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Bullish UK Charts

We received more positive economic data out of the UK this morning, in line with our Q4 2013 and Q1 2014 macro themes of #EuroBulls and #GrowthDivergences, respectively, that forecast a bullish outlook for UK equities and the British Pound.

  • The ILO Unemployment Rate ticked down to 7.1% in NOV vs 7.4% in OCT and expectations of 7.3%.
  • BOE Minutes released showed a 9-0 decision to keep the benchmark rate unchanged and the asset purchase target unchanged.

UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which we expect should provide further strength to the equity market and currency. The decline in the unemployment rate represents the largest decline in almost 5 years! Additionally we’re seeing CPI also moderated, down 10bps to 2.0% in DEC Y/Y in the last reading – we expect this cut to boost business and consumer confidence and increase purchasing power and consumption.

 

Bullish UK Charts - vv. unemployment

 

Bullish UK Charts - vv. cpi

 

While the FTSE (etf EWU) is approaching immediate term TRADE overbought level, it’s trading well above its intermediate term TREND level of support.

 

Bullish UK Charts - vv. ftse

 

On the currency side, we remain bullish on the British Pound versus the US Dollar (etf FXB), a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve). This was confirmed once again by the Minutes released today, which continues to stoke the Pound. The Bank said there was no need to raise rates even if the unemployment rate hits 7% in the near future.

 

The British Pound is holding its Bullish Formation, which we expect will continue to be supported by prudent monetary policy from the BOE and strengthening economic fundamentals.

 

Bullish UK Charts - vv. pound 

 

Matthew Hedrick

Associate


Tough Game Coach! $COH

Takeaway: Either they're being conservative (not) or there's a bigger problem at hand (likely).

Editor's note: This is an excerpt from Hedgeye Retail Analyst Brian McGough's morning research. To learn more about our range of subscriber services click here.

Tough Game Coach! $COH - coach

 

Coach has been one of our top shorts, and we knew numbers had to come down. But admittedly, we did not pinpoint this EPS print as the event.

 

There were so many callouts in this quarter we almost don't know where to begin. a) sales down 3%, b) inventories up 12%, c) gross margins down 300bp, d) EPS miss by 5%, e) take down margin guidance -- finally -- to 26-27%. It still needs to come down, e) take down sales guidance as well -- which is interesting in that it's logical to think that they need to pick either margin, or top line.

 

Tough Game Coach! $COH - bri1 

Either they're being conservative (not) or there's a bigger problem at hand (likely). The lack of leadership is still concerning. But not as concerning as its trajectory in the SIGMA chart above. 

Join the Hedgeye Revolution. 


What's New Today in Retail (1/22)

Takeaway: Sales trending down, painfully. COH capitulates - we’re still short. WWW’s new Merrell line a step in right direction. AMZN/Zappos M JWN

ECONOMIC DATA

 

ICSC - Chain Store Sales Index

 

Takeaway: Retail can't get out of its own way. Sales are down sequentially, and are showing an abysmal year/year growth trajectory. Clearly, the malaise that started in the last week of December has not ended.

 

What's New Today in Retail (1/22) - chart3 1 22

What's New Today in Retail (1/22) - chart4 1 22

 

COMPANY NEWS

 

COH - COH Q214 Earnings

 

Takeaway: Coach was one of our top shorts, and we knew numbers had to come down. But admittedly, we didn't pinpoint this EPS print as the event. There were so many callouts in this quarter we almost don't know where to begin. a) sales down 3%, b) inventories up 12%, c) gross margins down 300bp, d) EPS miss by 5%, e) take down margin guidance -- finally -- to 26-27%. It still needs to come down, e) take down sales guidance as well -- which is interesting in that it's logical to think that they need to pick either margin, or top line. Either they're being conservative (not) or there's a bigger problem at hand (likely). The lack of leadership is still concerning. But not as concerning as its trajectory in the SIGMA chart below.

