GPS: Waxing and Man-scaping?

Takeaway: We think $GPS hiring Michael Francis, recently fired CMO at JCP, as a strategic advisor is yet another building block to a developing short.


We think that GPS hiring Michael Francis, recently fired CMO and confidant of Ron Johnson at JC Penney, as a strategic advisor is extremely telling. Think about it like this…

Make no mistake, this has been a financial engineering story over the past 8-years. Basically, buying back stock. $11bn in repo has taken down the share count by 47%. As recently as 3-years ago, GPS was sitting on a net cash position of $2.3bn. Now it is down to $400mm. In other words, this did not need to be an operational improvement story to grow earnings. Now the share repo angle is largely over. GPS absolutely NEEDS to show consistent comp and/or margin improvement.


GPS: Waxing and Man-scaping? - 9 12 2012 11 44 42 AM


At the precise time that they needed to perform, two things happened.

1)    The company ‘hit a fashion trend’ with its colors. I’m still not sure what that means. Hitting a fashion trend is pretty much useless. Having a process to sustain driving fashion trends (Ralph Lauren, Nike) is a completely different issue. GPS hit fashion because it was lucky, not because it was good.  

2)      JC Penney imploded at that exact same moment. When one of the largest apparel retailers in the country comps down by 20%+ and hands off $3bn in sales to the lowest bidder, it is absolutely positive for GPS. Some people think that Gap’s biggest competitors are specialty apparel retailers – even the teen and adolescent retailers. Not true. GPS is basically a department store. The company competes head to head with JCP. In fact, when JCP started comping down, its top competitor, Kohl’s, ALSO comped down. Virtually all of the share was picked up by Macy’s, GPS, TJX, and ROST.


Though we think that JCP is terminally ill, the reality is that its business will ebb and flow along the way. The second that it stops ebbing, then these companies -- particularly GPS and M will stop gaining share on the margin – which is all that this P&L needs to start choking on itself.


So this takes us back to the Michael Francis hire. What does this tell us? Well, on one hand, it tells us that GPS is being proactive in getting as smart as possible as to how JCP will be going to market with its new strategies. That way, GPS can pre-empt, or even just cope appropriately when certain initiatives come to fruition.


But on the flip side, it shows just how vulnerable it is and how much it is downplaying the JCP threat. Check the last conference call transcript. Search for the name ‘JC Penney’. You’re not going to come up with much. They’re completely playing down to the street how much this has been helping them.


Are they flat-out lying? Probably not. We’re not crying conspiracy theory here. But the reality is that they simply don’t know. Do retailers know why people buy their goods? Why they walk past the door and go to the next retailer? They really don’t. The only one that likely can is Wal Mart. Amazon is a close second. Costco and Target round out the top. It falls precipitously from there. GPS simply does not know (and JCP does not know either). That’s why this industry has always been plagued by companies having to compete away what is near-universal previously-held optimism around sales and margins.


Ron Johnson announced this week that the company had logged in 1.6mm free haircuts at JC Penney stores this Back-to-School. Now that the former head of marketing is advising GPS, maybe we’ll see free waxing at Athleta, and Man-scaping at Banana. They’re gonna need it…no joke.


The consensus has GPS earning $2.40 next year. Then $2.72 the year after. We’re about 10% below next year, and 20% below the year after. We’d argue that barring a disproportionately large capital investment (which would drive returns lower) GPS will never see $2.50 again – ever. And as we say at Hedgeye, ‘ever’ is a long time.


That did not matter with the stock trading at $15 a year ago. But it certainly matters today at $35.  Let’s say we’re dead wrong, and the Street is spot-on. Then you’re paying 12.9x earnings for a number that GPS will earn in FY 2014. That’s right up there with AAPL, NKE and RL. Which would you rather own?


