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Jobless Claims: Fourth Consecutive Week of Solid Numbers

Takeaway: Claims continue to fall at an impressive rate as a precursor to a tight labor market and wage inflation.

the streak

The labor market put in another good week, bringing the series to four consecutive weeks of solid data. While a modest deceleration from last week on a single week basis, the rolling trend continued to sequentially accelerate. 

 

Jobless Claims: Fourth Consecutive Week of Solid Numbers - ATS stock

 

The year-over-year change in non-seasonally adjusted initial claims came in at -11.6% vs the prior week's 15.9% improvement and the previous week's 7.1% improvement. That brought the 4-week moving average to -12.1%, as compared with -10.5% and -7.5% in the preceding two weeks. Remember, a more negative number is better as it reflects a faster rate of improvement. 

 

As we pointed out last week, the weather's turn, particularly in the Northeast, remains coincident with the turn in the claims data. Based on the numbers so far, it looks like the April job's report will come in quite strong.

The Data 

Prior to revision, initial jobless claims rose 4k to 304k from 300k week-over-week, as the prior week's number was revised up by 2k to 302k.

 

The headline (unrevised) number shows claims were higher by 2k week-over-week. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4.25k week-over-week to 312k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -12.1% lower year-over-year, which is a sequential improvement versus the previous week's year-over-year change of -10.5%

 

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Jobless Claims: Fourth Consecutive Week of Solid Numbers - 2

 

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Editor's Note: This is an excerpt of a research note that was originally provided to subscribers on April 17, 2014 at 10:18 a.m. by Hedgeye’s Financials team Jonathan Casteleyn & Josh Steiner. Follow Jonathan and Josh on Twitter @HedgeyeJC and @HedgeyeFIG.

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Post: A Man And His Renoir

One of the names we’ve been focused on, but have not yet written on is Post Holdings Inc.  It is a well-managed company that is determined to transform its business into high growth categories.  That being said, today’s announcement that it is acquiring Michael Foods is not consistent with where we thought the company was going.  In our view, processed eggs, refrigerated potatoes and cheese products is far from the active healthy category we believed the company was perusing.

 

POST’s proposed acquisition of Michael Foods will cost them $2.45 billion or 1.3x trailing sales, a significant premium to the group at 1.0x.  While the acquisition gives the company “a platform to compete beyond its cereal and healthy snack categories,” management didn’t address the deviation from its original strategy.  This makes POST a direct competitor with other protein companies, such as Tyson Foods which trades at 0.4x sales versus POST at 1.6x.  We understand how the math works on this transaction – it is the longer-term strategy that we are questioning.

 

According to the company, “it has great possibilities to leverage this Post name.”  This statement was mildly confusing to us.  To be frank, we don’t know what Post brand name carries beyond the cereal category.  POST does own some active nutrition brands, but it is far from active nutrition in the minds of consumers.

 

William P. Stiritz, Chairman and Chief Executive Officer of POST, called the Michael Foods acquisition “really a unique, rare opportunity,” saying, “I’ve been in the business for over 50 years and this is, this one stood out.”  He went on to compare it to buying a Renoir: “you keep looking for these things because they come along so rarely.”

 

The analogy of Renoir and competing in the ultra-competitive and cyclical protein category of processed eggs is lost on us.

 

According to management, the company is investing behind “very large secular themes” around the increased consumption of protein and the away-from-home break occasion.  On the surface, those seem more like themes to justify the acquisition rather than secular themes around active healthy nutritional products.

 

Processed eggs are not a healthy alternative to organic fresh farm eggs.  Today, the USDA’s Food Safety and Inspection Service announced that Nutriom, LLC, based in Lacey, Wash., has recalled an additional 82,884 pounds of processed egg product because of possible Salmonella contamination.  While this is not a Michael Foods' product, it will certainly not help the consumer perception of processed eggs.

 

We continue to search for good ideas on both the long and short side of the consumer staples sector and POST has now moved to the top of our list.  We believe management is taking on a lot of risk with this acquisition, but we bet the imminent equity raise will be oversubscribed.

