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FNP: Something to Chew On

Takeaway: We expect FNP to undergo meaningful structural change in 2013 that will continue to unlock shareholder value.

Dinner with a management team rarely (if ever) shifts ones’ investment thesis on a stock, and our’s with FNP last night was no exception. But we definitely walked away with confirmation that the management team is deploying assets to the areas that will fuel growth, and will do what it needs to do in order to purge parts of the portfolio that are simply not working. The bottom-line is that we expect FNP to undergo meaningful structural change in 2013 that will continue to unlock shareholder value.     

 

The only negative point we could really think of is that with a ~20% hit to EBITDA guidance (Juicy plus general conservatism) and a resulting 12% increase in the stock price, it would be flat-out dishonest of us to not admit that this latest update started the clock and set expectations that something strategic will, in fact, happen this year. Fortunately, we think it will happen, and when it does the path to a $20 stock will be apparent.


In the process of reflecting on his current “State of the Industry,” CEO Bill McComb highlighted that apparel is becoming increasingly commoditized requiring brands to become more differentiated in a consumer-direct format with a focus in part on accessories to shape how he runs each of his portfolio brands for tomorrow. In listening to McComb talk strategyvabout the future of the business, he most similarly sounds like Dick Hayne of URBN. Not a bad stock chart overvthe past year to follow.

 

Here are a few musings from last night:      

  • As for branded commentary, while Kate continues to be the fastest growing, Juicy remains the most dynamic. McComb put new Juicy CEO Paul Blum in place to set a path for the brand’s approach to market and its product allocation/mix across categories. This leadership has been sorely missed in recent years, which has lead the brand to run astray under Chief Creative Officer Leann Nealz in 2012. Simply put, a creative designer has been running the brand, and our opinion is that she had too much latitude to skew the brand up and down in price point and age. The brand needs a business person to instill a process to methodically target a consumer and procure product accordingly. We’re not declaring victory for Juicy. But we think that it has more going for it today as it relates to touting leadership to make it salable.
  • The upshot is that Paul is setting the course, but that’s just the start. In order to execute effectively, 1) the role of Chief Merchant still needs to be filled, and 2) the chief creative visionary has to be onboard and willing to follow the course set before her. Any deviation there would likely result in a replacement.
  • At Lucky, it’s clear that the focus beyond core denim (i.e. more fashion product) is critical to driving store productivity from $460 up to and beyond management’s $650 per sq. ft. target. In addition, e-commerce will be the primary driver of comp over the next 12-months as the team integrates successful initiatives at both Kate and Juicy.
  • As for Kate, there’s a ton of moving parts over the next year or two that drive brand growth, but McComb remains focused on the bigger picture – investing to ensure the Kate Spade business achieves a critical mass not necessarily managing to profitability. We’re not talking about a $460mm brand at 10% margins getting to 12% overtime, but a path and vision for sub $500mm brand to ultimately achieve $3Bn in revenues at margins over 20%+. We don’t think that investors are looking at the big picture here with what this brand can become. Focusing on the baby steps is an opportunity cost.

 

As we look ahead to the upcoming catalyst calendar, we expect confirmation shortly that a Kate Spade analyst day will take place over the next 3-months. Given the transformation and multitude of moving pieces underlying Kate’s growth trajectory, the added detail and visibility will be a net positive in light of the discounted multiple the market assigns to this brand.


Prior to then, we wouldn’t be surprised to see the addition of a Head Merchant at Juicy. Beyond 3-months is when we suspect more significant divestiture events are most likely. Among the assets likely to be monetized first are the Adelington Group and then Juicy.


The impact of these events on the balance sheet and P&L would be substantial and set free FNP’s most important asset i.e. Kate Spade. Keep in mind that a 0.5x sales multiple on Juicy Cotoure would net $250mm, which would eliminate 65% of debt, and leave FNP with debt to total capital of under 15%. That’s definitely consistent with what investors want to see from an early cycle high growth story. A better informed market following a 1H analyst day is more likely to reward the remaining business with an appropriate market multiple, which could in turn reward investors with a 40%-65%+ return from current levels and a stock worth $20-$24 per share. FNP remains one of our top longs for 2013.



 

 


INITIAL CLAIMS TAKE THEIR CUES FROM 2012, FOLLOWING LAST YEAR'S PATTERN TO THE DAY

Takeaway: Initial claims were unusually strong today, yes, just as they were this time last year. Here's what to expect.

I Know I've Seen This Before ...

Initial jobless claims posted their largest 1-week decline since this same week last year. Claims fell 37k to 335k. For reference, in the corresponding week in 2012, claims fell 46k (to 356k) only to then bounce higher by 23k in the following week. That said, in the five weeks that followed that 23k bounce, claims trended lower by a further 25k. This is precisely the Jan/Feb tailwind we've been describing, and why we would expect a bonce in claims next week, but a strong tailwind to re-emerge through February-end.

 

Beginning in March and running through August, initial jobless claims will shift from having the wind at their back to the wind at their front. The effect will be subtle at first, but it will build compounding momentum. We'd expect the next six weeks of strong tailwinds (next week notwithstanding) to fuel the rally in Financials.

 

The Numbers

Prior to revision, initial jobless claims fell 36k to 335k from 371k WoW, as the prior week's number was revised up by 1k to 372k.

