FNP: On It's Way To Doubling Again

Takeaway: The stock doubled, and it should double again. We need to be mindful of duration, but all the building blocks for $FNP are there.

We think that FNP investors debating the fate of Juicy Coture, or whether Kate Spade will be a stand-alone entity ‘is so 2012’. At $17 you need to believe that the company’s real earnings power can be well north of $1.00 over 2-3 years. We happen to be in that camp, with an estimate of $1.15 vs. the Street at $0.39 in 2015.



FNP: On It's Way To Doubling Again - fnpchart1


FNP might seem expensive at 15x our estimate, but the reality is that if our estimates are correct, the company will be putting up triple digit growth rates (see assumptions below), which can sustain a multiple at least what we’re seeing today. In fact, we question how some Analysts could possibly have ‘Buy’ ratings while suggesting that the company’s earnings power is only $0.30-$0.40. They’ll be taking up numbers.


Interestingly enough, when we look at the sum of the parts, we get to a value based on current year earnings of only a buck or two above where it’s trading today.  That’s just 10%, and hardly anything to write home about given FNP’s more volatile style factors (not to mention short interest at the lowest level in four years and a beta of 1.8x).



FNP: On It's Way To Doubling Again - fnpchart2


But when we use our significantly higher 2014 estimates, we get to a value of $28 (60% above current levels), and a year later we’re at $38 using our 2015 model.


When the stock was at $10, we said specifically that 'it would double, and then would double again'. And we completely agree that the stock has far less room for error given the recent run. As such, throwing out a $38 value in 2-years is not thesis morph for us. It’s sticking to the same story. We’d be concerned if there was a tight gap between us and consensus. But as long as we’ve got the growth trajectory and earnings upside in Exhibit 1 above, we’re cool with the valuation.


Here are some of the key assumptions behind our model.

1) Juicy: For modeling purposes, we assume that it is in growth purgatory for the foreseeable future, with EBITDA bottoming at $10mm and rising to $16mm (less than a 3% EBITDA margin) over 3-years.


a) That’s probably not the best way to look at it, because the reality is that if it turns in such performance, the division will be history. If it improves slightly, then it’s still likely gone. If it improves dramatically, then our numbers go up.  


b) Actually, even if FNP divests at current levels, we think it’s reasonable to assume that FNP strikes an arrangement for something in the 0.5x sales range. That sounds rich at a mid-teens EBITDA multiple, but we think a buyer would be rational enough to assume that the real earnings power is higher (else they would not touch it). The key to that transaction, we think, would be that it would allow better than 60% of net debt to go away.


c) Our analysis of FNP using Sum of Parts only assumes that debt comes down as a result of cash generated by the company’s own free cash flow (i.e. from divisions that are actually throwing off cash). Anything else would be gravy.



2) Lucky: This is one where the number of growth initiatives in the pipe has caught us by surprise. Admittedly, out of the three divisions, this has garnered the least attention. It’s never been a problem child – at least not lately. But it’s never been a rock star, either.


a) Yet suddenly, the company’s assortment seems to be more fashion forward, with two major innovations (that management was tight-lipped on). They are also taking what is working from Kate and applying it to Lucky – with a handbag line, for example, which makes perfect sense. It is also expanding geographically – into six new territories starting in 3Q.


b) With all of this, the company put out mid-high single digit comp guidance for the year, which is the most upbeat we recall in a while. We have comps at 7% for the year, but driven by a back-end loaded 8% and 10% in 3Q and 4Q, respectively. Then we’re got 10% in 2014. Through all of this, we’re giving zero EBITDA margin improvement in our model, which seems like a conservative assumption to us.


