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Pay Attention to JJB

This JJB update that sales and margins continue to slide tells us a number of things… (FYI, JJB is like The Sports Authority of the UK).

1) Things ain’t gettin’ any better in European retail

2) Confirmation that The European Championship was a bust.  Here’s a good theory from Moshe Silver, Hedgeye’s ever-watchful head of compliance. In his words “Further to your mention of weak Championship sales: the semi-finalists in the Euro Cup were Germany, Portugal, Italy and Spain – with Spain winning the Cup.  50% unemployment in Spain ages 30 and under, and not much better in Italy or Portugal.  Only the Germans can afford much in the way of discretionary spending, and they obviously weren’t jamming the barricades to buy Spanish jerseys.  Maybe it’s simply the fact that the folks who would love to buy championship gear just can’t afford to?  Except for the odd American (like me) who was in Madrid for the championship celebration, who would buy Team Spain?”

3) Dick’s Sporting Goods threw JJB a $31.8mm lifeline in April, buying a call option to become the controlling shareholder in 1Q13. With JJB on the ropes, our sense is that DKS will both protect and accelerate its investment, and potentially buy the entire entity in 2H.

4) Other creditors, including Adidas, have also flexed to get JJB in order. Interestingly, Nike has not been mentioned in the general press as one of those parties.

5) A wrinkle here is that Sports Direct – which is one of the thorns in JJB’s side – might have to deal with a far superior competitor in Dick’s Sporting Goods. But DKS holds the exclusive for Umbro in the US – a brand that Sports Direct has a vested interest in buying now that Nike has announced its planned divestiture. The primary shareholder of Sports Direct – Mike Ashley – has been extremely non-valuation-sensitive (and dare we say ego centric) with purchases in the past. He’ll want to own Umbro to use as a competitive weapon against DKS. The Punchline? The winner here might be Nike’s valuation for Umbro. 

Short The Market


Hedgeye Director of Research Daryl Jones appeared on CNBC today to discuss the momentum in stocks in the heat of earnings season.  Daryl isn’t afraid to make a bold call like shorting the S&P 500, Others may disagree, but combined with our quantitative and fundamental valuations, we see opportunity where others don’t.


Valuing Sports Dollars

With Manchester United looking to raise approximately $300mm in an IPO, we should take a minute to put a few things into perspective around the values of sports teams, and brands that endorse them.


A) As it relates to the full value of Manchester United, it has nearly 400mm fans worldwide. Note to you/us Yankee fans who think it is the top team in the world – there are only 310mm people in the US, and outside our borders no one cares about the Yankees. Forbes ranks Manchester United as the number 1 team globally with a value of about $2.23bn. Next is Spain’s Real Madrid at $1.88bn. The Yankees manage to come in next in line at $1.85bn, but the interesting callout is that it is tied for third with the Dallas Cowboys. Then there’s a big step down to the Washington Redskins at $1.56bn, and no other teams passing the $1.5bn mark. As it relates to changes in value over the past year on the margin, here are some callouts amongst the top 50 franchises in looking at last year’s Forbes values vs what it is reporting today.

  1. The most notable point, by far, is that the two teams with the greatest increase in value are both in Los Angeles. The next two teams on the list are in Spain (FC Barcelona and Real Madrid). We get the California angle, but is Forbes watching what’s going on in Spain? Not so sure about that.
  2. As bullish as a $1.4bn valuation might sound for the Dodgers, the team was purchased by Guggenheim Baseball in April for $2bn which was based on an impending local TV deal that is expected to be worth nearly $3.5bn in cash and equity. Steve Forbes is probably getting several angry phone calls this week questioning valuation math.
  3. Despite the Juventus Football Club moving into a new stadium this year with a 49% increase in capacity, it fell off the top 50 list and was replaced by the Texas Rangers. Now valued at $674mm, the Rangers won the AL West only to lose in the World Series for the second straight year in game 7. Regardless, attendance reached Franchise history highs and the team struck a 20yr cable deal with Fox Sports Southwest beginning in 2014 valued at $3bn.
  4. Only 5 of the top 20 clubs are Football/Soccer.
  5. 12 of 20 are US rules (NFL) Football. There’s a  little snippet for NFL fans that hate soccer.

