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Retail Callouts (2/27): JCP, KSS, M, DDS, JWN, BBY, BBBY, SHLD

Takeaway: 4Q Comparative Analysis of JCP, KSS, M, DDS, JWN. Why we’re still negative on KSS. Nike shoots itself in Manu’s foot. BBY BBBY MW DLIA SHLD

EVENTS TO WATCH

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

 

COMPANY NEWS

 

NKE - Manu Ginobili Rips Through His Shoe While Playing Defense

(http://bleacherreport.com/articles/1975034-manu-ginobili-rips-through-his-shoe-while-playing-defense)

 

Retail Callouts (2/27): JCP, KSS, M, DDS, JWN, BBY, BBBY, SHLD - chart1 2 27

 

Takeaway: Seriously, is that even possible? Nike is going to have a PR field day with this one. No doubt that Manu will want some special mock-up of a shoe design to ensure that this never happens again. UnderArmour and AdiBok must be pumped.

 

JCP - 4Q Earnings

 

JCP bulls were definitely due for a win, and they definitely got one today. The quarter itself was nothing to write home about, but the reality is that several key line items improved on the margin -- and for a company like JCP, that's all that matters. We were less thrilled with elements of the company's cash flow, but net/net still think this was a positive event -- especially given the carnage in the retail space. *Link to our note on JCP (JCP: The Scoreboard Doesn't Lie)

 

Retail Callouts (2/27): JCP, KSS, M, DDS, JWN, BBY, BBBY, SHLD - chart2 2 27

 

DEPARTMENT STORE 4Q COMPARATIVE ANALYSIS

 

Retail Callouts (2/27): JCP, KSS, M, DDS, JWN, BBY, BBBY, SHLD - chart5 2 27

 

SHLD - 4Q Earnings

 

SHLD's print was a little like JCP's but with far less emotion on the short side. It bear revenue estimates, which is the first time we've seen that in a while from SHLD, though it was in the context of a -6.4% comp -- by far the worst out of the department store group. EBITDA was $12mm vs $429mm last year -- no that's not a typo. They printed a loss of $0.96, which is far better than the Street at -$1.60. But in fairness, the Street was only 2 estimates.

 

Retail Callouts (2/27): JCP, KSS, M, DDS, JWN, BBY, BBBY, SHLD - chart3 2 27

 

KSS - 4Q Earnings

 

KSS' 4Q was the most in-line out of its peer group. One standout is that comps were -2%, but every other department store (sans SHLD) was within 40bps of +2%. KSS definitely broke that trend. We're most concerned with guidance, which stands at 0.5%-2.5% comp growth for the year. Please, timestamp us on this one…there's no way that comps are positive in 2014. The only way we get there is if there is a meaningful decline in Gross Margin, which KSS didn't exactly forecast either. The crux of our argument rests in our work that shows that KSS took upwards of $800mm in share away from JCP over the past two years. JCP wants it back. It will either a) succeed, or b) drive down KSS' gross margins while it tries. Either way, it's not a pretty ending.

 

Retail Callouts (2/27): JCP, KSS, M, DDS, JWN, BBY, BBBY, SHLD - chart4 2 27

 

MW, JOSB - Financing for Eddie Bauer Buyout Gets Delayed

(http://blogs.wsj.com/moneybeat/2014/02/26/financing-for-eddie-bauer-buyout-gets-delayed/)

 

  • "Goldman Sachs Group Inc. has postponed its efforts to syndicate a $400 million loan that would help finance Jos. A. Bank Clothiers Inc.’s acquisition of fellow retailer Eddie Bauer, according to people familiar with the matter, after the proposed takeover was challenged in court."
  • "The people didn’t give a reason for the postponement, but it comes after a development in a court case that cast the timing of the Eddie Bauer deal in doubt."

 

Takeaway: Financing gets delayed because the deal should never have happened -- and  it won't happen -- either because of Men's Wearhouse, or the courts.