3) Kate Spade: Kate just put up a whopping 27% comp on top of a 58% comp a year ago. That momentum won’t continue forever. Management knows it, and they don’t want to step in front of the freight train of missing an ambiguously aggregated consensus estimate by a point and having people get bent out of shape by asking ‘why is Kate slowing?’.  That’s why they put out a ‘low teens’ comp rate.


a) We look at it by pegging an appropriate sales productivity rate, and then backing into what comp rate will get it there. After all, that’s how the company manages its business.


b) Right now, productivity at Kate is running at about $1,100. That might seem like a lot. It is. But KORS is running at about $1,700 this year, and if you believe in consensus estimates over the next 2-3 years (which we are inclined to believe) then they’ll approach $2,400/square foot.

c) Never in a million years will we suggest that Kate is KORS. But even Coach is at about $1,800/sq ft in the US, and is pushing $2,800 in Japan.

d) Something to keep in context is that the Kate Japan license that FNP just brought back in house is running at about $1,400/sq ft in productivity. Yes, this is a higher-end market and almost always commands higher prices. But this is a business that FNP has not even directly controlled. When RL took in its geographic licenses it saw sales lifts of 40-50%.

e) We can go on with this exercise for a while, but the point is that it is that $1,100 in productivity does not seem maxed out to us by any means, especially with 45% of the stores having come on to the P&L within the past 3-years – and they reach peak productivity in between 4-6 years. If Kate put up a low teens comp for 3-years, it’d still be below $1,600 in productivity. We’re closer to 20% in our model.


f) We’re modeling margins down 200bp at Kate this year, which is pretty much what management guided. We don’t think that they’re sandbagging, as the costs to integrate the Japanese business are real. Where we could be overly conservative is if comps come in meaningfully ahead of our 20% model, in which case they’d leverage occupancy to a greater extent that we think.


4) Other Notables

a) We have ‘Other Income’ ticking up by about $1-2mm per quarter, in part because of foreign currency gains, but also because this is the area where minority interest shows up. Believe it or not, we expect some of those business to contribute (albeit on a small scale).


b) Conversely. We have interest expense down by about $1mm per quarter as net debt levels tick down slightly from year-ago levels starting in 2H.

VIDEO: King Dollar


Hedgeye CEO Keith McCullough appeared a guest host on CNBC's The Kudlow Report this evening. Among the topics discussed was the ongoing currency wars and how a strong US dollar helps deflate the commodity bubble created by the Federal Reserve's quantitative easing programs. If you look at the dollar on a 40-year basis, the all-time low was in 2011 and coincidentally, commodity prices hit an all time high in 2011. If we get the Federal Reserve out of the way or introduce spending cuts, we'll drive down inflation which in turn will drive stocks higher as consumption increases through lower food and gas prices, etc. Get the dollar right and you get a lot of other things right.


Watch Keith's full appearance on Kudlow Report on the video above.


CAGNY Day 3 – Some Good Stories (IFF and AVP), but We Like NWL

We have observed a good bit of NWL CEO Mike Polk’s professional career, from the old Kraft to Unilever and now NWL – we like the story he told and the way he thinks about the business.


International Flavors & Fragrances (IFF)

Since HNZ apparently couldn’t get out of CAGNY fast enough, IFF stepped up to the plate and took the morning presentation.  It’s a good story, and to the extent that innovation has been a consistent theme throughout the conference (we call it the cost of doing business), IFF is the innovation backstop for most of the companies in the staples universe.  Total business grows 2-3% globally, and IFF tends to be a consistent share gainer over time (16% share of market).   Scale matters in this business (IFF has it) as the global companies that IFF partners with want the ability to deliver local solutions on a global scale.  What also struck us was that IFF was an underappreciated emerging markets story, which only stands to reason as the global CPG companies drag preferred suppliers along as the business expands into emerging markets. The company is at a low point in the leverage cycle in a global consolidating industry – possibility exists for accretive deals.


