FNP: Take 2

Takeaway: We think we’ll be making a call within six months that they’re finally getting rid of Juicy. You’re getting another shot at FNP today.

For those who think they’ve missed FNP, you’re getting another shot today. Sound familiar? It should. It’s the second time FNP has revised its F12 EBITDA outlook this year. The problem from our perspective is that they’ve shown us #2 when we thought it was improbable. We can argue until we’re blue in the face that the stock is cheap, but that would be pretty ridiculous when it comes down to one of the real questions to be researched – can #3 rear its’ ugly mug? We think it’s not likely, as this was probably a greater take-down than they needed. But then again McGough, you didn’t expect a press release after the close last night, so why should I believe you now? Excellent question.

Let’s step back, re-evaluate the thesis, and see what’s changed.


Thesis: FNP is an misunderstood, underloved, and grossly undervalued company made up of one power brand, and two call options on value creation. The company will aggressively grow Kate Spade globally while milking Lucky Brand for cash, and fix Juicy Couture or else boot it. This is all on a greatly reduced operating asset base after the Mexx and Liz Claiborne brand sale. In the end, there’s a much higher top line growth rate and a less volatile msd/hsd blended operating margin – and when laid over a reduced asset base the implications for ROIC are not even being considered by 99% of the investing population.

Changes to thesis: There’s no way we’d even attempt to argue that it did not change. But let’s review…

Kate: comps looked great and business is on plan. Check.

Lucky: Check

Juicy: While continued business ‘bumpiness’ has been feared and rumored for 3-6 months, the conformation is definitely a bad thing.


Management: We’re mixed on this one. We had a meeting with them two months back and learned that CEO and CFO were BOTH spending about 90% of their time on Juicy. Retail is a fickle business that changes daily, we get that. But it bugs us that so much of their effort is going to a division that just missed. To be fair, we said at the time that we did not know if that time ratio was a good or bad thing. Perhaps the same still applies. Maybe it’d have otherwise missed a lot more. Regardless, management is back on the spot with the ‘fix or sell’ decision. The good news is that we have enough confidence in McComb (and we don’t have confidence in most CEOs) that he’ll make the right call.

McGough’s prediction: The good news is that I think that Juicy will be outta here. The recent improvements to the back end of the combined company make it easy to do so. The bad news is that it might take another disappointment before they jettison the division. In addition, the miss is likely to hamper dollar value, as well as any discussions for international JV’s that management hinted will be announced near-term.

The stock had already broken critical TRADE support of 13.21 before the event even transpired, (which is why Keith wasn’t long it in the Hedgeye Virtual Portfolio); TREND support is 11.48; he’d probably buy it if recaptures that level and holds it.

Based on our model and assumptions, we think the impact of the announcement is roughly $26mm in lower FY12 sales as well as a $22mm reduction in Juicy EBIT and additional ~$3mm of DC related costs. In addition, we expect the impact on FY13 sales and EBIT to be $28mm and $10mm respectively. This shakes out at a $0.13 and $0.08 hit to FY12 and FY13 EPS respectively. All in, we’re at $0.54 and $1.03 next year and the year out (FY14). Assuming a high teens multiple for a significantly faster earnings grower, this $0.08 revision equates to roughly $1.50 in value. The market has it about right from a near term trading perspective with a $1.55 draw down.

From a longer-term vantage point, we think we’ll be making a call within six months that they’re finally getting rid of Juicy, with the difference being that it could generate a $500mm sale. You may have to live with the volatility of owning the business for 2 quarters before then. Over a TAIL duration, its well worth it. Else, get ready to buy it, bc the days where it will dip below $10 will not last long – if they ever even come to fruition.

What Happened:

The key delta impacting EBITDA by ~$25mm is impaired profitability at Juicy, which accounts for ~12% of FNP’s equity value. Importantly, results at both Kate and Lucky remain and on track to ahead of expectations.

So what have we learned:

  • Juicy has too much high priced product. The only plus here is that they moved up-scale too quickly, which is better than shifting down-scale too fast. However, it also begs the question re the direction that Leann Nealz has taken the brand since coming on 2-years ago, but more importantly, the process put in place to sustain consistent profitable growth. Is the brand more or less uniquely Juicy than it was 2-years ago such that they core customer is willing to pay more for it? It’s difficult to suggest the answer to that question is yes given today’s update. Perhaps there is simply too much product in the ‘Best’ tier of the product pyramid. Either way, we aren’t likely to have clarity here before Spring.
  • Also embedded in adjusted EBITDA is $2-$4mm of delay-related DC transition costs as the company looks to outsource its distribution.
  • They gave us better disclosure regarding the componentry of FY12 adjusted EBITDA guidance by brand. What jumped out at us was how much Juicy accounted for prior guidance at $45-$48mm (with corporate expense allocated) accounting for 32%-38% of $125-$140mm FY12 adjusted EBITDA. With this hindsight, we had been lower on Juicy and higher on Kate. The new outlook adjusted expectations for Kate higher nearly in-line with our model while Juicy was adjusted sharply lower accounting for the net negative $25mm delta.



