Takeaway: Japan’s bleak cyclical data remains the perfect handoff to the structural policy changes outlined in our bearish thesis on the yen.



  • Do your best to drown out the rhetorical noise coming from the G20 Summit and stay short the yen, which is now down -16.6% vs. the USD since we outlined our bearish bias back on SEP 27.
  • With major policy catalysts hanging in the balance, there is a lot more downside from here in our perspective, despite the trade having now become consensus – particularly among noteworthy Global Macro investors (see: FT article titled, “Hedge Funds Reap Billions on Yen Bets”).


MAJOR DEVELOPMENTS: On Tuesday, we published a note titled CURRENCY WAR UPDATE: THE G7 BOWS TO JAPAN; to the extent you may have missed it come through, please review that as a preamble to the brief prose below.


  • GDP bomb = recession continues: Japan’s 4Q Real GDP figures were released overnight and they left much to be desired in the way of healthy economic growth: +0.3% YoY from +0.4% prior; -0.1% QoQ from -1% prior vs. +0.1% Bloomberg consensus estimate; -0.4% QoQ SAAR from -3.8% prior vs. +0.4% Bloomberg consensus estimate. This confirms our call for Japan’s recession to extend into a third-straight quarter.
  • Things are picking up, though?: The conclusion of the BOJ’s latest two-day policy meeting produced little in the way of critical policy developments. The ¥76T Asset Purchase Program, ¥25T Bank Credit Program and ¥1.8T of monthly JGB purchases were all left on hold – as was the 0.1% Call Money Rate. What did qualify as news was board upping its view of the Japanese economy to “… appears to have stopped weakening” from “… remains relatively weak” at the prior meeting. This delta is more influenced by the timing of recent fiscal stimulus spending and improved consumer and business confidence figures than actual economic growth indicators – which remained very subdued in JAN-to-date.
  • Shirakawa’s last ride: The next BOJ meeting on MAR 7 will be the final meeting presided over by Governor Masaaki Shirakawa’s and his two deputy governors Hirohide Yamaguchi and Kiyohiko Nishimura. In rejecting Ryuzo Miyao’s call for a pledge of ZIRP until the inflation target is “in sight”, the three amigos signaled they want to ride off into the sunset much like former ECB President Jean-Claude Trichet – appearing uncompromised, unwavering towards market or political demands.
  • The next guys and gals won’t be so lucky:Much like Mario Draghi has become with respect to European banksters and financial market participants, we continue to believe their replacements will become more-or-less puppets of the Abe administration’s broader political agenda for the Japanese economy – which is +5% “monetary math” (+3% nominal growth and +2% inflation). From an intermediate-term TREND and long-term TAIL perspective, we expect whomever is running the BOJ to do “whatever it takes” to meet the aforementioned targets.
  • Minor hiccups may remain though: One very minor hurdle on the track to ‘USD/JPY = ¥100’ is Your Party’s recent pre-rejection of Haruhiko Kuroda and Toshiro Muto as candidates to be the next head of the BOJ because they are ex-MOF officials. That leaves only former BOJ Deputy Governor Kazumasa Iwata as the only consensus candidate remaining that stands to make it past the Upper House vote where the LDP does not have a majority. Dare we say a dark horse currency debaucher will emerge as the next BOJ head?
  • G20 Summit = all eyes on the yen: Another potential hurdle is this weekend’s G20 Summit. If, however, the G7 statement issued earlier this week is any indication of this weekend’s pending takeaways, we continue to anticipate muted international resistance to Japan’s Policies to Inflate. For now, it appears no country is fully prepared to officially stand in the way of the Japanese Cabinet Office’s political objectives. Japan’s awful 4Q GDP miss supports this conclusion in that it likely buys Japan more international goodwill/scope to carry on debauching.
  • Where to from here?: Do your best to drown out the rhetorical noise coming from the G20 Summit and stay short the yen, which is now down -16.6% vs. the USD since we outlined our bearish bias back on SEP 27. With major policy catalysts hanging in the balance, there is a lot more downside from here in our perspective, despite the trade having now become consensus – particularly among noteworthy Global Macro investors (see: FT article titled, “Hedge Funds Reap Billions on Yen Bets”).


