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Today we shorted EZ CORP (EZPW) at $19.59 a share at 10:35 AM EDT in our Real-Time Alerts. The only shorts Hedgeye CEO Keith McCullough really likes here are Gold related (pawn shops are in that bucket). Gold hates growth. And #GrowthAccelerating is where consensus needs to get. 



Bullish Enough? S&P 500 Levels, Refreshed

Takeaway: It’s a bull market. And consensus is nowhere near Bullish Enough.

This note was originally published May 03, 2013 at 11:18 in Macro



Fundamentally, the most important data point this week was yesterday’s jobless claims report of 324,000. Our non-consensus bull case for US Equities continues to get more bullish as the market is rising. Weird, but cool.


Across our core risk management durations, here are the levels that matter to me most:


  1. Immediate-term TRADE overbought = 1626
  2. Immediate-term TRADE support = 1590
  3. Intermediate-term TREND support = 1520


In other words, our model is now consistently signaling higher (all-time) highs of resistance and higher-lows of support. It’s a bull market. And consensus is nowhere near Bullish Enough.



Bullish Enough? S&P 500 Levels, Refreshed - SPX

U.S. Employment: Bullish Enough?

Takeaway: U.S. employment improving is bullish for domestic consumption and positive for the U.S. dollar as Japan and Europe continue to ease.

The April Payroll data improved sequentially, confirming the acceleration observed in the NSA Jobless Claims numbers in recent weeks.   Private and Nonfarm Payrolls both improved sequentially, the Unemployment Rate dropped to 7.5%  alongside accelerating job growth across most age demographics, Temp employment growth accelerated and State & Local government employment growth continued to improve.   Notably, the February & March NFP estimates saw a large positive revision with Feb revised from +268K to +332K and March revised from +88K to +138K for a combined 2M revision of +114K.    


Below we revisit the idea of seeing a 6-handle in unemployment in 2013 and provide a summary review of the April employment trends observed across both the Current Population Survey (Household Survey), which drives the Unemployment Rate, and the Establishment Survey (CES) which drives the NFP Number.


6-Handle?  Back in January, we examined the extent to which the variables driving the unemployment rate would have to move to push unemployment below 7% over 2013 (Will We See 6.5% Unemployment in 2013? ).  The early conclusion was that while a sub-7% unemployment rate probably wouldn’t represent our baseline case, we wouldn’t view it as a tail probability either. 


So, where do we stand currently?


Over the last 4 months, we’ve followed a path that pushes the probability a little closer to the heart of the curve.  If we make the simplifying assumptions of stable population growth and a static Labor Force Participation Rate from here (the lowest level since May of ’79), we need to average net payroll adds of 233K/mo over the next 8 months to breach 7% on the downside in December. 


If we use Nonfarm Payrolls as our proxy for monthly employment gains (note: the unemployment rate is determined using the Households survey of employment. The Household & Establishment survey, which produces the NFP number, can vary considerably on a month to month basis, but tracked closely on a trend basis) year-over-year growth would need to average ~1.85% over the balance of the year.  With NFP employment growth averaging 1.58% and 1.62% over the last 6M and 12M, respectively, this equates to ~25bps acceleration from current levels. 


Is a moderate acceleration in employment growth probable from here in the face of a negative seasonal distortion, a well-advertised fiscal policy drag and a slowing EU/China?  Similarly, can we expect the marked (arguably surprising) accelerating improvement in the Initial claims data to extend itself further?  I don’t know. 


Economies are certainly reflexive and three important components – Labor, Housing, & Confidence – all continue to accelerate while household debt and debt service levels continue to decline.  With the U.S. macro data looking good on an absolute basis, better than good on a relative basis, and equities in Bullish Formation from a quantitative Risk Management perspective, we’re continuing to manage gross and net exposure with a bullish bias towards domestic consumption oriented sectors and equities. We currently positioned 10 Longs, 4 Shorts in our Real-time Alerts with immediate term upside to 1626 in the SPX.


Non-Farm Payrolls (Establishment Survey):  NonFarm Payrolls rose 165K in April on expectations of 140K and 88K prior with y/y growth accelerating 10bps sequentially to +1.6%.   Private payrolls rose 176K on expectations of 150K and 95K prior (revised from 246) with y/y growth accelerating 5bps sequentially to +1.9%.   Notably, the February & March saw significant positive revisions with Feb revised from +268K to +332K and March revised from +88K to +138K for a combined 2M revision of +114K.    


Household Employment:  BLS’s Household survey of employment showed total employment increased 293K sequentially with y/y employment growth accelerating 30bps sequentially to +1.3% y/y.


