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FNP: Tory Burch Deal Reminds Us of Value

Takeaway: Tory Burch transaction underscores just how undervalued FNP is headed into ICR event.

The transaction in the private luxury brand Tory Burch – one of FNP’s closest comps – at year-end serves as the latest reminder of just how undervalued FNP is at current levels. We’ve written a fair amount about the favorable setup headed into ICR and our view hasn’t changed. Consider the following:

  • Tory Burch Transaction – a Valuation Reminder: The capital gains tax increase proved the final straw. After years of speculation, Chris Burch (Tory’s ex-husband) finally sold the majority of his ownership a 25% stake in the company for ~$813mm (he kept 3.3%) suggesting a $3.25Bn valuation for the brand. According to estimates on Burch's top-line, this would suggest a multiple north of 4x and ~3x 2012 and 2013 sales respectively. This lands right between FNP’s two public company peers with KORS at 5.5x and COH at 3.5x 2012 sales and at the low-end of 2013 multiples. FNP on the other hand trades at less than 2x 2013 Kate Spade sales alone (not including Lucky or Juicy Couture) – a 45% discount to the peer average.

For several reasons, Tory Burch is a better comp to Kate with both brands at an early stage in their life cycles. For starters, both concepts are closing in on 100 stores and generate ~20% of sales overseas. One of the key differences is profitability. Burch’s operating margin is reportedly similar to KORS in the mid 20s and below COH in the low 30s. However, Kate Spade margins are lower at ~11% including corporate expenses and ~15% without substantially below peer levels reflecting investments to grow the brand. Mind you, this is not because of any factor
aside from that Kate is simply investing in the areas that matter to fuel future growth. It could print 2x the current margin rate in a heartbeat, but then we’d have to question the sustainability of its growth trajectory. We don’t question that for a minute with Kate.

 

We’re modeling Kate Spade sales approaching $800mm in 2013 and exceeding $1Bn in 2014 and expect profitability to continue to move upward toward the 20% level over the next 2-3 years. Assuming a 3x multiple of next year’s sales for Kate Spade alone that would imply a valuation close to a $2.5Bn for the brand – over 50% higher than the entire value of FNP today.

  • Expected Pre-ICR Update: We expect the company to provide an updated brand outlook ahead of next week’s ICR conference (Jan 16th-17th) most likely later this week. While the recent hire of a CEO at Juicy reduces the likelihood of an early divestiture announcement, we expect the focus in Miami to be on the company’s commitment to materially accelerating square footage growth at Kate and Lucky (see our note “FNP: Juicing Kate” on 10/25), profitability growth (particularly at Kate), and the upcoming Kate Spade investor day likely in 1H 2013.

While we can easily get to $180mm in adjusted EBITDA in FY13, we wouldn’t be surprised to see the company come in a bit lower on its initial outlook in an effort to re-establish forecasting credibility. In fact, we’d prefer it. Recall at this time last year, the company lowered its outlook less than a quarter after resetting expectations on the sale of assets in October.

 

In addition, we wouldn’t be surprised to see a positive pre-announcement out of first-timer KORS as well into the event. Particularly in light of JWN highlighting handbag strength at the high-end over the holidays and based on how the company has managed expectations historically.

  • Hosting FNP Dinner Jan 16th: We will be hosting a dinner with the management (CEO Bill McComb, CFO/COO George Carrara, and SVP of Finance Bob Vill) on the night of Wednesday the 16th. Clients who are interested can contact .

 

FNP: Tory Burch Deal Reminds Us of Value - FNP TBurch Valn 2

 




RANKING THE G3 CURRENCIES

Takeaway: Our analysis points to further upside in the USD vs. peer currencies over the intermediate term.

SUMMARY CONCLUSIONS:

 

  • In the note below, we analyze a series of quantitative RISK MANAGEMENT and fundamental RESEARCH factors to rate each of the G3 currencies with an eye for expected performance over the intermediate-term TREND. Those factors include:
    • The market setup relative to our proprietary quantitative RISK MANAGEMENT levels;
    • Our propriety GROWTH/INFLATION/POLICY outlook for each country/region;
    • Sentiment via Bloomberg CFTC net length data;
    • Expectations for monetary POLICY via 2YR OIS spreads;
    • Sell-side expectations via 2013 Bloomberg consensus forecasts for each currency; and
    • The outlook for fiscal POLICY across each geography.
  • All told, our comprehensive analysis of G3 currency fundamentals and market indicators suggests the USD (via the DXY) is poised to trade marginally higher vs. the EUR throughout 2013 and demonstrably higher vs. the JPY over that same duration.
  • Importantly, broad USD strength vs. these two peer currencies should continue to auger negatively for global inflation expectations and market prices for inflation hedge assets, such as gold and TIPS.