 

BBY - Best Buy cutting 2,000 managers

(http://nypost.com/2014/02/26/best-buy-cutting-2000-managers/)

 

  • "The nation’s biggest electronics chain...has begun laying off thousands of midlevel managers nationwide as it girds for even more competition, The Post has learned."
  • "No store closings are planned in this latest round of cuts, and the exact number of pink slips hasn’t yet been confirmed. But one insider said layoffs could affect upward of 2,000 managers and supervisors."

 

BBBY - Bed Bath & Beyond Inc. Names Eugene A. Castagna - Chief Operating Officer, Susan E. Lattmann - Chief Financial Officer, Renews Employment Agreements With Co-Chairmen

(http://phx.corporate-ir.net/phoenix.zhtml?c=97860&p=irol-newsArticle&ID=1903979&highlight=)

 

  • "Bed Bath & Beyond Inc. today announced the promotion of Eugene A. Castagna, previously the Company's Chief Financial Officer and Treasurer, to the role of Chief Operating Officer.  Susan E. Lattmann, formerly the Company's Vice President – Finance, has been promoted to Chief Financial Officer and Treasurer."

 

Versace - Blackstone nears deal to buy into Versace

(http://www.ft.com/intl/cms/s/0/c5afd514-9f21-11e3-84feab7de.html?siteedition=intl#axzz2uT0xMgXg)

 

  • "...Blackstone is nearing agreement to buy a minority stake in Italian luxury group Versace...The Versace family, led by creative designer Donatella Versace, was on Wednesday expected to grant exclusivity to the New York-based fund manager to purchase a 20 per cent stake in the company, said two people with knowledge of the talks."
  • "Blackstone’s offer may value the Milan-based designer at as much as €1bn including debt, one of the people said. A deal has yet to be finalized, however, one of the people cautioned."

 

DLIA - Valinor Management Takes Stake in Delia's

(http://www.wwd.com/fashion-news/fashion-scoops/valinor-management-takes-stake-in-delias-7515889)

 

  • "Valinor Management LLC has picked up an 18.7 percent stake in teen/tween specialty store Delia’s Inc. and will nominate two individuals, including Valinor’s Seth Cohen, to the firm’s board of directors."
  • "Valinor disclosed the stake of nearly 14.4 million shares in the retailer in a regulatory filing with the Securities and Exchange Commission Wednesday. The second board nominee will be from outside Valinor but approved by Tracy Gardner, Delia’s chief executive officer."

 

 

 

 

 


Uncle Sam vs Union Jack

Client Talking Points

EUROPE

Let's be clear: Europe is not the USA. Not by a long shot. With #StrongEuro and Pound, my model still says you buy Europe over the U.S. (Cyclical Equities). Today’s pullback of -1.2% in Germany (DAX) and MIB Index (Italian business confidence hits new highs for February at 99.1 versus 97.7 January) are buys. Russia down -2%? Not so much. It's careening to fresh year-to-day lows (worst stock market in the world at -12.5% YTD).

YEN

The Yen is still ramping versus the Burning Buck as Janet "Mother of All Doves" Yellen prepares to chirp dovishly to the Senate Banking Committee this morning. USD/YEN weakness continues to keep a lid on every Nikkei bounce to lower highs (-0.32% overnight to -8.3% YTD).

UST 10YR

A big week to be long bonds, and I like it (US #GrowthSlowing as inflation accelerates). Don’t buy them today with the 10-year yield signaling immediate-term TRADE oversold (within its bearish TREND @Hedgeye) at 2.65%. The risk range is 2.64-2.80%.

Asset Allocation

CASH 48% US EQUITIES 0%
INTL EQUITIES 6% COMMODITIES 16%
FIXED INCOME 12% INTL CURRENCIES 18%

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

GOLD: +0.1% this morning to $1323/oz = +10.7% YTD (vs $SPY -0.2%) @KeithMcCullough

QUOTE OF THE DAY

"There are no seven wonders of the world in the eyes of a child. There are seven million." - Walt Streightiff

STAT OF THE DAY

Tesla's grand expansion plans will be funded in part by raising $1.6 billion through a bond issue announced Wednesday. The money will be used to build what founder Elon Musk has dubbed the "Gigafactory" and for production of a more affordable, new mass market vehicle. The massive factory is expected to produce more lithium ion batteries annually by 2020 than were produced worldwide in 2013. (CNN)


WTW: Why We're Still Short

Takeaway: WTW price suggests limited room for error moving forward; meaning we can stay short until the street finally gets the secular decline theme

SUMMARY

We have been mulling over what to do with WTW shares, wondering if there was anymore downside left in the short after selling off almost 30% since its earnings release.  

