Japan: The Hot Drop

Keynesian economics just don't work these days. If America's rabid stock market wasn't enough to convince you, then perhaps Japan's Nikkei 225 Index will show you the way. The Nikkei is down -14.3% since March highs and continues to trend lower with every passing month. Growth is still slowing on global scale and the proof is in the market.


Japan: The Hot Drop - nikkei

FDO: Bearish Setup

Takeaway: We like $FDO on the short-side headed into Q4 earnings Wednesday.

We remain bearish on the dollar store space and like FDO on the short-side headed into Q4 earnings Wednesday. We don’t need Operating Margins to contract in order to build a short case but simply for the prior drivers of expansion to fade.

The following table encapsulates our call here for investors across multiple durations. Headed into tomorrow’s print, FDO is sitting at the top end of its Immediate-term risk range of $62.98-$66.09.


FDO: Bearish Setup - FDO TTT Table


This SIGMA setup is about as bearish as it gets for gross margins.


FDO: Bearish Setup - FDO S


Sentiment is neither here nor there, but management has been selling and we haven’t seen any meaningful purchases since last year.


FDO: Bearish Setup - FDO Sent


Food stamp participation growth is on track to turn negative by year-end for the first time in 5-years eliminating what has been a nice tailwind for the dollar stores.


FDO: Bearish Setup - FDO SNAP



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.




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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

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.




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