 

METHODOLOGY

We assign 1pt if a particular factor screens bullish, (1pt) if the factor screens bearish and 0pts if the factor is inconclusive for each of the aforementioned factors across each currency – with the exception of our quantitative overlay. For the latter, the magnitude of scoring is both amplified and unique:

 

  • 1pt for bullish TRADE/(1pt) for bearish TRADE;
  • 2pts for bullish TREND/(2pts) for bearish TREND; and
  • 3pts for bullish TAIL/(3pts) for bearish TAIL.

 

As a point of process, PRICE, VOLUME and VOLATILITY signals tend to dominate our interpretation of fundamentals for a particular security or asset class, as well as our expectations for future PRICES; for this reason, we assign a greater weight to our quantitative overlay relative to the other factors.

 

Lastly, it should be duly noted that while we analyze each factor on an absolute basis by the signal(s) it is currently projecting, the overall analysis is one that is relative in nature – just like the currency crosses themselves. As such, investors should not interpret the final scores of this exercise as anything other than how each currency currently stacks up against the other two with respect to this comprehensive analysis.

 

QUANTITATIVE OVERLAY

On our quantitative factoring, the USD (via the DXY) is trading right at our immediate-term TRADE line of 80.24 and is bullish TREND and TAIL for a total of +5pts:

 

RANKING THE G3 CURRENCIES - 1

 

On our quantitative factoring, the EUR is trading right at our immediate-term TRADE line of $1.31 vs. the USD and bullish TREND and TAIL for a total of +5pts:

 

RANKING THE G3 CURRENCIES - 2

 

On our quantitative factoring, the JPY is bearish TRADE, TREND, and TAIL vs. the USD for a total of -6pts:

 

RANKING THE G3 CURRENCIES - 3

 

GROWTH/INFLATION/POLICY OUTLOOK

Those familiar with our fundamental RESEARCH process are likely aware of our G/I/P analysis. While this process is used primarily to front-run short-cycle deltas in a particular country and/or region’s economic fundamentals, we have added a new overlay that allows us to view those deltas on a full-year basis as well. For more details on the associated methodology, please refer to our 1/3 note titled: “SIZING UP ASIA & LATIN AMERICA FOR 2013”.

 

From a full-year 2013 perspective, the US economy appears poised to register a trip to Quad #1 on our G/I/P screen – specifically, GROWTH is likely to accelerate YoY, while INFLATION is likely to decelerate (+1pt):

 

RANKING THE G3 CURRENCIES - UNITED STATES

 

From a full-year 2013 perspective, the Eurozone economy appears poised to register a trip to Quad #1 on our G/I/P screen – specifically, GROWTH is likely to accelerate YoY, while INFLATION is likely to decelerate (+1pt):

 

RANKING THE G3 CURRENCIES - EUROZONE

 

From a full-year 2013 perspective, the Japanese economy appears poised to register a trip to Quad #3 on our G/I/P screen – specifically, GROWTH is likely to decelerate YoY, while INFLATION is likely to accelerate (-1pt):

 

RANKING THE G3 CURRENCIES - JAPAN

 

CFTC DATA

We use CFTC reporting of net futures and options contracts to gauge market sentiment and positioning for particular currencies or asset classes. Additionally, while it is common for market participants to focus on the non-commercial (i.e. speculators) data in lieu of the commercial (i.e. hedgers) data, we prefer to combine the two data sets to form a more holistic view of the market.

 

On our amalgamated look, the market is positioned net long of the US Dollar Index to the tune of 786 combined contracts for a z-score of 1.72. As it relates to market prices, this data series has a lagging relationship to the DXY, forming cycle peaks as the z-score breaks through 0 to the upside and forming cycle bottoms as the z-score breaks through 0 on the downside.

