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FNP: Debt Free FNP?

Takeaway: The potential sale of Lucky is a new and positive change. FNP would only be doing this if the price was a steep premium = a debt free FNP.


One of the usual ‘Juicy Coture is on the block’ stories just hit the tape regarding FNP, but the unusual component is that it had Lucky Brand attached to it as well.


While the market wants to see a sale of Juicy, we’d probably rather see FNP hang on to it for another quarter or two as we think that it’s in the process of bottoming, after which it will likely command a higher price.


Lucky, however, has better momentum right now around its product line than it has had in years as FNP parlays best practices learned from Kate over to Lucky (handbag line, brand extentions, etc..,).


Our best estimate is that Juicy will attract somewhere in the neighborhood of $200mm-$250mm (about 0.4x-0.5x sales). But for the company to let Lucky go at a point when momentum is building, we think that it would only do so at a premium valuation. 7x EBITDA implies around $150mm, which we think is the minimum Lucky would sell for.


We can speculate all day about the precise multiples that these two would sell for, but the truth is that only people involved in the transaction (which we’re not) should know. But what we can safely point out is that is that FNP ended the year with $325mm in net debt, and even if our estimates are high by 20%, the net proceeds of a deal would leave FNP debt free.


The company has already gone from being a debt-laden, low margin, low asset turning portfolio of bad brands to being one of the best growth stories in retail. Adding a debt-free element with the sale of its lowest-margin and lowest RNOA divisions only makes the story that much more attractive.


FNP has been our favorite name, and its still one of our top three. Despite the run, if you have a 12-month time horizon we'd resist the temptation to peel away today in the high teens. 


FNP: Debt Free FNP? - fnp1

Risk On: NYSE Margin Debt

Margin debt levels at the New York Stock Exchange (NYSE) show the amount of funds customers are borrowing from their brokerage (i.e. levering up). Historically, when NYSE margin debt gets to a +1.5 standard deviation or greater, market risk increases considerably. With current levels above +1.5 and the S&P 500 struggling to maintain its new all-time closing high of 1570, we could very well see a sell off in the US equity market sooner rather than later if history is anything to go by. 


Risk On: NYSE Margin Debt - NYSEmargindebt


Risk On: NYSE Margin Debt - NYSEdebt2

CAG, MKC, GIS – One of these Things is not like the Others

We don’t generally review quarters, but we do like to try and provide context for investors and we think it is important to put CAG into context with the two prior earnings releases in the packaged food sector.

GIS (March 20th) – Beat consensus by $0.07, raised full year guidance by $0.01 at the high and low end (1 quarter remaining).  Implied Q4 guidance is $0.51 per share vs. consensus of $0.59 ($0.08 below).  The company reduced advertising and media spending by 6% in its U.S. retail segment, offsetting some of the weakness on the gross margin line.


MKC (April 2) – Beat consensus by $0.01 (recall that the company had previously guided down this quarter), but lowered Q2 by $0.05 versus consensus.  The company maintained full-year guidance (had already guided down significantly back in the December quarter).


“While brand marketing support was $4 million lower in the first quarter of 2013, the company spent an additional $3 million for increased price promotions and paid allowances to gain distribution for new items” (emphasis added)


CAG (April 3) – Missed consensus by $0.01 ($0.55 versus $0.56), top line was weaker than expected due to a 3% decline in organic volume (troubling), but the company did see the benefit of 3% price/mix.  Importantly, the company increased marketing investment in its base business by 33% year over year (about $0.03 per share in EPS).  CAG maintained full year guidance of approximately $2.15 (one quarter remaining).


To be clear, we are in no way suggesting that EPS and revenue don’t matter.  However, quality matters as well and we view CAG’s EPS miss as a high quality problem in that it represents an investment in the business for the longer-term.


Bottom line for us is that this quarter doesn’t prompt any changes in either our estimates or our thinking on the name and we continue to see CAG as the best combination of value and “story” in the packaged food space.





Robert  Campagnino


Managing Director










Matt Hedrick


Senior Analyst

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VIDEO: The Downfall Of JCP


Hedgeye CEO Keith McCullough appeared on CNBC's Fast Money last night and discussed how JCPenney (JCP) is in trouble as the company and its beleaguered CEO, Ron Johnson, struggle with reinventing the brand. Johnson's compensation as CEO is under pressure as the stock continues to see its share price fall further week-after-week. Skip to 1:35 in the video for Keith's full take on the issue.

Morning Reads From Our Sector Heads

Brian McGough (Retail):


New Non-Martha Home Brands Go Live on Jcpenny.com (via Sourcing Journal Online)


Tom Tobin (Healthcare):


Feud between hospitals, Medicare contractors explodes over fraud bill (via The Hill)


Jay Van Sciver (Industrials):


US Airways Reports Record March Load Factor (via US Airways


Kevin Kaiser (Energy):


Owners With No Skin in the Game - Accounting Conservatism, Innovation, Shareholder Elections, and Passive Management (via Credit Bubble Stocks)


Penn takes aim at Magnum's Eagle Ford assets (via Upstream)


Rob Campagnino (Consumer Staples):


Corn Joins Crop Bear Market on Slow Demand, More Planting (via Bloomberg)


Howard Penney (Restaurants):


Beijing Prepares For Avian Flu (via Bloomberg Businessweek)


Josh Steiner (Financials):


U.S. Regulator, Bank of America Reach Mortgage-Loss Settlement (via WSJ)


Ex-SEC Enforcement Chief Defends ‘Neither Admit or Deny’ Settlements (via WSJ)


S&P Fires New Salvo in Battle With States (via WSJ)



Consuming Europe

Client Talking Points

Focus On Europe

Keeping a close eye on non-US markets is key to being a global macro player. And right now, we're focused on the DAX and FTSE 100 indices in Germany and the UK, respectively. Both were able to hold above our TRADE lines of support again this morning, which is quite meaningful as commodity-focused markets like Brazil and Russia continue to break down.

The Consumption Game

It's important to pay attention to commodities even if you don't trade them. Coal, corn and copper in particular are all very important to watch right now as consumption increases. An increase in consumption makes for an increase in global growth which helps boost consumption-oriented stocks. We remain bullish on consumption names as a massive divergence continues to widen between consumption assets and commodity assets. The catalyst behind all this is the strong US dollar, which continues, week-after-week, to post gains. Get the dollar right and you get a lot of other things right.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Darden stands to be a beneficiary from a housing recovery and an improved employment picture, which boosts casual dining trends. Darden reported earnings today that beat Wall Street expectations, though net income declined 18%.


With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view..


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


"The more crisis-mongering and concern, the better for US stocks #study" -@KeithMcCullough


“I never did give them hell. I just told the truth, and they thought it was hell.” –Harry S. Truman


ADP report says economy added 158,000 private-sector jobs in March, coming in below expectations. Economists' consensus was at 215,000.