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JCP: Fundamentals vs Newsflow vs The Stock

Takeaway: People are shooting first, then shooting again, and are not contextualizing reality at all as it relates to JCP. We're still bullish.

Here's our take on JCP's volatility over the past two days -- specifically its' announcement that it received an inquiry from the SEC about its liquidity and recent equity offering.  First off, let's just state up front that we take any SEC inquiry very seriously. We'd never in a million years chalk it up as a non-event. But there are some major factors to consider…

 

  1. We're Not Dismissing It, But This is Routine: Regulators ask for information all the time. In fact, we'd challenge anyone to find any three companies (you can probably find one) in the S&P that have never unexpectedly been subject to a request for information by either a federal or state regulator.
     
  2. Timing Matters: Consider the timing on this one…though it is only being disclosed now, the inquiry happened on October 7th -- that's almost two months ago. That was within two weeks of JCP announcing its equity deal, which subsequently took the stock down 26% by the inquiry date and sparked several shareholder lawsuits. To top it off, it was at a time when the company had yet to show any operating improvement whatsoever and the 'going to zero' call still carried some weight.  With all of that happening at the same time -- it seems to us that requesting information about financing and liquidity seems like a prudent fiduciary move by any regulator.
     
  3. Fundamentally, Nothing's Changed: What's changed with this story fundamentally? Nothing. Business continues to get better on the margin as JCP regains share from KSS and the other retailers who benefitted from it writing a $4.3bn check to competitors.
     
  4. Stock Move Led The News: So what about the stock move over the past two days? Do you think that just MAYBE someone somehow had scoop that a) One of its largest holders sold out of its 5.2% position in the equity (still holds the debt), and/or that b) the company was going to disclose the SEC inquiry with its 10Q -- after all JCP has been squatting on the information for the better part of 60 days.  So while that trading was taking place and the stock was tanking, it naturally gave the hoards of bears on the sell side the stock equivalent of beer-muscles to get louder on the short side while still hanging on to the same old stale 'going away' call.
     
  5. We're Tweaking Our Tone On Ullman. One quick point on Mike Ullman, interim CEO of JCP. The WSJ is out this evening with a comment that that while the company is still searching for a new CEO, it is inclined to keep Ullman at the helm til the turnaround is done. Now…let's be clear about something.  We're not members of the Mike Ullman fan club. We'd been in the camp that the company needed to replace him by April. We still want him out. But our patience has grown in recent weeks. The reality is that he's absolutely stabilized the company, and he's taking the appropriate steps to regain customer confidence, and ultimately re-grow the top and bottom line. We never thought we'd say this, but if the guy is still there in a year, we won't be upset -- so long as he realizes that the second that turnaround is within spitting distance, we need fresh blood in the C-Suite to take this company to the next level.
     
  6. We're Not Banking On JCP Being A Good Retailer: Importantly, that 'next level' is no where in our investment thesis. We're simply in the camp that JCP is going to go from being a horrendous retailer, to being a bad retailer. We realize that this hardly sounds like an appetizing investment thesis, but mathematically it all flushes out to about $1.50 in earnings power, or about a $20 stock.  If a new CEO could add any value above and beyond this turnaround, that's gravy as it relates to the stock and upside from $20. We'll take it one step at a time.
     
  7. Consumer Survey, Round 2: On Monday at 1pm we're hosting the second installment of our JCP consumer survey. The first iteration was critical in helping us gain confidence in JCP heading into the quarter, and in being short KSS. We look forward to sharing our update with you. Please send me a reply email if you are interested, or contact sales@hedgeye.com.
     
  8. Bottom line: Despite the confluence of bad news that hit over the past 48 hours, we're still bullish on the stock. 

Bernanke’s Burning Bucks

Takeaway: That smell you’re smelling? #BurningBucks.

In spite of the ECB rate cut, the Eurocrats just can’t seem to keep the Euro down versus the US Dollar.

 

Why?

