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Juicy ... Sold!

FIFTH & PACIFIC COMPANIES, INC. ANNOUNCES AGREEMENT TO SELL THE INTELLECTUAL PROPERTY OF JUICY COUTURE TO AUTHENTIC BRANDS GROUP FOR $195 MILLION IN CASH

 

Juicy ... Sold! - juicy

  • “[FNP] today announced that it has entered into a definitive agreement to sell the intellectual property of the Juicy Couture brand. Consummation of this transaction is subject to customary closing conditions and is expected to occur in November.”
  • “William L. McComb, Chief Executive Officer of Fifth & Pacific Companies, Inc., said: ‘We announced that we have signed an agreement to sell the intellectual property of the Juicy Couture brand to Authentic Brands Group (ABG) for $195 million, payable in cash. With this sale, we have also entered into a short-term licensing agreement with Authentic Brands Group that allows us to transition the business in an orderly fashion through the first half of 2014, with a $10 million guaranteed minimum royalty payable to Authentic Brands Group. In the coming weeks and months, we anticipate that Authentic Brands Group will announce licensees and affiliates that will work to take over elements of the operating business, including many of the company's talented associates, retail stores, wholesale, international, and certain components of the ecommerce site. We plan to work closely with these entities to ensure a smooth and orderly transition that is seamless to consumers and our business partners.’”

Takeaway: What’s interesting is that the sale is for ‘intellectual property.’ This sticks FNP with the leases – which it would have to terminate as a cost – as well as the employees (who are likely out of a job). Our model originally called for $250mm in proceeds. But after the deal fell through three weeks ago (for Juicy, Lucky, and the JOEZ deal – all in the same week), our expectations came down to a degree.

Assuming that – worst case – they net $150mm, it still allows them to pay off a third of their debt – and that’s before they sell Lucky, which should net $400mm or better.

 

(Editor's note: This is a complimentary research excerpt from Hedgeye Retail Sector Head Brian McGough. For more information on how you can subscribe to Hedgeye research click here.)


What's New Today in Retail (10/7)

Takeaway: FNP sells the dog. Tweeter vs. Twitter. WMT India vs. China. RL trades off Rugby for Denim & Supply. Levi/VFC, Topshop, Alibaba, New Balance

EVENTS TO WATCH OVER THE NEXT 24 HOURS

 

WWW - Earnings Call: Tuesday 10/8 8:30 am

 

COMPANY NEWS

 

FNP – FNP agrees to sell Juicy to Authentic Brands Group

(http://www.fifthandpacific.com/web/guest/investorrelations)

 

  • “[FNP] today announced that it has entered into a definitive agreement to sell the intellectual property of the Juicy Couture brand. Consummation of this transaction is subject to customary closing conditions and is expected to occur in November.”
  • “William L. McComb, Chief Executive Officer of Fifth & Pacific Companies, Inc., said: ‘We announced that we have signed an agreement to sell the intellectual property of the Juicy Couture brand to Authentic Brands Group (ABG) for $195 million, payable in cash. With this sale, we have also entered into a short-term licensing agreement with Authentic Brands Group that allows us to transition the business in an orderly fashion through the first half of 2014, with a $10 million guaranteed minimum royalty payable to Authentic Brands Group. In the coming weeks and months, we anticipate that Authentic Brands Group will announce licensees and affiliates that will work to take over elements of the operating business, including many of the company's talented associates, retail stores, wholesale, international, and certain components of the ecommerce site. We plan to work closely with these entities to ensure a smooth and orderly transition that is seamless to consumers and our business partners.’”

 

Takeaway: What’s interesting is that the sale is for ‘intellectual property’. This sticks FNP with the leases – which it would have to terminate as a cost – as well as the employees (who are likely out of a job). Our model originally called for $250mm in proceeds. But after the deal fell through three weeks ago (for Juicy, Lucky, and the JOEZ deal – all in the same week), our expectations came down to a degree.

Assuming that – worst case – they net $150mm, it still allows them to pay off a third of their debt – and that’s before they sell Lucky, which should net $400mm or better.