Takeaway: There are other ways for LVS to skin the table cap cat

Helping casinos cope with the Macau table cap



There has been a lot of chatter recently on how Macau casinos will overcome the table cap of 5,500, which is in effect until the end of March 2013.  First off, it's not a law, it's government stipulation that can be changed at any time.  One way casinos are helping to overcome this stipulation is through the placement of "super tables' each of which seats 12 people with two dealers, compared to 6-8 positions on a traditional Macau table with one dealer.


Here is our count of Macau super tables:







At the end of Q2, there were 5,498 tables reported by the Macau government.  The cap has been a concern for LVS investors in particular with the opening of Phase 2 on September 20th.  Sands China is already the most aggressive with the new product to free up room for the additional 200 tables expected at Sands Cotai Central in late 2012/early 2013. 


SCC isn’t likely to get their new table allocations until December or January 2013.  In the meantime, they can increase the table count above the cap during Golden Week.  The good news is that the number of tables that SCC originally opened with was too high so they moved a lot of those tables back to Venetian where they are more productive.  When Ph2 opens next week they will move some of those back and take some from Sands.  What that means is that on weekends and peak times, Sands’ properties will be running at overcapacity, however, most of the time, the table shortage will not impact them as there are plenty of under-utilized tables.




SUPER SIZE ME - IMG 20120912 00857


Takeaway: Casual dining traffic continued to decelerate through August $DRI $DIN $BLMN $EAT $CAKE $BWLD $TXRH

The estimated Knapp Track numbers for August suggest a slight sequential improvement in casual dining trends from July. Traffic, however, continues to decelerate.


Knapp Results


Estimated Knapp Track casual dining comparable restaurant sales grew 0.8% in August versus an estimated 0.6% in July.  The sequential change, in terms of the two-year average trend, was -45 basis points. 


Estimated Knapp Track casual dining guest counts declined -1.7% in August versus an estimated -1.8% in July.  The sequential change from July to August, in terms of the two-year average trend, was -70 basis points.



Black Box Intelligence


Black Box Intelligence released its casual dining index comparable restaurant sales growth for August earlier this month.  Comparable sales grew 1% last month while traffic declined -1.1% and price grew 2.2%.  The Knapp-Black Box spread was at -0.2% in August, which could imply that Darden underperformed since Darden is included in Knapp but not in the Black Box data.  To be clear, there are several differences between the Knapp Track and Blackbox data sets so the spread is not a sure-fire indicator of a slowdown in Darden comps but, given the size of the Darden system, we believe that the spread between Knapp Track and Blackbox is likely relevant for Darden’s top line trends.  The spread was +0.8% in February, which was a strong month for Darden (Red Lobster, in particular).  Since then, however, the spread has been negative through August.



Pricing Power Pressure


The restaurant industry’s pricing power is under pressure, currently, as Food at Home CPI is now well below Food Away from Home CPI on a year-over-year basis.   


AUGUST CASUAL DINING SALES TRENDS - food at home vs food away from home cpi



Howard Penney

Managing Director


Rory Green



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Takeaway: Expert Call on $NAV's emissions situation @11AM. It is not as simple as it looks and it doesn't look simple at all.

Participant Dialing Instructions

Toll Free Number:

Direct Dial Number:

Conference Code: 952591#


Conference Call Today at 11am EST

Focus on NAV emissions strategy. PCAR,CAT



  • Navistar's Emissions Situation
  • Drivers and Direction of EPA Policy
  • Potential Election Impact
  • Heavy & Light Vehicle Emissions Standards
  • Policy for Off-Road Vehicles
  • Impact of Power Plant Emissions Rulings
  • Other questions from the audience


In addition to his substantial emissions-related Bio, we chose to do a call with him because he represented Volvo in its suit against the EPA regarding Navistars non-conformance penalties.



Navistar has 18pct of the Class 8 market and a losing product strategy, in our view.  Additional lawsuits against the EPA's new non-conformance penalty regime would undermine Navistar's claim that the issues are now settled.  That notion - that the EPA issues are now settled - is what they are saying in the market place to sell trucks. If it turns out not to be true (even in relatively minor ways), it could further jeopardize the already shaky confidence customers have in the brand.  That is a win for PCAR, Volvo and Daimer, and NAV has a lot of share that it could lose. New new (ie higher) non-conformance penalties may also directly undermine NAV's products. There is even risk that the NCP concept itself could be over-turned.



