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JCP: Not Ready For Primetime

NOTE: This article was originally published on August 1. After reporting second quarter results, it has become clear that the company's turnaround plan is not working despite a pop in shares in today's trading. Same store sales (SSS) fell 21.7% in Q2 when analysts expected a 17.4% drop. Total revenues fell 22.6% to $3.02 billion. CEO Ron Johnson has promised to "stay the course." 

 

 

JCP: Not Ready For Primetime - JCP concept5

 

Despite the hype surrounding the new JCPenney (JCP) stores due to rollout this year into 2013, we remain bearish on the stock, a call that we’ve stuck with for about a year now. Ron Johnson and executive management continue to fail to execute on their turnaround plan which has helped the stock fall from $40 a share to $20 a share in under a year.

 

JCP proudly announced the unveiling of its new store concepts yesterday in a release, showcasing the mini-stores for the Levi’s and Arizona brands. While the video they produced was entertaining, showing off their concept of a “denim bar,” the Hedgeye Retail team begs to differ noting that there are noticeable hiccups in the rollout.

 

The team checked out a JCP store yesterday and instead of a hip, modern concept, found a half-completed store that resembled a warehouse more than anything. The Arizona stores were not ready due to a late shipment of wallpaper and the entire store had construction going on for other mini-stores that gave the store an unsightly appearance.

 

Here are the takeaways from our team, along with some choice photos below:

 

• The women’s Levi shop is already open although there we no i-pads in sight. This could simply be a store that did not receive the full blown Levi “store” however notable given the “denim bar” innovation.

 

• The Arizona shops (both men’s and women’s) will not be opening on time despite having been scheduled to open with the Levi shop due to wallpaper arriving late. The images below show a view into the women’s shop which has no décor as well as the men’s shop which is just to the right of the store’s entrance; neither is complete.

 

• The overall atmosphere of the store has a warehouse feel despite the areas under construction being concealed. Interestingly, with 2-4% of the location’s selling square footage remaining under construction over the next 2 years, there were concealed areas with no work complete inside. Our sense is this area is sectioned off for the September shops but we found this interesting nonetheless given the amount of the store already under construction.


IGT: BUYBACK NOW LOOKS BETTER

More disclosure surrounding Accelerated Buyback yields higher than expected accretion.

 

 

In the back of IGT’s 10Q filed on August 8th, we found additional details surrounding their “Capped Accelerated Stock Buyback Agreement, dated as of June 13, 2012” with Goldman.  The mechanics of the agreement allowed IGT to reduce their share count by a minimum 21MM by the end of F3Q, but leave the ultimate number of shares delivered to the company to vary based on IGT’s arithmetic VWAP (volume-weighted average price per share) over the course of the following 3-6 months.  In layman’s terms, since the price dropped like a rock post its earnings release on July 10th, we’re pretty sure the ultimate share reduction will be a lot greater than the initial 21MM at the same $400MM price tag.

 

We calculate the buyback could be 5 cents MORE accretive annually than our original estimate.  

 

On June 13th, IGT entered into accelerated buyback agreement with Goldman Sachs under which they would repurchase $400MM of the $1BN share repurchase program authorized by their Board.  The mechanics of the agreement are actually fairly standard so we’re not sure why IGT didn’t explain it better on their earnings call.  Below is our understanding of how the accelerated buyback works:

  • On June 19th IGT paid GS $400MM and delivered 21MM shares over the course of several days. This allowed IGT to start F4Q with approximately 274MM shares.  $320MM of the $400MM paid to GS was classified as treasury stock purchase and the balance was recorded in APIC.
  • In July, an additional 1.8MM were delivered and thus far, 4MM share have been delivered in through August 6th.  On August 6th, IGT had 267MM shares outstanding.
  • The ultimate number of shares that get repurchased will be determined by what IGT’s arithmetic VWAP is through at least September 19th but no later than December 19th.  Goldman has the discretion over the exact date to settle the trade within that window.  Based the VWAP of where IGT’s traded over the last 37 days and assuming that the stock stays between $11.25 and $12.50, the number of shares delivered should be between 31-33MM.
  • Assuming our math is close to accurate, IGT’s share count at September 30th should be around 264MM with a weighted average diluted count of 268MM.
  • The agreement has a cap of $19.  Normally, companies need to pay for a cap (somewhere in the neighborhood of 3% for a stock with IGT's volatility). However, perhaps due to the deep out of the money nature of the cap, IGT did not have to pay any additional money for this option.
  • The accelerated buyback agreement only covers the initial $400MM
  • IGT is not restricted on additional buyback activity during the period of the Accelerated Buyback as long as the aggregate purchases stay below 25% of 4 week average trailing volume

As to the question of timing, IGT likely had to sign a MPI agreement prior to the execution of this agreement; which means that the deal had to be done several weeks prior to the quarter or after IGT reported.  While this clearly improves EPS, this doesn't translate into higher management bonus incentives, as we previously thought, given that performance-based compensation is solely tied to revenue and operating income.  Even if IGT knew or suspected that a miss was in the works, they had to weigh the option of a lower average share count in 4Q vs the ability to buy back a few million more shares.  The other issue was that if they announced the buyback after the call, it would have likely buffered the stock decline – so on a net-net basis they may not have gotten a much better price.  If their stock trades in the $11.25-$12.00 range for the next 57 days, the effective buyback price will likely be in the $12.13-12.57 range.


