CRI: Let’s Put the Bull and Bear in the Octagon (Correction)

Takeaway: We can drive a truck through the Bull and Bear case on CRI. Here's our best stab at each.

Conclusion: Our bearish call on CRI is one that – especially today – has not gone our way. Let’s put on the accountability pants and see how the research call is changing – especially relative to a stock price that wants to do nothing but go up. We think that the bull/bear on this one is pretty well balanced – with a positive secular backdrop, but risky near-term positioning (and spending) to hit sales and margin targets that are already widely telegraphed. The +6% reaction showed that the market was looking for the negative momentum from last quarter to continue. We did too. Didn’t happen.   When we shake the Etch-a-Sketch clean and re-evaluating our position, we still come away with more risk than reward.


(Updated to include the correct e-commerce growth figures)


Here’s our take on the bull vs. bear research call: 


  • Relatively high-return, defendable brand with dominant share (24%) in its core Baby business that will capitalize on a rebound in the birth rate after a 5-year buildup in the deferred birth pipeline (see Exhibits below).
  • The company is investing today in a) e-commerce fulfillment,  b) more company-operated stores (including outlets), c) centralizing headquarters, d) converting Canadian Operations to higher-margin dual-brand stores, and e) taking its sourcing operations back in-house – all of which should take margins to 14-15%. While we have a hard time internalizing the concept of a business with these characteristics sustaining this type of margin level, there’s arguably no reason why it can not get close temporarily if it wants to.
  • This suggests EPS in the $4.50-$5.00 range, or a 15%+ CAGR from current levels.
  • Cash flow might be bad today, but capex will ease as they start to harvest the benefit of their spending, leading to far better FCF characteristics in 2014/2015.  That’s precisely when the ‘birth boom’ should be in full swing. CRI should have the sourcing and fulfillment assets in place at that point to capitalize on the favorable operating environment with a lower cost structure.



  • CRI might have dominant share in the Baby business, but that only accounts for 32% of CRI’s total. After backing out parts of its sleepwear business that we’d also consider equally as defendable, we’re looking at about 50-60%% of the portfolio has a competitive set that is no stranger to price competition and not as dependent on the birth rate.
  • Like for like sales in its portfolio are simply not good. CRI added $39mm in aggregate sales in the latest quarter, but $17mm-$18mm of that was in e-commerce alone. In addition, it added 14% more stores vs last year in Carters USA, which accounts for 29% of revenue.   We don’t want to ding the company for good performance in e-commerce, as it’s a critical part of growth. But with this store growth should we really be surprised that comps were up only 0.6% in Carters, down 0.5% in wholesale, and DOWN 9.5% at Osh Kosh? Not really. We’d rather the company focus on the productivity of its existing assets.
  • Gymboree just reported comps of -2% for it’s latest quarter (on a 2 month lag to CRI). If this ‘baby boom’ is materializing, we’re not seeing it yet in numbers. What’s interesting is that year-to date, we’ve seen a notable rebound in containerized traffic for Baby Apparel – about $3bn in retail value vs $1.9bn last year based on our math. Some of this is due to catch-up volume from last year’s port strike, but we think at least half represents real incremental shipments. Either this sales boost has yet to be realized by the major brands, or more competition is being attracted to the space – something that tends to happen when cyclical/secular trends turn positive in virtually any industry.

    CRI: Let’s Put the Bull and Bear in the Octagon  (Correction) - babyshipments
  • CRI’s inventories look fine – not good, not bad, just fine. The SIGMA chart shows that it’s going on its fifth quarter of improvement at a time when margin comparisons are getting more difficult. We almost never see multiples expand when this is the case. The punchline here is that the company needs to drive future stock performance by earnings upside. To its credit, that’s what it’s been doing, and our sense is that it simply set conservative expectations for the year today. But for a company that chalked up $0.08-$0.10 of a $0.10 beat to deferred SG&A and shipment timing (ie did not really beat), we’ve got to think that the Street is looking through the company’s ‘guide and beat’ strategy at least to a certain degree.