Unemployment Rate:  The Unemployment rate dropped to 7.5% from 7.6% m/m.  With Total Employment rising +293K and Total Unemployed declining -83K the dynamics driving the change in the unemployment rate improved vs. March where the decline was principally a function of the total unemployed (-290K) declining more than the decline in employed (-206K).    

Labor Force Participation:  The Labor Force Participation rate (LFPR) was essentially flat, ticking up to 63.32% in April vs 63.28% in March, holding at the lowest level since May of 1979.  As a reminder, the LFPR = Total Labor Force (Employed + Unemployed)/Civilian Non-institutional Population.  The Civilian non-institutional population was up +180K m/m  (+1.0% y/y) while the total Labor Force rose by 210K (+0.5% y/y).  A positive denominator and a slightly more positive numerator = a marginal increase in the Labor Force Participation Rate. 


Employment By Age:  With the exception of the 25-34 year old cohort, employment growth across all age buckets accelerated sequentially in April.  Of note, and as it relates to our expectation for a recovery in births, employment growth within the key 20-34YOA female demographic remained positive, accelerating 80bps sequentially to 1.3% y/y. 


Part-Time & Temp Employment: Part-time employment (household survey) increased 107K m/m while Temp employment (establishment survey) rose 31K in April.  While the growth trend in part-time employment remains one of deceleration, growth in Temp Employment accelerated on both a 1Y and 2Y basis in the latest month.    


One thing to consider as it relates to a payroll growth over the balance of the year is the potential for accelerating part-time and temp employment.  Anecdotally, instances of companies managing labor hours and temp staffing requests for part-time workers are picking up as businesses look to manage costs associated with Healthlaw implementation and the requirement that companies provide health insurance or pay a fine for any employee working at least 30 hours a week.   We’ll be taking a closer look at this dynamic to gauge the potential for any notable, prospective impact to employment trends.


State & Local Gov’t Employment: The slow grind higher for state & local government employment, after a four year run of negative growth, continued in April with growth coming in at -0.1% y/y.   Aggregate State Tax revenues surpassed the 2008 peak in nominal terms in 2012 with further positive growth expected in 2013. The continued recovery in revenues should be a tailwind for employment and investment, however, sequestration and uncertainty around impending fiscal policy and budget decisions at the federal level may be weighing on hiring decisions at the state/local gov’t level currently.  


Average Weekly Hours:   Average weekly hours for private employees ticked down to 34.4 from 34.6 in March, declining 0.6% m/m and flat y/y on a sequential basis.  We’ll be monitoring the trend here in conjunction with the trend in temp and part-time workers as it relates to businesses managing the SWB line ahead of ACA implementation (described in Part-time Employment section above) 