 

The current reading of 1.72 suggests we’ve either recently begun a phase change with regards to the market’s position (which was net short for much of the past three years) or there is further weakness to come. While we are inclined to believe the former view, historic data supports the latter conclusion, for now, for a score of -1pt:

 

RANKING THE G3 CURRENCIES - 7

 

On our amalgamated look, the market is positioned net short of the EUR to the tune of -2,346 combined contracts for a z-score of -2.44. As it relates to market prices, this data series has held a contrarian relationship with the EUR/USD cross since MAR ’09, after having held a coincident relationship for much of the 5-7 years prior to then.

 

As such, the current reading of -2.44 suggests the EUR is poised for further upside vs. the USD with respect to the intermediate term for a score of +1pt:

 

RANKING THE G3 CURRENCIES - 8

 

On our amalgamated look, the market is positioned net long of the JPY to the tune of 44,732 combined contracts for a z-score of 1.33. As it relates to market prices, this data series has held a contrarian relationship with the JPY/USD cross since mid-2007, after having held a coincident relationship for much of the two years prior to then.

 

As such, the current reading of 1.33 suggests the JPY is poised to give back some of its recent correction vs. the USD with respect to the intermediate term for a score of +1pt:

 

RANKING THE G3 CURRENCIES - 9

 

OIS SPREADS

We find that fluctuations in the spread of two countries and/or regions’ interest rates can often be a powerful driver of currency crosses. Moreover, we use 2YR overnight index swaps (OIS) to gauge where market expectations for said rates are.

 

For the USD (via DXY), we formed a weighted average of 2YR OIS for the six currencies that comprise the US Dollar Index by their respective weights in the index, then subtracting that figure from 2YR USD OIS rates to form a basis point spread. The current spread of -17bps suggests the DXY should be tracking roughly +3-4% higher in the ~83 range for a score of +1pt:

 

RANKING THE G3 CURRENCIES - 10

 

The +4bps spread between EUR and USD 2YR OIS rates is supportive of a much lower EUR/USD cross in the area code of ~$1.23. That’s roughly -6% lower than the current price of $1.31 per USD for a score of -1pt:

 

RANKING THE G3 CURRENCIES - 11

 

The +17bps spread between USD and JPY 2YR OIS rates is supportive of a much lower USD/JPY cross in the area code of ~¥82. That’s roughly +7% stronger than the current price of ¥87.69 per USD for a score of +1pt:

 

RANKING THE G3 CURRENCIES - 12

 

CONSENSUS EXPECTATIONS

Anchoring our expectations in and around consensus forecasts is not something we are ever inclined to do at Hedgeye. That said, however, because global moneycenter banks tend to dominate transactions in the FX market globally through a variety of trade and investment finance, hedging strategies and/or general flows of capital (i.e. repatriation of corporate overseas income, etc.), we would be remiss to discount their influence on market exchange rates.

 

In a similar fashion to how we constructed the weighted average 2YR OIS rate for the US Dollar Index constituent currencies, we have also constructed a weighted average Bloomberg Consensus 2013 year-end forecast for the US Dollar Index by amalgamating the Bloomberg Consensus 2013 year-end forecasts for each of the six constituent currencies according to their respective weights in the index.

 

On the metric, the sell-side expects the US Dollar Index to end the year roughly +2% higher at 82.10 for a score of +1pt:

 

RANKING THE G3 CURRENCIES - 13

 

The sell-side expects the EUR to end the year roughly -3% lower at $1.27 per USD for a score of -1pt:

 

RANKING THE G3 CURRENCIES - 14

 

The sell-side expects the JPY to end the year roughly flat at ¥88 per USD for a score of 0pts:

 

RANKING THE G3 CURRENCIES - 15

 

FISCAL POLICY OUTLOOK 

While typically slow-moving in nature, relative deltas in fiscal POLICY can have demonstrable effects on currency crosses when expectations for critical metrics (i.e. deficit/GDP, debt/GDP, sovereign debt issuance, etc.) are exceeded or unmet. As a result, we think currency investors should be very focused on what is likely to be an eventful 2013 with regards to G3 fiscal POLICY – particularly in both Japan and the US.

