ANF: 1Q12 Scorecard


The tattoo that the market inked on ANF today surprised us initially, given that we saw a (modest) headline beat, bullish margin outlook, and an incremental improvement in inventories– making for one of the more positive setups in retail in 2H. Sales are off, clearly, but margins are so strong such that guidance is in-tact. Let’s face it, top line expectations for ANF are not exactly high these days – at least that was our sense. In any other week, we think that these factors would have offset much of the revenue miss.


But unfortunately, most of ANF’s sales shortfall was in Europe, and it is reporting this in conjunction with a complete Euro freak-out in the market about a bank run and potential break-up of the Euro Zone. To be clear, our Macro team (which has traded the Dollar/Euro with extreme precision over a four-year scorecard) has a strong view that this will not happen – at least not in the near future – and that we’re seeing capitulation in the Euro.


Nonetheless, most of the people that trade names like ANF are likely to get caught up in the anxiety around weakness in US tourist markets, cannibalization in Europe (the tonal change of which was new), and the company’s comments about Macro. Heck, just to get a retailer to pronounce the word Macro is hard enough. At least they have a process (inventories, costs, etc…) to deliver results in a tough climate.  


When we model ANF, we get to EPS next year over $3. But today, it’s at 15x management’s EPS guidance for FY12. Clearly people who are increasingly concerned about traffic shriveling up on the vine can build to a number closer to $2. We can’t. But we can see how it can be done. Slap a low/mid teens multiple on that bad boy and you’re looking at 25% downside from here. We think that will prove to be a money-losing call over a 12-month time period. But for the next 1-2 quarters, ANF needs a catalyst to the upside to change people’s minds on the direction of earnings – otherwise it’s multiple on guidance will drift lower.


ANF: 1Q12 Scorecard - ANF SIGMA


Deltas in Forward Looking Commentary?


In order to properly measure performance relative to original expectations, we look at management’s First quarter results relative to Management guidance as well as any updates to previously provided full year 2012 outlook:


ANF: 1Q12 Scorecard - ANF Delta in commentary


Highlights from the Call


Top line Results: +10% overall

Comp: -5% with men's and women's performing comparably

US incl DTC Comp: +4%

International Comp: negative though economics remain strong (overall int'l +42%)

ANF: -4%

Kids: -11%

Hollister: -5%

Cannibalization/macro impacted international comps

Looking for strong earnings growth in 2H with peak cotton costs in the rear view



Opened 7 new Hollister stores internationally including 3rd new store in China with another 2-3 planned openings

Hong Kong ANF flagship opening in August

China remains a key priority



Opened Hamburg ANF flagship

Opening 3rd ANF in Munich later in the year

London- opened combined Hollister and Gilley Hicks store


Direct to Consumer: +40%

  • International business grew faster than the overall rate of growth
  • Margins remain strong
  • Will drive growth through increased international awareness and investment spending
  • US retail comps +4%, AUR up slightly
  • Happy with Spring Merchandise

Europe performance measured based on:

  • Performance relative to other stores in the mall
  • Are volumes consistent with original expectations when deal was approved
  • Are stores achieving annualizaed 30$ four wall margin
  • Is DTC growing at a healthy rate

Gross Margin: -241bps

  • Due to less promotional environment & slight better AUR

MGA: +9%

  • Increase due to marketing, equity compensation

Stores and Distribution expense: +14%

  • Store occupancy 179mm

EBIT Margin: -390 on 160bps of expense deleverage


Inventory: +44% above plan due to lower sales

  • Have adjusted receipts for the balance of the year based on inventory




  • GM slightly below last year
  • Modest deleverage of operating expenses

Full Year:

  • Comps down MSD based on modestly positive US comp and mid teen negative international
  • Greater than $250mm in revenue contribution from 2011 store openings as well as 2012 openings
  • Substantial recovery in 2011 GM erosion driven by international mix benefit and AUC improvement in Fall
  • FY2012 diluted EPS of $2.50-$2.75