 

We are digging deeper into the POST story.

 

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst

 



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INITIAL CLAIMS POST ANOTHER STRONG PRINT / CAP ONE RESULTS & OUTLOOK

Takeaway: Claims continue to fall at an impressive rate, a precursor to a tight labor market and wage inflation. COF remains a prime beneficiary.

The Streak

The labor market put in another good week, bringing the series to four consecutive weeks of solid data. While a modest deceleration from last week on a single week basis, the rolling trend continued to sequentially accelerate. 

 

The year-over-year change in non-seasonally adjusted initial claims came in at -11.6% vs the prior week's 15.9% improvement and the previous week's 7.1% improvement. That brought the 4-wk moving average to -12.1%, as compared with -10.5% and -7.5% in the preceding two weeks. Remember, a more negative number is better as it reflects a faster rate of improvement. 

 

As we pointed out last week, the weather's turn, particularly in the Northeast, remains coincident with the turn in the claims data. Based on the numbers so far, it looks like the April job's report will come in quite strong.

 

Capital One (COF) Update

We liked Capital One into the first quarter results last night, predicated primarily on our expectation for strong credit driving larger-than-expected reserve release. The company did beat estimates, reporting $1.91 vs $1.69 consensus, but didn't release as much reserve as we were looking for and so came in well short of our $2.38 bogey. The revenue margin was also under pressure, and CEO Fairbank pointed out an obvious but important thing. When credit gets better, fewer people are late with their payments, and that creates a drag on non-interest income. As such, revenue margins, even though they benefited from revenue suppression reversal, were down sequentially. While the stock is narrowly green this morning amidst a modestly red tape, we were expecting better. We continue to think Cap One shares should outperform over the coming months as labor market tailwinds persist and we draw nearer to the back half of the year when loan growth in US card balances should again turn positive.

 

The Data

Prior to revision, initial jobless claims rose 4k to 304k from 300k WoW, as the prior week's number was revised up by 2k to 302k.

 

The headline (unrevised) number shows claims were higher by 2k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4.25k WoW to 312k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -12.1% lower YoY, which is a sequential improvement versus the previous week's YoY change of -10.5%

 

INITIAL CLAIMS POST ANOTHER STRONG PRINT / CAP ONE RESULTS & OUTLOOK - 1

 

INITIAL CLAIMS POST ANOTHER STRONG PRINT / CAP ONE RESULTS & OUTLOOK - 2

 

INITIAL CLAIMS POST ANOTHER STRONG PRINT / CAP ONE RESULTS & OUTLOOK - 3

 

INITIAL CLAIMS POST ANOTHER STRONG PRINT / CAP ONE RESULTS & OUTLOOK - 4

 

INITIAL CLAIMS POST ANOTHER STRONG PRINT / CAP ONE RESULTS & OUTLOOK - 5

 

INITIAL CLAIMS POST ANOTHER STRONG PRINT / CAP ONE RESULTS & OUTLOOK - 6

 

INITIAL CLAIMS POST ANOTHER STRONG PRINT / CAP ONE RESULTS & OUTLOOK - 7

 

INITIAL CLAIMS POST ANOTHER STRONG PRINT / CAP ONE RESULTS & OUTLOOK - 8

 

INITIAL CLAIMS POST ANOTHER STRONG PRINT / CAP ONE RESULTS & OUTLOOK - 9

 

INITIAL CLAIMS POST ANOTHER STRONG PRINT / CAP ONE RESULTS & OUTLOOK - 10

 

INITIAL CLAIMS POST ANOTHER STRONG PRINT / CAP ONE RESULTS & OUTLOOK - 11

 

INITIAL CLAIMS POST ANOTHER STRONG PRINT / CAP ONE RESULTS & OUTLOOK - 12

 

INITIAL CLAIMS POST ANOTHER STRONG PRINT / CAP ONE RESULTS & OUTLOOK - 13

 

INITIAL CLAIMS POST ANOTHER STRONG PRINT / CAP ONE RESULTS & OUTLOOK - 19

 

INITIAL CLAIMS POST ANOTHER STRONG PRINT / CAP ONE RESULTS & OUTLOOK - 14

 

Yield Spreads

The 2-10 spread fell -6 basis points WoW to 226 bps. 2Q14TD, the 2-10 spread is averaging 230 bps, which is lower by -9 bps relative to 1Q14.