Dick will also discuss class 8 emissions in general, as well as the likely direction of regulation post 2018.



We will touch on Tier IV regulations, a possible driver of prebuy activity at CAT and other off-road engine manufacturers.



Dick actively worked on the new light-duty regulations. We will discuss the broader supply chain effects and the potential election impact.



PCAR:Truck Orders Lead Production Changes

Takeaway: $PCAR: Production cuts come from weak orders months ago - no surprise. Trading on production is like driving with the rear-view mirror.


Truck Orders Lead Production Changes: 

Trading on production announcements is like driving with the rear-view mirror.


“This is evident in strong sales of aftermarket parts and services and excellent performance at PACCAR Financial Services. Industry orders for new trucks in North America have slowed in recent months as customers evaluate the mixed signals of a sluggish economic recovery,” – PCAR CEO Mark Pigott in 9/11/12 press release.


  • Orders Lead, Production Lags: PCAR increased the amount of production cuts in 3Q from 10% to 15%-20% vs. 2Q.  That should not be surprising because truck orders have been below build rates for the industry for months.  Production cuts of at least this size are the correct and necessary response.
  • Cuts All Around:  All four Class 8 manufacturers will cut NA production.  Navistar appears to be taking the most aggressive approach to capacity reductions.
  • NA Orders Below Replacement Demand:  Truck earnings are far from peak levels, unlike, say, mining equipment profits.  Buying cyclicals when orders have been weak and production is being cut is likely to work much better than buying them at peak profits when the outlook has never been better. 
  • Fleet Age Increases: Our thesis is that the NA Class 8 fleet will remain elevated and probably age further.  This is what the stock has historically correlated with – not margins or truck sales.  Yes, lower production will result in lower margins and if an investor follows that, they will get the stock wrong.  An aging fleet will drive higher parts revenue and more stable financial services returns.  PCAR specifically referenced those trends in the quote above. 
  • PCAR a Top Idea: Share losses by NAV, greatly reduced pre-buy activity and an aging fleet, in addition to other factors, position PCAR to be a top performer, in our view.  See our August 16th Black Book on truck OEMs for details.

Central Planners With Attitude







Sometimes when you begin to examine the market, you see a pattern or movements that remind you of years past. For instance, back in 2008 when the crisis was in full swing, a lot of people brought up dates like 1987 and 2001. Those were big events where the market took a turn for the worse and made a lot of people feel sick to their stomachs. To us, this market feels somewhat similar to the aforementioned years. It’s toppy. The S&P 500 can’t seem to keep it together above 1438 (we went short SPY at 1437). If you’re still playing the game of saying stocks are up year-to-date, it’s time to cut that out. Even after the crash of ’87 stocks were still up year-to-date despite a -23% down day.




Central planners are popping caffeine pills and getting to work these days. There is no rest for the wicked. Bernanke is busy pushing 0% rates out until 2015 and will probably push them even further should he need to appease market participants even further. The argument is still the same: “Let me drop some QE into this market and you’ll have stocks and commodities rally!” The short-term stock gains don’t seem worth the pain at the pump and grocery store that the rest of America has to face. $150 oil just perpetuates slowing growth and that’s not something anyone wants, is it? 






Cash:                UP


U.S. Equities:   Flat


Int'l Equities:   Flat   


Commodities: Flat


Fixed Income:  DOWN


Int'l Currencies: Flat








Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

  • TAIL:      LONG            



Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TAIL:      LONG



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.

  • TAIL:      NEUTRAL







“Another nail to the heart of Not that's it's needed.#EMH has been dead for a long time” -@JamesGRickards




“A thought is often original, though you have uttered it a hundred times.” –Oliver Wendell Holmes




$104 million. The payout for a former whistleblower at UBS who altered US authorities to the firm’s tax evasion practices.




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