 

It would be an understatement to suggest that the domestic fiscal POLICY outlook is a bit unclear at the current juncture. While it is certainly fair to argue that hopes for any meaningful fiscal reform in the US were, at best, punted to ~MAR 1st via the introduction of the American Taxpayer Relief Act of 2012, it is not unreasonable to hold out hope for further progress.

 

The upcoming reform process is likely to be as messy as ever, but it does appear the GOP has enough political leverage (i.e. Debt Ceiling) to force Obama to play ball with regards to meaningful entitlement reform and/or tax code restructuring. Unfortunately for global investors, the world will once again be forced to watch the how proverbial “sausage” is made – if any is made at all. As an aside, any short-term bout of global risk aversion in the days and weeks leading up to and through any official breach of the Debt Ceiling would likely prove positive for the DXY via TIC inflows.

 

For a deeper discussion of the US’s fiscal POLICY outlook, please refer to our 1/7 note titled: “CLIFF JUMPING 101… TAKEAWAYS FROM PASSAGE OF THE AMERICAN TAXPAYER RELIEF ACT OF 2012”. All in, we assign the US a score of “TBD”/0pts in the fiscal POLICY department.

 

Flipping over to the Eurozone, after ~two years of European fiscal POLICY dominating global financial markets from a headline risk perspective, 2013 appears rather boring on a relative basis – both relative to what investors have likely become accustomed to receiving from Europe and relative to the US (above) and Japan (below).

 

From Matt Hedrick, our head of European fundamental research:

 

“Fiscally the Eurozone remains anchored, at least rhetorically, under Draghi’s accommodative ECB policy stance to keep rates low and use its bond purchasing program (OMT) if requested by a member nation. 2013 is setting up to look a lot like 2012 in which countries muddle through the impact of previously issued austerity packages.”

 

All in, we think a lack of fiscal deterioration in Europe is at least worth 0pts – and possibly 1pt if Draghi & Co. can help indebted sovereigns reduce their structural balances by via a lower cost of capital. For now, we think a score of 0pts is warranted for the Eurozone’s 2013 fiscal POLICY outlook.

 

Turning to Japan, Japan’s new Prime Minster Shinzo Abe and his Finance Minister Taro Aso appear poised to accelerate public expenditures and sovereign debt issuance beyond previous expectations set by the outgoing DPJ. The latest news on this front is the announcement of a ¥12 trillion supplementary stimulus budget and the accompanying debt issuance needed to finance these expenditures.

 

For a deeper discussion of Japan’s fiscal POLICY outlook, please refer to our 12/26 note titled: “JAPAN TO LOOSEN FISCAL POLICY AS WELL”. All in, we assign Japan a score of -1pt in the fiscal POLICY department.

 

RANKING THE G3 CURRENCIES - 16

 

RANKING THE G3 CURRENCIES - 17

 

FINAL TALLY AND KEY TAKEAWAYS

The cumulative score/rank for each currency is as follows:

 

  1. USD (via the DXY): 7
  2. EUR: 5
  3. JPY: -6

 

Our comprehensive analysis of G3 currency fundamentals suggests the USD (via the DXY) is poised to trade marginally higher vs. the EUR throughout 2013 and demonstrably higher vs. the JPY over that same duration. Importantly, broad USD strength vs. these two peer currencies should continue to auger negatively for global inflation expectations and market prices for inflation hedge assets, such as gold and TIPS.

 

Darius Dale

Senior Analyst


Gold In Bearish Formation

Gold has been selling off since September when it hit $1900/oz. As we move from "growth slowing" to "growth stabilizing," both commodities and gold have continued to deflate. From a long-term perspective, we think the gold bubble has already popped. From a quantitative setup, gold is in a bearish formation; we’ll short gold (GLD) and gold miners (GDX) as long as our models tell us to do. Across our core risk management durations in Gold, here are the lines that matter to us most:

 

1.       Intermediate-term TREND resistance = 1699

2.       Long-term TAIL resistance = 1671

3.       Immediate-term TRADE resistance = 1665

 

Gold In Bearish Formation - gold


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Improvement In Europe

Following the fiscal cliff resolution in the United States, credit default swaps (CDS) on European banks are tightening across the board save for Greece. Italian and Spanish banks were the most improved, while German and French banks were close behind. Additionally, the Basel Committee has imposed a four-year delay for European banks to improve their liquidity requirements, which would have tied up a large amount of capital at financial institutions. This is an additional tailwind in the near-term for European banks.