  • Business was tougher than 4Q, Hollister moved from comping positive to negative
  • Difficult compares in 1H
  • Remain confident that stores opening today are hitting 30% four wall margin on conservative volume
  • ANF is its own biggest competitor internally in Europe
  • Haven't seen huge division between Northern and Southern Europe
  • Expect pricing to be up slightly in the Spring and down slightly in the fall
  • Pricing will be down more aggressively at ANF vs. Hollister in the Fall season

Tax rate:

  • Slightly below 35% for the full year


  • Macro is the biggest factor in the downtrend in Europe, Cannibalization is secondary
  • Now planning cannibalization into future modeling and macro environment to remain unchanged
  • No impact on Hollister unit growth plan, even with cannibalization performing to plan
  • Have pulled back some ANF openings due to lower economic expectations resulting from cannibalization
  • Even after adjusting for cannibalization, London flagship traffic remains ahead of expectations


  • Expect rate of growth to moderate significantly at the end of Q2

Gross Margin:

  • AUR in the US business was up
  • Markdowns were better than expected

Share Repurchase:

  • No additional buybacks included in guidance relative to Q1


  • Hoping to raise the AUR for the balance of the year
  • Flagship pricing mix has been adjusted- difficult to tell how results have changed
  • Expect AUR will be raised but will respond quickly if competition is reducing pricing


  • Had originally reduced guidance based on lower comps
  • Now that comps have been reduced again, guidance is unchanged due to better than expected GM
  • Big piece of the improved GM outlook is due to better AUC outlook
  • Slightly higher AUR assumption


  • Doing a lot of business is Ginza however to enter the market quickly, Ginza flagship deal was uneconomical
  • With better economics, the store would be more profitable


  • Negotiating for a flagship in China next year
  • There is a lot of business to be done in China
  • Pleased with start in China- need to treat china like Europe with real estate in best centers
  • First store in Shanghai- good store gaining momentum
  • Opened in secondary city where stores are meeting plan but less aggressive
  • First store in Beijing should not have been in a 3rd rate mall, performing below expectations
  • Optimistic about all brands in China
  • Hollister store in Hong Kong would be rated in the top stores list

US Stores:

  • Comp decline in tourist stores due to fewer tourists vs. brand issue

Consumer patterns

  • Traffic is down in flagship locations which is driving volume
  • Clearly see traffic down in US tourist stores

Divisional Margins

  • 700bps decline in DTC margin driven primarily by YoY sourcing cost impact (rates in 2011 not sustainable, expecting mid 40s rate)
  • International margin decline- big piece of decline also from sourcing with some deleveraging of expenses resulting from the negative comps
  • US margins less impacted by sourcing costs- markdown taken in Q4 disproportionately benefitted Q1

Women's business

  • Women's bottoms business is good
  • Short business is good

AUC reductions

  • Expected down DD in 2H
  • Have made substantial progress with costs mostly locked


  • Continue to make progress on fashion
  • The business will continue at a good rate
  • Always in chase mode for fashion- good thing
  • Less promotional and anticipate trend to continue


  • Being to use social media for international marketing particularly in China
  • Big pushes around creating awareness with openings in China

Mobile Technology:

  • Working so all online interaction is mobile and able in both the US and international
  • Currently 20% of online traffic coming from mobile

Domestic Store closures:

  • Planning 180 closures through 2015
  • Closed 5 stores in Q1
  • Will have an update later in the year after speaking with landlords

FX impact for the full year

  • Will be less than the (-$50mm) full year impact provided in Feb
  • Euro assumption for the full year similar to current spot rate

Gilley Hicks

  • Performed well on a comp basis in the first quarter
  • Very happy with the progress of the business



TGT: 1Q12 Scorecard



Not many retailers are proving that they’ve got what it takes to drive sales up and inventory down – in absolute terms. Most of the ones that do are doing it at the expense of margin. Not Target. Like TJX yesterday, Target’s results and outlook exceeded expectations and continue to reflect the premium we’re seeing come deservedly out of the quality players.  


