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KORS: All About The Benjamins

Michael Kors (KORS) has been called “the unshortable stock,” something that still holds true today. In fact, with the company destroying Coach (COH), firing on all cylinders and continually growing revenue, we believe KORS will be a $100 stock within the next two years. Considering that the stock is above $60 a share and up +7.8% today as of writing, there’s plenty to like. But like any company, no matter how amazing they may seem, concerns still exist.



KORS: All About The Benjamins - KORS SIGMA



Starting in FY14 (i.e. in April) the company starts to use excess cash to buy back stock. In small amounts at first – about $100mm in year 1 – but ultimately building to $400mm by year 3 to prevent its return on investment from rolling over due to too much cash. The company has been spending a lot of cash lately and is also swooping in and buying primo real estate for store locations that don’t come cheap. Ready-to-wear margins could also come down as accessories make up more of the business and inventory buildup could pose a threat. Regardless, we like the stock and think KORS is one of the best names in retail.

KORS: $100 Roadmap

Takeaway: If this story plays out, $KORS is a $100 stock in 2-years. But let's look at what it takes to get there -- and what could go wrong.

On KORS’ last print we called it ‘the unshortable stock’ – something which still holds true. But the problem is that there are so many ‘knowns’ in support of owning KORS. We know that a) KORS is eating Coach’s lunch, b) every single part of the business is on fire – and that’s whether you look at product, channel, or geography, c) management completely sandbagged 4Q guidance. We’re got to think that much of this is embedded in the multiple.  When so many things are going so well, we think that the better question to be asking is “what do you need to believe to be buying KORS now, and what could go wrong if you do?”.


What you need to believe today to buy KORS here.

1)      That KORS can continue to grow its’ wholesale business at 30% or better for the next 2-3 years without margin degradation. With 15-20% growth in the US, we think the addition of Europe and Asia can make this happen.


2)      Retail can get halfway to management’s goal of 75% of the total mix. In order for that to happen on top of 25% wholesale growth, our model suggests that we need to see about 175 stores added over 3-years – which we think is doable – on top of comps averaging in the 20% range (we’re at 25%, 15%, and 10%, respectively for FY2014, 2015 and 2016). That gets us to sales/square foot of $2,400 by the end of year 3 versus $1,730 today. That’s the higher end of what we think is reasonable.


3)      With appropriate leverage on the top line growth numbers needed to hit these goals, we’re modeling margins between 31-32% (vs 27-28% today) over 3-years. Interesting in that this is precisely where Coach is today, and we think that in 3-years, Coach will be lucky to be where KORS is today.


4)      An increasing proportion of profit will come from lower-tax jurisdictions, which will take the aggregate tax rate down by 100-150bp per year.


5)      Starting in FY14 (i.e. in April) the company starts to use excess cash to buy back stock. In small amounts at first – about $100mm in year 1 – but ultimately building to $400mm by year 3 to prevent ROI from rolling over due to too much cash.


6)      When all is said and done, you’re looking at a global luxury goods brand with EBIT margins on their way to 31% that turns its operating assets once a month (as opposed to industry norm of 3-4x per year) that should have earnings power approaching $5.00 in three years. Yes, the stock is on fire. But even on today’s pop a $63 stock on $5 in EPS power in 3-years is hardly excessive. Over a 2-year time period, giving even a 20x p/e we’re looking at a stock close to $100.


What could go wrong?

The obvious problem would be loss of brand momentum. Let’s look past that one for the sake of this exercise. If there is one thing KORS is doing it is spending money – and lots of it. The company will have added around $140mm in SG&A dollars and another $130mm in capex this year on top of a $1.3bn revenue base. We’re ok with that. Other factors that we need to watch…


1)      ‘Ready-To-Wear’ Margins: The company highlighted on its call how well its women’s ready-to-wear apparel is performing and how the line will get greater real-estate in some of the company’s retail locations. With accessories now at 80% of the total business for KORS (vs 62% 2-years ago) it’s pretty safe to say that this shift is nearing its end. Initially RTW might be high margin, but the reality is that it is a business where there is a greater penalty for missing fashion trends, as excess inventory will need to be marked down greater than sunglasses, shoes, watches or eyewear.