SPY: The Time And Price

SPY: THE TIME AND PRICE

 

 

CLIENT TALKING POINTS

 

SHORTING THE S&P 500

This week we’ve discussed shorting the S&P 500 via SPY. What we were waiting for, particularly after hitting 1400, was time and price. At 10:21AM yesterday we shorted SPY at $140.78; it is timestamped in the Hedgeye Virtual Portfolio for your viewing pleasure. We think the market will continue to trend lower today but will manage the risk and the range and will cover if need be.

 

Keep in mind that it is Friday. The odds of Jon Hilsenrath from the Wall Street Journal running his mouth near the close (especially if the market is in the red) are high. Hopefully most people have gained some common sense by now to take those words at face value.

 

 

A MESS OF CORN

Corn continues to trend higher with the futures ripping higher this morning ahead of the 8:30AM crop report. Considering that the Midwest has been ravaged by hot heat, strong winds and a prolonged drought, it’s not going to be good. Throw in the falling US dollar, courtesy of your central planners, and commodity prices are going to keep going up. There’s nothing positive to come out of this. Corn is so interconnected to everything (fuel, feed for animals, etc.) that making a trip to the grocery store will likely make you wince.

 

 

THE TIMESTAMP

It’s important to timestamp your trades. The reason is obvious: hold yourself accountable. When you timestamp your entry and exit points, you have nothing to hide. Your P&L says it all. If you’re up, you’re up and if you’re down, well, you’re down. It’s how this game works. We pride ourselves on holding a darn good batting average while providing totally transparent trades and will continue to do so. It’d be nice to say we were short JCP in the Virtual Portfolio going into today’s open but that’s OK. Going back to the first note in today’s Playbook, it’s all about time and price. When the markets and moons align for a trade, we’

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                  UP

 

U.S. Equities:   DOWN

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  UP

 

Int'l Currencies: Flat   

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

JACK IN THE BOX (JACK)

This company is transitioning from cash burn to $75mm annual free cash flow generation thanks to completion of a reimaging program and refranchising of JIB units. Qdoba is the leverage; a maturing and growing store base will bring higher margins. We see 8.5% upside over the next 6-9 months.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG            

 

FIFTH & PACIFIC COMPANIES (FNP)

The former Liz Claiborne (LIZ) is on the path to prosperity. There’s a fantastic growth story with FNP. The Kate Spade brand is growing at an almost unprecedented clip. Save for Juicy Couture, the company has brands performing strongly throughout its entire portfolio. We’re bullish on FNP for all three durations: TRADE, TREND and TAIL.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

LAS VEGAS SANDS (LVS)

LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TRADE:  LONG
  • TREND:  NEUTRAL
  • TAIL:      NEUTRAL

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“$JCP discussing ‘gross margin ex markdowns’ is worse than a .com start-up I saw in ‘99 who touted ‘profit before costs’. That co is gone now” -@HedgeyeRetail

 

 

QUOTE OF THE DAY

“Never express yourself more clearly than you are able to think.” – Niels Bohr

 

 

STAT OF THE DAY

Tough day for Bill Ackman. JCPenney same-store sales fell 21.7 percent during the second quarter, steeper than the 17.4 percent drop analysts were expecting, according to Thomson Reuters. Revenue tumbled 22.6 percent to $3.02 billion, also below Wall Street's low expectations.

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%

Battling Ideology

This note was originally published at 8am on July 27, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“His own men wanted more of the same, the enemy less.”

-Victor Davis Hanson

 

I am grinding through two books about leadership and war right now – and that probably puts me in a mood to fight. When it comes to going to battle with Fed and ECB ideologies that are perpetuating global #GrowthSlowing, someone has to do it.

 

In his epic classic “The Soul of Battle”, Victor Davis Hanson tells the story of the great Greek General of Thebes, Epaminondas, and his fight for democracy versus the Spartans. “Thebes now battled for neither money nor power, but for the idea of allowing all Greek states to be autonomous.” (page 87)

 

Theban farmers taking up arms for their economic freedom was ultimately instigated by the central planning Spartans themselves. “The Spartan takeover of the sacred Theban Cadmen (382BC) – the city’s spiritual and political center – was the most foolhardy foreign enterprise in the entire history of Spartan foreign policy.” (page 28)

 

It’s different now, but it’s the same.

 

Our Keynesian overlords are taking over the most pure temple of free market capitalism that remains – our public markets. And while I may get my short-term market calls right and wrong, I will not confuse that risk management duration with my principles. After listening to Draghi’s drivel yesterday, I will not provide him the cowardice of standing idle.

 

I am here on the front lines of this ideological debate. And I too will do whatever it takes.

