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CRI: DON'T Build A Position Here

Takeaway: There's a lot of warning signs right now with CRI. The company has been executing, but PLEASE, don't build a position here.

We didn't like this CRI quarter one bit. In fact, with the exception of good growth in e-commerce, there wasn't a single thing we liked.   To be clear, we were negative on this name last year,  and though we were mostly right on the model, we couldn’t have been more wrong on the stock.  Though we continued to have a serious bias against the sustainability of the business model, we kept our discipline and (painfully) threw in the towel on our short. Congratulations to all of you that rode this horse from $50 to $75 over the past year.  Lesson learned for HedgeyeRetail.


All of that said, there's no shortage of reasons for selling your position today. Consider the following…


1. Here's the elephant in the room: CRI  borrowed an extra $400mm in debt to repo $454mm stock (thus far). We ordinarily would give a company credit for such a buyback, but to execute on such a big program when Margins are at peak, your stores are comping down, inventory is building, and your stock is at an all-time high???   We're sure it went through an exhaustive corporate governance process, but quite frankly, we're surprised that any board let it get past the goalie.


2. At face value, the growth algorithm looks good -- until you get to SG&A. On a GAAP basis, earnings were down for the second quarter in a row. We know no one cares about GAAP anymore, but hey, it's the REAL earnings of the company.  Even excluding all special charges, earnings only grewby 9.5% -- well below the rate of revenue.


3.  Wholesale Carters was the star. Kinda.


4.  Carter's Retail put up slammin' revenue numbers as well -- up 16% in aggregate, but 8.9% when we exclude e-commerce.  The comp was up only 0.5%. But get this…they're on track to open 66 new stores for the year. Can someone explain to me why a company is growing 14.5% square footage while its stores are not comping. This is a little reminiscent of Coach (but not as pathetic).


5.  As good as a 15% retail top line number is, it's hard to get excited about it when EBIT grows 500bp slower.


6.  Dot com looked really good for CRI, but keep in mind that its still only 7% of brand sales. Other premium brands are 2x that rate. The good news for CRI is that the new DC in Atlanta will help keep this growth rate in gear.


7.  In wholesale Carters, the Brand printed 6.4% EBIT growth on a whopping 15.6% top line performance.  Clearly it did not play the promotional game wisely this quarter. The company noted an ad shift into the quarter, as well as some air freight expense. If we assume that all of this  a) actually happened, and b) was about $7mm, then margins were about flat versus last year.


8.  Osh Kosh Wholesale: Down double digits for the fourth quarter in a row, with operating profit clocking in at a whopping $2mm. In fact, if you add up all the EBIT generated by Osh Kosh Wholesale over the past five ears, you come up with an embarrassingly low number -- $15mm. It's not getting better.


9.  Retail Osh Kosh put a better foot forward by NOT shrinking its revenue base for the first time in 8 quarters.  That said, it was entirely due to e-commerce, as the base stores comped down by 4.3%.


10.  Here's a comment we don't get...

Management: "We continue to see strong demand for our brands in international markets. Our growth in the quarter was largely driven by our business in Canada. The decline in earnings reflects the start-up costs in Japan."

Hedgeye: Why don't we get it!  Comps were -3.6% in Canada, -6.4% for Bonnie Togs, and -1.3% in the co-branded stores (the latter is billed as CRI's saving grace in Canada).



CRI: DON'T Build A Position Here - CRI FIN

 CRI: DON'T Build A Position Here - CRI Sigma


CL Organic Growth Continues to Impress

We remain positive on CL as it remains one of the few companies in HPPC delivering robust organic sales growth, globally. FX headwinds are impacting results and sentiment but, over the longer-term, we expect the stock to outperform.



3Q13 Thoughts


Colgate reported another slight top-line miss, the second in a row, but managed earnings to $0.73, which was in line with consensus estimates.


In our view, the most substantial positive, which bodes well for the longer-term potential of the company, was the ongoing top-line resilience in emerging markets. The negatives included a stronger-than-expected FX headwind and sequential volume deceleration in the United States.


Even with expectations pinned at the high end of the company’s (reiterated) EPS guidance range of 4.5-5.5%, we believe long-term upside in earnings potential will attract investors over the next three years. The company offered initial EPS guidance for 2014 of positive double digit growth, which should continue to justify its premium multiple.


