Idea Alert: JCP - Street Cred Dead

Keith shorted JCP again today on the short squeeze around what what was a quarter that can be characterized as none other than Horrendous.

We won't bother with the full financial review. Comps down -22%, down 33% and a ($0.67) loss pretty much sims that up.

But that's the past. We invest for the future. One thing that matters in investing for the future is believing in who is running the ship. We initially figured that Johnson's Apple halo would have lasted 18-24 months. But about 5-minutes into his commentary today, his credibility stood up, ran out the door, and got hit by a bus.

Last quarter, his level of arrogance around communicating the message was bothersome. He spoke to the Street like we were toddlers, or at least retail novices. He glossed over the bad, and played up whatever positive statistic he could find. A JV mistake for a new CEO.

We #timestamped our view in the Twittersphere this morning that the key thing we were looking for today from RJ was humility, and a realistic view as to how he portrayed what challenges lie ahead.

In the first 2 minutes, he started off great by highlighting 2 mistakes he's made. Pricing and marketing. But then he fowled it up by saying -- in a very firm tone -- "In January we laid out a four-year plan to transform the company. We said this will be a really tough year. I don't think that message got through. Your expectation is much higher than ours."

Really Ron? You sent through a pretty definitive message when you said the following...

Feb 24th Q4 earnings call: "We will meet or exceed $1.59 in EPS in 2012. Our GAAP earnings guidance is unchanged from the analyst meeting ($1.59 GAAP; $2.16 non-GAAP)"


May 15th Q1 earnings call: "We want to make the right business decision, and therefore we're going to remove our GAAP guidance, but stand by our non-GAAP guidance ($2.16 a share), which really is the earnings power of the company going forward." But the catch is that they did not let us know what the restructuring charges were. So there was no way we could really tell if they were on track.

Aug 10 Q2 earnings call: "We've made the decision to pull our guidance."

Also, can you explain why you sold your stock just before that last earnings release? You have better information than everybody else, and you bailed. Someone was on the other end of that trade. Ever think of that?

This is an execution story. Execution requires trust. Trust needs to be earned, not gifted. This team has zero. And what's sad is that it was all very avoidable. Simply be up-front and honest with your shareholders, and you generally will be ok. But a bad reputation will take a long time to recover from.


Idea Alert: JCP - Street Cred Dead - JCP YoutTube


Idea Alert: JCP - Street Cred Dead - jcp ttt






CONCLUSION: New data points, including negative revisions to the official growth forecasts out of Singapore and Hong Kong, affirm our bearish conviction on the slope of global growth with respect the intermediate-term TREND duration. Applying a longer-term lens, would argue that the incessant policy responses out of the global central planning cartel over the last ~5yrs have set us up for broadly weak economic fundamentals for the foreseeable future.


This week, Singapore and Hong Kong each cut the upper limit of their respective 2012 GDP forecasts by -50bps and -100bps, respectively. Singaporean officials now see Real GDP growth coming at +1.5-2.5% for 2012 and officials in Hong Kong anticipate domestic economic growth in the +1-2% range for the full year. We continue to trumpet the heightened sensitivity of Hong Kong and Singapore to the global economic cycle and view these countries as the best barometers for global growth out there: 

  • At 211% and 223% of GDP, respectively, Singapore and Hong Kong are far and away the most export-oriented countries in Asia – far more levered to global demand than other noteworthy exporters (China: 29.6%; South Korea: 52.4%; Japan: 15.2%; Thailand: 71.3%; and Taiwan: 58.9%);
  • The ratio of Singapore and Hong Kong’s share of world exports to their individual shares of world GDP are 7.1x and 7.5x, respectively – besting the next closest economy in Asia (Malaysia) on this metric by at least 3.7 turns; and
  • Singapore and Hong Kong are home to the world’s second and third-busiest container ports, handling 28,431,100 and 23,669,242 TEUs, respectively, per the latest yearly data from the American Association of Port Authorities. 