Darius Dale

Senior Analyst










STAY SHORT THE YEN -  Quadrill yen Catalyst Calendar

JNY: We Want Mgmt To Take The Other Route

Takeaway: The leverage in this model is nothing short of extreme. We want JNY to be the next LIZ/FNP. But until management agrees with us, it won't.

This note was originally published February 13, 2013 at 21:25 in Retail

Given how 'out of favor' JNY perennially is we’re tempted to want to go the other way – and today’s beat certainly supports that point. During the quarter, both Domestic Wholesale Jeanswear and Domestic Wholesale Footwear & Accessories confirmed not only the turn we saw last quarter, but a reacceleration in both sales and profitability in these key segments (accounting for 65% of total EBIT). At the same time, despite further revenue deceleration, incremental losses slowed in Domestic Wholesale Sportswear arresting the contracting profit trend reported in each of last four quarters. Not bad at all.


The leverage in this model – both operational and financial – is nothing short of extreme. If only a few things go right, this company can print $2 in earnings power – which makes a $12 stock look like a seriously mispriced asset. But there are two ways to get to the earnings power in question. A) improve the entire portfolio of 30+ brands under the JNY banner, or B) take a draconian stab at this portfolio and do to it something akin to what LIZ/FNP did over the past two years.


Despite the glaring evidence that things are getting better, the reality is that the risk/reward is still not good enough for us to get involved here. Why? Simply put, management is gunning for option ‘A’. For a portfolio that is simply ‘average’, we can’t bank on broad-based improvement in the macro environment to unleash the earnings, and we don’t have the confidence yet that JNY possesses the tools to keep the recent momentum going. We want option ‘B’.


We think that JNY needs to go the way of FNP. It needs to focus its portfolio into the brands the matter most, and dispose of/sell the rest. JNY has over 30 brands, and our sense is that the average investor can’t name the brands representing over a third of JNY’s revenue base.


Realistically, the best way to monetize this content will be for department stores to strike exclusive deals with the company for 100% wholesale distribution, or the brands should be sold to the retailer (like FNP did with JCP and the Liz Claiborne Brand).


When all is said and done, we think that this will prove to be a more valuable strategy for shareholders than to try to continue to run this company as a multi-brand portfolio.


The problem is that management seems to have zero desire to go down this path. They seem to be comfortable running the ship much like it has been run for the past 20 years. Are there call options in footwear and International? Yes. And they’re making great strides today in US Wholesale. Both of these things are great. But they require too many leaps of faith for us at this point, and we don’t like investing based on faith. 


Keith recently added IGT to our Real-time Alerts at $16.26.



With a cheap valuation of 11x forward, rising ship share, improving visibility and strong EPS growth, and better capital deployment away from acquisitions and towards stock buyback, IGT looks attractive.  IGT is clearly a show me stock and we believe that 2013 will be a year of performance.  Aggressive share repurchases should keep a floor on the stock while shareholder activism and a potentially large order from Oregon represent near-term catalysts.  The Oregon Lottery is considering submitting an RFP to refresh its all the units in its 20,000 VLT market.  We don't believe that order is reflected in the estimates or the stock.


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Ketchup Comes Off the Table

This morning, Berkshire Hathaway announced that it was acquiring Heinz (HNZ) for $72.50 per share - approximately a 20% premium to yesterday’s close - 13.2x EV/EBITDA.

HNZ wasn’t our favorite stock or our favorite management team, but the transaction does make sense within the context of Warren Buffett’s (Berkshire Hathaway) preferred investing style of being involved in iconic brands.  At various times, Berkshire has owned share of KFT (old Kraft Foods), BUD and KO – HNZ certainly fits the profile.