 

 

TWTRQ - Tweeter shares rocket 1,800% after news of Twitter's IPO

(http://www.theguardian.com/technology/2013/oct/04/twitter-stock-markets)

 

  • "Shares in failed electronics retail chain Tweeter Home Entertainment Group soared after Twitter announced it was intending a share sale. Tweeter, which specialised in high-end electronics, filed for bankruptcy in November 2008 and closed its stores soon after. But its shares surged 1,800% to 13¢ after the social media firm set out its plans for an initial public offering."
  • "The Financial Industry Regulatory Authority ordered the suspension of shares in Tweeter at 12.42pm ET, determining that an extraordinary event has occurred or is ongoing that has had a material effect on the market' for Tweeter shares."
  • "Tweeter trades under the stock symbol TWTRQ, just one letter different from Twitter's intended 'ticker' symbol, TWTR."

 

Takeaway: This is simply hysterical.

 

WMT - Wal-Mart says retail plans with India's Bharti "not tenable"

(http://in.reuters.com/article/2013/10/06/asia-walmart-idINL4N0HW02920131006)

 

  • "Wal-Mart Stores Inc's retail plans with India partner Bharti Enterprises are 'not tenable' and both sides are looking for the best way to move forward, an executive with the U.S. retailer told Reuters."
  • '"We created a franchise in retail with Bharti in the hopes that there could be a potential freeing up (of foreign direct investment) that would allow it to potentially be the base of the business. But frankly, the FDI has passed,' said Wal-Mart Asia Chief Executive Scott Price on the sidelines of the APEC conference in Bali, Indonesia. That means the existing franchise to Bharti is not tenable as the base. What we are talking about with Bharti is what we do with that business.'"
  • "Despite the uncertainty over the retail business, Price said the world's largest retailer was not planning on leaving India and was actually hoping to expand its wholesale business. 'We are committed to India and we are not thinking of leaving India anytime soon,' he said."

 

Takeaway: WMT has been courting the Indian market for the better part of – well…forever. It still has made very little progress relative to what is needed for a revaluation in the stock.

 

RL - Denim & Supply to Transform NYC Store Facade Into Art

(http://www.wwd.com/retail-news/specialty-stores/denim-supply-to-transform-nyc-store-facade-into-art-7212267?module=hp-markets)

 

  • "The Denim & Supply Ralph Lauren store in Greenwich Village will be undergoing a transformation, literally. Ralph Lauren Corp. said Friday that it will launch The Art Wall Project, an installation of large-scale outdoor artwork."
  • "The company will work with various emerging artists to transform the store’s facade into a work of art that celebrates the contemporary brand. The 4,000-square-foot store, the site of the former Rugby unit, is located at 99 University Place."

 

Takeaway: Not sure I get this. But hey… Having a store selling Denim and Supply with artwork on the exterior walls is better than having 4,000 feet dedicated to selling Rugby apparel that no one wants.

 

What's New Today in Retail (10/7) - chart1 10 7

 

 LS&CO - Levi Strauss Profit Doubles on Higher Jeans Sales

(http://online.wsj.com/article/SB10001424052702304906704579115691973886198.html)

 

  • "Levi Strauss & Co.'s fiscal third-quarter profit more than doubled on the jeans maker's higher sales in the Americas and Europe, as well as a $14 million tax benefit recorded in the latest period."
  • "For the quarter ended Aug. 25, Levi reported a profit of $57.1 million, up from $28.4 million a year earlier. The latest results also included a $14 million tax benefit. Revenue climbed 3.7% to $1.14 billion. In the Americas, where Levi Strauss does most of its business, sales grew 5%. Sales climbed 3% in Europe but were flat in the Asia Pacific."

 

Takeaway: Good read-through for VFC, as its Jeanswear division is 26% of the company. VFC just announced its 3Q earnings report date – Monday October 21.

 

WMT - Wal-Mart Looks to Gain Ground in Asia

(http://online.wsj.com/article/SB10001424052702303722604579116923897616240.html)

 

  • "[WMT's] top executive for Asia said the company has revamped its practices and legal compliance in the region and is considering acquisitions in China, as the retailer faces headwinds in a cornerstone of its global expansion plans."
  • "...Wal-Mart is considering acquisitions in China, aiming to build its market share in cities where Wal-Mart isn't already the No. 1 or No. 2 player, Mr. Price said."

 

Takeaway: While growth in China is an obvious part of WMT’s international strategy, it’s worth noting that the company has gotten louder on China since it started stumbling in India.

 

Alibaba - Alibaba IPO won’t happen until next year

(http://www.marketwatch.com/story/alibaba-ipo-wont-happen-until-next-year-2013-10-04)

 

  • "Alibaba Group Holding Ltd. will not commence its initial public offering until next year, according to two people familiar with the company’s plans...The fast-growing Chinese e-commerce and auction firm has yet to make a final decision, between New York and Shanghai, on where it will list its shares, said the source, while adding that the company expects to do so soon."

