JCP: Increasingly Comfortable Renting the Stock in 2013

Takeaway: A name with well-publicized hair that deserves every strand. But retail failures are not linear. We're increasingly comfortable renting here

Ackman just noted on CNBC that “if Ron Johnson is still at JCP in 3-years, then he’s probably not the right guy.” This 3-year reference flies in the face of those who that think that Johnson is on a tight leash at JCP. He might be pressured to show improvement on the margin (signaling that the worst is behind us) but still has Board-level support to do the job he was brought on to accomplish.


Let's be clear, we're not fans of investing with Ackman. Going the other way has usually been a better bet.


But as noted recently, after 18 months of being bearish, we’re favorably predisposed on JCP. We still think that it is in the ‘Retail Hail Mary’ category, and its ultimate success 3-5 years down the road is suspect. But most failures are not linear. JCP’s stock performance on days where there are glimmers of hope are bigger than its corresponding losses on days where there are credible rumors of horrible fundamentals.


This is a year where JCP goes up against -25% comps, and will have nearly a third of its stores redesigned by the end of the year. That might not boost comps, but it helps sales per square foot -- which is what matters. Also, once the new format is complete for the redesigned stores, the content could be scaled into JCP's business, which has been down by over a third yy. Our strong view is that JCP will do what it can to close the comp gap this year – even if that means buying it. We think that the stock will trade with the top line – not with profitability. We’re not saying that’s right, but we think it’s reality.


Ultimately, is this one of those names where we fundamentally believe in the story and are comfortable putting our money alongside management and the largest activist shareholders. No way. It's got hair and it deserves it. But are we increasingly comfortable renting the stock in 2013? Yes.


See our 12/13/12 note – JCP: Reasons To Reconsider Your Short.   

VIDEO: Attack Of The QuadrillYen


The third theme of our Q1 2013 Global Macro Themes call held last week was #QuadrillYen.

In our presentation, we discussed how Japan’s exports are slowing and their plan to devalue the Japanese Yen by following in the footsteps of the Federal Reserve. With the Bank of Japan targeting 2% inflation and entering an “open-ended asset purchase” program, Japanese stocks have been on the rise.

Unfortunately, policies to inflate stocks only work until they don’t and stagflation is more likely than economic growth in this case.

KMB: Bearish Bias Remains

After shorting Kimberly Clark (KMB) in our Real-Time Alerts yesterday, we covered our position this morning. Though the company was essentially in-line with expectations for its earnings, there’s a lot more pressure on KMB than investors think. Commodity prices like oil and raw pulp are moving against the company, which reinforces our bearish bias on the stock. We don’t think people should pay up for 3-4% top line growth and EBIT growth that’s largely derived from restructuring savings. 


We outlined earlier this week how the long PG/short KMB trade could be an idea worth considering...when the timing is right, of course.


KMB: Bearish Bias Remains - KMB EBIT normal


KMB: Bearish Bias Remains - pulp prices normal

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KMB - What’s The Right Multiple for Cost Savings?

KMB reported Q4 EPS of $1.37 versus consensus of $1.36 and provided 2013 guidance - $5.50 to $5.65 versus consensus of $5.59.  Ho-hum, enough with the Old Wall earnings recap.

The good – constant currency organic sales growth was +5.0%, against a +3.0% in the lapping quarter.  The sales result was at the high end of the 3-6% range we saw in the prior three quarters.

The deterioration in earnings quality that we highlighted earlier in the week continues to manifest - $39 million of EBIT growth year over year, provided courtesy of $80 million of cost savings and a $15 million commodity tailwind  (this with the benefit of 5% top line growth).  The commodity benefit is a decline from Q3 ($55 million) and Q2 ($30 million) reflecting the fact that core commodities have begun to creep up again.


KMB - What’s The Right Multiple for Cost Savings? - KMB EBIT

What’s the Bull Case?


We get that sales were solid this quarter, and that the KCI International business continues to be an opportunity.  Also, Q4 was a robust FCF quarter ($2.01 per share in Q4, $5.54 per share for the full-year) and that the company continues to deploy its FCF to the benefit of shareholders via dividends and share repurchases.  That sort of profile certainly has an appeal to a certain group of investors.

To those investors, we ask a couple of questions:

  1. What’s the right multiple for cost savings, recognizing that all of KMB’s EBIT growth is from restructuring savings? (4-6x earnings is what we are thinking).  We recognize that there is a stability and consistency to that EBIT growth, but there is also a limited duration that should be reflected in a far lower multiple relative to EBIT growth derived from operations.
  2. What happens if sales weaken?  When things are going well at a consumer products company, sales growth should drop to the bottom line in substantial fashion.  That is clearly not the case with KMB.  If sales weaken, declining core EBIT should overwhelm the level of cost savings.
  3. Are the company’s increases in strategic marketing really strategic?  We have seen investments in strategic marketing decline sequentially throughout 2012 – is the company using that investment tactically to manage earnings, or is it truly viewed as long-term in nature? We consider the former to be a distinct possibility.

With commodities moving against the company and the multiple at 15.5x 2013, we continue to believe that people should not be paying up for 3-4% top line growth and EBIT growth that is largely derived from restructuring savings.  Our bias remains to be short.


KMB - What’s The Right Multiple for Cost Savings? - pulp prices

KMB - What’s The Right Multiple for Cost Savings? - crude oil


Call with questions.


 - Rob


Robert  Campagnino

Managing Director




BWLD: Playing Chicken

Buffalo Wild Wings (BWLD) is under pressure as chicken wing prices move sharply higher to start the year. With the $2 per pound mark being surpassed with the possibility of further upside, we worry about risk to BWLD’s multiple. Hedgeye Restaurants Sector Head Howard Penney notes the difference in price change compared to 2012:

“In 2012, during the first 24 days of the year, chicken wing prices gained 14%.  For much of the remainder of last year, prices stayed within a range of roughly 180-190 cents per pound.  Year-to-date in 2013, wing prices are again moving higher: +7.2% YTD.  During the 3Q earnings call, management warned that the price of wings was trending to $2.07 for the first two months of the fourth quarter and stated that they expected it to exceed that level heading into the super bowl.”


BWLD: Playing Chicken - image004


The question is whether or not this expectation is baking in the possibility of McDonald’s expanding its testing of wings, currently in being sold in Chicago after a successful run in Atlanta, to its national system.  BWLD’s guidance for earnings growth of 20% seems dependent on a number of factors, one important one being some moderation in wing prices in 2H13, per remarks from CFO Mary Twinen in October.  MCD getting in on the act won’t help that happen.


BWLD: Playing Chicken - image003

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