2)      Rent Expense: When the company is comping 41%, its ability to leverage occupancy expenses is seemingly irrelevant. But keep in mind that KORS has been employing one of the most aggressive real estate strategies to secure prime locations than any company we have seen in a very long time. It’s no secret that not only are these locations expensive, but the rent escalators work as a compliment to stated rent/square foot such that they allow a company to get into an expensive storefront today but pay for it tomorrow. It is not transparent yet how KORS is handling this. On a 41% comp – it does not matter. On a 20% comp it probably does not matter (at least, it has not in the past). On a 10% comp, we think it probably matters.


3)      Licensing Looking Toppy: Licensing EBIT is about 14% of the company’s total. We’d be surprised if it grew much form there – kind of like we saw from Ralph Lauren over the past 8-years as it took control of its own distribution. Licenses like Watches will forever be outsourced, but on the margin the company will look to grow incrementally from within. This is not a risk, really, in that it will allow KORS to consolidate a greater portion of revenue, albeit at a margin less than the 64% is has today in Licensing. As long as it churns more EBIT through its P&L, we’re ok with it. But keep an eye on this.


KORS SIGMA: Margins Looking Solid. Keep An Eye On Inventories

KORS: $100 Roadmap - KORS sigma

CZR: Spin It Off?

Caesar’s Entertainment (CZR) has enjoyed a massive 64% run up since February 6th on the likelihood that New Jersey will pass legislation allowing for interactive gaming on the internet. Should the law go into effect, bondholders would prefer to see CZR spin off its interactive division into a new unit. While that’s fine and dandy for those holding company debt, CZR’s stock would probably not see a boost in price if the legislation passed as we believe that the 64% run up is not entirely justified by this news. Tax issues would come into play and though Caesar's would be able to monetize the new interactive unit, it would not be a boon for stockholders.


We think that the market is over-valuing the size and profitability of a legal NJ online gaming market.  Nevada legalized online gaming back in June 2011 and we have yet to see any impact.  Same goes with Delaware.  New Jersey has a larger population but it would still need to pool with other States to accumulate enough liquidity.  Legal hurdles will prevent that from happening any time soon.  More states will have to legalize gaming before any pooling becomes meaningful.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%


Long shares in Cheesecake Factory was one of the two ideas we pitched yesterday during our consumer sector heads’ Best Ideas call, the other being short Burger King.


We have been vocal about our bearish stance on casual dining for some time and have focused that call on two stocks in particular: BWLD and DRI.  The DRI call was particularly impactful given that it was highly contrarian, but also because of the ramifications for the space.  The crucial ingredient in Darden’s most recent quarter was its statement that the company’s strategy was to be less protective of margins going forward.   We believe CAKE is one company within casual dining that will see limited impact from Darden’s “price war”.  The stock has underperformed the market of late but we believe bottoming earnings estimates and other fundamental factors could make the stock an attractive long at this price.

  • Strong marketing presence, loyal consumer base, and high average unit volumes
  • Improving housing outlook benefits the core CAKE consumer
  • Negative sentiment in the stock
  • Modest same-restaurant sales expectations vs optimism in casual dining trends outlook








Potential For Upside Surprise


The company is set to take roughly 2% in price during 2013.  Consensus is modeling roughly flat average check growth despite traffic outperforming industry trends (Knapp) by an average of 270 bps over the past four reported quarters and mix running between -0.4% and -1%.  Management’s guidance on average check was quite firm during the most recent earnings call: “We're not considering a negative. The average check has never gone down that I know of, not in years. So no, we're not considering a negative average check.”



Howard Penney

Managing Director


Rory Green

Senior Analyst




In preparation for HYATT's 4Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.