Bernanke’s Burning Bucks - USD vs EUR

 

Because Professor Bernanke is prepping his academic turkeys for more no-taper basting. Fed fear sells.  

 

A 3.6% Q3 GDP print? No matter. Tumbling jobless claims? Big deal. Who cares what the economic data says? It’s always 2008 in Fed-Storytelling-Land and the sky is still falling.

 

Incidentally, that smell you’re smelling is the smell of #BurningBucks. Bernanke loves the smell of #BurningBucks in the morning.

 

Eurocrats? Not so much.

 


Jobs: Fed Head In the Sand

Takeaway: The Fed needs to bury its head further into the sand to reconcile its policy on purchases with the realities of the labor market.

Editor's note: This is an excerpt from a piece written by Hedgeye Financials Sector Head Josh Steiner. For more information on how you can subscribe to Hedgeye research click here.

 

Jobs: Fed Head In the Sand - headsand

Rising Rates Love Falling Claims

It's getting harder to ignore the improvement in the labor market, unless, of course, you're the Fed.

 

Increasingly, however, it seems as though the bond market is taking fewer cues from the Fed and more from the labor market. True, seasonally-adjusted initial claims have a 2-handle on them principally because of the Thanksgiving mismatch this week vs last year (a week later this year), but adjusting for that and all the other recent turbulence in the data reveals one unmistakable fact. The data continues to strengthen and the bond market is taking notice. 

 

Aside from the obvious, which is that this is more good news for credit quality, the upward pressure being exerted on rates is ferreting out clear winners and losers, i.e. good for banks and online brokers, and bad for homebuilders and mortgage REITs. For more details, see our note from 11/22 "#Rates-Rising: A Current Look at Rate Sensitivity Across Financials."

 

Next week should be the first week in a long time where we get a clean print on the labor market, so stay tuned.

Nuts & Bolts

Prior to revision, initial jobless claims fell 18k to 298k from 316k WoW, as the prior week's number was revised up by 5k to 321k.

 

The headline (unrevised) number shows claims were lower by 23k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -10.75k WoW to 322.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -21.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -13.3%

 

Jobs: Fed Head In the Sand - stein1

 

Jobs: Fed Head In the Sand - stein2


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INITIAL CLAIMS & 3Q13 GDP: GOBBLE GOBBLE

3Q13 GDP (1st Revision): Juiced by inventories. Rising probability of a sequential slowdown

 

3Q13 GDP was revised +0.8 higher to 3.6%, marking the best growth number since 1Q12.  Under the hood, the component dynamics that characterized the advance estimate – namely, inventory accumulation alongside middling consumption/real final sales – were further exaggerated in this first revision.

 

Inventory Accumulation contributed +1.68 to GDP while consumption (services) growth slowed 40bps sequentially and real final sales (GDP less Inventory change) and real final sales to domestic consumers  (GDP less exports less inventory change) both came in sub 2%. 

 

While backlogs are growing and vendors remain largely unconcerned with inventory levels according to the ISM survey data, the positive impact to GDP should reverse as inventory drawdown will be challenged by final demand still constrained by flagging personal income growth. 

 

In short, the strong headline print belied a moderately more vapid reality.   While momentum in the manufacturing base remains ongoing and disposable personal income growth comps ease through 2014, a sequential slowdown in growth is increasingly probable. We’ll get a first look at personal income and spending data for 4Q13 tomorrow alongside the payroll report. 

 

On the employment side, despite sizeable fluctuations in the absolute number of non-farm payroll gains the last few month, the rate of growth on a 2Y basis has held relatively consistent at ~+1.66% - a phenomenon largely stemming from seasonality.  Consensus is basically sitting right on this growth number with the current NFP estimate for November at +185K.  As a reminder, seasonality will build as a positive support to both the NFP and jobless claims figures through 1Q14.

 

From a policy perspective, today's growth data is probably another non-catalyst with inflation still holding below target, service consumption growth flagging and sustained acceleration in the aggregate labor market data still absent. 

 

But at the same time, if you can’t taper at 3.6% GDP, when can you taper?