We’ve got to admit that six months ago when we got the announcement that TGT suffered its third C-level defection (Doug Scovanner – CFO) that there’s no way we thought we could bank on such consistency. We were wrong.  By the time most people read this on Thursday morning, Wal-Mart will have reported numbers. It’s got big shoes to fill. 


What Drove the Beat?

With the +5.3% comps known, TGT’s EBIT margin exceeded expectations by 20bps (7.3% vs. 7.1E). Gross margin investments, store remodel and 5% rewards were more than offset by underlying strength in category gross margins and meaningful expense leverage. Target’s +5.3% comp, the strongest reported since 3Q05 was helped by weather combined with an earlier Easter. Though on a relative basis, this helped competitors as well. We think that JCP share gain is a factor. Sales were particularly strong in apparel, high frequency categories including food, healthcare & beauty as well as toys & sporting goods. Inventories at quarter end were down slightly YoY which drove the sales/inventory spread up 7 points sequentially now +6% -- one of the best moves we’ve seen out of any retailer quarter to date.  2Q12 guidance of $1.04-$1.14 is well above consensus of $1.00 with May comps performing in line with expectations to date.  


TGT: 1Q12 Scorecard - 5 16 2012 9 09 05 PM


Deltas in Forward Looking Commentary?


In order to properly measure performance relative to original expectations, we look at management’s First quarter results relative to Management guidance as well as any updates to previously provided full year 2012 outlook:


TGT: 1Q12 Scorecard - 2



Highlights from the Call


Comp: +5.3% represents the largest comp increase since 3Q05


TGT: 1Q12 Scorecard - 3

  • Traffic driven by unusually warm weather combined with an earlier Easter
  • Guests responded to spring assortment
  • Sales particularly strong in Apparel
  • High frequency categories including food, healthcare & beauty continue to grow consistently
  • Top performers in hardlines were lawn & patio, housewares, toys and sporting goods



  • Penetration in sales of the credit/debit continues to grow substantially and support the 5% rewards
  • Households spending more with the rewards program
  • Kansas City pilot market continues to grow penetration by 3 points creating confidence that the program will contribute to future growth



  • Modest decline in gross margins resulting from remodel program and 5% rewards partially offset by sales mix unrelated to remodels combined with improve category gross margins
  • Gross margin investments, store remodel and 5% rewards were more than offset by underlying strength in category gross margins and meaningful expense leverage
  • 50bps of opex leverage due to productivity improvements in stores and disciplined expense control.


Real Estate:

  • Opened 3 stores (1 store net of closure)
  • More than 100 remodels resulting in nearly 1000 general merchandise stores opened or remodeled in the last 4 years
  • Pleased with progress of launch in Canada in Spring 2013
  • Zellers begins vacating first set of stores In 2Q for TGT to begin renovating- planning 125-135 TGT Canada stores by 2014


Web Platform:

  • 1Q sales increased at a lower rate than in store
  • Traffic remains strong and conversion/satisfaction continue to improve
  • Focused on enhancing the guest experience near term
  • Long term planning integration of stores with online and social media to provide a great experience across all channels


Shops/new format:

  • Pleased with first flight of shops- currently offering beauty, apparel, pets, home & candy
  • Second flight in September offering men's apparel, women's apparel and home
  • Planning 1st three City Target stores in July (LA, Chicago, Seattle)
  • Curated assortment across categories localized to consumer needs
  • 2 additional Target city stores planned for October


Consumer Sentiment:

  • Peaked in February and declined in March and April suggesting slower growth near term
  • Recent declines in gas prices might lead to stronger household budgets




  • 2Q comp +3% (expected to be relatively consistent across the months)
  • May sales have been running essentially on plan consistent with prior guidance of LSD-MSD increase
  • Expect US segment EBITDA margins in line with last year and continued most gross margin rate declines generally offset by SG&A leverage
  • Expecting Q2 EBITDA margin rate to be flat YoY
  • Expect continued declines in Credit asset base though declines should moderate through the year
  • EPS of $1.04 to $1.14 and GAAP EPS of $0.94 to $1.04



Full Year

  • Full year comp +3%
  • Expect credit segment to earn a spread to LIBOR spread of 700bps or more
  • Expect Canadian SG&A to continue to build
  • raised outlook by $0.05 and expect adjusted EPS of $4.60 to $4.80 and GAAP EPS of $4.10 to $4.30.




