FINL: Q4 Preview


Conclusion: We expect a solid quarter driven by robust February sales to finish out the quarter and believe that current trends suggest March is running ahead of expectations for Q1 as well.


TRADE (3-Weeks or Less):

We’re at $0.86 for FINL headed into Thursday’s print after the close ahead of Street estimates at $0.81E.

  • February sales in the Athletic Specialty channel came in big up +17% increasing the quarterly average a full 4pts to +10.3% from +6.3%. Based on the Hedgeye FINL Comp index below, which has proven to be a strong indicator, we expect comps of +10% vs. +6.7%E to drive sales up +15.5% reflecting the 14thweek and ~$25mm in incremental sales.
  • These results are even stronger than FL’s bullish commentary last month noting that February sales were up mid-teens month-to-date. This strength isn’t captured in consensus estimates.
  • In addition, weekly sales suggest that March is running up HSD. While a sequential deceleration from February levels, this too is better than expectations and will be viewed favorably if confirmed as expected on the call.
  • In light of a more robust top-line, we are modeling GMs up +150bps driven by +110bps in occupancy leverage and +40bps of merchandise margin and SG&A up +15% yy reflecting incremental e-commerce investment.

TREND (3-Months or More):

The company remains committed to investing in its digital platform, which has and will continue to drive higher than average SG&A growth for the next few quarters. This is a known, however, and is largely the reason why FINL has been trading at a discount relative to its historical range as well as to FL among other reasons. What’s changed here recently is the top-line. Sales are coming in stronger than expected helping to offset FINL’s higher costs. If this trend continues as we’ve seen since February, we could see upside to our $1.85 2012 estimates.


TAIL (3-Months or Less):

FINL is spending when it should to fuel its e-commerce business, which now accounts for ~10% of total sales. With 60% growth last quarter there is little question that this is a key growth engine. As investment spending rolls off and e-commerce grows in addition to further growth in its run specialty store initiative, we expect earnings to approach $2.20 in two years. At $25, will FINL make you rich? Probably not, but we're definitely positively inclined on the name here.


Casey Flavin



FINL: Q4 Preview - FINL Comps


FINL: Q4 Preview - FINL Comp Table



Experts vs Algos

This note was originally published at 8am on March 15, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Why are experts inferior to algorithms?”

-Daniel Kahneman


That’s just another great risk management question from the guru of behavioral finance on page 224 of “Thinking, Fast and Slow.” If you don’t have time to read the entire book, definitely take the time to study and consider the implications of Chapter 21, Intuitions vs Formulas. In the last 4.5 years of my time away from a hedge fund desk, I’ve thought a lot about Experts vs Algos.


Understandably, algorithms scare people; particularly people who have zero analytical competence in modern math (i.e. 99% of the politicians and central planners running America). This contrasts sharply with the Chinese political leadership where 8 of China’s top 9 political dudes are mathematicians and/or scientists.


I started building my own predictive tracking algorithms so that I could attempt to remove the emotion when I hit buy and sell buttons. It helped me so much that we started plugging these predictors into our fundamental Growth and Inflation models for countries. That’s why our intermediate-term forecasts on things like GDP, PPI, etc. are so variant from the Old Wall’s consensus.


I’m not saying that what we have built is perfect. However, I am saying it’s better than what I used to use – and a lot of people on Old Wall Street still use what I was taught to use at A) the Keynesian School of Economics and B) the Sell-Side brokerage firms that perpetuate its dogmatic principles.


Kahneman’s answer to the aforementioned question is pretty simple. “One reason, which Meehl suspected, is that experts try to be clever, think outside the box, and consider complex combinations of features making their predictions. Complexity may work in the odd case, but more often than not it reduces validity. Simple combinations of features are better.” (page 224)


Kahneman goes on to remind us that “humans are incorrigibly inconsistent in making summary judgment of complex information.” And if there is one thing that any of you know about your own team’s investment meetings since late 2007, that’s God’s honest truth.