 

What's New Today in Retail (1/22) - chart1 1 22

 

WWW - Fall Preview: Merrell

(http://www.wwd.com/footwear-news/fashion/fall-preview-merrell-7384500)

 

  • "For fall ’14, the brand brings low-profile and responsive constructions to light hiking and trail running styles; mapped insulation and two lug densities for grip to winter hikers; and lugged outsoles with hiking-boot inspired details for more casual products. Priced from $100 to $200, the line will begin to deliver in July to outdoor shops, footwear independents and online accounts"

 

What's New Today in Retail (1/22) - chart2 1 22

 

Takeaway: Nice shift for Merrell away from it's traditional styles. What's even more encouraging for us is that new President Gene McCarthy likely had minimal impact on these styles. He simply has not been there long enough. We'd look for a stronger 'McCarthy presence' in the product in the Spring.

 

AMZN - Amazon to Start Collecting NC Sales Tax Next Month 

(http://www.sportsonesource.com/news/article_home.asp?Prod=1&section=9&id=49545)

 

  • "Amazon has struck a deal to start collecting sales tax Feb. 1 from its customers in North Carolina, according to the News & Observer newspaper of Raleigh."
  • "North Carolina assesses a state sales tax of 4.75 percent, but the state’s residents generally pay 6.25 to 7.5 percent due to additional city and county sales taxes. Amazon had already agreed to start collecting sales taxes in South Carolina starting in 2016. The online retailer has now reached such agreements with 19 states, often after agreeing to invest millions of dollars and hire thousands of workers to build and run distribution centers that provide same-day delivery within a certain radius."

 

Takeaway: Amazon continues to build out its network of distribution centers. Currently, Amazon is only required to collect sales tax from customers in states in which it has a 'physical presence'. So with each new agreement to pay sales tax it means a new DC for AMZN - we have to think there is a trade-off between the states and AMZN, on one hand the states can begin collecting sales tax and on the other AMZN is more than likely receiving tax incentives for creating new jobs.

 

AMZN - Andre Leon Talley, Zappos to Relaunch Couture Site

(http://www.wwd.com/footwear-news/retail/andre-leon-talley-zappos-to-relaunch-couture-site-7384355)

 

  • "Zappos.com will debut its redesigned Couture.Zappos.com site today with artistic and editorial direction from former Vogue editor André Leon Talley."
  • "The company tapped Talley as artistic director of the digital platform as part of its continued expansion into the luxury market."

 

Takeaway: Zappos seems to be having early success in entering the luxury market. We were shocked at the quality of the brands sold on the site.

 

M - Macy’s opens Super Bowl shop in Herald Square flagship

(http://www.retailingtoday.com/article/macy%E2%80%99s-opens-super-bowl-shop-herald-square-flagship)

 

  • "In anticipation of Super Bowl XLVIII, Macy’s has opened an exclusive NFL Shop at Super Bowl on the fourth floor of its flagship Herald Square in New York City. Macy’s will keep the 36,000-sq.-ft. space open through Tuesday, Feb. 4."

 

Takeaway: Macy's must be thanking the NFL for sending them 0 East Coast teams to the Super Bowl in New York. We don't even think an uptick in Richard Sherman jersey sales can offset that absence. Nonetheless, we give Macy's credit for attempting to capitalize on the big event being held in the NY Area.

 

JWN - Nordstrom to open online fulfillment center

(http://www.retailingtoday.com/article/nordstrom-open-online-fulfillment-center)

 

  • "Nordstrom plans to open its third fulfillment center at Conewago Industrial Park in Elizabethtown, Pa., in summer 2015."
  • "The new facility joins the company's existing fulfillment centers in Cedar Rapids, Iowa, and San Bernardino, Calif."

 

Takeaway: JWN gets e-commerce and executes better than anyone in the business. This is another piece of their growth strategy and will be used to support the company's 3 sites: Nordstrom's, Nordstrom's Rack, and Hautelook.

 

PartyCity -Party City files for IPO of up to $500 mln

(http://www.reuters.com/article/2014/01/21/partycity-ipo-idUSL3N0KV54C20140121)

 

  • "Party City Holdco Inc...filed with U.S. regulators to raise up to $500 million in an initial public offering of common stock."
  • "...Party City has 40,000 retail outlets worldwide, which include its own stores, independent party supply stores and grocery retailers."
  • "The company, whose biggest markets include UK, France, Germany and Australia apart from North America, reported a net loss of $51.7 million and revenue of $1.33 billion for the nine months ended Sept. 30."

 

Takeaway: We didn't realize that Party City had a presence outside the US. Little known fact, one of the higher profile executives in the company is the CPO -- or Chief Party Officer. It's that person's job to ensure that there are always parties being thrown for one reason or another. 