 

Takeaway: We’ve said this before, but any US retail investors that don’t watch Alibaba closely are missing out. It is, and will increasingly be, the ultimate force in building an online business in China for US companies. It puts Amazon to shame from a branding standpoint.

 

New Balance - New Balance Launches Made in USA 990 Apparel Line

(http://www.wwd.com/markets-news/intimates-activewear/new-balance-launching-made-in-the-usa-apparel-7211747?module=hp-markets)

 

  • "Three months after it ran a full-page ad plugging American manufacturing, New Balance is furthering that commitment with the introduction of its Made in the USA 990 apparel collection."
  • "Inspired by the sneaker label’s 990 style, the women’s and men’s items will be available starting Nov. 1 in New Balance boutiques and via the company’s Web site."
  • "Products with the Made in the USA label will retail from $30 to $200."

Takeaway: Brilliant move by New Balance, as its ‘Made in the USA’ label is its biggest asset.

  

JWN - Kate Moss, Topshop Set New Collection

(http://www.wwd.com/retail-news/specialty-stores/kate-moss-topshop-set-new-collection-7212130?module=hp-topstories)

 

  • "Topshop and Kate Moss will resume their design partnership with a new collection that will launch in April...The range will be made up of about 40 styles, including ready-to-wear, accessories and footwear. It will be sold in the retailer’s stores in 40 countries; via Topshop.com and through wholesale partnerships including 41 Nordstrom stores…"

 

Takeaway: If Topshop expands aggressively in the US, the current competitive set should be very very afraid.

 

House of Fraser moves ahead with flotation plans

(http://www.theguardian.com/business/2013/oct/06/house-of-fraser-flotation-plans)

 

  • "Department store chain House of Fraser is pushing ahead with plans for a stock market flotation, as several UK firms rush to go public."
  • "The group, which has 61 sites across Britain and Ireland, is expected to appoint investment bankers to advise on a listing in the next few weeks, the Sunday Times reports. It is thought the group may look to launch its initial public offering early next year and could be valued at between £300m and £400m."

 

INDUSTRY NEWS

 

McKinsey Survey: Sourcing Costs to Rise

(https://www.sourcingjournalonline.com/mckinsey-survey-sourcing-costs-rise/)

 

  • "According to a new report issued by the McKinsey & Co., booming wages will be the principal mover of rapidly accelerating costs all along the supply chain. McKinsey & Co. conducted a survey, entitled 'Outlook on Expected Cost Development in Apparel Sourcing,' of twenty-nine chief purchasing officers who collectively oversee more than $39 billion in sourcing business, employed by companies in both the U.S. and Europe."
  • "Of these, 76 percent anticipate that the general costs of sourcing will rise an average of 1.7% and 14 percent think there will be increases that exceed 4 percent."
  • "The primary culprit behind the rising costs is labor. Once a reliable source of heavily discounted work, China’s expanding middle class, and the wages they increasingly demand, has transformed it into an expensive and sophisticated manufacturer. And especially with the newfound emphasis on social compliance following the Rana Plaza factory collapse, the costs of sourcing to bargain basement destinations like Bangladesh, Vietnam and Cambodia are widely forecast to go up."
  • "Also contributing to the upward swing in price will be the increased cost of raw materials. Cotton prices have been aggressively climbing and no abatement of that trend is on the far horizon. Both polyester staple and polyester filament continue to become more expensive as well."

 

LeBron James tops U.S. NBA jersey sales, but not in China, Europe

(http://blogs.marketwatch.com/behindthestorefront/2013/10/04/lebron-james-tops-u-s-nba-jersey-sales-but-not-in-china-europe/)

 

  • "For the first time, the U.S. basketball league released its worldwide rankings of top selling basketball jerseys for the 2012 to 2013 season, based on global sales of Adidas, which has the licensing rights to make the jerseys."

 

What's New Today in Retail (10/7) - chart2 10 7

 

No festive cheer for shipping industry, Maersk boss David Skov says

(http://www.scmp.com/business/companies/article/1324757/no-festive-cheer-shipping-industry-maersk-boss-david-skov-says)

 

  • "The world's biggest shipping group, Maersk Line, says the Christmas season is unlikely to boost sluggish shipping business this year because of slow global demand and an 'unsustainably low freight rate.'"
  • "David Skov, the Danish shipping company's head of South China operations, made the comments in Hong Kong yesterday, echoing the concerns of local exporters who said they had seen big US retail chain Walmart and sportswear brand Nike cut orders for the festive season."