BLS Household Survey Data


U.S. Employment: Bullish Enough? - Unemployment Rate Household


U.S. Employment: Bullish Enough? - CPS vs CES


U.S. Employment: Bullish Enough? - Employment by Age


U.S. Employment: Bullish Enough? - Part time


U.S. Employment: Bullish Enough? - Unemployment Rate vs LFPR monthly


U.S. Employment: Bullish Enough? - CNP




BLS Establishment Survey Data  


U.S. Employment: Bullish Enough? - NFP


U.S. Employment: Bullish Enough? - NFP vs Household Survey 2Y


U.S. Employment: Bullish Enough? - Temp Employment


U.S. Employment: Bullish Enough? - State   Local Gov t


U.S. Employment: Bullish Enough? - Aggregate Hours




Christian B. Drake

Senior Analyst 

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In preparation for NCLH's F1Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • “Looking just at fuel expense, we have a hedging strategy in place using both swaps and collars to help mitigate volatility in the market. We also continually research ways to decrease fuel consumption with the share loan posting a 1.4% decrease in fuel consumption per capacity day.”
  • “Capacity for the first quarter will be lower versus prior year as Pride of America enters dry dock from March 24 to April 7. Capacity for the remaining quarters will increase over prior year with the introduction of Norwegian Breakaway and partially offset by dry docks in Q2 and Q4.”
  • “Deployment for the year [2013] is 41% in the Caribbean's. Europe, which is made up of Mediterranean voyages, which represent 18% and Baltic and Canary Islands voyages which make up 7%. Alaska, Bermuda and Hawaii which represent between 7% and 9% each and the balance in other itineraries.”
  • “It's booking better than at the same point for the Norwegian Epic which was our best booked ship before for launch and pricing continues to be very strong. So on both counts we're comfortable with the direction and we're filling a lot of momentum.... with the booking patterns over the last four or five weeks as we're in wave season. As far as the future cruise costs, just give us another quarter as we grow into our shoes a little bit. We've got a lot of moving parts with the Breakaway coming in and all of the rest of it.”
  • “Since we got into the full wave season we've been booking... consistent with what you heard on the Royal Caribbean call last week in the 20% zone. We went down and we kind of took a razor focus at the booking patterns for the European itineraries and the good news is that to-date they are booking around the same tone as the overall number. There is nothing standing out .... out because it is not booking kind of consistent with the other itineraries.”
  • [Europe] “It is a little early, but we're pretty comfortable right now that we've gotten through this early season here in the first quarter with our ships that are in Europe, and we have started to be able to move a little bit into those final itineraries in the spring, and we are feeling pretty decent about the summer.
  • “Our booking period has extended a little bit from what it was in 2012, so that's a good sign.”
  • [Dry-dock] “I think as long as you're figuring three per year going forward you're in the right zone.”
  • [Onboard spend on Getaway/Breakaway] “I think what we found is that the Epic... is probably a double-digit improvement upon the other ships just because of the flow of the ship and the way everything is kind of laid out it encourages and we're seeing people are staying out a lot later in the evening and having fun and enjoying themselves and or by the way, maybe having another drink or dropping something in the casino.  We're using that as our base case and we do have an expectation that maybe we'll get a little lucky on that because we do feel like the design of these new ships are a little bit even better than the Epic.”
  • “At this point we're cautiously optimistic that the season in Alaska will be a solid one for us.”
  • “We're putting a scrubber on the Pride of America in the dry-dock that we're about to go through. It's a significant cost for us, but it has a very quick payback because it enables us to continue to use the other fuel, and as you can imagine Pride of America is 100% in the eco zone. We'll do that as we move forward with these future dry-docks and as well on the Breakaway Plus class of ships we're putting scrubbers in as well.”
  • “We will continue to drive down consumption just with layering on the more fuel efficient Breakaway which would be about 2% on an annual basis or prorated in 2013 for another 1.5%. We are constantly looking at additional ways. We have at least 10 initiatives going on right now to continue to chip away at our fuel consumptions.”


Farewell To Gold

The price of gold and gold-related stocks have fallen considerably over the last year as investors turn to the equity markets for returns and the US dollar appreciates in value. Over the last year, gold (GLD) and gold miners (GDX) have fallen -11% and -37.6%, respectively. That pain is due to continue with the S&P 500 (SPY) and Russell 2000 (IWM) hitting new all-time highs today as the US economy continues to show improvement.


Farewell To Gold - GLD GDX 1year

FNP: Where Do We Go Now?

Takeaway: If you own FNP for a transaction, you should get out. The call is bigger than that. The upside is there under both scenarios.

The single greatest takeaway from this FNP quarter is that the 17% top line growth rate is the highest we've seen out of the company since March 2003. We cringe every time an analyst congratulates a management team on a conference call (do any of us get publicly congratulated for doing our jobs?) -- but we gotta hand it to McComb. This quarter was a big step forward for FNP.


All of that said, this stock has been one of the best performers in the market over the past 6, 12, and 24-month time periods. It's been one of our favorites all along. But with the stock at $21 we need to step back and really re-evaluate where we can go from here. The answer, we think, is 'higher'. 


We think we need to tear apart the model and look at two scenarios. 1) FNP as is today, with Juicy and Lucky as part of the portfolio, and 2) what the model will look like on that day the company announces that it's selling 55% of its revenue (but only 25% of next year's EBITDA). We think many people will be surprised to see that the profitability levels don't look dramatically different under both scenarios. The difference, however, is in the flexibility to maximize and optimize the amount of capital allocated towards highest-return businesses. 




Contrary to what many people think, we're not against FNP abandoning its efforts to sell Juicy and Lucky. Yeah, the stock would take a hit due to people renting it for the deal. But here are our assumptions...

a) Juicy: The reality is that we're convinced that Juicy has hit a bottom, and the new initiatives coming down the pike  over the next 12 months (like outlet redesign and Juicy Sport -- it's answer to Lululemon) have very minimal downside for the brand and its cash flow. Even if we assume that it stabilizes comps, adds minimal square footage, and returns to a (still paltry) sub-8% EBITDA margin, we get to a 5-year EBITDA growth CAGR of about 25%. It's not a slam dunk, as we need to see the new org chart at Juicy execute on the hype. But we think that our assumptions are hardly heroic.


