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JCP: Credibility Shot to Pieces

This announcement that JCP President Michael Francis is leaving the company after less than 9 months on the job is not only embarrassing, but it might have severed the last shred of credibility Johnson had with Wall Street.



After the close, JCP announced that Michael Francis -- President and head of merchandising -- is leaving the company 'effective today'. There's been a lot of moving parts in the JCP ranks, but this one is a disaster. Francis just joined from Tar-jay 8 1/2 months ago. He's been one of the two key operating people that flanked Ron Johnson on stage in the past two investor meetings.


Make no mistake, this is an unmitigated disaster, for four reasons. 1) Francis just hired a merchandising organization. Now he's out. What does that tell the troops as it relates to organizational stability? 2) He probably did not get canned because 'he was smoking plan.' 3) What happened to a long-term plan? 4) ) Most notably, this blows Johnson's credibility, which was already hanging by a thread after how poorly he handled the 1Q release, and sold stock before the event.


One thing we'll give Johnson is that he sure is decisive. He made a mistake, and he's fixing it -- quickly. But this was a big mistake...and one that he paraded around to customers, investors, and future employees. This was a biggie.


We have keep ourselves honest and look at this and think that anyone who was hanging on to any shred of this as a turnaround has to throw in the towel -- thereby making 'short JCP' a consensus call. But on the other hand, the $1.40 GAAP consensus needs to come down below a buck. Until it does, this thing is flat-out expensive.


We continue to believe that this is all about duration. Johnson is paid to get this right in another 5-years. That might or might not happen. But we think the real call relates to the impact JCP will have on the retail ecosystem while it evolves. Today's move sends an ugly sign to Wall Street, but an even uglier one to vendors. KSS and Macy's must be licking their chops. 



Here's a couple of interesting YouTube-style sound bites from the analyst Meeting that took place just 1 months ago on May 15.


  • Johnson "...Michael [Francis] and I are looking forward to sharing our vision with you [later in the meeting]."


  • Francis: ... our merchants have totally embraced the new direction. We have a lot of them here today, but they are loving the chance to compete on product. They never sit in a room – 40% of the time last year was what's the price tomorrow, what's the price next week? Never happens. The only question is what's the next great product we can develop? How do we present it better? How do we get it in store on the right inventory? How do we win on merchandise? And the teams are doing a fabulous job.


[Hedgeye Note: Guess not...]



  • Average trip gambling spend among visitors who gamble has reached a 10-year low
  • Visitors are spending more and more on food and beverage
  • Average LV visitor total budget has declined by almost 20% to $1,060 since the 2006 peak of $1,289.


HOSPITALS: Healthy lobbying

Lobbying is a tricky game. Everyone in Washington knows this, but don’t worry – the politicians definitely have your best interests at hand.  It could be argued right now that the biggest catalyst in healthcare at the moment is the Affordable Care Act (ACA). The Supreme Court is said to have made a decision on whether to uphold or strike down ACA but that’s just speculation. Regardless, hospitals have much to gain should the ruling come out in the Obama administration’s favor.


Hedgeye Healthcare Sector Head Thomas Tobin has put out a chart showing just how much lobbying has occurred pre and post-ACA. Here’s how Tobin composed the chart:


Below we show total lobbying expenditures by HC industry over the last 5 years.   We’ve combined Hospitals and Health Professionals (which include the AMA and other Physician groups) as their interests are generally aligned on the larger issues.   As can be seen, in combination, Hospitals & Physicians support the largest Lobbying effort with total lobbyists and expenditures averaging some 2K and $190M annually over the last 3 years.”


HOSPITALS: Healthy lobbying - hospital lobbying

PROTECT THIS HOUSE: Putting UA to work

Similar to our view of Nike, we like Under Armour more on a longer-term duration rather than the immediate-term TRADE duration. We added and removed UA from the virtual portfolio due to macro risks but Hedgeye Retail Sector Head Brian McGough remains bullish on the company for a variety of reasons.




First, UA is a great brand with solid recognition.  It basically rolled into the market a decade ago and “punched Nike in the jaw” with its line of compression apparel. The company also has a habit of reinvesting capital back into the business rather than pumping up operating margins.


For the TRADE duration, UA is looking a little too expensive for some. But as far as the TREND and TAIL durations go, we like UA for the long run. Look for a stronger dollar to boost UA’s margins due to the company’s lack of international operations. We also estimate that UA will be pushing out $3 billion in revenue by 2014 compared with $1.5 billion in 2011. 

HedgeyeRetail Visual: BBBY Comp Upside?

Our Home Furnishings index suggests BBBY’s 1Q12 comps should come in +6.5% vs. guidance of +2-4% and consensus expectations of +4.1% when the company reports after the close on Wednesday.


Over the past 12 quarters, BBBY comps have only missed consensus once (in 3Q11, by 40bps) despite coming in slightly above the high end of guidance (+4.1% vs. +2-4%). BBBY did not miss its own comp guidance once over that same time period and bucked the street by an average of 250bps over those 12 quarters. Mind you, however, that this coincided with the period during which it contributed to, and benefitted from the Bankruptcy of Linens ‘N Things.


Now, comp expectations are above the high end of BBBY’s standard +2-4% guidance at +4.1%, and as noted, our model suggests that we’ll see it.  But given our poor outlook for the company longer-term, we’d view any near-term strength as an opportunity to get out.


We see concern over the runway for omni-channel growth given BBBY’s e-commerce penetration has declined over the past 4 years with its exposure to the older spending group increasing. Of the nearly 100 companies we analyzed, BBBY was ranked 9th in terms of exposure to the 55 and up spending demographic which actually increased in 2011 relative to 2010. Finally, with a 93% direct product overlap with amazon.com, there is additional risk in transitioning current BBBY shoppers from in store to online without remaining vulnerable to attrition from AMZN- BBBY’s competitive advantage is its in store shopping experience, quite the opposite for AMZN.


HedgeyeRetail Visual: BBBY Comp Upside? - Home furnishings index


HedgeyeRetail Visual: BBBY Comp Upside? - BBBY comp guidance history



Whispers: SP500 Levels, Refreshed

POSITIONS: Long Consumer Staples (XLP); Short Industrials (XLI)


I’ve only heard 4 whispers about different flavors of interventions in the last hour. That’s just got to be good for someone, because it sure can’t be for confidence.


No trust; no volume. That’s the market you have to risk manage right now. Equity outflows remain a paramount factor when we get to the top end of either my immediate or intermediate-term range.


Across risk management durations, here are the lines that matter most: 

  1. Intermediate-term TREND resistance = 1365
  2. Immediate-term TRADE resistance = 1347
  3. Immediate-term TRADE support = 1319 

In other words, keep managing the risk of the range. It’s somewhat predictable. So are the whispers.



Just make sure to have a large cash position for that day when the whispering stops,



Keith R. McCullough
Chief Executive Officer


Whispers: SP500 Levels, Refreshed  - SPX

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