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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

 


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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

 

 


LEISURE LETTER (04/17/2014)

TICKERS: MGM, PENN, RCL

EVENTS TO WATCH

Thursday, April 17

  • Iowa Racing & Gaming Commission Meeting - scheduled to decide whether it will grant Cedar Crossing Casino a state gaming license, which would make the facility the 19th casino in Iowa.
  • BX 1Q14 Earnings – 11 am Conf Call PIN 149 943 55 – lodging comments & color?
  • TZOO  Earnings – 11 am Con Call
  • DIS – Investor Day – cruise & parks commentary?

Monday, April 21

  • Genting Singapore – Annual General Meeting

Tuesday, April 22

  • IGT FQ2 earnings:  5 p.m. Conf Call   , Passcode: IGT

Thursday, April 24

  • WYN Q1 earnings - 8:30 a.m. , Passcode: Wyndham
  • LHO Q1 earnings - 9:30 a.m.
  • PENN Q1 earnings - 10 a.m.
  • HOT Q1 earnings - 10:30 a.m. , Passcode: 12049644
  • LVS Q1 earnings - 4:30 p.m. ; PW: 18236529

Friday, April 25

  • PEB Q1 earnings – 9:00 a.m. ,

 

COMPANY

MGM - Company executives are asking the Massachusetts Gaming Commission to delay the formal award of the license, currently planned for June, because the license award would trigger $200 million in obligations for the company.  According to MGM, the company does not want to pay the fees (including, $85 million state licensing fee, which by law must be paid within 30 days of the commission making the award) while the state casino law is under the threat of a possible repeal.

TAKEAWAY: MA living up to its reputation...

 

PENN - PENN and the Cordish Cos., which are competing for Philadelphia's second casino license, joined forces to pursue a license in New York's Hudson Valley-Catskills region. The companies said they would propose a $750 million casino and resort in South Blooming Grove, a small town in Orange County. The casino would operate under the Cordish's Live! brand.

TAKEAWAY: Need to maintain the growth story... but what happens in 7 years when the Greater NYC becomes open to new casino development?  Not our favorite idea.

 

PENN - Construction of Hollywood Casino Jamul is facing a construction delay as a result of a lawsuit claiming ground excavated for the casino was relocated and illegally dumped on an Indian burial ground - thus desecrating the site.

TAKEAWAY:  A potential blow to a big part of PENN's growth story.

 

RCL - Royal Caribbean International reports will have the Quantum of the Seas homeport in Shanghai, China effective May 2015, following her inaugural winter season sailing out of Cape Liberty (Bayonne, N.J.).  In China, Quantum will join Mariner of the Seas and Voyager of the Seas in Asia, increasing the company's capacity in the region by 66%. 

 

Anthem of the Seas will debut in Southampton, England in April 2015 first and then move to New York for the winter.  This is a change for Anthem of the Seas since she was previously planned to be sailing out of Fort Lauderdale in Winter 2015. 

TAKEAWAY:  The Quantum decision is a bold but risky one.


INDUSTRY

Macau - the Legislative Assembly again voted against a bill to allow unions to organize strikes and provide workers legal advice.  This was the fifth time such legislation was voted down. 

TAKEAWAY:  We find it peculiar the Unions would have any influence with casino workers when the casino operators have repeatedly and annually raised worker wages.  

 

Cosmopolitan to be sold - Deutsche Bank is in talks with potential buyers of the Cosmopolitan resort in Las Vegas.  The bank is seeking more than $2 billion and has attracted at least four possible bidders.  However, other bidders believe the value is closer to $1.5 billion.

TAKEAWAY:  Given the size, location and issues, could Barry Sternlicht's Starwood Capital Group be the odds on favored buyer?  We are hearing the leading buyer has ties to USA hotel interests on the East Coast and shopping centers on the West Coast.  $2 billion could be a stretch.

 

Illinois Gaming Expansion – the General Assembly will again consider legislation to expand commercial gaming from 10 riverboat casinos and thousands of local video slot machines spread across the state with the expansion of four new casinos (Lake County, the south suburbs, Danville and Rockford) as well as the addition of slot machines at horse racing tracks across the state. 