 

INITIAL CLAIMS POST ANOTHER STRONG PRINT / CAP ONE RESULTS & OUTLOOK - 15

 

INITIAL CLAIMS POST ANOTHER STRONG PRINT / CAP ONE RESULTS & OUTLOOK - 16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Retail Callouts (4/17): KATE, GPS, RSH, HD, URBN, APP

Takeaway: KATE partners with GPS to test viability of kid's brand extension. What to do with RSH real estate? HD looking to grow dot.com

EVENTS TO WATCH

 

THURSDAY

  • LULU - Analyst Day: Thursday 4/17, 12:00 pm

 

COMPANY NEWS

 

KATE, GPS - Gap to partner with Kate Spade, Jack Spade on kids collection

(http://www.latimes.com/fashion/alltherage/la-ar-gap-to-partner-with-kate-spade-jack-spade-on-kids-collection-20140416,0,2701466.story#axzz2z8nqd3ZJ)

 

  • "According to the announcement, the collection, which is expected to hit retail in November, will be available through Gap's website as well as Gap Kids bricks-and-mortar stores in the U.S., Canada, the U.K., France, Hong Kong and Japan."

 

Takeaway: KATE uses partnerships as a low risk beta test for new potential categories. They did it with footwear, and will use this GPS partnership to test the viability of kids before deciding whether or not it makes sense to add the brand extension to its growing list of categories.

 

RSH - RadioShack Mired in Talks With Lenders Over Closings

(http://online.wsj.com/news/articles/SB10001424052702304626304579505932615127164?mg=reno64-wsj)

 

  • "RadioShack Corp. is mired in negotiations with its lenders over plans to close as many as 1,100 stores, complicating the struggling consumer-electronics retailer's turnaround efforts, said people familiar with the talks."
  • "The company, which operates about 4,300 stores in the U.S., said at the time that the plan still needed permission from its lenders, adding that its credit agreements allowed it to close only about 200 stores without the approval of lead lenders Salus Capital Partners and GE Capital, a unit of General Electric Co."
  • "Some of the lenders are exploring whether as many as 2,000 stores should close, people familiar with the matter said, though others said that possibility hasn't become part of negotiations with the company. The company is set to keep the proceeds of any store-closing inventory liquidation, but it is possible the lenders could try to negotiate for part of the proceeds to pay down their loans, some of these people said."

 

Takeaway: Still a lot of controversy surrounding the best way to handle the company's current real estate position.  This is what we had to say about the announcement back inMarch, "The reality is that RSH probably does not need to close stores. It needs to close Radio Shack. The store banner is hardly an asset, nor is the fact that it is the destination for replacement transistors, extension cords, cheap electronic toys, and mobile phones (which is underperforming). The greatest asset, in our opinion, is actually the 4,000+ US store locations. Think about it. If you wanted to build a small format retail concept in any other category -- apparel, sporting goods, or heck, even e-tail showrooms, it would take at least a decade to build up that kind of scale. If current management (who is quite good -- especially for Radio Shack) can pull off this turnaround, then we'll give 'em all the credit in the world. But we think a better answer lies in a different strategic direction."

 

HD - Home Depot Lumbers Into E-Commerce

(http://online.wsj.com/news/articles/SB10001424052702304626304579505723441210120?mg=reno64-wsj)

 

  • "This year, the home-improvement chain will open two distribution centers and just one store. The move is a stark signal for an overbuilt industry that may be witnessing a permanent drop in shopper traffic, even in the middle of a housing recovery that is boosting sales."
  • "Online sales accounted for only 3.5% of the company's $78.8 billion of sales last year. But they are growing faster than the rest, so the fix-it chain is investing $1.5 billion this year for supply chain and technology improvements to link its stores and Internet business, including the new online fulfillment centers."
  • "Still, Mr. Blake is firm that adding new stores isn't the answer. 'When we get to the point where we're all in a room and we can't think of anything to invest in the business to make it better, then you would say, let's build some more stores,' he said."