 

- Hedgeye Macro

 

INITIAL CLAIMS & 3Q13 GDP:  GOBBLE GOBBLE - GDP 3Q13 Prelim

 

INITIAL CLAIMS & 3Q13 GDP:  GOBBLE GOBBLE - UNITED STATES

 

 

 

INITIAL CLAIMS:  The Fed needs to bury its head further into the sand to reconcile its policy on purchases with the realities of the labor market.


Rising Rates Love Falling Claims

It's getting harder to ignore the improvement in the labor market, unless, of course, you're the Fed.

 

Increasingly, however, it seems as though the bond market is taking fewer cues from the Fed and more from the labor market. True, seasonally-adjusted initial claims have a 2-handle on them principally because of the Thanksgiving mismatch this week vs last year (a week later this year), but adjusting for that and all the other recent turbulence in the data reveals one unmistakable fact. The data continues to strengthen and the bond market is taking notice. 

 

Aside from the obvious, which is that this is more good news for credit quality, the upward pressure being exerted on rates is ferreting out clear winners and losers, i.e. good for banks and online brokers, and bad for homebuilders and mortgage REITs. For more details, see our note from 11/22 "#Rates-Rising: A Current Look at Rate Sensitivity Across Financials", a link to which can be found here.

 

Next week should be the first week in a long time where we get a clean print on the labor market, so stay tuned.

 

Nuts & Bolts

Prior to revision, initial jobless claims fell 18k to 298k from 316k WoW, as the prior week's number was revised up by 5k to 321k.

 

The headline (unrevised) number shows claims were lower by 23k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -10.75k WoW to 322.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -21.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -13.3%

 

INITIAL CLAIMS & 3Q13 GDP:  GOBBLE GOBBLE - JS 1

 

INITIAL CLAIMS & 3Q13 GDP:  GOBBLE GOBBLE - JS 2

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 

 


[VIDEO] Keith's Macro Notebook 12/5: JAPAN, EURO, UST 10YR


What's New Today in Retail (12/5)

Takeaway: Big week for UA Apparel. DG offsets weak comp. GES SIGMA in the toilet. Cotton could help HBI/GIL until it hurts. DKS/hockey??? COST M AMZN

 

EVENTS TO WATCH

 

Hedgeye Black Friday Consumer Survey: Focus on JCP.  We'll be conducting a follow-up to our prior consumer survey (which helped us call a JCP beat and KSS miss) following Black Friday weekend and Cyber Monday. We'll have results next week, and will have an updated presentation accordingly. If you are interested in our results, please email sales@hedgeye.com, or .

 

FIVE - Earnings Call: Thursday (12/5) 4:30 pm

ZUMZ - Earnings Call: Thursday (12/5) 5:00 pm

ULTA - Earnings Call: Thursday (12/5) 5:00 pm

 

ECONOMIC DATA

 

Athletic Apparel Data

 

Takeaway: This week is meaningless due to the holiday being off by a week compared to last year's calendar. But market share data is still relevant. The big winner from our perspective is UnderArmour, which gained over 2 full points of market share for the week. Nike did well, but let's face it…it needs to gain 1-2 points pf share simply to hit its stated financial goals.

 

What's New Today in Retail (12/5) - chart1 12 5

What's New Today in Retail (12/5) - chart2 12 5

What's New Today in Retail (12/5) - chart3 12 5

What's New Today in Retail (12/5) - chart4 12 5

 

COMPANY NEWS

 

KSS - Kohl’s Stores Open Around the Clock for First Time Ever from December 20 through Christmas Eve

(http://phx.corporate-ir.net/phoenix.zhtml?c=60706&p=irol-newsArticle&ID=1882204&highlight=)

 

  • "Kohl’s Department Stores today announced that for the first time ever, it will keep its doors open for more than 100 hours straight – beginning at 6 a.m. on Friday, Dec. 20 through 6 p.m. on Christmas Eve, Tuesday, Dec. 24."