b)  Lucky:  This is a brand that we think has meaningful upside under FNP's umbrella. We think that having a sister brand like Kate pave the way to grow outside of traditional denim categories could take productivity well above management's stated goal of $600/square foot. After square footage shrank over the past three years, we think we're finally going to see a reacceleration in store growth, and will see the company once again break through the 10% EBITDA margin mark.


c) Kate: There's not much that hasn't been said here. Management subtly took up square footage growth goals on this conference call (10 outlets for this year up to 10-12, and 30 US Specialty stores up to 30-35), which is a drop in the bucket relative to the 300 stores that the company is likely to add globally over a 3-4 year time period. Seriously, the store growth potential here is very difficult to find in retail. We're often asked what gives us the confidence that it can grow at this clip -- and one of our answers is that it is currently running at just a low double digit operating margin. Brands like Coach and Kors are hovering around 30% (ie we need to ask the question of whether they are investing enough capital to sustain brand momentum and allure). Same goes for other high margin concepts like LULU. But this is not the case with Kate. In fact, after it is done with its multi-year investment phase, we should see EBITDA margins climb past 20% (EBIT margins still in teens), which should make profitability explode. In short, we have Kate's EBITDA going from $94mm in 2012 to $425mm over a 5-year time period, with comps and unit growth fueling the early years, and margin improvement (up to 22% EBITDA margins) driving the back-end of the model.


d) Total Company:  Bottom line, EBITDA from $106mm to nearly $500mm over 5-years . It will not have the cash flow to start paying down debt until 2015 given the step-up in capex in 2013 and the absence of what would likely be $600mm+ from the sale of Juicy/Lucky. But on the flip side, it still likely has a good three years until it has to pay cash taxes due to NOL carryforwards, which serves as a big offset to interest expense.  On a fully taxed basis, FNP should break-even this year excluding streamlining charges, and then ramp at a precipitous rate thereafter -- with an extra $0.40-$0.60 per share in earnings per year through 2017. Perhaps the most telling statistic is FNP's RNOA. It has not earned its cost of capital since 2006 -- and that was a fluke due to the operating environment. Previous peak RNOA was 17%, which happened when the company was using a low cost of borrowing to roll up the industry.    But over the next 5-years, the new FNP should see its returns in the 70-80% range. Not a bad return on capital by any stretch.


FNP: Where Do We Go Now? - fnp liz vs fnp



We think we can safely assume that FNP sells both Juicy and Lucky for a combined $600mm. We're going to ignore what the press is saying for the time being (which would get us to a higher valuation) -- as we don't want to fall victim to bankers negotiating a transaction through Deal Reporter or Women's Wear Daily. If we look at 2013 numbers, we think that $300mm-$350mm is fair for Lucky, and $250mm is fair for Juicy.  Interestingly enough, when all is said and done, the earnings numbers don’t look much different whether FNP owns these two divisions or not. The offsets to losing Juicy and Lucky's EBIT are a) $383mm in debt goes away, which saves about $50mm in interest expense, b) D&A comes down by about 40%, and c) both stock-based comp and unallocated corporate costs come down by 10-20%.  


FNP: Where Do We Go Now? - chart2fnp


So the question then, is 'why do the deal'? The answer comes down to the balance sheet, as eliminating $383mm in in debt definitely means something. In addition, at any given point, the company has over $100mm in capital tied up in inventories at Juicy and Lucky, as well as what we think is $10-$20mm in maintenance capex in those two concepts. In the end, this is not a balance sheet killer for FNP. But when you're painting a picture of a $4bn ultimate brand roadmap, there's something to be said about keeping capital flowing towards the highest margin and highest return opportunities.



If you're in it for a transaction, then we'd suggest that you get out. It's not the right reason to own it at this point in time. You should be buying FNP today for one reason…and that's because you think that the Kate Spade brand can triple its store size globally, build out its e-commerce business, and layer on additional concession shops  at a rate such that revenue grows 4-5x in 5 years without having to make assumptions that Kate ever prints an operating margin above 20%. With this kind of brand growth, we should see the company handily beat consensus whether they sell Juicy/Lucky or not.  Would we rather see the brands go? For the right price, yes. But it's not imperative to the underlying call. Until the Street realizes our modeled earnings power and EBITDA trajectory, we're not concerned about valuation. It is trading today at 30-35x next year's earnings. Yeah, that's high. But for a company growing earnings well in excess of 30% while the balance sheet continues to de-risk itself and returns head from 0% to 70%...we'd give pretty big pushback to anyone who is short and making a valuation call. 


FNP: Where Do We Go Now? - 5 3 2013 1 29 26 PM



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