We’re adding FNP to the Hedgeye Virtual Portfolio as the near-term quantitative setup and catalyst calendar synch with our bullish intermediate and long-term fundamental view. Our estimates remain double the consensus for the next two years.
We think that the pre-ICR update is likely to be favorable, and that we’re more like than not to see a 25% upwards positive revision beginning by the time the company reports its fourth quarter in early January.
The crux of our call around FNP is that this is an out of favor stock with more unrealized value than perhaps any other name in retail. It has Kate Spade, which is one of the best growth stories in global retail today and is worth over 40% above where the stock is today based on our assumptions. Then it has Lucky Brand, which we view as an annuity. It is one of the few denim brands that might not take a big swing at the fences each year, but has muted fashion risk and it consistently contributes cash flow to cover roughly half of the parent’s capex. Then…there’s Juicy Coture. We think that the break here is not temporary, but that they have a customer problem that will be too much to overcome. That’s when bad news is good news because we think that CEO McComb has low tolerance for having his crown jewel (Kate) weighed down by the ugly red-headed stepchild.
Our point is that the chance is low that Juicy is still part of the company in six months’ time. We don’t think that having a new COO (hired last month) impedes this decision. In fact, it allows McComb to run the parent, not the sub, and also makes the bench more attractive for a buyer.
If we assume that Juicy gets a paltry $160mm on a $500mm revenue base, then we get to a scenario where 45% of FNP’s debt is gone and it takes any concern about the balance sheet right along with it.
Perversely, we don’t think that there will be as much value added if Juicy is fixed – but in the end, we think that the only risk to Juicy is no volatility. Improvement is good. Erosion is good (ie it gets sold). Status quo is like Chinese water torture.
But that's already priced in to the stock, and status quo on a third of the business while one third acts as an annuity, and the other third continues as one of the best growers in retail is not exactly a bad place to be. Our aggregate value for the company today – using a very realistic ‘sell it now’ price for Juicy is $20 per share, and we think that either corporate action or the upwardly revised earnings power of the company will get it there in 2013.