 

Takeaway: Only one reason Kohl's opens 24/7 for 5 days. It's simply sitting on too much inventory.  Good luck to them in having  to pay 1.5-2x wages to the employees working in each of Kohl's 1,158 stores. KSS has been -- and remains -- one of our top shorts.

 

FNP - Kate Spade Saturday Opens in SoHo

(http://www.wwd.com/retail-news/specialty-stores/kate-spade-saturday-opens-in-soho-7299347)

 

  • "The retailer’s first Manhattan store, a 1,500-square-foot unit at 152 Spring Street, stands out like a giant canary with its storefront painted the brand’s trademark bright yellow."
  • "While the company is opening stores slowly and deliberately for now, Kyle Andrew, senior vice president and brand director, said Kate Spade Saturday could surpass the store count of its sister brand, Kate Spade New York, which boasts 80 units in the U.S. and 100 overseas."
  • "...at John F. Kennedy International Airport, there’s a shock of yellow in the middle of Terminal 5, JetBlue’s hub...Both the store and airport pop-up play on Kate Spade Saturday’s tech-infused concept. The store has a semicircular bar with a charging station, iPads and a customization tool for personalizing Weekender bags."
  • "The SoHo store is Kate Spade Saturday’s second in the U.S. after a Houston unit. There’s a pop-up on Gansevoort Street in the Meatpacking District and one in Los Angeles. The brand also has six units in Japan and a store in Singapore."
  • "Products universally appeal to consumers across cultures and climates. 'Our bestsellers here are our bestsellers in Japan and Singapore,' Andrew said. 'The Weekender bag is a universal favorite. The slip-neck T is universally loved. Shoes and dresses have been great and anything in our black-and-white-striped logo pattern is popular.'”

 

What's New Today in Retail (12/5) - chart7 12 5

 

Takeaway: KS Saturday has been in test mode for a while now, and is just starting to roll out permanent doors in the US. If the concept is able to capture some momentum we may take up our sq. ft. estimates, which are already the highest on the Street. The key thing we need to keep in mind is that sales productivity at KS Saturday (we can't call it KSS for obvious reasons) is not yet proven, and our sense is that it will max out about a third below KSNY. As store addition numbers go up, we may take aggregate productivity numbers down. Margins should still march higher from 12% today to 22% over 3-years.

 

3Q SIGMAS

 

  • Here are the SIGMA charts for 2 companies that just printed 3Q earnings -- both of whom missed comp expectations, but beat the quarter by a few pennies.

 

DG - Q313 Earnings

 

What's New Today in Retail (12/5) - chart8 12 5

 

DG: The Street likes what it sees in DG, and for the most part, so do we -- despite our bearish long-term view on the business. The SIGMA move is pointed toward the upper left, indicating that inventories are getting better on the margin. We don't see a lot of that these days.

 

GES - Q314 Earnings

 

What's New Today in Retail (12/5) - chart9 12 5

 

GES: This company can't get out of its own way. Comping down 5%? U-G-L-Y. SIGMA showed slight erosion in inventory/sales. But the big factor is the 225bp erosion in margins. Most notable is the fact that the company has been over inventoried for 8-quarters now -- and still can't figure out the formula as to how to comp consistently and grow margins. It has issues…we'd avoid it.

 

DKS - Dick's Sporting Goods Opens NHL Super Shops

(http://www.wwd.com/menswear-news/retail-business/dicks-opens-nhl-super-shops-7299220?module=hp-mens)

 

  • "Dick's Sporting Goods and the National Hockey League have teamed up to open NHL Super Shops in three hockey-crazed cities around the country."
  • "The shops, which measure about 400 square feet, were installed in Lombard, Ill., near Chicago; Cranberry, Pa., near Pittsburgh, and West Nyack, N.Y., in the suburbs of New York City, in time for Black Friday. If the shops are successful, the concept is expected to be rolled out further for next year."