 

Back to the Global Macro Grind

 

Undoubtedly, the toughest balance beam to traverse in my head is my absolute disgust for what I hear these people say every day and what it is I need to do in order to not violate Rule #1 (don’t lose money).

 

We need to keep getting our economic forecasts and risk managed positions right in order to crack these Keynesians right up the middle of their phalanx. Ideologies die on the vine of mediocrity and broken promises.

 

Whether they are coming at us from the ECB or Fed flanks, their ultimate impact can be measured. As you can see in Darius Dale’s Chart of the Day, this is their 2nd major centrally planned attack since June:

  1. Dollar Down
  2. Gold Up
  3. Stocks Up

If you’re going to step on the field with me and my boys, you better realize that winning a few battles doesn’t win you the war. Yesterday, the S&P Futures rallied 27 handles (2 full percentage points) at the stroke of Draghi’s “whatever” shot hitting the tape. Spanish and Italian stocks moved 6-7 full percentage points in less than 3 hours of trading.

 

That’s normal, right? Bull market.

 

If I have reminded you of this 100x in the last 5 years, it’s been 1000x. Get the US Dollar right, and you’ll get a lot of other things right. With the US Dollar Index down a full percentage point on the day yesterday, the #BailoutBulls of the 112th Correlation ran wild.

 

Here’s how our most immediate-term TRADE correlation scored on yesterday’s close (correlation to the USD):

  1. EuroStoxx 600 Index = -0.82
  2. SP500 Index = -0.75
  3. SPX Volatility Index (VIX) = +0.77

In other words, more central planning fire in your Purchasing Power hole continues to do the 2 very things we stand against for The People (24.6% unemployment in Spain this morning) who don’t get paid by food/energy/stock market inflations:

  1. Shortening Economic Cycles
  2. Amplifying Market Volatility

They know it. You know it. The People watching this market know it. No matter which side of this battle of ideologies you stand on, the short-term correlation (price action) is being drive by causality (short-term policy reactions).

 

Their world is built on broken promises. Their bailout policies are designed to inflate asset prices by debauching your hard earned dollars. And now these said leaders of Western Academia’s tallest ivory towers have shot arrows towards the heart of “whatever” they think will have us stand down. Ironically, this is precisely what will make us rise up.

 

Our men and women want more of the same, the enemy less – and that’s the free-market’s trust.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1586-1623, $101.91-107.86, $82.52-83.39, $1.20-1.23, 5846-6349, and 1349-1366, respectively.

 

Enjoy your weekend and best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Battling Ideology - Chart of the Day

 

Battling Ideology - Virtual Portfolio



Timing Shorts

“Observe due measure, for right timing is in all things the most important factor.”

-Hesiod

 

Efficient market folks say they can’t time markets. Take their word for it. It’s our job, not theirs.

 

Whether you practice the art of short selling in gnomic, hymnic, or genealogical form, at some point in the decision making process we all have to do the same thing – timestamp our position.

 

We waited, watched, and finally re-shorted the SP500 yesterday at 10:21AM EST (1405). Given all the perma-bullish narratives I’ve had to listen to for the last few weeks, I must say I enjoyed the experience quite thoroughly.

 

Back to the Global Macro Grind

 

To timestamp or not to timestamp, remains the question. All of you who do this with real money understand the concept obviously. Timing stares at you from your P&L every day. For the Old Wall’s finest strategists, the whole accountability exercise still appears to be quite foreign.

 

If you’re one of the many non-timestamping strategists who had a 3% US GDP growth forecast and 1 target for the SP500 back in March, you had the entire 2012 fundamental thesis wrong. In order to remain bullish, the best move from here is to beg for bailouts and just change your thesis entirely because the “market is up year-to-date.”

 

Since the March 26th YTD high for the Russell2000 (+5.5% higher at 846) and the April 2nd YTD high for the SP500 (+1.2% higher at 1419) if nothing else, we’ve been consistent with both our research call (#GrowthSlowing) and our risk management process (#timestamps).

 

Looking back at the tapes, since February 15th this will be the 9th time we have made a risk management call on the SP500 itself without violating Rule #1 (don’t lose money). We’ve shorted it 8 times and bought it once (bought SPY on May 17th when plenty a March Perma-Bull was in the fetal position).

 

I’m not trying to evangelize or puff out my chest here. We haven’t killed it with all these calls. They haven’t been the worst timed calls to land in your inbox either. They aren’t meant to be anything other than immediate-term risk signals (which go both ways).

 

I’m just reminding you that there are some firms in this industry that have at least attempted to evolve the research and risk management process while many haven’t changed a darn thing.

 

Maybe this time we’ll be wrong. Maybe we’ll be right. The only thing I can tell you is that there will be no maybe when the position is closed.

 

Timing Matters. In some parts of this country, so does winning and losing – and being held accountable to both.

 

My immediate-term risk ranges (support and resistance) for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $108.96-114.11, $81.95-83.01, $1.20-1.23, and 1, respectively.

 

Best of luck out there today and have a great weekend,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Timing Shorts - Chart of the Day

 

Timing Shorts - Virtual Portfolio


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