Over the long term, we continue to see CL as one of the best stocks in personal care on the long side. On a relative basis, versus its peers, we believe the stock is less vulnerable to a rising rates environment, given its growth profile and future prospects. Additionally, there is plenty of room for sentiment to improve, particularly on the sell-side (3rd least-liked stock in HPPC on the sell-side).


CL Organic Growth Continues to Impress - hppc sentiment



What we liked from the CL 3Q13 release

  • EPS met consensus expectations
  • Organic growth came in at 6%, a solid number despite being slightly below the Street
  • Continuing strong performance in EM’s – taking share across categories
  • Commodity outlook remains benign
  • Gross margin expansion despite a sequentially tougher comp (chart below)
  • US EBIT margin improvement accelerated in 3Q to +370 bps, resulting in 31.5% margin
  • Hill’s organic sales of 6% surprised to the upside


CL Organic Growth Continues to Impress - CL Gross Margin



What we didn’t like from the CL 3Q13 release

  • EBIT year-over-year growth of 1.2% versus 1.5% sales growth
  • FX continues to be a substantial drag on earnings
  • LatAm EBIT margins declined once again


Rory Green

Senior Analyst


Ben + Gold = Love?

Takeaway: A breakout over $1345 would be explicitly bullish.

I sold the US equity open yesterday. I’ll sell it again today. US #GrowthAccelerating is ending. For now anyway.


This is the first time in at least a year that I'm actually considering buying Gold. Now that’s not because I've got religion about it, or anything like that. It's just that my signal is stabilizing for the first time in a year.


We need to see $1316 hold. A breakout over $1345? That would be explicitly bullish.


Ben Bernanke should be so proud of himself. Slow-growth investors, unite!


Ben + Gold = Love? - BFF


Editor's note: This is a brief excerpt from Hedgeye morning research. For more information on how you can subscribe click here.

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In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance





  • BETTER:  HOT delivers a beat driven by better margins on their owned & leased business and stronger fees growth.   Buybacks and the steady quarterly dividend were also a bonus although not a surprise. 






  • SLIGHTLY BETTER:    Absence of new supply has allowed occupancies to reach record levels and keep RevPAR steady in the 2-3% range.  Mgmt  expects that to continue.  They had a good summer in Spain and strenght in Eastern Europe.  They are optimistic regarding 2014. 
    • Turning to Europe, the economic picture is still anemic overall. But as before though, our business is holding up pretty well. We attribute this to tight supply and our ability to bring in global suppliers to Europe – global travelers to Europe with SPG, and our global sales team.
    • Europe is steady but sluggish, as it has been for the past couple of years. 
    • We expect this 2% to 3% growth rate to continue into Q3 as leisure travel looks good for the summer and we may benefit from Ramadan ending earlier in August.


  • BETTER:  EBITDA of $19MM was ahead of 3Q guidance and HOT raised its 2013 net cash flow forecast to over $200MM from $175MM previously.
  • PREVIOUSLY: At the end of the quarter, we only had 22 condos left to sell or close. We have been raising prices and recent square footage rates have exceeded $1,500. Unfortunately, this gift will stop giving by the end of the year since we will be sold out. We are raising Bal Harbour profit expectations by $20 million to $110 million, and cash flow to at least $175 million


  • BETTER:  HOT repurchased approximately 2.73MM shares for $180.7MM.  Subsequent to the end of the quarter and through October 18, 2013, HOT repurchased an additional 1.14MM shares for $75.9MM.  In addition,  HOT's Board of Directors has an annual cash dividend of $1.35.  There will be quarterly dividends starting in 2014. 
  • PREVIOUSLY:  We will also discuss moving to a quarterly dividend starting in 2014. Stock buybacks remain a priority. 


  • SAME: North American RevPAR came in at 5.8% in 4Q, driven by strong transient revenues (up 8-9%), leisure travel and corporate demand
  • PREVIOUSLY:  North American REVPAR has been growing at about 6% through the first half and we are projecting that this will continue with rate accounting for 80% of the increase.


  • SAME: Group pace remains in the mid-single digits and expect rate increases in the high to mid-single digits
  • PREVIOUSLY:  Group pace for 2014 and 2015 is currently tracking in the mid-single digits. 


  • SAME:  Transient revenues were up 8-9% in the quarter
  • PREVIOUSLY:  Transient demand, especially corporate travel has remained robust. Helped by record low supply, occupancies hit new peaks. 