 

What's New Today in Retail (12/5) - chart6 12 5

 

Takeaway: We like hockey at Hedgeye, but we highly doubt this will help DKS comp. At least they picked three of the best hockey markets in the US -- though (sadly) that's not saying much. Our own biases aside, aren't there other sports the company could focus on that are more relevant to the US Consumer?

 

COST - Costco Wholesale Corporation Reports First Quarter Fiscal Year 2014 and November Sales Results

(https://www.streetaccount.com/pressrelease.aspx?ticker=COST&intraday_id=1406033)

 

  • "Costco Wholesale Corporation today reported net sales of $8.78 billion for the month of November, the four weeks ended December 1, 2013, an increase of five percent from $8.40 billion during the similar four-week period last year."
  • "For the thirteen weeks ended December 1, 2013, the Company reported net sales of $26.80 billion, an increase of six percent from $25.40 billion during the similar period last year."

 

What's New Today in Retail (12/5) - chart5 12 5

 

Takeaway: COST isn't really a 'Black Friday' play. But even still, it didn't exactly knock the cover off the ball last month. The saving grace is that Gas crushed the Int'l comp -- 1% including gas, and 6% excluding gas and fx. That doesn't change the total sales figure that the company reports at the end of the quarter. But it gives some explanation about why sales were so weak.

 

AMZN - Lush Cosmetics in Legal Tangle With Amazon

(http://www.wwd.com/fashion-news/fashion-scoops/lush-battles-amazon-7299964?module=hp-beauty)

 

  • "Lush Cosmetics has entered into a legal dispute with Amazon in the U.K. over trademark infringement. In a case that was heard in the U.K.’s high court last week, Lush argued that Amazon is buying advertising words related to Lush in order to drive traffic to Amazon’s site, which does not sell Lush products."
  • "Lush also said that when customers search for Lush’s products on Amazon’s U.K. site, they’re shown competitors’ products."
  • "The court is expected to release its verdict early next year. Amazon in the U.K. did not respond to requests for comment."

 

Takeaway: This shouldn't have any major implications, but we're interested to see how this plays out. We wonder why Luch isn't doing business with Amazon in the first place. The risk for AMZN is if Lush can prove that it has made its best good-faith effort to kick start the partnership, and yet AMZN went ahead and used its trade name to sell other cosmetics.

 

M - Macy's to Unveil Thalía Collection

(http://www.wwd.com/retail-news/department-stores/macys-to-unveil-thala-collection-7299816?module=hp-retail)

 

  • "At Macy’s, 16 percent of the traffic is Latino — and it’s been a major market miss. Acknowledging its 'white space,' or dearth of products, targeting Latinos, Macy’s today will unveil a Thalía Sodi collection for a spring 2015 launch."
  • "Underscoring how much the retailer wants to better connect with Latinos, Gennette said Thalía dresses, tops, pants, shoes and jewelry will be rolled out to 300 stores and macys.com from the outset, and that additional categories are in the works. A multiyear agreement for the exclusive Thalía Sodi brand was signed, though no financial details were disclosed."

 

Takeaway: The fact that they refer to Latino's as a 'White Space' shows that perhaps they haven't really figured it out yet.

 

INDUSTRY NEWS

 

Weak Cotton Prices Continue in November

(https://www.sourcingjournalonline.com/weak-cotton-prices-continue-in-november/)

 

  • "Cotton prices dropped by a penny in November, finishing the month at 75.6 cents per pound. Larger-than-expected global production and weakening demand in Asia continue to put downward pressure on prices."
  • "Although commodities forecasters were expecting global production to fall in the coming year, particularly in the U.S., it now looks as if crops in key regions might be bigger than originally expected. India will have larger-than-expected crops due to an abundance of rain during monsoon season and clear weather during the harvest.  U.S. cotton market experts are now predicting yields that top prior expectations."
  • "China began to offer for sale some of the cotton reserves it had been stockpiling in support of local prices. However, the price at which it offered the stocks was higher than the market price for imports, so got few takers."

 

Takeaway: Good initially for HBI and GIL. But if lower cotton once again causes deflation in the industry, these guys are in trouble.

 

 

 


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