 

After further analysis, it appears WTW is now considerably overvalued, which implies that the street is baking in upside to 2014 guidance or a return to revenue growth in 2015.  We do not believe either is likely; particularly the latter (see our most recent notes and slide deck below for more detail).  

 

So even if the company can surprise to the upside in 2014, we doubt the stock will move much higher in response.  On the other hand, if WTW fundamentals deteriorate further, it could trade much lower; especially as we draw closer to 2015 when the secular themes become more evident.  

 

WTW: Staying Short

02/14/14 12:09 PM EST

 

WTW: Short Slide Deck

01/30/14 11:00 AM EST

 

WTW: Initiating Short

01/22/14 09:21 AM EST 

PEAK MULTIPLES SUGGEST NO ROOM FOR ERROR

WTW is now trading near its peak LTM valuation on both a NTM P/E and NTM EV/EBITDA basis (both on an absolute and relative basis).  That statement seems counter intuitive given the considerable miss on 2014 guidance.

 

Prior to its 2014 guidance release, consensus was expecting 2014 EPS of $2.77.  WTW issued 2014 EPS guidance of $1.30-$1.60, missing EPS guidance by 48% at the midpoint.  However, the stock is down ~29% since its earnings release; resulting in a considerable divergence on P/E basis (the "E" declined more than the "P").  Net-net, WTW's trading multiples have expanded considerably since the 2014 guidance release

 

In the charts below, we're showing a time series of WTW's valuations relative to its historical peak and trough ranges over the past 1,3, and 5 years.  The first chart is WTW's NTM P/E and NTM EV/EBITDA valuations on an absolute basis; the multiples have expanded roughly 5x and 4x turns, respectively, since its earnings release.  

 

WTW: Why We're Still Short - WTW   PE Bands 2 26 14

WTW: Why We're Still Short - WTW   EV Bands 2 26 14

 

The same dynamic holds on a relative basis (vs. the SPX).  In the charts below, we are showing a similar time series of the spread between WTW's multiples vs. those of the SPX (in order to remove the impact of beta from WTW's valuation).  The relative valuations have expanded as well, which implies that the street believes WTW should be trading inline with the SPX on a NTM P/E basis, and 4x above on a NTM EV/EBITDA basis.  

 

WTW: Why We're Still Short - WTW   PE Spread Bands 2 26 14

WTW: Why We're Still Short - WTW   EV Spread Bands 2 26 14

 

 

Hesham Shaaban, CFA

@HedgeyeInternet

 

 

Thomas W. Tobin

@HedgeyeHC

 


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


DIAL-IN & MATERIALS: TIME TO BUY BRAZIL?: CONFERENCE CALL TODAY AT 11AM EST

REMINDER - We will be hosting a brief conference call today, February 27th at 11:00am EST to discuss why we think market participants may finally be appropriately bearish on Brazil.

 

CALL DETAILS

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 896782#
  • Materials: CLICK HERE (slides will be available approximately one hour prior to the start of the call

 

With the Bovespa Index down -54% in USD terms since peaking in APR ’11, we now think it’s appropriate to explore whether or not the currently distressed prices of Brazilian assets represent real value or if they remain a value trap. We will conclude the call with a live Q&A session.

  

 

KEY TOPICS WILL INCLUDE

  • A review of our bearish thesis and key risks over the next few quarters
  • Scenario analysis on whether or not this is a good time buy
  • Is the bottoming process underway for Petrobras (PBR) and Vale (VALE)?

 

RELATED TICKERS

EWZ, PBR, VALE, USD/BRL

 

 

Contact for more information.

 

We look forward to your participation on the call. Please email with any questions you'd like us to address.

 

-The Hedgeye Macro Team



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