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FNP: On-Track

Takeaway: We're comfortable that things are still on track at $FNP to be a $20 stock.

We met recently with the top management team at FNP – which included our first introduction to new CFO George Carrera. Overall, we walked away with a high degree of confidence that this is a name that should continue to work despite doubling over the past year.


Here are our notes…


George Carrera (CFO) Introduction:

  • Impressive. Bringing more transparency and granularity to the forecasting and planning functions – something that was not the focus of prior CFO (who was all about getting much-needed deals done).
  • Comes across as much as a COO as he does a CFO, if not more. This actually makes sense at FNP, given that they have Bob Vill, who is SVP/Treasurer and could otherwise represent FNP as CFO both externally and internally (he was offered the job).
  • Providing key operational support to Leeann at Juicy. Bill McComb (CEO) and George are spending 80% of their time at Juicy Coture (not sure if this is good or bad).
  • Focused on SG&A allocation – initially at corporate where primary experience has been, but now shifting towards greater focus on brand level SG&A – particularly at Juicy where he is working to redeploy SG&A. This is not incremental investment, but reduction of some redundancies offsetting additional planning resources.
  • It’s nice to see the brand-level SG&A reallocation as long as 1) it does not come away from a capital base otherwise needed to grow sales and gain share, and 2) mitigating redundancies does not get in the way of FNP being able to easily shed one of its brands if the time and/or necessity presents itself.
  • During the 3-year time period Bill tried to sell Mexx, he met George during M&A process w Tommy Europe.
  • Was looking for someone that can play a bigger role in the corporation under the new strategy
  • What attracted GC to FNP:
    • Opportunity to make $
    • Int'l footprint - white space opportunity
    • SG&A - opportunity to leverage it given experience at Tommy where they had to revisit cost structure nearly 2x a year
    • Quality of team here much stronger than at Tommy, have invested in the right areas

Note: The SG&A element is the only potential negative point that came from our meeting. If executed properly, and if all three concepts thrive, it could be great, but if they implement too many shared services between the three distinct companies, it could take down the 'ease of disposal' factor should either Juicy or Lucky become un-savable. We’ll keep a close eye on this.

    • Corp SG&A at ~4% were considering a corporate ERP system, but have opted to spend on e-commerce instead = higher ROI
    • When asked about what he thinks will drive his stock price (keeping in mind that he has never been CFO of a publicly traded company) he noted – very quickly “Growth in profitability and beating expectations.” Not a perfect answer, but good enough for us to check the box.


  • New POS systems to enable mobile checkout and converging data sources and brands into one database to optimize e-commerce assets
  • Kate e-commerce accounts for over 20% of sales; Juicy and Lucky just under 10% suggests an aggregate e-commerce penetration of ~11% of total sales putting FNP in the top quartile of retailers. Goal is 30% for all brands.




  • Key hurdle remains store productivity of $650
  • Focus has been retail > wholesale > outlet > e-commerce > sourcing - currently at e-commerce as primary focus after securing and improving retail/whsl/outlet performance
  • Top/bottoms still very strong - accessories very strong on a smaller base as well as Vince Camuto FW license also doing very well
  • Men's has been strong, but key is reinvigoration of women's line
  • Next steps to growing business is int'l - have been getting increasing interest from brand partners to run business overseas - expect to ramp in 2013



  • Product is good, it's the merchandizing that's the issue
  • Addition of second level talent has been a key addition to the team
    • Tom Linko (CFO as of June) - had worked with George at Tommy before will oversee order management, merchandise planning and allocation, and real estate
    • Ann Bernstein (SVP Global Business and Strategy in April) leading financial planning, Juicy Int'l, licensing, retail, wholesale, and e-commerce
    • George has also stepped in as LeAnn's operational partner of sorts
    • There's a redeployment issue at Juicy no an incremental SG&A investment issue - the planning and allocating issues have become more visible
    • Dave DeMattei was starved for the data to better plan his business - George is taking that process to Juicy
    • The brand leaders have been very good at sharing best practices, but they are deeply brand loyal - therefore doesn't make sense to transfer talent from Kate or Lucky to help out at Juicy
    • Recouturing of Stores:
      • Not looking for drastic architectural changes - looking for new paint, rugs, some fixtures (like they did with Kate)
      • More of a touch up (only 2 rehauls where stores will need to be closed) than larger transformation along the magnitude of new store investment
      • Will impact 16 stores on top of 12 done already on 131 store base
      • Very light capital investment


Kate Spade:

  • Asia business - buys off U.S. product line
  • Growth in Japan driven primarily by comp, not as much by doors
  • Customer demo has broadened to women born in the 1980s - an incremental add'n to brand demand
  • Re distribution - think fragrance is a big opportunity - also watches at wholesale