  • SAME:  RevPAR declined to under 1% this Q.  Owning to political turmoil, Egpyt and Syria dragged down performance.  UAE had a good quarter.
  • PREVIOUSLY:  Middle East: We expect growth rates in Q3 to tick down in this region for a couple of reasons. Egypt, which was recovering nicely, is impacted by the recent turmoil and Saudi Visa restrictions are sharply reducing Ramadan-related travel. Things are expected to recover as we enter Q4.


  • WORSE:  REVPAR only grew 1%, below previous expectations.  Strength in Mexico was not enough to offset weakness in Brazil. 
    • With the crisis in Argentina and now a slowdown in Brazil, Latin America has struggled this year. Brazil was down 6% in the quarter, but by the demonstrations, a slowing economy and the impact of major renovations at the Sheraton Rio, which remains in the same store set. Mexico is helping mitigate some of this as it grows from increasing business activity as well as the return of the American vacationer.
    • As we enter Q3, we lap 16% declines in Argentina last year, so we might actually see Latin American REVPAR grow 5% to 6%.


  • WORSE:  Mgmt is disappointed with results.  Assume that RevPAR growth will be in the 2% range in 4Q.
    • In China, REVPAR growth continues to track well below the expectations we had at the start of the year.
    • As we enter the second half, we begin to lap the slowdown in China last year.  As such, we expect REVPAR growth will pick up a bit to the 2% to 4% range.

HSY – A Sweet Year-End Set-up

Hershey’s reported another strong quarter, furthering our bullish outlook on the stock since last quarter, through solid core brand performance with momentum building going into the holiday season.  While net sales were driven squarely by volume (Volume +6.1%; Net Price +0.5%; FX -0.5%) and today’s -2% move in the stock may reflect concerns about its decision to invest $250MM in cap-ex to build a new plant in Malaysia (to supply markets in Asia and assist existing capacity in China), we think these concerns are overblown and would be buyers on any weakness as we look out to year-end. 


Heading into year-end, the company reiterated its expectations for FY 2013 net sales of 7%, with no change to the input cost outlook, revised up its FY Gross Margins expectations to 240 to 250 bps vs a previous estimate of 220 to 230, and said it sees a more favorable tax rate and earlier Chinese New Year offsetting an increased marketing spend in Q4.  We’re bullish on HSY’s performance across retail channels and its determination to grow it international business, in particular China to its second largest business, and believe the additional cap-ex spend will allow it to enhance its manufacturing scale in China (currently it has a manufacturing JV facility) and across Asia.


From a quantitative set-up HSY is comfortably trading above its intermediate term TREND level, confirming our bullish outlook:


HSY – A Sweet Year-End Set-up   - z. hsy


What we liked:

  • Net Sales increased 6.1% (Volume +6.1%; Net Price +0.5%; FX -0.5%)
  • EPS of $1.04 (beat consensus of $1.01), an increase of 19.5% vs the prior-year quarter
  • Candy, Mint, Gum (CMG), which equals 90% of U.S. retail business, expanded in all retail channels, up +5% Y/Y, with market share gains of 0.7 points in the quarter
  • Q3 Adjusted Gross Margin increased +300bps on lower commodity costs, supply chain productivity, and cost savings initiatives
  • Input cost deflation of $33MM in the quarter (in line with estimates); no change to cost outlook for the year.
  • Expect a meaningful boost in advertising in Q4 due in part to a lighter spend in Q3 (increased 12% vs target of 20% due to timing); FY target expected to increase 22-23%
  • Strong performance from Brookside. Expected to contribute 1.2% to 1.3% of sales growth in 2013
  • Q4 will benefit from earlier Chinese new year
  • International net sales up 14%, led by China, Mexico, and Brazil
  • Expect 2013 net sales of 7% of sales and FY Gross Margins up 240 to 250 bps (vs previous estimate of 220 to 230)
  • 2014 Guidance: 5-7% net sales growth, and 9-11% growth in adjusted EPS

Matthew Hedrick



Takeaway: Alot has changed in the last few weeks. The strength in the labor market has not. It will "look" a lot different by Feb/Mar 2014 as well....

A lot has changed over the last few weeks.  We’ve gone from the prevailing dynamic of Dollar Up, Yields Up, Stocks Up, Pro-Growth style factor outperformance, and a comparatively high gross and net long exposure in #RealTimeAlerts to Down Dollar, Down Yields, Slow-Growth style factor outperformance, lower gross exposure and (now) a net short position in equities.    