Commodities Cornered

If you look at the chart below, you can clearly see the effects that Ben Bernanke and the Federal Reserve have had in commodity markets since implementing quantitative easing. This is the work of your central planners at work, folks. Since April 2009, you've had to feel the effects at the pump and the grocery store. Commodity prices will continue to climb higher as long as the US dollar stays depressed. 



Commodities Cornered - spcommod

Sellem! SP500 Levels, Refreshed

Takeaway: For now, I say Sellem!

POSITIONS: none (SPY or Sector ETFs)


Maybe I’ll come back and say buyem! at 1430 again. We’ll see what the process instructs. I wake up, every day, embracing uncertainty.


For now, across our risk management durations, here are the lines that matter to me most:


  1. SELL TRADE = 1449 (getting lower-highs of resistance)
  2. BUY TRADE = 1430
  3. BUY TREND = 1419


In other words, my intermediate-term risk range is tight (1) and we have not yet tested the low-end of that range. If #EarningsSlowing becomes the market’s main concern in the coming weeks, we should test 1.


What should happen isn’t what will happen. We’ll see. For now, I say Sellem!



Keith R. McCullough
Chief Executive Officer


Sellem! SP500 Levels, Refreshed - SPX

Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Global Central Planners







Skipping the acclaimed David Lynch television series and going straight to the market for our peaks. When cycles peak and stocks appear to be “cheap,” it’s easy to want to buy into them. We sell into peak cycles because cheap gets cheaper and right now, one of our finest shorts is Caterpillar (CAT), which appears to be the epitome of the aforementioned thesis.




There are two kinds of central planners out there. One kind is keen on Keynesian economics and does what the US and Japan have been doing a lot of: printing money. Some people think that works but take a look at the Nikkei in Japan and its performance since March of this year and you’ll begin to think twice. The other kind of planner is one like that of Glenn Stevens, the Reserve Bank of Australia’s chief banker. He’s raised rates and cut rates where appropriate and it seems to have worked out nicely for everyone. Remember when you could go into a bank and actually get yield on a CD or a savings account? Those were the days and Australians have plenty of those days ahead of them.






Cash:                DOWN


U.S. Equities:   Flat


Int'l Equities:   Flat   


Commodities: Flat


Fixed Income:  UP


Int'l Currencies: UP  








Remains our top long in casual dining as new sales layers (pizza) and strong-performing remodels (~5% comps) should maintain sales momentum. The company is continuing to enhance returns for shareholders through share buybacks . The stock trades at a discount to DIN (7.7x vs 9.3x EV/EBITDA) and in line with the group at 7.3x.

  • 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



This company’s on track to post $3Bn in revenues by ’14 – impressive given a $1.5Bn print in 2011. Perhaps more impressive is the breadth of growth drivers that will get it there – women’s, accessories, new underwear platform etc. in addition to footwear. UA is gaining share in both apparel and footwear quarter-to-date. While some may be concerned over the loss of UA’s SVP/Sourcing we’re 8% ahead of the Street in the upcoming quarter and buyers on weakness.

  • TAIL:      LONG







“Anti momentum market continues, Fade every move higher and lower” -@MissTrade




“Never be afraid to laugh at yourself, after all, you could be missing out on the joke of the century.” -Dame Edna Everage




ISM U.S. factory Index rose to 51.5 in September from 49.6 a month earlier.




President Obama's Reelection Chances

After a run up to an all-time high of 63%, President Obama’s odds of being reelected dropped 60 basis points week-over-week to 62.4%. It’ll be interesting to see what next week’s data holds after the debates. Can Mitt Romney make a daring comeback? We’ll soon find out.


Hedgeye developed the HEI to understand the relationship between key market and economic data and the US Presidential Election. After rigorous back testing, Hedgeye has determined that there are a short list of real time market-based indicators, that move ahead of President Obama’s position in conventional polls or other measures of sentiment.


Based on our analysis, market prices will adjust in real-time ahead of economic conditions, which will ultimately shape voters’ perception of the Obama Presidency, the Republican candidates and influence the probability of an Obama reelection.  The model assumes that the Presidential election would be held today against any Republican candidate. Our model is indifferent toward who the Republican candidate is as the sentiment for Obama and for any Republican opponent is imputed in the market prices that determine the HEI. The HEI is based on a scale of 0 – 200, with 100 equating to a 50% probability that President Obama would win or lose if the election were held today.


President Obama’s reelection chances reached a peak of 63% on September 17, according to the HEI. Hedgeye will release the HEI every Tuesday at 7am ET until election day November 6.


President Obama's Reelection Chances - HEI

Whatever They Want

This note was originally published at 8am on September 18, 2012 for Hedgeye subscribers.