  • "The Hotel Nikko acquisition in Mexico City which we acquired and rebranded as the Hyatt Regency in Mexico City this past May is performing well.  We're on track to begin renovations to this property next year."
  • "The public space renovations of the Grand Hyatt San Francisco are expected to be completed by the end of this year."
  • "Our international loan-to-lease hotels were relatively weaker in a number of markets with the exception of London, which benefited from the Summer Olympics."
  • "For the full year 2012, we expect to realize approximately $15 million of savings relative to our prior estimate, about half of which is a reduction of run rate expenses driven by savings from personnel and staffing changes and about half is due to other cost savings initiatives that are more one-time in nature."
  • "In terms of adjusted EBITDA impact from these asset sales for the full year of 2013, earnings will be reduced by about $11 million to $12 million relative to 2012, or about $15 million on a full year run-rate basis."
  • "We've approximately $131 million remaining under our authorization. We remained committed to a balanced strategy of investing in growth and also returning cash to shareholders when appropriate."
  • "In the coming quarter and then into early 2013, we're likely to see a carryover of the same type of issues that we saw in the third quarter... We do think that there are some signs of a more modest overall growth trajectory. Longer term, we continue to feel very confident about the strength of our brands and about the prospects for the industry."
  • "The election in the U.S. next week, the party Congress in China that begins next week, and the timing of other holidays are likely to negatively impact the fourth quarter."
  • "Fee growth will be negatively affected in the short-term by ongoing renovations at large managed hotels, notably in the fourth quarter we expect the Grand Hyatt, San Diego, the Grand Hyatt and Hyatt Regency hotels in Washington, D.C., and the Hyatt Regency Dallas to be under renovation."
  • "As we look to next year, several of our large Grand Hyatt hotels in gateway cities in the Asia-Pacific region are planning renovations. These renovations are great for our brand presence and for our guests and for the owners over the long term, but do lead to short-term impact on RevPAR and fees."
  • "Our negotiated corporate volume business is actually increasing year-over-year and I think that that will continue to be the case as we continue to focus on the expansion of our Select Service presence around the country."
  • "We expect the realignment savings to continue into 2013, partially offset by wage and other cost inflation, and the selected increase in resources as we allocate some resources towards growth initiatives. Overall, we expect the net impact to result in sort of a flattish SG&A growth in 2013."
  • "In the third quarter and heading into fourth quarter, definitely a slowdown in the rate of growth in group bookings for corporate customers. And I think a lot of that has to do with uncertainty due to the fiscal cliff, the election and the like. Government business was particularly weak, it was down in the third quarter for us significantly, so if you look at our third quarter results we had a slight decline in room nights for group bookings for the quarter. More than a 100% of that decline was derived from government business. Part of that is demand and part of it was yield-management decisions that we undertook to actually trade away from some of that business, so some unusual short-term impacts from the government side."
  • "The short-term booking pace in the quarter, for the quarter and in the quarter for the year bookings is still dominated by corporations. And when we see the production in the third quarter, our total production in the third quarter was up significantly, up 12% year-over-year, the vast majority of that was associations booking into 2014. And we believe that the reason we're seeing that is because associations are looking out further into the future. They are seeing higher levels of overall occupancy and are now beginning to secure dates for major meetings that they've got planned for 2014. So we have a bit of a barbell going on in the sense of very different dynamics, short term among corporate groups and longer term among associations."
  • "In terms of overall pace, it's still positive for 2012, 2013 and 2014. The pace of growth, or the rate of growth, has actually declined a bit, and rate growth continues to be positive across all the booking periods. So I would say that there is a bit of a mixed picture here, and but the key drivers that we're looking at are this segregation of prebooking in the winter period, but also looking at rate progression that remains positive across all the period."
  • [Margin impact]  "We continue to experience some challenges in some of our international markets, which contributed about 50 basis points. We have overall lighter food and beverage than expected, particularly in the high margin banquet revenues."
  • "RevPAR performance is expected to be weaker in China given the political changes. In addition, Beijing has seen a drop in corporate business which has been postponed until after the elections. We've seen a tightening of government spending, particularly in the south of China. Once the election is over, we anticipate corporate demand will return to more normalized levels."
  • "India RevPAR was also weak due to additional supply and the decrease in demand as a result of slowing economic growth. Most markets are not expected to see a rate increase as a result of the increased supply, near term, such as Mumbai and Delhi."
  • "Two-thirds of the realignment cost is related to severance and personnel expense, and one-third is owing to professional fees. The expectation is that minimal impact in the fourth quarter from the realignment cost perspective, and there are no realignment costs in 2013 as we perceive now... With respect to – and so therefore a lot of the run rate expense which is about half of the $15 million that we
    described this year relates to personnel and staffing issues. With respect to the remainder, there are other thirdparty contractual – we underwent a third-party contractual review around the world. We looked at professional  fees and expenses. We also recognized that under the old organizational structure we had a number of open positions embedded in our SG&A estimate that would no longer apply by virtue of the changes that we made structurally"
  • "In terms of our pipeline, we about 75% of our total pipeline is outside the U.S., and virtually all of that is for managed properties and within the U.S. it's a mix of management and franchise but more franchise than managed and mostly and more of Select Service than full service in North America at least."
  • "Since we do have a large portfolio of Select Service properties, we will continue to look at different ways in which we can utilize that asset base through sales or in some cases JV. So, we contributed I think it was eight hotels to a JV with Noble last year, or possibly the year before"
  • "We will continue to pursue transactions for both full service and Select Service properties, but on the Select Service side, we've been highly focused on trying to find new and different ways to expand our ownership and end up with good owners long-term for our properties."