    CRI: Let’s Put the Bull and Bear in the Octagon  (Correction) - crisigma
  • Its' capital spending projects seem to be going according to plan, and we like the fact that more people transferred to Atlanta than the company previously thought. That suggests better continuity and more faith by the team internally in what the management team is doing. But we still can’t gloss over the fact that the sheer level of spending at this company is off the charts. Capex is going up from $83mm to $200mm this year – and we definitely are cautious towards that. SG&A growing by over 2x the rate of sales hardly puts us in our happy place. either. Not because the company should't be spending, but simply because its risky having so many balls in the air at once, and its causing free cash flow to evaporate. We’re modeling cash flow to erode from $195mm in 2012 to $30mm this year, and we don’t this we’ll see a rebound to ’12 levels until 2015.




Here’s Hedgeye Healthcare Team’s overview on their expected increase in the birth rate. Contact or Tom Tobin () for additional color.


CRI: Let’s Put the Bull and Bear in the Octagon  (Correction) - 2


CRI: Let’s Put the Bull and Bear in the Octagon  (Correction) - 3


CRI: Let’s Put the Bull and Bear in the Octagon  (Correction) - 5


Takeaway: In-line quarter on a hold adjusted basis

In-line quarter on a hold adjusted basis




  • Best quarter ever in China.  Did ok in Las Vegas.
    • Cotai budget just under $4.0 billion
  • Quality of competition has ticked upward in Macau


  • LV hold-adjusted EBITDA: $105-108MM vs $120MM actual
  • Macau hold-adjusted EBITDA: $315MM vs $331Mm actual
  • Capital allocation if Philly/Boston bids don't come to fruition?  Want to maintain investment grade on non-recourse debt.  Dividend policy of $1/quarter can continue.  New Cotai debt borrowed at LIBOR + 1.75%.
  • Commisions in Macau were down because of higher hold with direct players relative to junket players
  • Customers buy money at cage which do not factor into drop;  should disregard Mass hold % in Macau; should only pay attention to win
  • Opened Phase 1 of high-limit slot space with 96 slots; will open 50 additional slots in time for May holidays
  • Believe mass business is healthy 
  • Direct VIP is doing well
  • 1Q provision of doubtful accounts is a good run rate
  • Annual meeting is May 16 in Macau and May 7 in LV
  • Afraid of the competition
  • Cotai:  design is finished; 1st stop from ferry terminal
  • WYNN will not get behind on US online gaming; currently, the future is 'murky' and WYNN is monitoring it
  • In the next month, there will be WYNN Cotai model photos and walk through video
  • WYNN Philly/Boston design:  No comparison to regional casinos (slot boxes)
  • Saw pickup in more corporate/convention trips 
    • 7% increase in rooms and revenues
    • 2014 bookings 'way ahead of pace' - much more robust compared with the last several years
  • Toronto/Japan: watching it closely
    • Toronto City Council votes on May 7
    • Japan PM is pro-gaming, along with several senators
  • Las Vegas trends:  Jan/Feb/March was similar
    • $600MM in table win: 70% is in roulette/baccarat (Latin America/European/Asian customers)



