughly one third of Applebee’s remodels are complete.  DIN says that 50% of Applebee’s remodels will be done by year end.




BWLD: Buffalo Wild Wings declined on accelerating volume following Deutsche Bank downgrading the stock.


THE HBM: YUM, WEN, DIN - stocks



Howard Penney

Managing Director


Rory Green



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