Valuing Sports Dollars - increases in team value


B) It just so happens that Nike does, in fact, endorse Manchester United and pays in the vicinity of $40mm per year for the rights to manufacture ManU replica kits. It is anticipated that come 2015 when Manchester United’s current deal with Nike expires, they will be looking to ink a deal worth up to  £600m over 10 years. This is pre-contract negotiating in the press, but it’s interesting to note that if they get £60 per year (nearly $95mm annually), Manchester United would have the highest valued contract amongst Nike's high profile endorsements topping The French National Football Team, FC Barcelona,~7 Lebron James’ and 314 Tim Tebows…. 


Valuing Sports Dollars - Nike Endorsement Values


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HedgeyeRetail Visual: Is eBay Adding to GSI?

While not exactly the first metric people look at with eBay, the performance of GSI Commerce, which it acquired in June of 2011, is particularly important to us as a proxy for brick & mortar expansion into the digital marketplace. GSI (8% of eBay sales) specializes in creating, developing and running online shopping sites for brick and mortar brands and retailers (customers include but are not limited to Sport’s Authority, Dick’s Sporting Goods & Toys R Us). It might be too soon to judge, but since the acquisition, growth at GSI has gone in the wrong direction. It still rang in a healthy 21% comp in the latest quarter, though this was a 500bp deceleration from the 26% rate posted in both 4Q and 1Q. It’s not the end of the world, but the synergies have clearly yet to show themselves.


HedgeyeRetail Visual: Is eBay Adding to GSI? - GSIC COTD


  • According to AppData, Double Down’s MAU (monthly average user) looks like they’ve taken a breather since April.  Its DAU (daily average user) also look flat QoQ at 1.4MM.
  • While Double Down is not going to make or break the quarter for IGT, it is a sore topic for many investors.   Therefore, disappointment in interactive may elicit an exaggerated response from the investor community, especially given that Patty has marketed this segment as a large source of growth for IGT.
  • Based on our analysis, Double Down casino seems to be losing some market share in its competitive set.  We estimate that their market share in 1Q12 was approx 8.7% and has declined to 6.6% in 2Q12.  The good news is that July share seems to be tracking at 6.8% up from just 6.1% in May.



FCFS: Canary In A Goldmine?

Our original call pre-earnings on First Cash Financial Services (FCFS) was that it would take a hit on earnings due to falling gold prices and the influx of “we’ll buy your gold now” stores popping up all over the place. That was our consensus on the pawn space as a whole. FCFS managed to beat expectations for Q2, but after speaking directly with management, we’re still cautious about this name.


Management pushed back on our argument. Since we had some valid discourse, we’ve decided to outline the points they made on the call below:


  • Point 1: On the issue of gold, FCFS says it’s becoming a smaller portion of their business. US stores see gold for 60% of collateral, while Mexico only sees 20%. That’s significantly less than competitors in the pawn space like CSH and EZPW.
  • Point 2: There are two types of customers: those trying to just sell their gold and those who are using valuable items (i.e. family heirlooms, wedding rings) for collateral that they ultimately want back.
  • Point 3: FCFS is growing. From 2002 to 2Q12, they’ve gone from ~120 stores to 675 stores. The bottom line is that store growth has likely accounted for a larger portion of long-term revenue growth than we had assumed, which means that gold price tailwinds must have accounted for a smaller portion.


This quarter's results are consistent with our basic view on First Cash.  The company is a solid operator with strong growth prospects baked into existing store count from acquisitions and new store openings.  However, First Cash has significant gold exposure, though less than CSH and EZPW, and so long as gold prices are moving sideways to lower we think it will be hard for FCFS shares to hold their current level. 



FCFS: Canary In A Goldmine?  - FCFS earningsreview

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