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YUM: ONE MORE QUARTER

Takeaway: China may still be an issue, but we expect sales in the region to turn positive in October and ignite a long stretch of outperformance.

YUM continues to be our favorite LONG in the big cap QSR landscape and, despite facing significant volatility since December 2012, it’s long-term growth story remains intact.


The company will report 3Q13 earnings after the close tomorrow while simultaneously releasing same-store sales for the month of September.

 

As a reminder, Yum! Brands reported a -10% decline in same-store sales, versus an estimate of -7.7%, in August for the China Division.  The August same-store sales results included a decline of -12% at KFC and an increase of +5% at Pizza Hut.  Looking ahead to September, consensus expects a -5.7% decline in China same-store sales.  Importantly, we believe the company will report positive same-store sales for both brands in the month of October and expect this trend to continue throughout the remainder of 4Q13 and into 2014.

 

YUM: ONE MORE QUARTER - finakl

 

 

As the reality of an improving top-line becomes common knowledge, we believe the stock will outperform its peer group.  As sales begin to improve, the next real driver of sentiment moving forward will be the slope of the line in the margins of the China Division.  All told, China margins actually held up better than expected in 1H13, as significant declines in traffic and mix were partially offset by lower food costs and improved labor productivity.

 

We expect to see margins in the remainder of 2H13 and 2014 to improve concurrently with an improvement in same-store sales.  Management has previously acknowledged that they need mid-single digit same-store sales growth in China in order to fully offset inflation, and we believe a continued internal focus on margin management will likely lead to better than expected earnings in 4Q13 and 2014.

 

Since peaking at 22.6% in 1Q10 on a TTM basis, restaurant level margins in China are estimated to have declined by 770 bps in 3Q13.  In our view, YUM will have one more ugly quarter.  The trends in the China division may again, be difficult for some investors to swallow – restaurant level margins are expected to be down 310 bps in 3Q13 versus a decline of 500 bps in 2Q13.  But, there is a light at the end of the tunnel.  By 4Q13, restaurant level margins and operating margins will begin to improve on a year-over-year basis in China.  Essentially, once we get past 3Q13 results, we expect YUM’s China Division will begin to improve significantly.

 

YUM: ONE MORE QUARTER - china rlm

YUM: ONE MORE QUARTER - yum operating margins

 

 

For 3Q13, we expect YUM to report numbers in the YRI and U.S. Divisions in-line with expectations, with the possibility that they could be slightly better.

 

Sentiment on YUM is still fairly negative.  Illustrated in the chart below, 39.3% of analysts rate YUM a Buy, 57.1% rate YUM a Hold, and 3.6% rate YUM a Sell.  Short interest in the stock is rather muted at 1.75% of the float. 

 

YUM: ONE MORE QUARTER - YUM short interest

YUM: ONE MORE QUARTER - anr

 

 

At a 10.9x EV/EBITDA, YUM is trading at a significant discount to its QSR peer group at 12x EV/EBITDA.  We believe this valuation is reasonable – for now.

 

YUM: ONE MORE QUARTER - ev ebitda

 

 

 

Howard Penney

Managing Director

 


ENR – Is the Bottom In?

Our answer: no.

 

On September 12th, we wrote a note stating that ENR was “Cheap for a Reason”. The crux of our thesis was that the macro and company-specific setup was not suggestive of upside in the stock price. At this level, we remain bearish on the name as the fundamental and quantitative outlook suggest that consensus price targets may need to come down over the near-to-intermediate term.

 

This stock could be a longer-term winner for investors, given the plethora of positive attributes in the company’s profile but we see material downside in the stock (as far as $80, from a quantitative perspective) over the next three to four quarters.

 


Summary Bullets:

  • ENR’s wet shave business (37% of revenue) is exposed to declining U.S. industry trends
  • Organic revenue growth remains anemic at best
  • ENR holders may be on the wrong side of a “heads-I-win-tails-you-lose” macro outlook

 

ENR – Is the Bottom In? - enr levels

 

 

Fundamental Outlook: We remain bearish on Energizer’s fundamental outlook as competitive pressures and industry declines impact some of the company’s most important businesses. During the most recent earnings call, on July 31st, management argued that the company was maintaining its share of the razors and blade category due to the successful launch of Hydro Disposables.

 

Whether or not that claim is accurate, the overall razors and blade category has continued to decline into 3Q and we expect negative top-line growth in that segment for ENR once again.

 

 

The household products segment remains challenging for Energizer as a combination of historically high promotional activity and a declining category impair the company’s ability to drive sales. The losses of two U.S. retailers will impact numbers by roughly 6% starting in 4Q and continuing for three quarters of FY14 at the same rate.

 

Despite earnings growth in the mid-single-digit range, we are reluctant to get behind the stock until the company’s organic growth outlook improves, or the stock becomes cheaper.

 

 

Organic Revenue Growth: Consistent organic growth, or the lack thereof, in Energizer’s business is a primary concern. Over the past 10 years, the company has driven revenue growth primarily through acquisitions. While the company can drive revenue through that strategy, we see organic growth as being central to creating shareholder value as the complexity of the company continues to increase. The most recent acquisition of J&J’s feminine hygiene brands has not been met with enthusiasm by the market with the share price declining -12% since the announcement versus the S&P 500 down 42 bps and HPPC peers average of up 23 bps.


Note that the +3.7% organic sales growth in Household Products was due “primarily to increased shipments versus soft prior year comparisons and higher promotional activities in the U.S., and distribution gains in Asia.” In the fourth quarter, HP global sales will decline by more than 10% due to market share losses, promotional and shipment timing, and storm-related volume in the prior year quarter, according to management.

 

ENR – Is the Bottom In? - ENR organic growth

 

 

ENR – Is the Bottom In? - enr sales and acui

 

 

Macro: This is a difficult point to prove but we think some readers may find it interesting.

  1. The expectations of interest rates rising makes buying a company (or division of a company) more expensive as buyers rush to complete deals
  2. The prospect of higher rates is likely to be a negative for ENR as the company’s dividend yield (an increasingly important part of the bull case) becomes less attractive on a relative basis.
  3. If, contrary to our Macro Team’s view, employment data deteriorates from here and the Federal Reserve maintains low rates on the basis of a weak labor economy, that would also be negative for ENR and consumption more broadly.

 

 

Other Factors: We see Energizer as a company that has many risks weighing on the value of its equity. Besides the slow growth of its major divisions, we see some other risks as being noteworthy:

  1. Sentiment has shot to the upside over the last six months and we see peak or close-to-peak sentiment as bearish. The stock currently has 9 Buy ratings, 6 hold ratings, and 0 sell ratings. As of the most recent data, 4.75% of the float is sold short
  2. Intangible Assets being such a high percentage of Total Assets is a latent risk that could be a factor for ENR and, potentially, the broader HPPC sector if impairment charges are incurred going forward

 

ENR – Is the Bottom In? - enr sentiment

 

ENR – Is the Bottom In? - intangible tangible assets

 

 

Rory Green

Senior Analyst


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.)


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 80.33%
  • SHORT SIGNALS 78.49%

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)


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



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