FNP: Big Value

The recent Tory Burch deal, in which Chris Burch (Tory’s ex-husband) sold the majority of his 25% stake in the company for ~$813 million, acts as a reminder that Fifth & Pacific (FNP) is undervalued at current levels. It’s worth noting that Tory Burch is one of FNP’s closest comps. Estimates on Burch's top-line suggest a multiple north of 4x and ~3x 2012 and 2013 sales respectively. This lands right between FNP’s two publicly traded peers: KORS at 5.5x and COH at 3.5x 2012 sales and at the low-end of 2013 multiples.


FNP: Big Value - image001


FNP on the other hand trades at less than 2x 2013 Kate Spade sales alone (not including Lucky or Juicy Couture, which FNP owns in addition to Kate Spade) – a 45% discount to the peer average. Hedgeye Retail Sector Head Brian McGough outlines the growth potential in FNP:


“We’re modeling Kate Spade sales approaching $800 million in sales for 2013 and over $1 billion in 2014; we 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.”


We don't think November's GGR release will be a pretty one for the Strip



November Nevada gaming figures will be released this Thursday, the 10th.  As we wrote in "LV STRIP: BACK IN RED FOR NOVEMBER" (12/31/2012), we're projecting November Strip gaming revenue to fall between -6% and -10%, assuming normal slot and table hold.  We're starting to think we may even be too conservative with that estimate.  Difficult slot hold comps (8.4% vs normal of 7.5%) and sluggish slot volumes will certainly pressure slot revenue.  Moreover, November 2012 has one less Friday relative to November 2011.  Finally, the Pacquiao vs Marquez 3 fight occurred in November 2011 while Pacquiao vs Marquez 4 took place in December 2012.  The 2011 fight contributed to a 7% increase in table drop last year in November.

Not Enough From ICSC Reading To Save 4Q

Takeaway: This morning’s -4.2% w/w reading in the ICSC index is not enough to save 4Q earnings for retailers. The clock is ticking.

This morning’s -4.2% w/w reading in the ICSC index is not enough to save 4Q earnings for retailers. This week actually marks a slight improvement from the -5.4% sequential decline we saw in the first week of last year. But 2012 is hardly the benchmark year, as it finished below both 2010 and 2011 levels. The next week is critical. If we do not see a pickup at a rate ahead of last year, we’re likely to see the retailers step on the gas as it relates to discounting in order to clear inventories for the 4Q13 reporting period. That synchs perfectly with preannouncements into ICR.


We remain bearish on softlines retail overall.

Top Shorts: GPS, M, GES, TJX, VFC, FDO, CRI, UA

Top Longs: NKE, FNP, URBN, RH, RL

After a year and half of being bearish on JCP, we have an upside bias – though we think it will be one of the biggest factors leading to draconian competitive landscape changes during the year.


Note: Unlike Same Store Sales day, which has become largely irrelevant die to the shrinking sample of participating, this ICSC index is made up of 80 relevant retailers and is weighted to portray an accurate view of the real state of discretionary retail in the US.


Not Enough From ICSC Reading To Save 4Q - 1 8 2013 10 12 55 AM


This note was originally published January 07, 2013 at 11:36 in Restaurants

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 - 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. 





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)



Howard Penney

Managing Director



Rory Green

Senior Analyst



Switching It Up

Client Talking Points

Ebb And Flow

The markets can move any which way they please, regardless of what participants think it should do. Right now, we’ve been enjoying (so to speak) a move from #GrowthSlowing to #GrowthStabilizing. Commodities continue to deflate, equities are on the rise and housing is recovering. There is a caveat: crude oil. It’s been going up in price since December and if we go back to $120 a barrel oil, that can take us right back to #GrowthSlowing. Oil is an important indicator of growth in our model, so we'll be watching it closely to see which direction it heads over the next week.