 

Global Union Wants $71 Million for Rana Plaza Victims

(https://www.sourcingjournalonline.com/global-union-wants-71-million-rana-plaza-victims/)

 

  • "IndustriALL Global Union, an organization that represents 50 million workers in 140 countries held a meeting Tuesday to discuss proper compensation for victims and survivors [of the Rana Plaza collapse] and according their demands, proper compensation equals $71 million USD. They also urged brands and retailers to participate in a compensation program for victims.]
  • "Of the $71 million total, 45 percent should be paid by retailers, 28 percent by owners, 18 percent by the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) and the balance by the government…"

Morning Reads on Our Radar Screen

Takeaway: A quick look at some stories on our radar screen.

Keith McCullough – CEO

U.S. Default Seen as Catastrophe Dwarfing Lehman’s Fall (KM note: ridiculous and reckless headline of the morning  … via Bloomberg)

CNBC Has Lowest-Rated Quarter in 20 Years (via Mediaite)

Fukushima worker accidentally switches off cooling pumps (via Reuters)

US credits Syria's Assad over chemical weapons destruction (via BBC)

 

Morning Reads on Our Radar Screen - cong5

 

Tom Tobin – Healthcare

ACA Grace Period for Late Payments Could Pose Problems for Doctors (via SouthBrunswick)

Experts Suggest Software Problems, Not Just Demand, May Be Behind Marketplace Glitches  (via KHN)

 

Jay Van Sciver – Industrials

Why You Should Fill Your Company With 'Athletes'  (via Forbes)

 

Kevin Kaiser – Energy

Petronas Plans LNG Project in Canada (via WSJ)

 

Daryl Jones – Macro

Twitter defying gravity with fastest growth in ad revenue (via Sunshine Coast Daily)

 

Josh Steiner – Financials

Eight banks join chat network from Markit and Thomson Reuters (via Yahoo!)

Ex-CBOT chief accused of fleeing U.S. to avoid $18 million bill: report (via Chicago Tribune)

Richmond’s rules: Why one California town is keeping Wall Street up at night (via WonkBlog)

 

Brian McGough – Retail

Fifth & Pacific sells Juicy Couture brand for $195 million (via Reuters)

 

Todd Jordan – Gaming

Man accused of stealing $25K in casino poker chips (via AP)

 

Jonathan Casteleyn – Financials

Gensler Assesses U.S. Swap Rules’ Debut by Phone Amid Shutdown (via Bloomberg)


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BLACK BOOK CONFERENCE CALL: SLOTHY GROWTH IN SLOT MACHINES

Please join us for an in-depth look at the slot machine industry.  The Black Book conference call will be held on Thursday, October 10th at 11:00am EDT.

 

BLACK BOOK CONFERENCE CALL: SLOTHY GROWTH IN SLOT MACHINES - gll2

 

TOPICS WILL INCLUDE:

  • Stocks of the big U.S. gaming supply companies are up 30% to 95% on the year yet big fundamental hurdles have emerged.
  • How will these same stocks fare over the coming months and years in the face of stagnating replacement demand, a dearth of new markets, pricing pressure, and bad demographics?
  • We'll analyze the issues - there are many - and explain who is at risk and for how long.

 

RELEVANT TICKERS

BYI, IGT, SGMS, WMS, MGAM, ALL.AX, KNM

 

 

CALL DETAILS

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 187413#
  • Materials: CLICK HERE



EXCELLENT GOLDEN WEEK

As expected, October exploded out of the gate in Macau with average daily table revenues (ADTR) up 38% YoY to HK$1,679MM.  We fully anticipate softer weekly run rates.  Golden Week will not be matched the rest of the month and this coming week is apt to be slower than normal as is typical following the holiday.  Our full month GGR estimate (including slots) remains at YoY growth of 20-25%.  Indeed, October should continue the strong momentum of the past few months.

 

Too early to gain much from the market share numbers this early in the month.  SJM flew out of the blocks with big gains, Wynn and MPEL likely held lower than the market, and LVS/Galaxy look normal.  LVS remains our favorite name among the Macau stocks as the properties should continue to gain market share at least through next year.