Rewards Penetration:

  • Around 12% penetration but closer to 15% in Kansas City
  • Planning to increase penetration but unsure of overall opportunity



  • Pricing has been rational but will heat up as we approach the summer and back to school



  • Remains in great shape
  • Don’t see flat inventory as a performance obstacle in Q2



  • Investing meaningful resources in omni channel- committed to improvements
  • Have seen metrics improve so far in the spring
  • Have several releases coming in the Spring and Summer to improve website


Retail SG&A Improvement:

  • Significant productivity improvements has driven leverage
  • Disciplined expense management across the entire company


Product Mix:

  • Apparel has helped the mix 'quite a bit'
  • Consumables and commodity categories continue to be strong
  • Own apparel brands performing well
  • Good results in home
  • Currently have 10 own brands doing over $1bn in retail


Gross Margin:

  • Negative impact from 5% rewards and P Fresh
  • Saw significant improvement in mix
  • Expecting similar declines in GM going forward driven by 5% rewards and P Fresh
  • Apparel mix helps the bottom line
  • Owned brands also accretive to the bottom line


Traffic Uptick:

  • Weather drove traffic delivering great value, a great experience, good merchandising content



  • $3.3bn total this year
  • 2.5bn in the US, $800mm in Canada
  • Expect US to be between 2.5-3bn next year with Canada peaking near $1bn
  • $10mm-$11mm per store


Customer Sentiment:

  • Sentiment peaked in February but the decline in March and April partially due to gas prices
  • Tied to gas, unemployment, etc.


Weather Pull Forward

  • Reaching more normalized timeframe now
  • Difficult to tell how much was pulled forward
  • Weather related factors in the rear view



  • Many customers already familiar with the brand
  • Looking for a full blown TGT experience
  • Believe there is a white space opportunity in apparel and home
  • All of the Canadian competitors are anticipating the Target arrival 
  • Hope for a successful launch wowing the consumer with content, value proposition, service




Should be very accretive and acquisition EBITDA looks stable to growing


"Acquiring Peninsula Gaming is a transformative transaction that fits perfectly into our growth strategy by expanding our Company's scale, diversifying our platform, strengthening our financial profile, and generating meaningful value for our shareholders. The Peninsula properties are a strong fit for us, as they are well-managed and operate in resilient markets in the Midwest and South. We anticipate this transaction will be immediately accretive to earnings and significantly increase our free cash flow." -  Keith Smith, President and Chief Executive Officer of Boyd Gaming 



  • Since the properties are fairly new, there is minimal maintenance capex
  • Opportunity to grow revenues by introducing the B-Connected to the portfolio
  • The Iowa properties control more than 45% of the northern part of that market
  • The 2 Louisiana properties:
    • Their properties are halfway between Delta Downs and Treasure Chest.  
    • Most of the patrons are locals - so there is no overlap.
  • Kansas Star: only property serving the greater Witchita area.  Despite limited amenities, they are already generating $27MM of EBITDA in the first quarter operating out of a temp facility.
  • Post acquisition, 54% of their EBITDA will come from the Midwest and South assets vs. 35% today
  • They will refinance $1.2BN of Peninsula's debt, which includes paying for pre-payment fees on the existing debt



