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New Best Idea Conference Call: LONG Lorillard (LO)

Hedgeye’s Consumer Staples team is adding Lorillard (LO) to our Best Ideas list.

 

We are hosting a conference call Tuesday, March 4th at 11:00am ET to discuss the key points of our high-conviction bullish thesis. Consumer Staples Analyst Matt Hedrick will answer questions at the conclusion of the call. Ping for access.

 

 

HEDGEYE IS BULLISH ON LORILLARD? YES.

  • We’ll discuss our exclusive view on why we now believe Lorillard’s advantaged menthol portfolio is essentially shielded from regulatory risk.*
  • We’ll offer granular insight into long-term upside growth in Lorillard’s leading electronic cigarette business “blu,” as industry cigarette volumes decline.  
  • Got growth? We’ll take a look inside Lorillard’s continued stable (and profitable) sales and earnings growth outlook.

*A supplemental expert report on menthol by a top Washington, DC law firm involved in tobacco public policy is available by request.

 


NOTE

Attendance on this call is limited. Please note if you are not a current subscriber to our Consumer Staples research, there will be a fee associated with this call. Email to learn more about our research and how to subscribe. 


Ursine on $TGT + $CRI

Takeaway: Target and Carter's? Eek.

Editor's note: What follows below is a brief excerpt from Hedgeye Retail Analyst Brian McGough's morning research.

 

Ursine on $TGT + $CRI - new3

 

CRI - Carter's Leaves Much to Be Desired

 

So, Carter's (CRI) beat the quarter by a penny. That's obviously good enough in this tape. But the quality of earnings left much to be desired. Guidance was weak, but that's typical for CRI. They're a 'guide and beat' kind of company. But the SIGMA chart below really tells all here. The past five quarters have been a downward spiral. Margins are slowly eroding, while sales weaken and inventories build. Not good. While there are factors to explain some of this away, including international expansion, the fact is that when the line in the chart below goes down and to the left, it means that cash flow compresses.

 

Ursine on $TGT + $CRI - cha1

 

TGT - Be Weary of Target

 

You know what we just wrote about Carter's? Now substitute the word Target for Carters'. That pretty much sums it up.

 

The only real difference is that TGT's guidance in 1Q is worse than CRI's . It makes sense given that now they have to deal with their highly publicized data breach. We'll get more details on the quantification on the company's conference call at 10:30am. But it looks like Target has thrown a very beared-up scenario into their comp. But just because they set appropriate expectations, it doesn't mean that it's worth buying. Not by a long shot.

 

Ursine on $TGT + $CRI - cha2

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[video] Keith's Macro Notebook 2/26: UST10YR FINANCIALS OIL


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Retail Callouts (2/26): CRI, TGT, ANF, UA, JCREW IPO?

Takeaway: Much going on today – too much to list. Apparently all a company has to do is print a number – any number – and stock goes up. #expectations

EVENTS TO WATCH - Big Earnings Week

 

WEDNESDAY

  • TGT - Earnings Call: Wednesday 2/26, 10:30am
  • TJX - Earnings Call: Wednesday 2/26, 11:00am
  • JCP - Earnings Call: Wednesday 2/26, 4:30pm

 

THURSDAY

  • BBY - Earnings Call: Thursday 2/27, 8:00am
  • KSS - Earnings Call: Thursday 2/27, 8:30am
  • DECK - Earnings Call: Thursday 2/27, 4:30pm
  • GPS - Earnings Call: Thursday 2/27, 5:00pm

 

EARNINGS CALLOUTS

 

CRI - 4Q Earnings

 

Carter's (CRI) beat the quarter by a penny, which is good enough in this tape. But the quality of earnings left much to be desired. Guidance was weak, but that's typical for CRI. They're a 'guide and beat' kind of company. But the SIGMA chart really tells all here. The past five quarters have been a downward spiral. Margins slowly eroding, while sales weaken and inventories build. There are factors to explain some of this away, including international expansion. But the fact is that when the line in the chart below goes down and to the left, it means that cash flow compresses.

 

Retail Callouts (2/26): CRI, TGT, ANF, UA, JCREW IPO?  - chart5 2 26

 

TGT - 4Q Earnings

 

Please check out what we just said about Carter's. Now substitute the word Target for Carters'. That pretty much sums it up. The only real difference is that TGT's guidance in 1Q is worse than CRI's . Makes sense given that now they have to deal with their data breach. We'll get more details on the quantification on the company's conference call at 10:30. But it looks like they've thrown a very beared-up scenario into their comp. But just because they set appropriate expectations, it doesn't mean that it's worth buying. Not by a long shot.

