After a period where private equity firms were buying retail and consumer brands as far as the eye can see, they are now clearly net sellers. You might come across an occasional KORS. But beware of the Michael’s of the world.


We’ve been waiting and waiting for Michael’s Stores to come back to market, and not only were we handed this little gift, but we got it in conjunction with a long-awaited Dollar General secondary! (there was severe sarcasm in that statement, fyi).


Seriously, let’s look at this from a thousand feet, which is where we get the best context. In doing so we see that companies taken private over the last 3-6 years need to ultimately come back out. After a period where LBOs ruled the roost, IPOs are back. So expect the calendar to be full. But not full of KORS, full of something else. 


We think it’s really important to dial back the mental clock for a minute to what was happening in 2006.

a) The market was on a complete tear, and the deal market followed.

b) From the time of the 2002 bottom to the 2007 peak, the S&P was up 95%, while retail (as measured by the MVRX) was up 165%.

c) During that same time period, we saw 34 retail/consumer discretionary IPOs. 20 of these were in 2005-06. In 2007, we only had 6, and then in 2008 there were none. Zero.

d) That ’06-’08 time period is most interesting. As our analysis shows, when we compare the purchase transactions for financial buyers vs. IPOs, there was a meaningful divergence in 2006. It was the start of a three year time period where the number of ‘going private’ deals outpaced IPOs for the first time since well into the 1990s.

e) This was the same period where everyone was afraid to short any junky stock, because all it took was a simple press release – or the rumor of one – that the company was being bought, and it sent the junk to new highs. Yes, many bad businesses were being bought at what seemed to be toppy prices.


In fairness, what seemed to be a toppy price back then ain’t looking so lofty anymore. Dollar General is up 164%, and we’re looking at an Enterprise Value of $18bn even. Over the 2+ years DG has been (re) public, it has nearly doubled its operating margin to 10%. For many reasons, we’d argue that the incremental boost in margin from here will carry with it an outsized capital cost. But nonetheless, EBITDA is up by 50% since the deal.


Michael’s is an interesting case because – unless bloomberg’s numbers are flat-out wrong -- it is already running back up around historical peak double digit margins. That’s not to say that Bain and Blackstone can’t profit nicely from the progress made since 2006, but we question what kind of growth anyone is buying into here. This story needs to have some serious teeth that we simply don’t see yet in order to be a winner.


As it relates to the concept, by no means is it bad. In fact, between Michael’s and Jo-Anne stores, they have a duopoly on stores completely dedicated to arts and crafts. But it falls into the category of ‘why does it need to grow’?

A colleague of mine asked me in our morning meeting yesterday: “Michaels Stores. Isn’t that where you go to get Styrofoam balls?” The answer is Yes, among many other things. It’s a great destination for teachers to get material for class, and for people that like ‘scrapbooking’ as a hobby. While the need for the venue will likely not go away, the reality is that ‘scrapbooking’ is not gaining in popularity anymore, and expenses related to education are not going up (as sad as it is to say).


Opinions aside, the product is largely a commodity, is increasingly available on Amazon, and is largely present in every Wal-Mart. We’re not suggesting that the Wal-Mart factor is anything new. Because it’s not. But it certainly has not gotten less intense over the past five years.  In fact, in the four years leading up to the deal, comps were +3-4% annually, and in the three years subsequent – comps average (-2%).



MIK/DG: STYROFOAM BALLS - styrofoam balls

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more