  • Is there any room for margin improvement at the assets they are acquiring?
    • Expect a benefit from B-Connected 
    • Opportunities on the centralized services side like purchasing
    • This deal is more about growth than synergies
  • Are comfortable with the pro-forma exposure to Louisiana since each of their properties is in a difference sub market
  • The $1.25BN of debt financing is inclusive of the seller note.  They are not ready to disclose the financing terms.
  • They will only be on the hook for funding Phase 3 of the Kansas Star development.  The permanent facility will be funded by the time it opens. They will see a decline in margins at Kansas Star once all the amenities open but total EBITDA should grow as they add incremental revenue.
  • Management fee from Peninsula gaming? There will be some form of management fee but they don't know how much.  
  • They are non-committal on how they will fund the $200MM of cash.  They don't need to raise equity but have the option. 
  • The deal will not require any amendment on their existing revolver
  • PNK's Baton Rouge impact on Evangeline Downs: 
    • The property is very stable
    • has been there a long time and given the local customer base
    • they do not expect to see a material impact from BR
  • How long will B-Connected take to implement?
    • About 6 months after closing
  • They are pretty comfortable that the competitive landscape will remain stable around Kansas Star.  BYD thinks that Peninsula has done a great job master planning the property.  For PH2, they see a lot of upside from the equestrian facility and hotel addition.
  • This deal will not preclude them from acquiring the balance of Borgata if it becomes available at the right price
  • The $10MM of corporate will likely stay in place.  The assets are run very well.
  • Rebranding is not on their radar screen at the moment
  • They are tendering for the bonds at T+50 but that's included in the cost
  • Unclear how much goodwill will be and how much of incremental D&A they will have.  The run rate number they have now may not be a bad number to use for now.  $50-55MM is likely a good run rate.
  • There could be some accounting for the earn out
  • Just the management fee will accrue to benefit BYD's covenants 
  • Legislative action is needed for more Kansas casino licenses.  There is potential of a tribal facility but it's not likely. 
  • There is some talk about electronic bingo in Minnesota, but don't expect any impact on them if that happens



  • BYD has entered into a definitive agreement to acquire Peninsula Gaming for total consideration of $1.45B
  • "The purchase price represents an EBITDA multiple of 7.0 times based on the trailing 12-month EBITDA of $109 million for Peninsula's Iowa and Louisiana properties, an annualized run-rate for Kansas Star based on its first-quarter 2012 EBITDA of $26.8 million, and corporate expense of $10 million."
  • Transaction is expected to close by year end
  • BYD has committed financing for the acquisition, which should be deleveraging.  Funding will consist of $200MM of cash, $1.1BN of new debt, and a $144MM note provided by the seller
  • If Kansas Star's 2016 EBITDA exceeds $105MM in 2016, BYD will make additional payments to the seller in the amount of 7.5x EBITDA in excess of $105MM
  • The acquisition will add 5 properties to BYD's portfolio
    • Kansas Star Casino near Wichita, Kansas 
    • Diamond Jo Casino in Dubuque, Iowa
    • Diamond Jo Worth in Northwood, Iowa
    • Evangeline Downs Racetrack & Casino in Opelousas, Louisiana
    • Amelia Belle Casino in Amelia, Louisiana

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CONCLUSION: Chinese economic growth is slowing at a faster rate as of late while market-based indicators of monetary easing speculation are accelerating, leaving the Chinese economy at a perfectly confusing fundamental juncture. We do, however, continue to side with our research process – the net output of which points to a bottoming/inflection point in Chinese growth here in 2Q.


VIRTUAL PORTFOLIO: Long Chinese equities (CAF).



The month of APR certainly brought some fairly sour economic growth data out of China. The headline data was as follows: 

  • APR Industrial Production: +9.3% YoY vs. +11.9% prior
  • APR Retail Sales: +14.1% YoY vs. +15.2% prior
  • APR Fixed Assets Investments YTD: +20.2% YoY vs. +20.9% prior
  • APR M2 Money Supply: +12.8% YoY vs. +13.4% prior
  • APR New Loans: +CNY681.8B MoM vs. +CNY1010B prior
  • APR Exports: +4.9% YoY vs. +8.9% prior
    • To US: +10% YoY vs. +14% prior
    • To EU: -2.4% YoY vs. -3.1% prior
  • APR Imports: +0.3% YoY vs. +5.3% prior
  • APR Manufacturing PMI: 53.3 vs. 53.1 prior (improved at a slower rate, though)
  • APR Services PMI: 56.1 vs. 58 prior 