What we didn’t like about HNZ is largely irrelevant at this point – EPS growth driven by a lower tax rate and declining brand investment.  Good luck to Mr. Buffett.

Importantly, we don’t see this as a harbinger of a consolidation wave in packaged food, though obviously all of the “deal” names get a bid this morning – POST, for example.  CPB also has a bid, though some of the move is likely short covering into earnings as well as this news.  We wouldn’t be doing anything into the CPB print, but might look to short on any strength.

One off deals aside, we prefer to stick with our preferred long in the space, CAG, as recently highlighted on Hedgeye’s Consumer Best Ideas calls.




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst


Price elasticity of demand is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price.  We think there are a few companies within the restaurant industry that are depending on price inelasticity of demand among their consumers to hit FY13 guidance.  There are some indications that, in casual dining at least, demand may be more elastic than operators would like.


The recent deterioration in same-restaurant sales growth can be attributed to many different factors like the payroll tax increase, delayed tax returns, and higher gas prices year-over-year.  It seems that operators increasing prices may also be playing a role.  Black Box Intelligence data, illustrated in the chart below, suggests that traffic growth in the lower-margin casual dining industry has been decelerating of late as prices have been moving higher. 


Some points on specific companies:

  • BWLD traffic is down mid-to-high single digits, depending on where mix is tracking, in the early innings of 1Q13.  Is the company seeing a negative “multiplier effect” in its traffic trends as it takes price?
  • CMG has indicated that it will likely raise prices later this year.  We are skeptical of the concept’s ability to raise prices further in FY13
  • PNRA has been increasingly dependent on price and mix to drive its comp.  With traffic possibly negative in 2013, the company’s ability to push new menu items will be crucial to its success in 2013.
  • Concepts that have heavy exposure to red meat prices may experience the most margin pressure if the consumer begins to push back on pricing.  Insiders in the beef industry are anticipating another record year for beef prices in 2013 as the US herd has been cut to its smallest size since 1952.



While some management teams tell us that they are not feeling any pushback on price increases in their restaurants, is this chart indicating that operators within casual dining are seeing it?





Howard Penney

Managing Director


Rory Green

Senior Analyst

Hedgeye's Best Consumer Ideas: Long IGT

Takeaway: IGT is set to reap the benefits of a three to five year bull market in the slots business.

Todd Jordan – Gaming, Lodging & Leisure: LONG International Game Technology (IGT)

The previous management team spent heavily on acquisitions anticipating a boom in Server-Based Gaming (SBG).  But SBG failed to take off, and by 2009 IGT stock went into a steep decline.  With new management focused on developing gaming content, we think the company is done with acquisitions.  This frees up substantial cash flow, and management has made it clear they intend to use this to benefit shareholders.  The stock now trades at the low end of its earnings multiple range (11X forward P/E) management’s stated goal of increasing leverage should make as much as $450 million available each year for share repurchases, while leaving room for multiple expansion to drive higher share prices.


Jordan says the company is at an inflection point as company and sector fundamentals have turned.  IGT’s market share has stabilized and is now on the upswing.  If we are right, and the company is done with acquisitions, this should lead to rapidly rising Return On Investment – faster than today’s stock price would imply.


IGT is seeing both profitability and cash flow increase.  As interactive gaming starts to build momentum, earlier acquisitions are finally starting to pay off.  Meanwhile the stock price is stuck on the idea that “previous management made a bunch of lousy acquisitions.”  Jordan says these acquisitions aren’t “lousy” any more, which should be reflected in 2013 earnings and ROI performance.  Jordan sees the industry moving into what should be a 3-5 year bull market as replacement demand improves and new jurisdictions look to increase tax revenues.   ON-line gaming proposals are under discussion in a number of US states, but there is also plenty of room for expansion internationally as countries such as Japan, Taiwan, the Philippines and South Korea explore the potential of gaming as a revenue generator.

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