This marked shift has occurred largely as a result of shifting expectations around the Taper timeline in the wake of confused policy communication from Bernanke on Sept 18th and alongside the peak in negative seasonality impacts in the reported U.S. macro data.


What hasn’t changed, in large part, is the ongoing strength in the domestic labor market.  After normalizing, as best we can, for the distortive impacts of California and the government shutdown, the trend in the Initial Claims data continues to look positive.  We expect to see a return towards the 2013 trend line of improvement in reported claims over the next few weeks.    


Elsewhere on the labor front, the unemployment rate, U-6 unemployment rate and long-term unemployment all continue to decline and, while BLS reported hiring has slowed in recent months, we expect monthly NFP gains will follow positive seasonality higher again as we move into 1Q14.    


This morning’s JOLTS data showed the TREND improvement in Job Openings and the Quit Rate remains ongoing while, on the other side, Bloomberg Consumer Confidence dropped again WoW and the preliminary Markit PMI hit its worst level in a year. 


We’ll be interested to see the confidence figures over the next month as we move past the negative impacts of the government shutdown – confidence catalyzes economic activity and 2013 has, thus far, seen a discrete breakout in consumer and business confidence.  


Below is the detailed breakdown of this morning's claims data from the Hedgeye Financials team.  If you would like to setup a call with Josh or Jonathan or trial their research, please contact 


-  Hedgeye Macro










California Exits the Data (Mostly) and Now the Data Looks Pretty Good

Last week we focused on the impact that distortions from California were having on the perceptions of the labor market. This week we'll revisit that theme. Take a look at the first two charts below.


The first chart shows the Y/Y change in NSA initial claims by week since the start of August.  The red line shows the average amount of Y/Y change for the month of August, a reasonable baseline trend ahead of the distortion. We then see the impact of the California and govt shutdown on the data, first suppressing it and then inflating it. Based on this morning's data, it appears that the NSA series is back to baseline. The Y/Y change in NSA claims this morning was a decline of 34,412 vs the same week last year. That compares with the August 2013 average of a decline of 34,508 Y/Y.


The media is reporting that California is still not caught up, but either that's not true, or the underlying data is stronger today than what we were seeing in August, when claims were improving at a rate of 10-11% Y/Y. The second chart shows California in isolation. The key here is that state level data is only available on a 1-week lag. Consequently, we're looking at last week's numbers since they're the most current available. You can see that as of last week, California reported 83,383 initial claims, which was up about 11k Y/Y from 2012.


The trend had been that 2013 claims were coming in at a rate of roughly 21k lower Y/Y, so we would expect to see a roughly 33k sequential improvement this week and that's almost exactly what we saw (again, see the first chart below).


The bottom line is this. The seasonally-adjusted NFP numbers reported Tuesday reflect the low watermark in the labor market. This is no surprise, as August/September have represented the low watermark for the past 5 years due to the distortive effects of Lehman Brothers on the seasonal adjustment models. Just as we've seen in the past 4 years, we would expect the "perceived" labor market data to steadily strengthen over the coming 5-6 months through the Feb/Mar 2014 timeframe and carry with it a steadily rising market but also a steadily rising expectation for tapering sometime in the late first quarter or second quarter of 2014. Plan accordingly.


Revisiting the Ghost of Lehman

For a look at multiple charts illustrating the serious seasonality distortion in NFP caused by Lehman's economic ripples refer to our macro team's note from Tuesday, entitled: SEPTEMBER EMPLOYMENT: MARKING THE LOW?


We've included one chart from that note below (the third chart down). It shows that in each of the past 4 years, the average positive trendline improvement from September through February has been 118k monthly jobs (i.e. you're 118k higher in Feb than you were in Sep). Conversely, the average negative trendline change from March through August has been -56k monthly jobs (i.e. you're 56k lower in August than you were in March). Translation, the market thinks we're at a 140k monthly NFP run rate right now, but by March, the market will think we're at 250-260k. That will create a very different environment for Fed expectations.








Nuts & Bolts 

Prior to revision, initial jobless claims fell 8k to 350k from 358k WoW, as the prior week's number was revised down by 0k to 358k.


The headline (unrevised) number shows claims were lower by 8k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 10.5k WoW to 347.25k.


The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -5.9% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -7.2%











Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


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