Takeaway: The path towards a lower yen is once again clear with the recent mollification of int’l criticism of Japan’s “beggar thy neighbor” policies.



  • The path towards a lower yen is once again clear with the recent mollification of international criticism of Japan’s “beggar thy neighbor” policies among G7 finance ministry and central bank officials.
  • While the direction of our bearish thesis on the Japanese yen has certainly become consensus over the past few months – speculators were net long the JPY to the tune of 21.9k contracts back in late SEP (vs. 59.1k net short today) and the Bloomberg Consensus 2013 EOY USD/JPY forecast was for ¥84 then (vs. ¥93.5 now) – we still contend that market participants do not fully appreciate the scope and magnitude of the pending phase change in Japanese monetary policy.
  • In fact, our previous call for the USD/JPY cross to hit ¥100 in this calendar year may ultimately prove not bearish enough if the Abe administration continues to encounter limited blowback to their Policies To Inflate.




  • The G7 “bows” to Japan: Today, the G7 released a statement designed to assuage growing – albeit late – fears of a Currency War by jointly pledging to avoid devaluing their respective exchange rates in the pursuit of stronger economic growth. “We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates,” G7 finance ministers and central bank governors said in the statement, which was released today in London. Japan’s Finance Minister Taro Aso said the G7 acknowledged that Japan is not necessarily pursuing a weaker yen, but that its recent monetary and fiscal policy measures are aimed at overcoming entrenched deflation.
  • Not fooling us: Who exactly are these people trying to kid? Everyone in that room and everyone who’ll attend this weekend’s G20 summit in Moscow knows full well that each of their respective countries are engaged in “beggar thy neighbor” currency policies to varying degrees. We personally find it odd that few in the Western media, if any, have spoken out against the Fed and ECB’s currency debasement strategies over the previous 2-3yrs. Now that Japan wants a turn in the devaluation driver’s seat, all ‘heck’ has broken loose…
  • It’s Japan’s turn anyway: As we’ve quantified in our #Quadrill-yen presentation, it’s the BOJ’s rightful turn to take center stage in the competitive devaluation arena. Inclusive of the yen’s -17.7% decline vs. the USD since we outlined our bearish thesis back on 9/27/12, the Japanese currency is still up +13.9% vs. the dollar over the past 5yrs of debt, deficit and devaluation strategies employed by the US Treasury and Federal Reserve. With respect to the EUR, those deltas are -20.8% and +23.6%, respectively.
  • … And Japan is poised to get real busy: Indeed, it would seem Japanese policymakers have a lot of hay to bale if they are to continue to make up for previously lost ground during this multi-year Currency War. With the relatively hawkish Masaaki Shirakawa stepping down early as BOJ governor on MAR 19 (along with his two deputy governors), we continue to believe a new era of unprecedented monetary policy aggression is coming to Japan with full support from the Abe administration.
  • The Japanese bond market agrees: Japan’s bond market is definitely starting to agree with our call for the BOJ’s balance sheet and policy toolkit to expand in a relatively aggressive and potentially creative manner over the intermediate-to-long term:
    • 5Y nominal JGB yields hit a record low today (0.138%) on speculation that the BOJ will eventually increase the duration of its purchases;
    • Japan's 5Y breakeven inflation rate hit a new all-time high of 1.05% today; and
    • Also, the spread between 30Y and 10Y nominal JGB yields reached 122ps wide today – a mere 9bps shy of the all-time wides reached in NOV ’00.
  • The BOJ leadership transition remains a key catalyst: Potential candidates to replace Shirakawa include: Asian Development Bank President Haruhiko Kuroda, former BOJ Deputy Governor Toshiro Muto and former BOJ Deputy Governor Kazumasa Iwata.