Back to the Global Macro Grind


Rather than attempt to handicap who has to chase S&P 1400 into options expiration tomorrow (there’s a massively skewed position in the 1400 strike calls vs puts), I’ll just rattle off what my Algos think on risk ranges, prices, and probabilities vs Experts:

  1. SP500 could easily trade to 1401 inasmuch as it could fall to 1369 – that’s my immediate-term TRADE range
  2. US Equity Volatility (VIX) holds its long-term TAIL line of 14.21 support like a champ; upside to $17.34
  3. US Equity Volume/SKEW signals are at least as bearish as the 1987 signals that started developing in Q1 of 1987
  4. The first 2 of 9 S&P Sectors that have snapped their immediate-term TRADE lines of support (XLE and XLB) did last yr too
  5. Size (as in the risk management factor to describe cap) flashed another bearish signal yesterday (Russell 2000 = -0.82%)
  6. US Basic Materials (XLB) and Small Cap (IWM) stocks have been making lower-highs since peaking YTD on Feb 3rd
  7. US Dollar Index has moved back into a Bullish Formation (bullish on all 3 risk mgt durations – TRADE, TREND, and TAIL)
  8. US Treasury Yields are ripping above their intermediate-term TREND lines of 0.26% (2yr) and 2.03% (10yr), respectively
  9. US Treasury Yield Spread has widened 20bps as the Financials (XLF) have moved to immediate-term TRADE overbought
  10. US Technology (XLK) Sector Study is flashing a grossly immediate-term TRADE overbought signal at $29.97

While it’s tidy to tell ourselves that everything in America is fine, what all of this is really saying is that if Apple (17% of the XLK) and the Financials (up in a straight line in the last 2 days in response to the rallying cry of “success” to a made-up test) stop going up, the SP500 will probably stop going up too, in the immediate-term (3 weeks or less), at 1401.


What are the rest of the world’s signals telling us?

  1. Japanese Yen is crashing (yes when a Top 3 world currency drops 10% in a straight line, that’s a crash)
  2. Japanese Equities (like European Equities did around this time last year – pre Sov Debt Crisis) like a crashing currency
  3. Chinese stocks, down for 2 consecutive days (-3.3%) post the US “stress test”, still see Growth Slowing
  4. Indian stocks, down -1.6% overnight, failing at immediate-term TRADE resistance of 18,023 again, don’t like oil up here either
  5. Germany’s DAX melts up to +20% YTD as German bond yield spreads versus US Treasuries widen (bullish for Germany)
  6. Spain’s stock market (IBEX) is flashing a very bearish negative divergence vs Global Equities (down -1.4% YTD)
  7. Spanish bonds, currency (euro), and stocks are now all falling at the same time – clean cut sovereign debt alarm bell ringing
  8. Greece’s stock market would need to close > 771 on the Athex to signal any accomplishment of quantitative support
  9. Israel’s Equity market (TelAviv25) up for the 3rdconsecutive day, holding 1081 support (post Gaza “truce”)
  10. Dr Copper agrees with China on Growth Slowing, failing to close above its long-term TAIL line of $3.98/lb, again

Obviously weaving throughout this Storytelling of “growth is back” (as US GDP Growth gets cut in ½ sequentially vs Q4) are US stock market centric people trying to tell you that Gold falling is a “bullish sign for US stocks” (like they did in FEB and SEP of 2011). My Algos vs Experts on that say God Speed. Bond Yields spiked, momentarily, as US Stocks topped in February of 2011 too.


I’ve tried to not get mad at my Algos since 2008. They don’t give me any lip, and they don’t make excuses when they fail. They may have not always made my risk management views popular either. But at the big turns, before big draw-downs in asset prices, they’ve also gotten me out of the way.


My immediate-term support and resistance ranges for Gold, Oil (WTIC), US Dollar Index, Japanese Yen, and the SP500 are now $1644-1691, $105.02-106.49, $79.79-80.61, $82.71-83.98, and 1369-1401, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Experts vs Algos - 11. IBEX


Experts vs Algos - vp 3 15


Despite dollar weakness over the past week, most agricultural commodities that we monitor declined week-over-week.  Chicken wing prices continue to gain as leading indications of chicken supply and increasing demand for chicken from food service.