The fact that both countries independently revised down the upper band of their 2012 GDP forecast this week (even as the SPX raced to another long-term lower-high) is telling. Data points like these continue to affirm our bearish conviction on the slope of global growth with respect the intermediate-term TREND duration. China’s JUL Export/Import numbers (released overnight) also lend credence to this view.   

  • JUL Exports: +1% YoY from +11.3%
    • JUL Exports to US: +0.6% YoY from +10.6%; lowest since NOV ‘09
    • JUL Exports to EU: -16.2% YoY from -1.1%; lowest since SEP ‘09
    • JUL Imports: +4.7% YoY from +6.3%
    • Key Takeaways: China’s bombed-out Export growth numbers – particularly those to the US and Europe – portend negatively for the slope of end-consumer demand growth across those regions over the next few months. Furthermore, China’s slowing Import growth continues to remind people that China, itself, remains a drag on the slope of global economic growth and demand for raw materials. 

Applying a longer-term lens, we continue to side with 219 years of data afforded by the renowned analysis of Reinhart and Rogoff to conclude that we should expect slower rates of world economic growth going forward. We would argue that the incessant policy responses out of the global central planning cartel over the last ~5yrs have set us up for broadly weak economic fundamentals for the foreseeable future. Across the globe, various markets and economies have, unfortunately, not been allowed to clear, leading to a broad-based misallocation of capital and resources. Much akin to a company with bad CapEx management, the “management teams” of the world economy (i.e. our central planners) have broadly set the stage for subpar performance on the top line by encumbering us with sovereign debt loads well beyond critical thresholds and perpetual monetary Policies To Inflate.








As always, we encourage disagreement and debate – having such an intelligent collection of clients has certainly made us jocks much smarter over the years. Feel free to ping us if you’d like to discuss any of our existing theses.


Have a great weekend,


Darius Dale

Senior Analyst

Trucks: What’s Next For The Global Truck OEM Industry?

Next Thursday, August 16th at 11am EST, the Hedgeye Industrials Team, led by Jay Van Sciver will be hosting a conference call discussing opportunities in shares of Truck OEMs.  The presentation will review Truck markets globally, with a look at Brazil, Europe and the U.S.  The dial-in information and materials will be circulated prior to the call. 




Suppliers/Related: CMI, ACW, CVGI, RUSHA  



Topics Will Include

  • The Cycle: A long-term look at Truck equipment cycles - what is changing and what is not.  Regulation, fleet age, OEM product trends and aftermarket growth will position the industry differently over the next several years.  It is not just about fleet age driving truck sales.  
  • Industry Structure: The trucking industry has a supportive industry structure, leaving the industry better able to weather variations in demand.  We look at several key ways that this already strong industry structure is improving. 
  • Valuation, Sentiment & Company Specific: The U.S. based truck OEMs are out of favor at the moment, with valuations at highly attractive levels.  We present our ideas on the best way to play this attractive industry and some key areas we would avoid.


About Jay Van Sciver

Jay has covered the Industrials sector for over a decade, providing buy-side research for long-only, long/short hedge fund, and proprietary trading strategies. He was a Co-Founder and Partner at Bishop & Carroll Capital Management, where he focused on Industrials, Materials and Consumer Durables. Previously he was a Managing Director at LaBranche, which seeded Bishop & Carroll, and an Industrials and Materials Sector Analyst at Brown Brothers Harriman. Jay graduated from Yale with a B.S. in Chemistry.  




Hedgeye Risk Management is a leading independent provider of real-time investment research. Focused exclusively on generating and delivering actionable investment ideas, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing. The Hedgeye team features some of the world's most regarded research analysts - united around a vision of independent, uncompromised real-time investment research as a service.




Please contact if you have any questions.

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The Economic Data calendar for the week of the 13th of August through the 17th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


THE WEEK AHEAD - weekahead

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.


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.

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