RL: Hurry Up and Wait

Takeaway: RL came a long way to ease our 2Q concerns. But quality was lacking -- tax, sg&a, and Chaps math matters. Not expensive, but no catalysts.

Conclusion: Three months ago, we definitely did not like RL’s quarter. Sales were sluggish, margins were weak, inventories high, and management was in a clear and questionable transition. Fast forward to today’s results, and most of those issues have been addressed. Don’t get us wrong, there was more we disliked than we liked in the 3Q results, but given the horrific operating environment, the company redeemed itself today – even if the market does not agree. To be clear, we still would not buy the stock here. Near-term catalysts are simply nonexistent, and we have to wait another 15 months for double digit EPS growth. The stock has grown into its multiple – so we’re only looking at about 16-17x forward earnings today, which isn’t egregious. But unlike three months ago, there are so many other outstanding businesses with rock solid fundamentals that are simply at fire-sale prices.  If the stock is still sitting here in another 9-12 months, we’ll likely be more constructive. But here and now – it’s got no go-juice.


Here are some key takeaways from the quarter…

  1. Beat, Kind Of: Yes, RL beat the quarter  -- which is a feat in itself for any company in this tape -- by $0.06 per share.  That’s the good news. We’d note, however, that that’s only about a 2% beat. Still better than the alternative, but this isn’t like what we’ve seen out of some other high-quality consumer companies. On the downside, a lower tax rate accounted for anywhere between $0.05-$0.10 of the $0.06 upside, and lower SG&A spend helped by another $0.02-$0.03 relative to our expectations. Earnings tailwind from SG&A and taxes is never something we look at with a company’s results and get overly excited about. We want sales and gross margin.
  2. Sales: The top line looked really good this quarter. Can’t take anything away from RL there. To excel on the top line in a climate when consumers generally are not buying anything is a testament to the geographic and category portfolio. Sales were up 9.1% (11% in constant currency) -- an acceleration from the 2.8% level we saw in 2Q. Solid acceleration…
  3. …But: We at least need to acknowledge the shift in the Chaps business from a license to consolidated wholesale operation. The impact on profitability should not be meaningful at first, but the impact on revenue should be considered. It’s impossible given the information at hand to determine the precise math, but the way we see it, it’s possible that 100% of the revenue growth associated with the Wholesale business is derived from simply switching over Chaps from Licensing to Owned. Here’s our math – Licensing revenue was down about $6mm. That included strength in the core licensing business, which tells us that reallocated Chaps revenue was probably a number in the high single digits. Let’s say $8mm. Now we need to apply a royalty rate to gross it up to a wholesale equivalent. Normally, we’d use something around 7-8%. Let’s be conservative and use 5%. That equates to about $160mm wholesale equivalent, which is the rough amount Wholesale should have been up due to Chaps alone. But wholesale was only up by about $110mm.  One could make the case that the business was down excluding Chaps. You can poke holes in our assumptions and royalty rates, but directionally, this is something to consider when applauding the growth rate of the wholesale business.  To be clear, this reclassification of licenses has been a core part of the Ralph story for a long time, and it has worked brilliantly. They’ll probably crush it with this Chaps business as well. But we simply want to make people aware of the underlying real organic growth.
  4. This is stating the obvious, as the stock gave up its 7% pre-market gain (and then some) nearly immediately after the CFO noted profitability trends – but margins are expected to be down in fiscal 2015 (March). This is largely due to global expansion of the POLO brand, higher quality/cost of goods, ecommerce investment to support growth in US, Europe, Asia (Korea, Japan), SAP implementation in Europe Let’s assume that the company can leverage Chaps and its new business initiatives and grow the top line 10% -- at best we’ve got a mid-high single digit growth rate until the 2016 fiscal year. That’s a long time to wait for profitable growth.
  5. Management surprised us on the upside. Last quarter’s call was almost painful to listen to -- it sounded grossly inconsistent with a company of Ralph Lauren’s caliber. There was no question the company was going through transition in its executive ranks, and the conference call all but confirmed that premise. But today, the group was focused around one brand message, and all were clear and concise. We know, this seems like kind of a fluff point to comment on, but with a company like RL where the people up top are such a driving force behind the product, brand, culture and company we think it matters. Most notable, we were running for the hills after last quarter. Today, this risk is far diminished after this quarter.
  6. Other Notables

a. Europe - Europe up HSD in C$ YY- Northern Europe is growing and southern Europe is stabilized

                                          i. Opportunities - Polo - Flagship in NY (Fall '14), Flagship in London ('15) - Regent St

                                         ii. Actively looking for property in US, Europe, Asia

                                        iii. Women's Polo (Fall '14)

                                       iv. Men's tailored line (Fall '14)


b. China - will begin to actively open stores beginning in FY '15

                                          i. Hong Kong Ralph flagship next fall

c. E-commerce - grew at a high teens rate

                                          i. 10% of revenue in US retail

                                         ii. Still investing in Europe which will most likely turn profitable in this Year

                                        iii. Asia (Japan and Korea) just getting started with that investment


7. SIGMA Analysis Looking Rough

Inventories still not looking good relative to sales. On top of that, the company swung into positive margin territory. While that's better than the alternative, usually when a company has positive margins and a negative inventory spread it proves to be bearish for the stock. That's not our opinion, it's a proven fact based on a few thousand tickers over time. In general, after being in the quadrant where margins are down and inventories are unfavorable, the move the market wants to see is improved inventories, even if it is at the expense of margin. That's almost always a positive stock move. 