 

Takeaway: Store growth may not be the answer to grow revenues, but we're not sure that dot.com is the right answer at least for HD as it exists today. Many of its categories just don't translate to e-commerce. A bigger web presence for HD likely means more acquisitions a la the blinds.com deal back in January.

 

OTHER NEWS

 

APP - American Apparel Meets Listing Requirement

(http://www.wwd.com/business-news/financial/american-apparel-meets-listing-requirement-7646728)

 

  • "American Apparel Inc. is no longer facing a delisting threat from the NYSE MKT exchange."
  • "The Los Angeles-based vertical retailer said Wednesday that it had received a letter from the exchange saying the firm has resolved a listing deficiency involving companies with 'impaired operations,' which first drew the exchange’s attention in late February."

 

URBN - Trish Donnelly Said Headed to Urban Outfitters

(http://www.wwd.com/retail-news/people/trish-donnelly-said-headed-to-urban-outfitters-7647132)

 

  • "Trish Donnelly, president of Steven Alan, is believed headed to Urban Outfitters Inc. An announcement could be made soon, sources said. Donnelly, the sources said, will be president of Urban Outfitters North America, reporting to Ted Marlow, chief executive of the Urban Outfitters brand."
  • "Prior to Steven Alan, Donnelly was an executive vice president at J. Crew Group. Earlier, she worked at Cole Haan and Ralph Lauren."

 

SPWH - Sportsman's Warehouse prices IPO at $9.50, below the range

(http://www.nasdaq.com/article/sportsmans-warehouse-prices-ipo-at-950-below-the-range-cm345078)

 

  • "Sportsman's Warehouse, the largest outdoor sporting goods specialty retailer in the Western US with 49 stores, raised $119 million by offering 12.5 million shares at $9.50, below the range of $11 to $13. Sportsman's Warehouse plans to list on the NASDAQ under the symbol SPWH."

 

DSW - DSW Inc. Announces New Chief Financial Officer

(http://investors.dswshoe.com/2014-04-17-DSW-Inc-Announces-New-Chief-Financial-Officer)

 

  • "DSW Inc., a leading branded footwear and accessories retailer, announced the appointment of Mary Meixelsperger as Chief Financial Officer effective May 1. Ms. Meixelsperger replaces Douglas Probst, who is retiring from DSW Inc. on the same day."
  • "Ms. Meixelsperger joins DSW Inc. from Shopko Stores, a regional discount store chain, where she held the roles of Chief Financial Officer, Controller and Treasurer for the last nine years. Prior to Shopko, Ms. Meixelsperger was the Chief Financial Officer for two non-profit organizations between 1 and was the Chief Financial Officer for Worldmark Group, a private equity firm between 1."

 

VNCE - VINCE HOLDING CORP. ANNOUNCES INDEPENDENT DIRECTORS

(http://investors.vince.com/press-releases/press-release-details/2014/Vince-Holding-Corp-Announces-Independent-Directors/default.aspx)

 

  • "Vince Holding Corp...today announced that its Board of Directors (the "Board") has appointed Eugenia Ulasewicz  as a new director, effective immediately.  This appointment will bring the total number of directors to seven.  Ms. Ulasewicz joins the Board as one of the three outside directors, along with Robert A. Bowman and Jerome Griffith, who were elected to the Board in connection with Vince's initial public offering."
  • "Prior to her retirement in March 2013, Ms. Ulasewicz was President of the Americas division of Burberry Group PLC , responsible for the US, Canada, Central and South America. Ms. Ulasewicz joined Burberry in 1998 and became a member of its executive committee in 2006.  Previously, Ms. Ulasewicz held positions of increasing responsibility with Bloomingdales, Galeries Lafayette and Saks, Inc. She currently serves as a director of Signet Jewelers Limited and Bunzl plc."

 

Alec Richards

Analyst

 

 


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