Behind the scenes, APR also saw a slowdown in Chinese energy demand and an incremental deterioration of conditions within the country’s property market: 

  • APR Electricity Production: +1.5% YoY vs. +7.3% prior
  • APR Processing of Crude Oil: -0.6% YoY vs. +1.9% prior
  • APR Real Estate Climate Index: -7.3% YoY vs. -5.9% prior 





As an aside, we flag these lesser-tracked data points because of their signaling power into the current Chinese growth model: 46.4% of GDP is Gross Fixed Capital Formation and Industrial Production accounts for 70% of all electricity use.


Moving along, it also appears that April’s Showers invited themselves into MAY, as the nation’s four largest banks are reported to have recorded only +CNY20B of Net New Lending MTD (per the Shanghai Securities News, citing unidentified sources). If this report is indeed accurate, it is an early (and extremely negative) read on the state of Chinese economic growth here in MAY, given the capital intensive nature of the Chinese economy.



Looking ahead, our models continue to point to a bottoming/inflection point in Chinese growth here in 2Q and the APR inflation data (CPI: +3.4% YoY vs. +3.6% prior; PPI: -0.7% YoY vs. -0.3% prior) lends credence to our long-held view that Deflating the Inflation alone would prompt the State Council, PBOC and the China Securities Regulatory Commission to continue “fine tuning” policy in support of growth. NOTE: we are not of the view that incremental easing is a function of slowing growth data; the latter has been purposefully engineered by Chinese policymakers starting as early as 1Q10 (recall our then-bearish Chinese Ox in a Box thesis).


China’s near world-beating currency strength has been supportive of domestic disinflation and that looks to continue despite what we see as TREND and potentially TAIL duration CNY weakness (commodities have higher beta on the downside) – a view that is increasingly being priced into forward-looking FX markets and in the yuan-sensitive Dim Sum bond market (yields breaking out as CNH deposit growth slows).








Most importantly, Chinese interest rate markets have dramatically accelerated their pricing in of easier domestic monetary policy over the past week (all spreads relative to the PBOC’s Benchmark 1yr Household Deposit Rate): 

  • 1yr Sovereign L/C Yield: -120bps vs. -70bps 1wk ago
  • 1yr OIS: -70bps vs. -24bps 1wk ago
  • 1yr PBOC Bill Yield: -78bps vs. -28bps 1wk ago 



In short, while we don’t view a material acceleration in Chinese economic growth in 2H as a probable event absent a removal of the property market curbs, we do think further RRR reductions and actual interest rate cuts will start to filter through the economy and provide an eventual boost to Chinese economic growth.



Given that Chinese interest rate markets have put on a marked move towards the expectation of further/more aggressive monetary easing of late, it strikes us as odd that the equity values of China’s most capital intensive industries (Financials and Industrials) are not outperforming on a S/T basis. We do expect them to outperform in the aforementioned scenario, so we’ll continue to monitor this for signs of eventual follow-through or further hold-out.




Even rumors that the China Securities Regulatory Commission may grant foreign pension funds access to China’s capital markets wasn’t enough to boost Chinese stocks at large this week. It is our view that improving TREND-duration fundamentals will spell outperformance of Chinese equities over that duration. TAIL-duration questions remain; a potential property price collapse and a dramatic deterioration in systemic bank credit quality are two key structural issues we need to see resolved before we’d argue that the Chinese economy is in the clear from a L/T perspective.



All told, Chinese economic growth is slowing at a faster rate of late while market-based indicators of monetary easing speculation are accelerating, leaving the Chinese economy at a perfectly confusing fundamental juncture. We do, however, continue side with our research process – the net output of which points to a bottoming/inflection point in Chinese growth here in 2Q.


Darius Dale

Senior Analyst

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