  • Target is to have ~80% of product made for outlet (where Kate and Lucky are)
  • Juicy is a drag - need to design for outlet instead of shipping out of season product from specialty stores
  • Margin differential b/w full-price and outlet similar to peers



  • Kate e-commerce accounts for over 20% of sales; Juicy and Lucky just under 10% suggests an aggregate e-commerce penetration of ~11% of total sales putting FNP in the top quartile of retailers.
  • In the process of converging data sources and brand info into one database to leverage intell
  • Store presence/showroom is additive to drive traffic and interest in e-commerce



  • Incremental increase in F12 CapEx to $90mm from $75mm includes $5mm of transformative growth CapEx = high ROI investments (40%+)
    • 16 Juicy stores, add'l Lucky outlets, and NYC specialty Lucky store in Time Warner Center


Balance Sheet:

  • Turning inventory at an 'appropriate' rate (at benchmark or better)
  • Plan to improve inventory buys to further improve turns


Incentive Structure:

  • Based on profitability re 4-yr plan
  • Tweaking up the minimum thresholds internally


Is The Vegas Recovery Over?

Las Vegas Strip data for July seemed positive off the bat, signaling that Vegas might have gotten its act together after putting up continuously dismal numbers since April. However, examining the all important slot metric and revenue per available room (RevPAR) data, it appears that Strip has a long way to go before it's in full on recovery mode.


July’s data is a tad misleading due to the fact that it’s missing two weekend days. RevPAR is trending very low and needs to be at least +3% to offset inflation. Vegas is also seeing fewer slot players. Visitation growth needs to be higher by 1-2% over the long-term. Our chart below shows year-over-year visitation and RevPAR change and as you can see, both are beginning to trend even lower.


Is The Vegas Recovery Over?  - FF

URBN: Feel The Love

Takeaway: It's a sell-side love-fest as it relates to commenting on $URBN's comp trends, but in reality, it is still an under-loved stock.

Conclusion: It's a sell-side love-fest as it relates to commenting on URBN's comp trends, but in reality, it is still an under-loved stock. Despite the move, we're still there.


Several brokers were out this morning echoing URBN's positive comp trajectory commentary in its 10Q filed last night, and how it supports the turnaround story that is taking place. We usually step back and re-evaluate when we see so many uniformly similar comments about a name that we have been positive on – especially when the stock is up 50% since May when we added to the Hedgeye Virtual Portfolio. But the reality is that when looked at in context, the Street is still not too bullish on URBN at all. In fact, there are 32 firms that ‘cover’ URBN, and as the first chart below indicates, we’re currently looking at the lowest ratio of Buy ratings, and highest ratio of Sell ratings in the recent (5-year) cycle. While some will consider the 9% of the float being short as too low for URBN (ie suggesting that investors are a step ahead of analysts), we'd look at others like Macy's where short interest is sub 2% -- which is an absolutely unsustainable level. That's makes investors' bearish bets on URBN look more significant.


URBN: Feel The Love - 9 11 2012 12 33 34 PM

 Source: Factset


Aside from looking at sentiment we need to take this announcement for what it is – a sequential improvement in a high-return concept that has a lot of upside.


Here’s what we said back in May around the time we got more heavily involved…  

“Let’s not bend any facts here. The quarter stunk. URBN took 8.6% sales growth and morphed it into a 10.1% EBIT decline. But relative to expectations, it was slightly better. One comped a comp (Urban), while the other (Anthro) comped down on the easiest compare of the year. There were definitely puts and takes. But the big take-away came from simply listening to this management team.


They sounded so extraordinarily focused on the conference call – such a stark contrast to the URBN of six months ago. Seriously…go back and listen to the past two calls. Night and day. That’s what you get when you bring in the founders to save the day.


The message is simple.

  1. Hire all the right talent.
  2. Empower each of them to come up with a concise plan, to which they will be held accountable.
  3. Give them the financial and human resources to achieve the plan.


Along the way, they’ve got shared services initiatives (DC just going up for 3Q) that should allow URBN to leverage the back-end across concepts while investing in areas like mobile and digital to more efficiently flow product and reach new customers.


They don’t really give comp forecasts – which is great bc forecasting comps is ridiculous. They simply focus on the process to put up the numbers, and hold themselves accountable to execute. Anyone reading this knows that I (McGough) rarely throw out public kudos to management teams, but the bottom line is that listening to these guys is like listening to a company with $10bn in revenue, not $2.5bn.


There’s still wood to chop here, no doubt. But we’re coming up with estimates about 20% above consensus. If we’re right, then URBN is trading at about 7.1x our next year EBITDA estimate. If you want to short that, knock yourself out.”


The stock is certainly much more expensive today, but we arguably underestimated the extent to which estimates needed to go up. When estimates are headed higher (as they still have to go) it’s a fool’s game to bet against a high-return growth retailer.


URBN: Feel The Love - 222

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Takeaway: The all important slot volume metric has been consistently negative. RevPAR and visitation are now sloping lower as well.