  • Approved a cash dividend for the quarter of $1.00 per common share. This dividend will be payable on May 23, 2013, to stockholders of record on May 9, 2013.
  • Macau: Net revenues were $992MM and Adjusted property EBITDA was $331MM
    • Turnover in the VIP: $28.4BN, down 15.3% YoY
    • Hold: 3.14%
    • Mass table win was $243MM on hold of 35.5%
      • Chips purchased at the casino cage are excluded from table games drop and will increase the expected win percentage.
    • Slot machine handle was $1.1BN, down 23.4% YoY
    • RevPAR was flat YoY
    • 503 tables (288 VIP tables, 205 mass market tables and 10 poker tables) and 834 slot machines
  • Cotai Update: 
    • Project budget to be in the range of $3.5 billion to $4.0 billion. 
    • WYNN expects to enter into a guaranteed maximum price contract for the project construction costs in the first half of 2013. 
    • Started foundation work in February 2013 and expect to open our resort in Cotai during the first half of 2016.
    • In 1Q13, we spent approximately $76.3 million on our Cotai project
  • Las Vegas:  Net revenues were $387MM and Adjusted property EBITDA of $120MM
    • Table games drop: $669MM was up 2.2% YoY and hold was 26.7%, higher than the property’s expected range of 21% to 24%
    • Gross non-casino revenues were 1.6% YoY due to increases in hotel and food and beverage, which were partially offset by lower entertainment revenues.
      • Room revenues were up 4.8% on a 6% RevPAR increase
      • F&B revenues increased 6.0%... primarily due to the strength in our restaurant, night club and beach club businesses. Retail revenues were down 0.9%. Entertainment revenues were down 28.3% due to a show that ended its run at the Encore theater in November 2012
  • Cash:  $2.3 BN
  • Debt: $5.8 BN ($3.1BN Wynn LV, $749MM Wynn Macau, and $1.9 BN parent)
  • Corporate expense was down $7.0 million as WYNN incurred significant expenses associated with the redemption of the Aruze USA, Inc.'s shares during 1Q 2012


Today we shorted Freeport-McMoRan Copper & Gold (FCX) at $30.30 a share at 10:22 AM EDT in our Real-Time Alerts. Hello darkness, my old friend. Nice to see you back up here at lower-highs as the Commodity Bubble continues to pop. 



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Growth Accelerating: Home Prices

Recent data from CoreLogic and the Federal Housing Finance Agency (FHFA) shows that home prices continued to rise through March with CoreLogic estimated 10.2% year-over-year growth, up from flat growth in February at 9.41% year-over-year in January. The FHFA Home Price Index reflects similar trends with prices accelerating month-over-month to 7.07% year-over-year growth in February. That's the fastest rate of growth since November 2009.


Growth Accelerating: Home Prices - CORELOGIC1

CCE Chugs Along and Walks Away From Germany

CCE reported Q1 2013 EPS this morning in which the company saw meaningful volume improvement in the quarter, yet we believe persistent economic weakness and a challenged consumer will remain headwinds in the coming quarters. The announcement to walk away from acquiring the German bottling business will equate to $1 billion in share repurchases in 2013; future expectations around how the company may position itself with a strong balance sheet (net debt/ebitda of 2.5-3x) may further stoke the stock. We remain neutral on the stock until there’s more clarity on the sustained improvement in the underlying business. That said, easy Q2 2013 revenue comps of -8.3% may make CCE attractive into the print.


We expect that the decision to walk away from Germany will disappoint some investors - there is certainly some percentage of the shareholder base that is special situation/merger oriented in its investing style.  However, while this deal moves into the rear view mirror, KO certainly isn't through re-imaging its global bottling network and CCE is very likely in those plans, perhaps even as a target at some point down the road.


What we liked:

  • EPS $0.39 vs consensus of $0.38
  • FY EPS growth 11%-12% versus prior guidance of ~10%
  • The decision to let the right to acquire the German bottling business from The Coca-Cola Company expire spells an increase in share repurchases of approximately $1 billion in 2013
  • The company moves further past aggressive excise tax measures, in France in particular

What we didn’t like:

  • Revenue came in below expectations at $1.85B vs consensus of $1.90B, or +0.5% Y/Y (Volume -1.5; Pricing +2%)
  • FY Net sales growth guidance was lowered to the low to mid-single-digit range v. prior guidance of mid-single-digit range


Call with questions,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst


Growth Accelerating: Home Sales

Both existing home sales and new home sales are showing positive trends in housing as one of the drivers of US growth. Existing inventory was largely unchanged in March at 1.93 million units but median home prices rose 11.8% on a year-over-year basis. That kind of growth hasn't been seen since November of 2005.


Growth Accelerating: Home Sales - GROWTHPART1


Organic demand is helping drive sales on the new home sales front. New home sales rose 18.5% year-over-year in March to 417,000 units. We believe that over time, new home sales could double based on current levels as household formation trends show increased demand combined with a jump in new housing starts.


Growth Accelerating: Home Sales - GROWTHPART2

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