 

DOTS - Dots Joins Clothing Retailers Filing for Bankruptcy

(http://www.bloomberg.com/news/2014-01-21/dots-llc-women-s-clothing-retailer-files-for-bankruptcy.html)

 

  • "Dots LLC, the 400-store clothing chain for young women, filed for bankruptcy protection, blaming prior management, the economy and leases that cost too much."
  • "The company, founded 27 years ago outside Cleveland, has arranged to borrow $36 million to keep operating as it reorganizes under court protection and implements a new merchandising strategy, according to an e-mailed statement."

 

Takeaway: Another regional apparel discounter bites the dust. We wish it the best with its $36mm loan, but our sense is that it will simply prolong the inevitable. Our bet is that DOTS is done. Few and far between are the regional department store chains that have earned the right to exist.

 


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$DRI: NEWTON’S FIRST LAW

Takeaway: If you are a current shareholder of DRI, do you have the confidence that the current management team can and will make the right decisions?

This note was originally published January 22, 2014 at 09:48 in Restaurants. For more information on how you can subscribe to Hedgeye click here.

The behavior of all objects can be described by saying that objects tend to "keep on doing what they're doing."  Yesterday proved that Darden will continue to be Darden until acted upon by an unbalanced force!

$DRI: NEWTON’S FIRST LAW - 44 

There is a foot of snow on the ground, but I can see a long heated battle this summer for control over the future of this company. 

 

The irony of yesterday’s new flow on Darden was that the Chairman of the Board/CEO, Clarence Otis, thinks he has the best plan to create value for shareholders.  On what track record does he base his credibility on? As the CEO of DRI, he has burned billions of shareholders’ cash flow without any accountability.  Alas, I’d be remiss not to point out that Mr. Otis’ only operational job at Darden, before becoming CEO, was the $500 million disaster called Smokey Bones.

 

Here are a few key statistics on Clarence’s track record as CEO of DRI:

  • In FY07, DRI generated $5.5 billion in revenues versus and estimated $8.9 in FY14 – CAGR of 7.12% (including acquisitions).
  • In FY07, DRI generated $773 million in EBITDA versus an estimated $979 in FY14 – CAGR of 3.43% (including acquisitions).
  • Between FY07 and FY14, DRI will have spent an estimated $4.204 billion in capital spending to generate an incremental $206 million in EBITDA.  Is this considered creating shareholder value?
  • In FY07, DRI reported $2.53 in EPS.  In FY14, we expect them to report $2.40 in EPS.
  • Between FY07 and FY14, DRI will have reduced its share count by an estimated 11%.

As CEO of Darden Mr. Otis could not grow the earnings of this company over a seven year period! 

 

What is shocking is not simply that he still has a job, but rather that he has a plan to create shareholder value.  Oh, the irony in this thought!   If you are a current shareholder of DRI, do you have the confidence that the current management team can and will make the right decisions?

 

We must question, given these facts, why the Board of Darden has not taken more decisive action.

 

The challenge for the Board members of Darden (or any Board) is to recognize the appropriate time to step up and implement change.  It is their challenge, their job, and their responsibility not to maintain the status quo.  Newton’s first law of motion is often stated as: “An object at rest stays at rest and an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force.”  Well, it is time for the Board of Darden to be the unbalanced force and to keep the company moving forward – in the right direction.

 

When a Board works closely with a CEO for a number of years, the best interest of shareholders’ can become blurred.  As an outsider, it appears that this is the case with the current Board and Chairman/CEO Clarence Otis.  The operational performance of DRI has stagnated and it is time for a change.  Within this context, we urge the current Board members to consider the last paragraph of the Starboard letter very carefully:

 

“Based on our research and discussions with you to date, we do not believe that these initiatives have been fully and objectively explored. Further, given the negative reaction to the announcement of the proposed Red Lobster separation, shareholders are also clearly dissatisfied with the current proposal. In light of the foregoing concerns, as well as those raised by other large shareholders, we urge you not to continue down the current, potentially value destructive path. Instead, we believe it is incumbent upon management and the Board to commit to a full exploration of all alternatives, including those discussed in this letter, with an open mind. We believe that a failure to do so may violate the Board’s fiduciary duties.”