Gasoline prices continue to rise as Ben Bernanke’s recent commentary sent the dollar lower.  Average national prices are now above $3.90 and consumers’ displeasure is increasingly apparent.  Below, we present the most recent quotes from a select group of companies on the issue of gasoline prices.  We expect, if the current trend continues, for the tone of these statements to change when each management team discusses gas prices again. 


There have been two dueling schools of thought during the recent debate on gas prices that we feel are worth calling out.  First, there seems to be a camp that has a fixed price such as $3.75 or $4.00 that is seen as the “rubicon” beyond which consumer demand is greatly impaired.  Second, there is another group that proposed that it is the rate of change, rather than the dollar price, that impacts consumer spending.  While we have a view on that debate, the important takeaway from the chart below is that there is ample evidence to suggest that a consensus can be reached; not only are gas prices closing in on $4, they have gotten there in an expedited fashion (+20% YTD, roughly). 





WEN: Obviously, we're all watching gas prices carefully and – but consumers seem to quite honestly have digested that quite nicely.


BAGL: If employment continues to be positive, again from my perspective, I think that sort of offsets any impact that you might get – we might get on gas prices … That said, if employment tightens up or we don't see continuously positive momentum than longer-term, obviously, if we get a $5 gas price, that's one of those price points that hits overall.


CBRL: We think that given our susceptibility particularly to – in the summer travel season to potential increases in gasoline prices that it is appropriate to be suitably cautious about our third and fourth quarter traffic outlook.


DRI: Yes, I would say as we look back, we don't think the current levels, the $4 current gas prices, no longer represents sticker shock.









Goldman released a note yesterday saying that coffee may gain in Brazil if weather remains dry in the country’s crop growing regions.  German researcher, F.O. Licht GmBH, also said in a report that the main coffee growing areas in Brazil were “drier than usual” in February.




World coffee demand growth remains “resilient”, according to Roberio Silva, executive director of the London-based International Coffee Organization.  Silva attributes the resilience to emerging market demand, increased consumption in producing countries, and the expanding popularity of single-cup dispensers.






Egg sets placements continue to contract at around the same rate, -6%, according to the Broiler Hatchery report released by the USDA today. This implies that supply will remain tight as the industry looks for more favorable business conditions before expanding production.  As the chart below shows, supply is not showing any clear signs of picking up.


WEEKLY COMMODITY CHARTBOOK - egg sets wing prices





Coffee: Prices are now down -24% versus last year


PEET: We expect 2012 coffee costs to rise 12% instead of last year's 42%.


SBUX: We've taken advantage of the recent declines in the C-price to lock in more of our coffee needs for fiscal 2013. We now have six months of our fiscal 2013 requirements secured at costs moderately favorable to 2012.




















WEEKLY COMMODITY CHARTBOOK - chicken whole breast








Howard Penney

Managing Director


Rory Green




investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.


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


Keith shorted CZR in the Hedgeye Virtual Portfolio at $13.89.  According to his model, the TRADE range is between $11.89 and $13.97.



CZR shares have been extremely volatile as investors and analysts try to determine fair value.  In our view, outside of an option on internet gaming, CZR's core casino operations provide zero value given its huge debt burden of >$22 billion.


Better regional gaming performance and a recovery in Vegas still do not justify any equity value.  Investors may be playing roulette with the internet gaming option.  A federally legislated US online poker market is no sure thing and even if it does occur, investors may be too optimistic on expectations for timing.




Keith bought CZR in the Hedgeye Virtual Portfolio at $13.89.  According to his model, the TRADE range is between $11.89 and $13.97.



CZR shares have been extremely volatile as investors and analysts try to determine fair value.  In our view, outside of an option on internet gaming, CZR's core casino operations provide zero value given its huge debt burden of >$22 billion.


Better regional gaming performance and a recovery in Vegas still do not justify any equity value.  Investors may be playing roulette with the internet gaming option.  A federally legislated US online poker market is no sure thing and even if it does occur, investors may be too optimistic on expectations for timing.