  • July was a little misleading because it contained 2 fewer weekend days so this chart examines RevPAR and visitation on a 3 month moving average basis
  • RevPAR is trending dangerously low – probably needs to be at least +3% to offset inflation
  • Given the composition – fewer slot players – visitation growth needs to be higher over the long-term than 1-2%




Takeaway: $CAT Flash Conference Call on Friday @11AM


Date: Friday, September 14th

Time: 11 a.m. EST

Toll Free Number:

Direct Dial Number:

Conference Code: 581552#

*Materials will be distributed prior to the call.



While a great company in many ways, we believe that CAT is exposed to declining investment in its core markets.  In particular, the potential decline in mining-related investment may be severe.  This does not appear to be priced into the market or reflected in profit estimates.

  • CAT: End Market Exposures
    • Coal
    • Mining
    • Construction
    • Oil & Gas
    • Part Sales At Risk
  • Backlogs & Orders
    • Potential order cancellations coming
    • Impact of slowing Chinese growth
    • Last Quarter’s Results
    • Impact of Tier IV
  • Management Strategy
    • Acquisitions
    • Capacity Addition
    • Inventory Trends
  • Disconfirming Evidence
    • Chinese Real Estate Price
    • July Order Trends
    • Manufacturing Flexibility
  • Valuation & Sentiment
    • Our Valuation
    • Market View of CAT
    • Centrality of Mining Underappreciated


If you have any questions regarding this call please contact us at .


Takeaway: $MCD faces a difficult top-line outlook over the next 5-6 months

McDonald’s sales improved on a sequential basis, partly due to calendar shifts, in the month of August.  The US number was in line with our estimate while APMEA and Europe exceeded and missed our estimates, respectively.  We do not read much into this one-month sequential improvement in the headline numbers.  From here, compares ramp up dramatically through February.  The downside in this stock is limited, in our view, but patience will be required for meaningful upside to come about; we are staying on the sidelines until catalysts emerge.


“Every mile is two in winter.”

-George Herbert



Trend Still Corroborating Hedgeye Macro’s “Growth Slowing” Thesis


McDonald’s released August comparable restaurant sales growth numbers this morning.  Versus consensus, Global, US, and Europe narrowly missed while APMEA posted a beat.  We discuss these geographies in greater depth below.  Given the significant calendar shifts that seem to have resulted in some distortion of the July and August headline numbers, we believe that looking at the average of the numbers for those months is useful when thinking about the underlying trend of the business.  In all geographies, taking the average of July and August, and considering the resulting numbers versus prior trends, implies a continuation of slowing growth.  Looking at the headline numbers on a month-by-month basis suggests a sequential recovery which, we believe, will not show up in the numbers from here on.


August was a “last chance saloon”, of sorts, for McDonald’s to post a strong sales headline.  As we have written over the last few days, the coming dividend announcement offers management the opportunity to send a positive message regarding the state of the business but, looking at the compares MCD must lap from here suggests that it could be a long, harsh winter from a sales headline perspective.





United States


The US print came in at 3%, in line with our expectations and 10 bps below the Street, as breakfast contributed the results.  Any mention of beverages was conspicuous by its absence, despite the continuing advertising focus.  The outlook for MCD’s US business suggests that headline numbers may be depressed for the next six months as compares ramp up and traffic is flat (price running at roughly 3%).   McDonald’s will likely struggle to avoid posting some negative monthly comparable sales numbers for the US over the next six months.  As we wrote on 4/23/12, “The evidence suggests that beverages are increasingly becoming a less important part of the vocabulary from McDonald’s’ management team.  With that in mind, foremost in our thoughts is what the company’s strategy will be to maintain top-line momentum over the next few months.”







Europe comparable restaurant sales grew 3.1% in August, missing Hedgeye and Consensus expectations by 50 and 20 bps, respectively, as positive results in the U.K., France, and Russia were offset by Germany and certain markets in Southern Europe.  The Olympics had, as we wrote in our preview, a positive impact on sales but, going forward, the macroeconomic environment remains a concern.







APMEA comparable restaurant sales grew 5.7% as strong results in Australia and China, along with the positive impact from the Ramadan shift, were offset by ongoing weakness in Japan.  That APMEA was such an outlier to the downside in July, and to the upside in August, is likely due in no small part to the impact of the Ramadan calendar shift.  The macroeconomic data in major APMEA markets continues to suggest difficult conditions for MCD and, taking the average of July and August comps, we believe that the Growth Slowing theme, articulate by the Hedgeye Macro team earlier this year, continues to manifest itself in McDonald’s sales trends in APMEA and elsewhere.  We are not believers in any recovery narrative in MCD’s APMEA business from here.   As the chart below indicates, compares step up meaningfully from here through January 2013.





Howard Penney

Managing Director


Rory Green


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