 

EXCELLENT GOLDEN WEEK - chart1

 

EXCELLENT GOLDEN WEEK - chart2


CAKE: BULL CASE NOT FULLY BAKED IN

Takeaway: Sales are strong, margins continue to improve and international expansion plans remain underappreciated by the street.

CAKE remains on the Hedgeye Best Ideas list as a LONG.

 

Same-Restaurant Sales Are Strong

Sales trends remain strong at CAKE, as the company continues to outperform the industry.  In fact, CAKE has outpaced industry sales for at least the last 18 months.  That said, the casual dining industry is currently in secular decline and CAKE is not completely immune to any near-term weakness.  This, in addition to a difficult comp in 3Q, could incite some short-term pressure, but we believe the strong likelihood of a rebound in 4Q will allay these fears. 

 

CAKE: BULL CASE NOT FULLY BAKED IN - chart1

 

 

International Expansion

We believe CAKE’s long-term international expansion growth strategy is underappreciated by the street.  This is an attractive opportunity for the company and, to date, performance abroad has been stronger than management originally anticipated, leaving the door open for a potential increase in their current expansion plans. Management expects to open one new restaurant in the Middle East this year, driving the total unit count in the region up to four.  They have also identified other international sites to add to their pipeline, including site in Mexico City and Latin America.  We’ll be looking for a little more color on 2014 international growth plans when the company reports 3Q13 earnings.

 

CAKE: BULL CASE NOT FULLY BAKED IN - chart2

 


Margins Continue to Improve

Restaurant level and operating margins continue to be points of strength for CAKE.  Restaurant level margins, despite ticking down 5 bps in 2Q13, are expected to improve by 64 bps in 3Q13 and another 96 bps in 4Q13.  On top of that, operating margins, which ticked up 1 bps in 2Q13, are expected to fall by 2 bps in 3Q13, before improving by 101 bps in 4Q13. 

 

Overall, the company expects operating margins to improve 50 bps over the prior year.  Strong restaurant level and operating margins can be mostly attributed to the following:

  1. Lower expenses – every line item, aside from G&A, is expected to be better than last year
  2. International expansion – the three Middle East locations have exceeded management’s expectations and continue to deliver impressive volumes

CAKE: BULL CASE NOT FULLY BAKED IN - chart3

CAKE: BULL CASE NOT FULLY BAKED IN - Chart4

 

 

Favorable Food Costs

CAKE should continue to benefit from lower cost of sales due to moderate commodity cost inflation and favorable dairy costs over the prior year.

 

CAKE: BULL CASE NOT FULLY BAKED IN - chart5

CAKE: BULL CASE NOT FULLY BAKED IN - chart6

 

 

Financially Robust

CAKE is expected to generate more than $100 million in free cash flow this fiscal year and, despite ongoing international expansion efforts, management continues to reward shareholders.  Not only does the company boast a 1.28% dividend yield, but the Board of Directors recently authorized up to $125 million to repurchase shares in the latter half of the year.  In aggregate, CAKE is expected to return as much as $200 million to shareholders in fiscal 2013.

 

CAKE: BULL CASE NOT FULLY BAKED IN - share rep1o

 

 

ROIIC Treading Upward

While the majority of metrics analysts look at fall in and out of favor over time, one metric that has outlasted the test of time for every company is also, to no surprise, one of our favorites – Return On Incremental Invest Capital (ROIIC).  After an impressive stretch in 2010, CAKE’s ROIIC TTM fell rapidly over the course of 2011, before bottoming out in the middle of 2012.  From that point, we have been seeing, and believe we will continue to see, gradual and steady improvement in this trend.

 

CAKE: BULL CASE NOT FULLY BAKED IN - chart8

 

 

Sentiment

Sentiment on CAKE is very low – yet another reason we continue to like this call.  Illustrated in the chart below, 33.3% of analysts rate CAKE a Buy, 63.0% rate CAKE a Hold, and 3.7% rate CAKE a Sell.  Furthermore, short interest in the stock is currently 11.90% of the float.

 

CAKE: BULL CASE NOT FULLY BAKED IN - chart9

CAKE: BULL CASE NOT FULLY BAKED IN - chart10

 

 

Valuation

At 8.8x EV/EBITDA, CAKE is trading in line with its Casual Dining peer group.  We believe this valuation is fair and justified by the company’s international expansion plans, improving ROIIC, and robust financial profile. 

 

CAKE: BULL CASE NOT FULLY BAKED IN - chart11

 

 

 

Howard Penney

Managing Director

 


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