 

Retail Callouts (2/26): CRI, TGT, ANF, UA, JCREW IPO?  - chart3 2 26

 

ANF - 4Q Earnings

 

Notice a trend anyone? Over the past 5 quarters ANF looks just like the names above. ANF clearly put up a good number relative to expectations -- which is has to do given that it's in the midst of a management coup and it has to put its best foot forward. ANF actually did what CRI and TGT did not…it took a turn in the SIGMA analysis up and to the left, which is almost always an extremely bullish signal. Let's not declare victory here, as the move is a small one. But we'll take it.

 

Retail Callouts (2/26): CRI, TGT, ANF, UA, JCREW IPO?  - chart4 2 26

 

COMPANY NEWS

 

JCrew - J. Crew Said to Be Talking With Banks About 2014 IPO

(http://www.bloomberg.com/news/2014-02-25/j-crew-said-to-be-talking-with-banks-about-2014-ipo.html)

 

  • "J. Crew Group Inc...is interviewing banks as it weighs an initial public offering in the U.S. later this year, people familiar with the matter said."
  • "With 451 stores and about $2.4 billion in annual sales, J. Crew may fetch a valuation of as much as $5 billion, one of the people said, asking not to be identified discussing private information. That’s almost twice the $2.64 billion value of J. Crew’s buyout by TPG and Leonard Green three years ago."

 

Takeaway: Remember when going private at its all-time high was a great idea AFTER JCG went on a blistering run from $9 to $43 back in 2010/11? Well… let's forget that. Now going public is an even better idea. This article says that J Crew is 'interviewing' bankers, but something tells us that the bankers had this planned all along. Now Drexler's appearance at ICR last month makes all the more sense.

 

UA - UnderArmour set to release Speedform Apollo 2/28

 

Retail Callouts (2/26): CRI, TGT, ANF, UA, JCREW IPO?  - chart2 2 26

 

Takeaway: Like 'em or not, UA is doing an outstanding job marketing this new footwear launch. It's heads and tails above prior launches. Quite frankly, if you did not see an UA reference, you'd probably otherwise think that this is Nike.  UA is turning footwear into a two-horse race in the US. Adibok is no longer a factor.

 

ADDYY - World Cup T-shirts pulled by adidas after Brazilian tourism board complain they 'encourage prostitution'

(http://www.dailymail.co.uk/sport/worldcup2014/article-2567884/World-Cup-T-shirts-pulled-adidas-Brazil-tourist-board-complaints.html)

 

  • "Sports brand adidas have accepted a request from Brazil's tourism board to stop selling two T-shirts it marketed ahead of this year's World Cup because they encourage sexual tourism."
  • "One shirt shows a bikini-clad woman with open arms on a sunny Rio de Janeiro beach under the word-play 'Looking to Score.'" 
  • "The other has an 'I love Brazil' heart resembling the upside-down buttocks of a woman wearing a thong bikini bottom."

 

Retail Callouts (2/26): CRI, TGT, ANF, UA, JCREW IPO?  - chart1 2 26

 

Takeaway: I think I've got to bow out of commenting on this one.

 

MW, JOSB - Men's Wearhouse Wins First Battle

(http://www.wwd.com/business-news/legal/mens-wearhouse-wins-first-battle-7511761)

 

  • "Men's Wearhouse on Tuesday won court approval to expedite its request for a hearing on whether it can bar the planned acquisition of Eddie Bauer by Jos. A. Bank Clothiers Inc."
  • "Delaware Chancery Court Vice Chancellor J. Travis Laster made the ruling... said that Men's Wearhouse made a 'credible basis for believing that the Eddie Bauer transaction is defensive' and that it was in response to a 'hostile bid.' He also noted that the features of the Eddie Bauer transaction 'totally may well fall outside the range of reasonableness,' noting for example the termination fee and its 'alleged magnitude.'"

 

Takeaway: This whole thing has turned into a circus sideshow, but we've gotta say that we're happy to see MW come out ahead on this one. The move to buy Eddie Bauer on the part of JOSB is one of the more laughable M&A moves we've seen in retail -- ever.