Procter & Gamble (PG)

Company focused on some overdue innovations – again we go back to our comment that innovation is the lifeblood of the staples sector.  Company seems to realize (finally) that you can only take pricing or price at a premium when you offer compelling value to the consumer and communicate that value.  Value needs to be communicated to retail partners as well – make it a win/win (really hate that phrase).  Rate of change of innovation is increasing, and thinking globally about those innovations.  Company basically admitted that productivity had taken a back seat when results were more robust – I see productivity as a process of constant improvement, and it will be interesting to see just how ingrained this process becomes in PG once the big savings program runs its course.  There are some bad habits that have been ingrained in this company over a long period – pricing without value and using that pricing umbrella as an excuse to be less diligent about costs.  The process of change at PG is well-begun, let’s see how well the lessons of the past are learned.  At least the company is no longer relying on sales growth in order to leverage the company’s SG&A base.


Pepsi (PEP)

The presentation started out as your basic business overview – yawn.  Some of the global demographics were interesting, for example - sweet spot between $10,000 and $20,000 in GDP per capita in terms of adoption of the company’s products – a number of emerging markets entering into and currently in the sweet spot for the company.   Company followed up with familiar chart – the opportunity to get per capita consumption up to the levels seen in Mexico – this charts never sit all that well with us, truthfully.  A single number never seems to do justice to the substantial differences between consumers in different geographies.  Next we move on to the obligatory commentary on innovation – have to say that the Doritos/Taco Bell shells rock hard.  And what do you know – commentary on productivity.  No need for large scale M&A – stated twice, it was so nice.


Avon Products (AVP)

I like leading in with the mea culpa for years of disappointing stakeholders – probably understated the level of frustration a bit.  The company has some very aggressive financial goals, but seems to have the strategy in place to execute against the plan, starting with – you guessed it – innovation.  The company has seen some market share challenges across multiple categories – but the categories are attractive in terms of the long-term growth, but need to get fair share of growth.  Innovation for AVP is a little more complicated, because there is a component of educating the representatives as to the benefits of the innovation.  Representative is social connection between product and consumers and need to upgrade the capabilities of the representative.  All things considered, it was a very comprehensive and confident presentation with a focus on products, people and places.


Clorox (CLX)

The company basically took a victory lap for what it had accomplished since 2008 - double digit EPS growth, 2-3% consistent top line growth.  Interesting, and obviously true, but we are not big on rear-view mirror stuff.  The company shared some very interesting data on bleach compaction and incremental advertising on bleach, with the data on advertising suggesting that advertising targeted at adults under age 35 actually drove an uptick in usage of bleach.  Who says advertising doesn’t work?  The “give your home a flu shot” campaign and healthcare solutions make sense and are certainly on trend.    Further, the company’s opportunity outside the U.S. appears reasonable and on trend with respect to health and wellness.  Management seemed very confident about the margin opportunity and the ability to execute against those plans for the foreseeable future, in part because of a more benign commodity environment.


Newell Rubbermaid (NWL)

The company outlined a fairly compelling investment thesis to start, a tail wind behind categories - housing starts is a relevant indicator for 1/3 of NWL's categories.  Second, cost savings provide a reasonable clear line of sight to EPS growth.  Next, innovate and invest to move closer to the virtuous cycle to which all staples companies aspire.  The company is focusing efforts behind key categories that represent material growth opportunities with superior margin structures.  The rest of the portfolio has to run lean and mean (used to be run as autonomous business units with associated cost structure).   This year will be a transition year, with progress accelerating throughout the year – NWL, weak Q1, stronger Q2 – just pacing.  Good management, good story.


Church & Dwight (CHD)

CHD boasts that they are a smaller player at CAGNY (2012 Rev. $3B, Market cap $8B) and are “Total Shareholder Return (TSR) Junkies” with 12 consecutive years of 10%+ EPS growth. The company describes its portfolio of brands as recession resistant, 40% in the value category, with a compelling offering to meet the “new normal” consumer.  Alongside its 8 Power brands that equate to 80% of profits, CHD is looking to make condoms, lubricants, and vibrators its next megabrand and grow its recent acquisition of Avid Health in vitamin gummies. Its 2013 Outlook is 3-4% Organic Sales; GM 44.2% (core business ex-Avid +25-50bps vs ’12); and 14% EPS growth to $2.79 on a marketing spend that is flat at 12.2% vs last year. CHD’s balance sheet is “under levered” at 1.4x. The company did not signal any acquisition targets but is confident in its ability to find targets that it can make earnings accretive within the first 12 months.