The headline (unrevised) number shows claims were lower by 37k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -6.75k WoW to 359k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -7.0% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -9.7%

 

 

INITIAL CLAIMS TAKE THEIR CUES FROM 2012, FOLLOWING LAST YEAR'S PATTERN TO THE DAY - chart 1

 

INITIAL CLAIMS TAKE THEIR CUES FROM 2012, FOLLOWING LAST YEAR'S PATTERN TO THE DAY - chart 2

 

INITIAL CLAIMS TAKE THEIR CUES FROM 2012, FOLLOWING LAST YEAR'S PATTERN TO THE DAY - chart 3

 

INITIAL CLAIMS TAKE THEIR CUES FROM 2012, FOLLOWING LAST YEAR'S PATTERN TO THE DAY - chart 4

 

INITIAL CLAIMS TAKE THEIR CUES FROM 2012, FOLLOWING LAST YEAR'S PATTERN TO THE DAY - chart 5

 

INITIAL CLAIMS TAKE THEIR CUES FROM 2012, FOLLOWING LAST YEAR'S PATTERN TO THE DAY - Chart 6

 

INITIAL CLAIMS TAKE THEIR CUES FROM 2012, FOLLOWING LAST YEAR'S PATTERN TO THE DAY - Chart 7

 

INITIAL CLAIMS TAKE THEIR CUES FROM 2012, FOLLOWING LAST YEAR'S PATTERN TO THE DAY - Chart 8

 

INITIAL CLAIMS TAKE THEIR CUES FROM 2012, FOLLOWING LAST YEAR'S PATTERN TO THE DAY - Chart 9

 

INITIAL CLAIMS TAKE THEIR CUES FROM 2012, FOLLOWING LAST YEAR'S PATTERN TO THE DAY - Chart 10

 

INITIAL CLAIMS TAKE THEIR CUES FROM 2012, FOLLOWING LAST YEAR'S PATTERN TO THE DAY - Chart 11

 

 

Joshua Steiner, CFA

 

 


UNH: Caveat Emptor

When United Healthcare (UNH) reported earnings this morning that were in line with expectations but also showed rising costs, that might have surprised some on Wall Street, but not Hedgeye Healthcare Sector Head Tom Tobin. UNH has been one of Tobin’s top short ideas.  The story hasn’t played out yet, but it is beginning to, and there were several negative signals in today’s earnings release, so stay tuned.

 

UNH: Caveat Emptor - UNH   Benefit Expense PPRD adjusted

 

Tobin’s research led him to expect rising costs for UNH, which in turn would put pressure on the company’s margins. That’s essentially what today’s earnings report showed and he expects it to get worse from here.

 

Here’s a link to a story we posted last week, which detailed Tobin’s thesis.

 

UNH: Caveat Emptor - UNH   EPS Beat


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CHART DU JOUR: REVPAR ACCELERATION

Takeaway: Positive momentum for H, HOT, MAR, and HST

Our math shows RevPAR accelerating December through February

 

  • December was a good month for hotels with Upper Upscale RevPAR likely up double digits
  • We expect the positive momentum to continue through Q1 with projected RevPAR up 8%, 9%, 6% and 8% in Jan, Feb, Mar, and Apr, respectively.
  • We believe consensus Q1 RevPAR expectations are for 5% YoY growth.  If we're right on RevPAR, hotel stocks could continue to move higher

 

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HOUSING: Jump Start The Market

An explosive jump in housing starts was revealed today as US builders broke ground on more homes in December than in November as builders began construction of houses and apartments at a seasonally adjusted annual rate of 954,000. 

 

Additionally, US homebuilder confidence reached a seven-year high; the NAHB/Wells Fargo Housing Market index was at 47 this month, the highest level since April 2006. The recent tailwinds in housing, such as yesterday's surge in mortgage applications, coincide with our Q1 2013 Global Macro Theme of #HousingsHammer. With plenty of positive data lifting housing, it’s clear that the best is yet to come.

 

HOUSING: Jump Start The Market - image015


Top Of The Morning

Client Talking Points

The Low Down

1466-1478 is our risk range for the S&P 500 today. There is plenty of opportunity here to make some sales and take some profits. Buying tops isn’t cool, because that’s when you get smoked and get a margin call from your broker. It’s important to manage the risk and the range of your trades because despite what the Federal Reserve is capable of, the market doesn’t just go up and to the right all the time. Our S&P Sector Model isn’t "perfectly bullish" as it has been recently and combined with yesterday’s close (the Russell 2000 didn’t make another new all-time high), it’s important to realize that the market can get nervous and dive lower. Proceed with caution out there today. 

VIX Tricks

The VIX has been getting hammered nearly every day over the past few weeks as the stock market rose towards infinity and beyond (Sorry, Buzz). We’ll be keeping an eye on it since the VIX signaled immediate-term TRADE oversold at 13.16. When the VIX is at levels this low, there's plenty of risk for a move to the downside in equities.

Asset Allocation

CASH 52% US EQUITIES 15%
INTL EQUITIES 15% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 18%

Top Long Ideas

Company Ticker Sector Duration
ASCA

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.

ADM

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.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road

TWEET OF THE DAY

“Mantei T'eo will be confessing to Oprah in less than a month ...” -@nickragone2

QUOTE OF THE DAY

“Victory goes to the player who makes the next-to-last mistake.” -Grigorievitch Tartakower

STAT OF THE DAY

Jobless claims drop to five-year low: Initial claims for state unemployment benefits fell 37,000 to a seasonally adjusted 335,000.


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