 

OTHER NEWS

 

ARO - Aeropostale Said to Consider Investment From Private Equity

(http://www.bloomberg.com/news/2014-02-25/aeropostale-said-to-work-with-barclays-on-buyout-firm-investment.html)

 

  • "Aeropostale Inc., the teen apparel retailer under pressure from an activist investor to sell itself, is working with Barclays Plc to explore options such as the sale of a convertible note or preferred stock to a private-equity firm, people with knowledge of the matter said."
  • "Aeropostale is also weighing a straight-up sale, said the people, who asked not to be identified because the talks are private. The New York-based retailer contacted at least two buyout firms as of last month as management weighs alternatives, people familiar with the situation said then."

 

TGT - House oversight panel seeks documents on Target breach

(http://www.reuters.com/article/2014/02/25/us-usa-target-idUSBREA1O19720140225)

 

  • "A House of Representatives committee with broad investigative jurisdiction has turned up the heat on Target Corp, demanding that the No. 3 U.S. retailer turn over internal documents and messages describing how and when it learned of a recent massive consumer data breach."
  • "In a letter made available on Tuesday to Reuters, the House Committee on Oversight and Government Reform requested that Target turn over all documents or communications generated between November 1 and December 13, in which Target employees or 'agents' discuss 'any suspicion' that a data breach had occurred."

 

LVMH - All Eyes on Nicolas Ghesquière's Debut at Louis Vuitton

(http://www.wwd.com/fashion-news/designer-luxury/all-eyes-on-nicolas-ghesquires-debut-at-louis-vuitton-7511207)

 

  • "Nicolas Ghesquière is fashion’s man of the hour: 10 a.m. on March 5, to be precise. That’s when one of the most anticipated events of this international fashion season takes place as the French designer makes his runway debut at Louis Vuitton…"
  • "Since being appointed to succeed Marc Jacobs as artistic director of Vuitton in October, roughly one year after ending a 15-year tenure at Balenciaga, Ghesquière has given scant indication about where he might steer the storied French firm, which is marking its 160th anniversary this year."

 


To Chase Or Not to Chase?

Client Talking Points

UST 10YR

After failing our Hedgeye TREND resistance of 2.81%, yields dropped and bonds rallied to their highs for the month yesterday. We think a test of 2.54% for the 10-year is still in the cards if we’re right on U.S. economic growth slowing and GDP falling back towards the 2% handle.

FINANCIALS (XLF)

Unsurprisingly (with Dollar Down, Rates Down) the Financials (XLF) were down yesterday, leading decliners alongside the Transports. Inflation slows earnings-per-share growth for the Transports, but the Fed having 0% credibility fighting inflation keeps Yield Spread compression in play (10s minus 2s = -5 basis points for the week.)

OIL

Oil is holding its $108.02 support (Brent) and looks primed for a breakout. It's just one of many commodity #InflationAccelerating signals in my model right now that you can make money on from the long side. Energy (XLE) looks great

Asset Allocation

CASH 43% US EQUITIES 0%
INTL EQUITIES 6% COMMODITIES 18%
FIXED INCOME 16% INTL CURRENCIES 17%

Top Long Ideas

Company Ticker Sector Duration
FXB

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. 

LVS

Las Vegas Sands has transformed into that rare stock that should appeal to “Growth,” “Value”, and “Dividend/Cash Flow” investors alike.  The stock now yields higher than the S&P 500 (43% sequential quarterly dividend increase), and the company is buying back $200 million + in stock a quarter, yet still retains a pristine balance sheet.  The significant capital deployment opportunities can be funded out of annual free cash flow of nearly $4 billion. Management has indicated they are willing to raise leverage 1.5x which would still keep them well below industry average and if directed toward dividends, would result in a yield of over 6%.  And we haven’t gotten to the $10-14 billion in mall assets that could be monetized. We know of no other stocks in consumer land that provide this combination of cash flow, growth, cash return to shareholders, and value levers.

DRI

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

TWEET OF THE DAY

COMMODITIES: inflation continues to slow global growth - CRB Index +7.9% YTD vs $SPY -0.2% @KeithMcCullough

QUOTE OF THE DAY

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

STAT OF THE DAY

Some numbers from YouTube’s own blog that put some perspective on its penetration into our culture and time.

  • 1 billion unique monthly visitors
  • 6 billion hours of videos are watched every month
  • YouTube reaches more U.S. adults ages 18-34 than any cable network

 



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