“These guys can do whatever they want, whenever they want.”

-Neil Barofsky


Sounds like the American Dream, right? Right. That, and the Fed proclaiming their mystery of faith this morning that “unemployment would be close to 7%... if it wasn’t for consumer doubt”, will get you a free scratch-and-sniff at the Washington Sticker Institute of fair play.


The aforementioned quote comes from Chapter 3 of Neil Barofsky’s Bailout, where he explains how Hank Paulson and Tim Geithner got a “blank check” to bailout GM, AIG, etc. “Well, the good news is that we didn’t approve an illegal transaction as our first official act…” (page 50)


At the highs, market volumes and equity fund inflows are dead right now because the America’s trust in the political system is. Both Bush and Obama have signed off on giving un-elected central planners like Ben Bernanke un-precedented powers to do Whatever They Want.


Back to the Global Macro Grind


For Obama, evidently that’s working. His probability of winning the US Presidency just hit a new high in our weekly Hedgeye Election Indicator. Week-over-week Obama just picked up another +220 basis points in our model, taking him to 63%. Romney is in trouble.


What does another Obama Administration mean for the US economy? Is there still a chance that Obama loses? How do you dynamically risk manage this binary event if and when the probabilities change in the coming weeks?


Last night, our Director of Research, Daryl Jones, and I enjoyed a dinner with pollster Scott Rasmussen. Daryl will have a more detailed note on Rasmussen’s current election thoughts tomorrow. The bottom line is that he still sees this one too close to call.


What isn’t too close to call is what the rest of the world’s interconnected risks are doing in the face of Ben Bernanke devaluing the US Dollar and ripping inflation higher (India consumer price inflation hit +10.03% this morning) for the sake of short-term political votes.  


Across our durations in our risk management model, here are some key Global Equity market callouts:

  1. Asian Equities continue to make lower-highs versus those established before growth slowing started, globally, in March
  2. Chinese Equities, down 3% in 2 days this wk, continue lower as China won’t “stimulate” during Bernanke commodity inflations
  3. Japanese Equities (down -11% since the March top) continue to languish as their 20yr experiment with Keynesian economics fails
  4. European Equities (EuroStoxx50), down -1.2% this morning, are now making lower-highs versus those established in March
  5. Italian Equities (MIB Index), down -1.8% this morning, are leading today’s decline; no Spanish bailout imminent for them
  6. Russian Equities (like Japan, down -11% from the March top), are getting tagged for a -1.7% decline this morning (Oil down)

Did something bad happen in the last 24 hours; what’s all the economic gravity and commotion about?


It’s called Correlation Risk to the US Dollar. Sadly, those two words are not part of the Washington, D.C. central planning narrative. And yes, dear Keynesian academics, we get that sometimes (like now) causality (monetary policy) perpetuates correlation.


All it took to get things like Oil and Russian Equities down was stopping the US Dollar from going down. The US Dollar Index remains the other side of the Ben Bernanke trade. He can do and say whatever he wants until that massive asymmetric risk goes the other way.


What would happen to stocks and commodities if the US Dollar recovered its last 6 weeks of losses? What if there was political leadership on the fiscal or monetary side to drive the US Dollar Index back to its July high of $84?


I don’t know. What I do know is that $84 on the US Dollar Index is +7% higher than where Bernanke Burned The Buck to yesterday – and that if a +0.14% move off the lows gets you this kind of constipation in Global Equity markets this morning, he may be spending more time in the men’s room than Paulson did in October 2008.


Since the speculation that Bernanke will do Whatever He Wants pre-election has found its way into commodities (and commodity linked stocks and currencies) more so than anywhere else, it’s going to be critical to monitor our immediate-term TRADE duration risk in things like oil in the coming weeks and months.


Across durations, here’s how Brent Oil looks in our risk management model:

  1. Immediate-term TRADE line = $114.69/barrel
  2. Intermediate-term TREND support = $105.85/barrel
  3. Long-term TAIL risk line = $111.47/barrel

In other words, the Ball Under Water trade (Dollar Down) just stopped going down, and Oil’s immediate-term TRADE line of momentum snapped almost instantly. If anything real drives the Dollar up +3-6%, our TAIL risk line for the Oil price comes into play, fast.


That, of course, would be good for Consumers, globally. But, perversely, it will be very bad for the stock market (and Obama’s chances), in a hurry. If you didn’t know Obama has already figured this out, now you know. He’s smart. And for the next 50 days his boys will say whatever they want to tell you Dollar Down, Oil Up is about everything other than what the Fed is doing when you aren’t looking.


My immediate-term risk ranges of support and resistance for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1739-1785, $112.49-116.86, $78.56-79.99, $1.28-1.31, 1.73-1.87%, and 1439-1474, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Whatever They Want - Chart of the Day


Whatever They Want - Virtual Portfolio

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