Energizer (ENR)

Successful innovation and restructuring projects – it certainly sounds familiar, but it is a fairly new concept for ENR.  A familiar name to most of us (Schick Hydro) is the example of successful innovation provided by CEO Ward Klein – multiple market share examples were provided across various line extensions.   Presentation moves to a build-up of the organic growth and acquisition growth that has created the Energizer of today – moved on to the tale of woe that is the secular challenges of the battery category.  Interesting that it appears that restructuring was forced on the company by the challenges of the category, rather than any discipline with respect to costs.  The meat of the presentation was familiar – manage batteries for cash, generate growth from personal care.  At the end, it was also nice to see the company continue to acknowledge the bare minimum required of them as a public company in terms of investor relations, eschewing the company’s prior history where it acted more like a quasi-private company.  Golf clap?




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst


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VIDEO: What's Next For Stocks?


On today’s Fast Money Halftime Report on CNBC, Hedgeye CEO Keith McCullough debated with Dennis Gartman, founder of The Gartman Letter, over which way the US stock market is headed. Gartman forsees a “7 percent correction” in stocks while Keith lays out his bullish case for the market. Commodity prices coming down will act as a catalyst for consumption. Strong Dollar = Strong America as the great commodity bubble deflates. 



Both were up in Q4 but Singapore VIP volume surged while Macau grew only modestly.  Prior to Q4, the correlation was much higher.


  • Singapore 4Q VIP rolling chip (RC) volume soared 50% YoY while in Macau, 4Q VIP volume only gained 5% YoY.
  • Correlation between Singapore RC volume and Macau RC volume prior to Q4 was 0.86
  • Low hold usually drives higher volumes since people keep playing when they win.  Singapore held very low in Q4 while Macau was close to normal.  Singapore's a relatively new market so VIP business should grow faster than that in Macau.
  • Genting today was upbeat regarding VIP volume growth while Macau's VIP volume growth thus far in 2013 has been subdued
  • It remains to be seen if Singapore is taking VIP share from Macau. 




Pricing In The Restaurants Sector

Yesterday, Hedgeye Restaurants Sector Head Howard Penney hosted a conference call with Leslie Kerr, founder and CEO of Intellaprice.  Leslie built the pricing structure for Dunkin’ Donuts and has held brand management and strategic positions at Baskin-Robbins, PepsiCo Restaurant Services Group, and Disney Consumer Products.  After working in Coopers & Lybrand’s compensation consulting practice, Leslie founded Intellaprice, a recognized leader in pricing strategies, finance, brand management consulting.


Leslie presented a “Pricing 101” seminar for subscribers.  Investors almost never think about how a restaurant chain arrives at prices for its menu offerings.  Worse, many restaurant companies don’t think strategically about pricing.  Intellaprice focuses company managements to focus on pricing the same way they focus on areas such as inventory management, operations, or purchasing.


A pricing strategy reflects relationships within the company.  Who makles pricing decisions?  What is the company’s brand image and objective, and how does pricing work to achieve that objective?  Who is the actual customer of the company’s pricing strategy?  (It’s often the franchisee, not the customer.)  How does a company derive pricing information, and who uses that data?


Companies should view pricing in the context of brand identification.  What does a brand stand for?  What is the objective of pricing?  It’s not enough to say “we sell a premium product, so we charge more.”  A shop owner who says “I’m a discounter, so I’ll charge 25% less than the store across the street” has a pricing strategy.  Many major companies don’t even have something that basic.


