LM: Adding Legg Mason, Inc. to Investing Ideas

Takeaway: We are adding LM to Investing Ideas.

Hedgeye Co-Head of Financials Sector Research Jonathan Casteleyn is adding Legg Mason to Investing Ideas. 


We will send out a full report shortly detailing our bullish case.


LM: Adding Legg Mason, Inc. to Investing Ideas - 170 1Legg Mason Tower II

HOLX: Adding Hologic, Inc. to Investing Ideas

Takeaway: We are adding HOLX to Investing Ideas.

Hedgeye Healthcare Sector Head Tom Tobin is adding Hologic, Inc. to Investing Ideas. 


We will send out a full report shortly detailing our bullish case.


HOLX: Adding Hologic, Inc. to Investing Ideas - Hologic Logo RGB

LULU: Why We're Pulling the Plug on the Bear

Takeaway: We pulled the plug on our LULU Bear call. Our work clearly shows that things are improving. If the qtr is weak, we may get outright bullish.

Conclusion: After being extremely bearish on LULU since the fall, we're changing our position on the name. While we are not outright bulls at this point -- and while we believe there are extreme challenges for LULU from here -- we do not think that the bear case carries meaningful merit. If the quarter is sloppy and the stock trades down, we may get outright bullish. 



As background, we had been long-term bulls of LULU, but last fall turned bearish as LULU's well-publicized gaffes started to come about. Then we conducted a detailed consumer survey of 500 female Yoga shoppers (80% of whom were LULU customers) across appropriate demographic groups. That survey -- conducted three months ago -- told us to press our short, and it was right to suggest we do so. 


But yesterday we released an update to our survey, which asks the same detailed questions (and then some) to the same demographic group. The punchline is that things are unquestionably getting better on the margin. We outline all of the reasons why, and then some, in our 52-page slide deck, the link to which is below. Also, if you care to listen to the accompanying presentation, that audio link is below as well. 


One slide we'll highlight is #12, which shows the 'Brand recommendation factor' now versus when we first ran the survey at the beginning of the year.   The question asks the extent to which consumers would recommend each of 18 brands to their friends. At the start of the year, LULU ranked embarrassingly low. But today, it is right in line with peers. There's definitely room for improvement. But things have gotten better on the margin, and that's what matters most to us.


LULU: Why We're Pulling the Plug on the Bear - lulu1   


By no means is the change in our opinion based on one simple question. But many of the questions that we asked -- especially those where we could compare today's results versus those from the start of the year, simply suggest that anyone playing on the short side for things to materially worsen from here has a pretty tough risk/reward on their hands.


Are their challenges? Sure. Athleta (GPS) is emerging as a major threat to LULU's business, and Nike is strengthening on the margin. Also, based on our results we think that there is a problem with perception of value for LULU's product, which suggests to us that the company will have to start a more meaningful discounting strategy.


In the end, we come out much higher on the top line over our 3-5 year modeling period, but we have margins going from 24.5% to just under 19% (see Exhibit below). While multiples rarely expand when margins are coming down, we think that with the stock having a 4-handle, better top line will probably win over margin degradation.


If the company gives weak guidance on the quarter, based on what we see we'd likely look to get more aggressive on the name. 


LULU: Why We're Pulling the Plug on the Bear - LULU2







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Video | Got Gold Yet?

Gold has shot up over 9% versus the DJIA, which is down over 1% year-to-date. Why? #InflationAccelerating.


Watch Hedgeye CEO Keith McCullough discuss the market and economic implications for investors of our top Q1 global macro theme.



Gold remains one of the best ways to be long of inflation slowing US growth.  


In an effort to evaluate performance, we compare how the quarter measured up to previous management commentary and guidance




  • MIXED:  CCL disappointed investors today by not raising FY yield or EPS guidance and providing below consensus Q2 expectations. Investor expectations going into the earnings release and call were higher this time which is hurting the stock despite strong first quarter results. But is CCL playing the conservative card? We think so. Q2 is likely to be a pretty big beat which should push full year to at least the higher end of the guidance range.



  • MIXED:  While the Carnival brand recovery continued with better bookings, it is at the expense of lower pricing in the Caribbean. Carnival sacrificed occupancy to maintain price in F1Q.
    • Very pleased that the surveys show a significant recovery in the brand perception at Carnival Cruise Lines since the voyage disruptions...expect to benefit from it going forward.
    • Carnival recovery is a little bit ahead of that two to three-year timeframe that is conventional kind of thinking concerning recovery of brands that have suffered incidents.

1H 2014 TRENDS

  • WORSE:  F2Q yield guidance (-3% to -4% constant currency) came in much lower than expectations. While pricing remains low, it seemed to not have improved at all since last guidance.
    • Fleet-wide volumes during the last 13 weeks have been running well ahead of the prior year, outpacing capacity at prices that are lower.
    • Despite the recent high volumes, the cumulative bookings for the first half on a fleet-wide basis are still behind at lower prices.
    • Expecting lower yields in the first half
    • NA brands are impacted by challenging comps from the first half of last year, as they were booked prior to the voyage disruptions that occurred in February.  EAA brands face ongoing economic environment challenges in Southern Europe, the loss of the attractive Red Sea program and a close-in booking curve that is impacting their first half of '14.



  • SAME:  Onboard yields rose 0.8% (CC) in FQ1.
  • PREVIOUSLY:  What is built into the 2014 guidance was yields up a little over 1%.
    • Some of CCL's operating companies are continuing to roll out the all-inclusive drink program, the high-end photography and other things.


  • SAME:  For the reminder of the year, Caribbean is behind on both price and occupancy for the NA brands. Caribbean accounts for 50% of remaining capacity for NA brands.
  • PREVIOUSLY:  NA brands - behind on both price and occupancy


  • BETTER:  Costa's yield was up a couple of points more than expected in FQ1, mainly due to occupancy gains.  European economy is still choppy but has strengthened recently. 
    • Surveys were also very encouraging. They showed an improvement in brand perception.
    • Seeing lifting in yields and occupancy in Costa, but the recovery may take longer than the two to three-year norm


  • SAME:  Behind on price but remained well ahead on occupancy
  • PREVIOUSLY:  Behind on price but well ahead on occupancy.  


  • IN-LINE:  Behind on price but well ahead on occupancy and substantially ahead of 2013.  Europe accounts for 70% of remaining itineraries for EAA brands.
  • PREVIOUSLY:  Seeing a sequential improvement in YoY pricing in each quarter from the first to the third quarter for this program.  Booking by volumes for these European programs for the last 13 weeks have been nicely higher as well.


  • WORSE:  Japan underperformance will have an impact for the rest of FY 2014.  Japan deployments represents 1%. 
    • The yields in Asia are a little bit below the overall corporate average. Have talked a lot about a continued expansion into Asia.
    • Returns in Asia at the moment aren't where CCL would like them to be


  • SAME:  While Carnival did not change their cost guidance forecast for the year, some FQ1 costs have been shifted into FQ2.  Advertising spend for 2014 is now 20% higher than that in 2012. Advertising is clearly the main driver of higher costs for CCL.
    • Expect cost per ALBD to be up only slightly for 2014
    • Found ways to do some of the vessel enhancement and service, thereby reducing dry-dock days in 2014.
    • Concerning advertising, CCL clearly invested heavily in Carnival, but also invested across a number of other brands to generate demand. And that is continuing into the first quarter of next year. For the full year CCL'll be substantially ahead in 2014 in total advertising spend versus 2012.
    • Expect net cruise cost excluding fuel to be flat to half of inflation in the long term...that's a good starting point for guidance for 2015 

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