    • In his latest [shameless] campaign plug, Kuroda – who once wrote that the BOJ should pursue a +3% inflation target – spoke out today calling for more aggressive easing out of the BOJ: “The Bank of Japan could usher in a growth spurt unseen in a generation by stepping up stimulus and ending deflation… Japan, along with other nations, has really substantial room for monetary easing… There’s the equivalent of trillions of dollars of financial assets that could be bought by the BOJ.”
    • Muto, chairman of the Daiwa Institute of Research, said in an recent interview that he’s revised his views on monetary policy from 2007. Then, as a deputy governor, he repeatedly said that keeping interest rates too low could be problematic for the economy. Contrast that with his recent commentary: “Ending deflation is the top priority and a policy of monetary easing is justified… No potential monetary step should be considered taboo.”
    • Iwata, head of the Japan Center for Economic Research, has championed the idea of the central bank buying foreign-currency bonds to help weaken the yen – a proposal the LDP is said to be considering, as it would require approval from the Finance Ministry. Some of his recent comments indicate he may be just as aggressive as Kuroda appears to be: “Deflation and strong yen can be overcome with monetary policy alone… The central bank governor should be prepared to resign if targets are missed… The BOJ law should be changed to oblige the central bank to publicly explain should inflation be more than 1 percentage point off target.”
  • T-minus 2-3 weeks: The Abe administration plans to officially introduce its endorsed candidates to the Diet for vetting at the end of this month. Regarding the appointment process specifically, it should be noted that no party has an outright majority in the Upper House of the Diet/House of Councillors, which is on equal footing with the Lower House/House of Representatives as it relates to approving appointments to the BOJ board.
  • Will the LDP get “their guy”?: That means the LDP and NKP (83 and 19 seats respectively) will have to gain the support of smaller regional parties to push through any of their preferred, ultra-dovish candidates. Eleven votes from Your Party – which has rhetorically aligned themselves with the LDP-NKP platform on this agenda – would put them at 113 seats, leaving them 9 seats shy of a decisive victory, but still well within reach because we think the smaller parties will be more inclined to associate themselves with the LDP’s drive to reflate the Japanese economy ahead of the JUL ’13 Upper House elections, rather than side with the DPJ, which was blown out in the DEC Lower House elections.
  • Where to from here?: While the direction of our bearish thesis on the Japanese yen has certainly become consensus over the past few months – speculators were net long the JPY to the tune of 21.9k contracts back in late SEP (vs. 59.1k net short today) and the Bloomberg Consensus 2013 EOY USD/JPY forecast was for ¥84 then (vs. ¥93.5 now) – we still contend that market participants do not fully appreciate the scope and magnitude of the pending phase change in Japanese monetary policy. Our previous call for the USD/JPY cross to hit ¥100 in this calendar year may ultimately prove not bearish enough if the Abe administration continues to encounter limited blowback to their Policies To Inflate.
  • Why?: Because “they” said so. Macro investing ≠ micro investing. In macro investing, people (i.e. policymakers) have a funny way of determining what is and isn’t priced in on the fly. Just because a macro trade has become consensus doesn’t mean it will cease to work (think: gold and US Treasury bonds over the past 10yrs).


Darius Dale

Senior Analyst












CURRENCY WAR UPDATE: THE G7 BOWS TO JAPAN - Japan House of Councillors







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