RL: Hurry Up and Wait - RL SIGMA

REPLAY: U.S. Economy Update Call: What Is Priced In?

This morning Keith McCullough and the Hedgeye Macro team hosted a flash call updating their view on the U.S. economy, discussing what is priced into assets after the recent sell-off and how to be positioned for the continued manifestation of  #InflationAccelerating and #GrowthDivergences


The presentation and replay information can be accessed via the links below:






  • #GrowthDivergences:  Since our 1Q14 Macro Investment Themes call on 1/9/14, the incremental fundamental data has continued to reflect a deceleration in the slope of domestic growth.  We survey the latest income, housing, manufacturing and consumption data and the implications for equity and asset class positioning. 
  • #InflationAccelerating:  Long inflation expectations and #GrowthSlowing has been the positioning playbook YTD with the CRB commodities index accelerating, Utilities and Healthcare leading sector performance and low short interest, low beta, and large cap style factors driving relative equity out-performance. We discuss whether to remain long this trend.  


- Hedgeye Macro        


In preparation for PENN FQ4 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • On a same store sales basis, where the gaming industry in terms of our view looks no different than what you're seeing from a retail sales perspective. It's sluggish and it's troubling.


  • We do have two cannibalization events next year. One is the opening of the Horseshoe Casino in Baltimore that will cannibalize our Charles Town facility. And then we have a few of the race tracks that are opening in Ohio will cannibalize predominantly the Lawrenceburg facility. But to a smaller extent, they'll take some of the growth out of the Columbus facility also, one of those being our facility opened in Dayton.
  • The cannibalization should largely be over after next year. I think we only have one other known event, which is probably a 2016 event, best case.


  • We've been going through a rebranding process. We'll be about $670 million of total purchase price into this facility after the rebranding is done. The facility will be completed just before Christmas, so it will be open for the all-important New Year's week late this year.
  • We are putting about $60 million into it. About $35 million of that is on the construction side, and the rest of it is in systems to replace the slot system, replace the general ledger. I think they've got about $7 million of it went to IT. The rest of it went to slot machines to bring the floor up to speed. We usually run on about a 7, 7.5 year cycle in floor replacement, and it was behind that, so we kind of wanted to get it into our spectrum of comfortable.


  • Total project cost of these is a little bit over $500 million, Penn is responsible for about basically $320 million. A portion of that will be paid in 2014, with the remainder paid in some payments over the next nine years to the State of Ohio. There's a license fee, which is $50 million per facility. $25 million of that is due in 2014, $25 million is due a year after that. And then there's relocation fees of $75 million per facility. $15 million is paid at open, and then about just under $20 million paid per year for the nine years after that.


  • The Zia Park Hotel is going to open late in 2014


  • Started construction on Hollywood Casino Jamul, projected to open in late 2015, is expected to include a three-story gaming and entertainment facility of approximately 200,000 square feet, featuring over 1,700 slot machines, 50 live table games including poker, multiple restaurants, bars and lounges and an enclosed below grade parking structure with over 1,900 spaces.
  • It's a 30% of net income management contract.

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[podcast] Keith's Macro Notebook 2/5: JAPAN RUSSIA COMMODITIES

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What's Working (and What's Not)

Client Talking Points


The CRB Index (19 commodities) was up another +1% yesterday to +2.5% year-to-date versus the S&P 500 which is down -5% YTD and Consumer Discretionary (XLY) -7.5% YTD. Incidentally, this northeast weather isn’t going to slow this trend either. We will be hosting a call on why this morning at 11AM EST. Ping for access.


Gold registered another buy-signal on red yesterday in #RealTimeAlerts. That's the 6th buy signal in my model since November when commodities bottomed. What Gold needs to really breakout is already in motion, a 10-year bond yield confirming a bullish to bearish TREND reversal.


The Yen is also signaling a potential bearish to bullish reversal on my intermediate-term TREND duration (breadown line for US Dollar versus Yen is $102.23). How many people are positioned for that? Seriously? The Japanese retail dudes who were short Yen, long Mothers #nope.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

JPMorgan shares are currently trading with the most implied upside to fair value in our fair value model for money-center, super-regional and regional bank stocks. By our estimates, JPM shares have upside of 33% based on our regression of EVA (economic value added) – which looks at the spread between return on capital and cost of capital – and the current multiple to tangible book value. Over time, we have found that sizeable discounts and premiums mean revert toward fair value giving JPMorgan an embedded tailwind in 2014.


We remain bullish on the British Pound versus the US Dollar, 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) and the Bank maintaining its existing asset purchase program (QE). 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 should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road


JAPAN: is that all they got? +1.2% Nikkei to -13% YTD as the government buys ETFs? @KeithMcCullough


"Most of the shadows of this life are caused by our standing in our own sunshine." - Ralph Waldo Emerson


At its peak in January, the S&P 500 had rallied 173 percent from its 2009 bottom, a bull market that was almost a year older than the average since World War II. (Bloomberg)

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