 

Improvement In Europe - 33  banks

 

Improvement In Europe - image001


European Banking Monitor: Bank Swaps Reflect Fiscal Cliff Resolution

Takeaway: Bank Swaps Reflect Fiscal Cliff Resolution; Extension of Basel liquidity requirements is another tailwind.

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

Key Takeaways:

  

* European Financial CDS - With the exception of Greece and one Spanish Bank (Caja de Ahorros del Mediterraneo), European bank swaps were tighter across the board on US fiscal cliff resolution. Italian and Spanish banks were the most improved, while German and French banks were close behind. We’d note that the Basel Committee’s decision to award banks a four-year delay to meet international liquidity requirements may provide a near-term tailwind for the banks and their risk profiles.

 

* On OMTs Reporting: The ECB has stated that Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis and the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis. There is no indication that the OMTs has been initiated to date.

 

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If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.

 

Matthew Hedrick

Senior Analyst

 

 

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European Financials CDS Monitor – With the exception of Greece and one Spanish Bank (Caja de Ahorros del Mediterraneo), European bank swaps were tighter across the board on US fiscal cliff resolution. Italian and Spanish banks were the most improved, while German and French banks were close behind.

 

European Banking Monitor: Bank Swaps Reflect Fiscal Cliff Resolution  - 33  banks

 

Euribor-OIS spread – The Euribor-OIS spread widened by roughly half a basis point to 12.5 bps in the latest week. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

European Banking Monitor: Bank Swaps Reflect Fiscal Cliff Resolution  - 33. Euribor

 

ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

European Banking Monitor: Bank Swaps Reflect Fiscal Cliff Resolution  - 33. facillity


EMPLOYMENT DATA CONFIRMING BEARISH CASUAL DINING STANCE

The primary takeaway from this post is the most important macro indicators are continuing to confirm our bearish stance on casual dining. 

 

Employment trends within the industry suggest a possible sequential deceleration in same-restaurant casual dining sales. The deceleration of employment growth within casual dining versus quick service and the broader leisure and hospitality industry is worth noting.

 

Knapp Track Casual Dining sales data track BLS employment growth data for the full-service and leisure and hospitality industries.  Within casual dining, we are bearish on DRI, BWLD, and TXRH

 

EMPLOYMENT DATA CONFIRMING BEARISH CASUAL DINING STANCE - knapp comps vs full service employment

 

EMPLOYMENT DATA CONFIRMING BEARISH CASUAL DINING STANCE - leisure   hospitality vs full service employment growth

 

 

Employment by Age

 

Employment growth by age cohort implies that quick service restaurants are benefitting from strong employment growth among core consumers while casual dining’s struggles are being caused, at least in part, by decelerating employment growth of one of the sector’s core demographics. 

 

The chart below illustrates a strong end to the year for employment growth among the younger age cohorts.  Job growth in the 20-24 years of age cohort remained in the 3% range while growth in the number of employed 23-34 year olds accelerated to 1.2% in December from 0.7% the month prior.  This is positive data point for QSR. 

 

Employment growth among 55-64 year olds remains robust, accelerating to 5.6% in December, but softer trends in the 45-54 years of age cohort is a concern for casual dining. 

 

EMPLOYMENT DATA CONFIRMING BEARISH CASUAL DINING STANCE - Employment by Age

 

 

Industry Hiring

 

If we assume that hiring within the restaurant industry serves as a decent proxy for operator confidence, it seems that QSR operators have a very different outlook than casual dining operators.

 

The continuing sideways trajectory of Leisure & Hospitality employment growth suggests that employment growth in limited service restaurants could be overstretching at this point.  However, with consumers trading down and quick service chains investing in enhancing the consumer’s experience at their restaurants, it is difficult to come to a firm conclusion.

 

Sequential Moves

  • Leisure and Hospitality: Employment growth at 2.38% in December (+1.7 bps seq acceleration)
  • Limited Service: Employment growth at 4.29% in November (-5.3 bps seq deceleration)
  • Full Service: Employment growth at 1.93% in November (-47.8 bps seq deceleration)

EMPLOYMENT DATA CONFIRMING BEARISH CASUAL DINING STANCE - restaurant employment

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 


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