Kerr says it is surprising how many major companies do not understand their own pricing data, and where no one is clearly responsible for pricing policy.  Despite tremendous quantities of price data flowing through a company, many companies do not compile this data into usable information to make available to operators.  Kerr says most point-of-sale (POS) systems are not set up to track pricing patterns, and many companies do not communicate a pricing strategy to their managers or franchisees, making it impossible for operators to make effective pricing decisions.


The goal of a pricing policy is to support franchisees and managers by laying out strategic reasons for corporate pricing decisions, and to make pricing a basic and ongoing part of business discussions.


Kerr says her research at Intellaprice shows that the return on investment to establish a pricing strategy can be over four times the cost of establishing that strategy, and she says her clients experience sales increases of up to 3% as a result of using her recommendations.

The “Five D’s of Pricing”: 

DEBUNKING – managers believe antitrust laws make it illegal to discuss pricing.  It is illegal to price-fix, but it is perfectly legal to have a corporate pricing strategy.


Companies let pricing decisions default to other functions: finance on the basis of profitability, marketing on the basis of sales volume.  But, says Kerr, successful companies see pricing as a component of brand definition.


Companies believe that the market dictates prices, or that technological solutions – expensive software packages – should make pricing determinations.


Kerr says all of these approaches lead to inefficient pricing.  Pricing must be part of a rigorous management decision-making process.


DEFINING – a price strategy is more than just saying “we’re a premium brand,” or “we’re a discounter.”  Management needs to identify business objectives and the role pricing plays in brand and company identity, what Kerr calls a “Pricing Philosophy.”


DIRECTION – pricing needs to be a defined and repeatable process that includes data collection and analysis, testing, and the development of optimal pricing.  This must be communicated clearly across the company.  The loop closes with performance analysis, which becomes the data collection stage for the next iteration of the process.


Kerr gave examples using four approaches to synthesizing information:

Competitive – compare with prices of comparable or substitute goods

Consumer – public perception of products and price sensitivity

Store – demographics and sales mix

Economic – cost, profitability and economic trends


She then laid out four pricing methods, citing pros and cons of each:

The Market-Based approach provides good price data on price behavior, but lacks predictive ability.

Consumer-Based measures price sensitivity and purchasing decisions, but is too costly to be used exclusively.

Price Optimization allows a company to leverage its own sales data but does not allow any non-price factors into the decision-making process.


Cost-Plus is the simplest to apply, but it ignores the customer’s willingness to pay for the product.


DATA – a company chooses among sources of information (its own POS data, competitors’ prices, customer sensitivity).  A number of services also offer statistical tools for various retail settings.


The database must be appropriate for the company and its industry.  Brand performance, customer traffic and comments and complaints are among the most useful sources of information.


DECISIONS – what makes a successful pricing decision?  It must be integrated into the company’s overall decision making.  It is grounded in reality.  It emerges from a continuous process linked to company objectives. The most successful pricing processes are built around pricing committees that work across functional areas of a company, communicating within the organization and harmonizing objectives.  The group responsible for pricing must also stay in communication with franchisees, brand managers, and other decision makers in the field.  Effective pricing managers have ongoing dialogue that also provides valuable information as an input to the pricing decision-making process.



Pricing has been a neglected component of corporate strategy.  Investors should ask: does this company have an established pricing process?  Who is responsible for pricing decisions – Where in the corporate structure does pricing “live”?  How robust is the pricing process?  What resources are committed to it?  Are senior executives involved in the pricing process?  What pricing data is used for decisions, and what other inputs does the process rely on?


Kerr’s analysis shows that companies have realized profits in excess of 400% of every dollar committed to developing a pricing strategy.  Yet this is an area that remains largely unexplored, even by some major firms.  In mature industries, such as restaurants, marginal differences in profitability can sometimes drive significant gains in stock price.  Investors who learn to ask hard questions about a company’s pricing strategy – or lack thereof – stand to be rewarded. 

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 80.52%
  • SHORT SIGNALS 78.70%