Bad Bonds, Bad Bonds

COPS-theme song aside, bonds have had one hell of a bad start this year. Treasuries in particular haven’t had a start this bad since 2009. The 10-year risk range for today is 1.84-1.96% and is currently trading at 1.885% as of writing. A 200bps yield is a stone’s throw away. Investors are worried that the Fed will stop buying debt this year but it remains to be seen if that’s merely gossip or hard fact.  As Congress works with the Treasury to raise the debt ceiling, the yield on the 10-year looks to keep climbing.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Our competitors are neutral to bearish on the name ahead of earnings, but we think they’re missing the bigger picture. We think concerns over the shoe cycle rolling over are overdone. With R&D in the mid-teens, NKE has the ability to drive the ‘sneaker cycle’ in a case of “the tail wagging the dog”. We also think $NKE is a candidate for releasing a special dividend when they report EPS next week.


ADM has significantly lagged the overall market in 2012 over concerns that weakness in the company’s bioproducts (ethanol) and merchandise and handling segment will persist. Ethanol margins suffered from higher corn costs, as well as weak domestic demand and low capacity utilization across the industry. Merchandising and handling results were at the mercy of a smaller U.S. corn harvest. Both segments could be in a position to rebound as we move into 2013 and a new crop goes into the ground. With corn prices remaining at elevated levels, the incentive to plant corn certainly exists, and we expect that we will see corn planted fencepost to fencepost.


Margins are in a cycle trough as the USPS is on the brink. FDX is taking more share in the U.S. and following the recent $TNT news flow we think $UPS is in a tough spot.

Three for the Road


“Easier for the #PoliticalClass to talk political economy instead of real-time business - easier to just make stuff up” -@KeithMcCullough


“If absolute power corrupts absolutely, does absolute powerlessness make you pure?” -Harry Shearer


ICSC/GS weekly chain store sales w/e Jan 6th w/w: -4.2%; y/y: +4.0%


News flow for YUM in China may be negative for much of 1H13 but investors looking to buy a global retail stock for the long-term TAIL have an attractive opportunity today in Yum! Brands.


Guidance Revised


The headlines this morning are decidedly negative for YUM’s stock as the company released an 8-K yesterday after the close describing the impact of a probe into a former chicken supplier for the company as “significant”.  Last night’s 8-K also revised 4Q China SSS guidance to -6% from -4%.  Previously, on December 21st, the company had described the impact of the government probe on demand as “moderate”.


YUM SHARES APPETIZING FOR 2013 - china pod 1



There will likely be pressure on YUM’s shares over the near-term TRADE as this news is absorbed but there are a couple of things worth bearing in mind:

  • The suppliers implicated in the government probe represent an “extremely small percentage of product to KFC”, according to YUM.  Given the size of this company and the importance of China to its overall profitability, we are confident that management will go to appropriate lengths to address any trust issues consumers have. 
  • In 2011, Taco Bell in the US was subject of a lawsuit, which was ultimately dropped, that had a significant impact on the US business. The company’s response was vigorous and it is clear that consumer perception has been improved.  We expect management to act with even more urgency in this instance, given the importance of China to overall profitability.

YUM SHARES APPETIZING FOR 2013 - yum op inc geography



What Matters

China is a huge part of Yum! Brands and it is no surprise that the stock price reaction to the guidance revision has been so strong.  However, YUM remains our best pick for 2013.  The enterprise value will continue to accrete value at 10-13% per year with added gains possibly coming from a 2% dividend yield and share repurchases in 2013. 


The argument for near-term multiple contraction is purely a forecast on sentiment.  The growth potential of YUM, in our view, is unrivalled in the restaurant industry when the capability of management to execute is considered.  Even if there is a one-multiple contraction in EV/EBITDA, we see downside reaching $63-64, which is where the stock rallied from in December. 


The macro setup in China has been improving and, despite narratives that will attempt to attribute all of the recent softness in China to a probe into a chicken supplier of a small percentage of KFC’s product in the country, slowing growth was clearly a factor in recent decelerations in same-store sales growth.  The retail sales environment in China is sequentially improving as of November 2012 and, if this continues into 2013, we believe it will benefit YUM as the negative headlines abate.


For 2013, we still believe that there is upside in the shares to $85-90 per share. 


YUM SHARES APPETIZING FOR 2013 - china retail sales growth


Howard Penney

Managing Director


Rory Green

Senior Analyst




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