 

I couldn’t agree more with the Starboard letter and it appears that the DRI activists are close to agreeing on what we believe the new Darden should look like.  If I could put myself in the position as the third activist, we’d all be in agreement that a different operating structure is critical to future of the company.  Where I differ from the two shareholders, other than the fact that I don’t own a share, is they want to work with management and come to some sort of agreement.  The problem is that the management of DRI doesn’t want to work with them.

 

This company has the potential to become the true leader in the casual dining industry, but it needs an unbalanced (unbiased) force to make the changes necessary.

 

 

Howard Penney

Managing Director

HPenney@hedgeye.com


DRI: NEWTON’S FIRST LAW

The behavior of all objects can be described by saying that objects tend to "keep on doing what they're doing."  Yesterday proved that Darden will continue to be Darden until acted upon by an unbalanced force!

 

There is a foot of snow on the ground, but I can see a long heated battle this summer for control over the future of this company. 

 

The irony of yesterday’s new flow on Darden was that the Chairman of the Board/CEO, Clarence Otis, thinks he has the best plan to create value for shareholders.  On what track record does he base his credibility on? As the CEO of DRI, he has burned billions of shareholders’ cash flow without any accountability.  Alas, I’d be remiss not to point out that Mr. Otis’ only operational job at Darden, before becoming CEO, was the $500 million disaster called Smokey Bones.

 

Here are a few key statistics on Clarence’s track record as CEO of DRI:

  • In FY07, DRI generated $5.5 billion in revenues versus and estimated $8.9 in FY14 – CAGR of 7.12% (including acquisitions).
  • In FY07, DRI generated $773 million in EBITDA versus an estimated $979 in FY14 – CAGR of 3.43% (including acquisitions).
  • Between FY07 and FY14, DRI will have spent an estimated $4.204 billion in capital spending to generate an incremental $206 million in EBITDA.  Is this considered creating shareholder value?
  • In FY07, DRI reported $2.53 in EPS.  In FY14, we expect them to report $2.40 in EPS.
  • Between FY07 and FY14, DRI will have reduced its share count by an estimated 11%.

As CEO of Darden Mr. Otis could not grow the earnings of this company over a seven year period! 

 

What is shocking is not simply that he still has a job, but rather that he has a plan to create shareholder value.  Oh, the irony in this thought!   If you are a current shareholder of DRI, do you have the confidence that the current management team can and will make the right decisions?

 

We must question, given these facts, why the Board of Darden has not taken more decisive action.

 

The challenge for the Board members of Darden (or any Board) is to recognize the appropriate time to step up and implement change.  It is their challenge, their job, and their responsibility not to maintain the status quo.  Newton’s first law of motion is often stated as: “An object at rest stays at rest and an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force.”  Well, it is time for the Board of Darden to be the unbalanced force and to keep the company moving forward – in the right direction.

 

When a Board works closely with a CEO for a number of years, the best interest of shareholders’ can become blurred.  As an outsider, it appears that this is the case with the current Board and Chairman/CEO Clarence Otis.  The operational performance of DRI has stagnated and it is time for a change.  Within this context, we urge the current Board members to consider the last paragraph of the Starboard letter very carefully:

 

“Based on our research and discussions with you to date, we do not believe that these initiatives have been fully and objectively explored. Further, given the negative reaction to the announcement of the proposed Red Lobster separation, shareholders are also clearly dissatisfied with the current proposal. In light of the foregoing concerns, as well as those raised by other large shareholders, we urge you not to continue down the current, potentially value destructive path. Instead, we believe it is incumbent upon management and the Board to commit to a full exploration of all alternatives, including those discussed in this letter, with an open mind. We believe that a failure to do so may violate the Board’s fiduciary duties.”

 

I couldn’t agree more with the Starboard letter and it appears that the DRI activists are close to agreeing on what we believe the new Darden should look like.  If I could put myself in the position as the third activist, we’d all be in agreement that a different operating structure is critical to future of the company.  Where I differ from the two shareholders, other than the fact that I don’t own a share, is they want to work with management and come to some sort of agreement.  The problem is that the management of DRI doesn’t want to work with them.

 

This company has the potential to become the true leader in the casual dining industry, but it needs an unbalanced (unbiased) force to make the changes necessary.

 

 

Howard Penney

Managing Director


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