TAKEAWAY:  Will this ever pass?

 

Massachusetts Gaming - the Massachusetts Gaming Commission on Thursday delayed the second-phase application deadline for commercial casino proposals in Southeastern Massachusetts to at least Sept. 23 – which will likely postpone the award of a casino license in Greater Boston till at least August and delay a license for Southeastern Massachusetts even longer, to February or later. The exact application deadline will likely be set at the Commission’s next meeting, when it is also expected to decide whether to waive the $500 million minimum investment requirement in an effort to encourage more applications. Such moves would delay the license award date until 2015.

TAKEAWAY:  More delays, which has become the norm in Massachusetts.

 

Atlantic City - Hoping to lure new carriers to Atlantic City International Airport, the Casino Reinvestment Development Authority voted to devote funding to a risk-abatement program, allowing airlines to compete for up to $5 million in total grant funding (subsidies). 

TAKEAWAY:  Need to promote new airline lift; we remain skeptical on AC's turnaround.

 

Atlantic City - A State of New Jersey report that preceded the creation of the Tourism District called for increasing convention business 30% per year for five years.  Data released this week show that in 1Q 2014, the number of shows hosted at the Atlantic City Convention Center remained flat compared to the first quarter of 2013, but the number of delegates who attended shows rose 9% to 21,219.

TAKEAWAY:  AC still a tough draw.

 

Hotel CMBS Lending - Deutsche Bank AG will lend $1.9 billion to Kyo-ya Hotels & Resorts LP, which owns five HOT hotels in Hawaii. Deutsche Bank will package the debt into about $1.5 billion of commercial-mortgage bonds, and sell the rest of the debt to investors as mezzanine loans.  The Kyo-ya portfolio includes the Sheraton Waikiki, The Royal Hawaiian, the Westin Moana Surfrider, Sheraton Princess Kaiulani and the Sheraton Maui, which are all managed by HOT.

TAKEAWAY:  The availability of securitized debt is a positive for hotel transactions as Starwood looks to continue selling assets. 

MACRO

Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive.

TAKEAWAY:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.


KMP 1Q14 Takeaways

Nothing out of the 1Q14 results changes our negative view on Kinder Morgan Energy Partners (KMP/KMR).  A few takeaways from a rather uninteresting quarter (we’ll have more after the 10-Qs are out) from the Kinder Complex:

 

  • KMP Financial Results Mixed, But Below Budget……KMP reported EPU (before items) of $0.73, below the budgeted $0.74, and up 11% from $0.66 in 1Q13.  DCF/unit was $1.55, missing the budgeted $1.57, and up 6% from $1.46 in 1Q13.  Segment EBDA + JV DD&A was $1,591MM, below the budgeted $1,599MM.  DCF-to-Distribution coverage was 1.12x in 1Q14, down slightly from 1.13x in 1Q13 (and 1.14x in 1Q12).  As is typical, KMP builds “excess coverage” in the seasonally-strong 1Q and will give it back in 2Q and 3Q.  KMP’s Payout Ratio (Distribution-to-EPU) was 189% in 1Q14, improving from 198% in 1Q13.  KMP’s annualized return on tangible assets (net income before items / average assets ex. goodwill) was 3.6% in 1Q14, an improvement from 3.3% in 1Q13.

KMP 1Q14 Takeaways - km1

 

KMP 1Q14 Takeaways - km2

  • KMP Natural Gas Midstream Has Huge Growth CapEx and Doesn’t Grow……KMP’s long-haul natural gas transportation businesses are growing well (total volumes were +5.5% YoY), driven by increased demand for north-to-south capacity on Tennessee Gas (TGP) and export opportunities to Mexico via El Paso Natural Gas (EPNG).  This strong volume growth should continue going forward with additional TGP back-haul projects, expansions into New England, and increased Mexican demand.  (Related Note: Kinder was super bullish re: demand for north-to-south natural gas transportation – bullish read-through to Boardwalk Pipeline (BWP), which has a new, underutilized south-to-north system in Texas Gas Transmission that it can repurpose.)  However, KMP’s Natural Gas Midstream segment is not growing, with natural gas sales volumes down 4.4% YoY and natural gas gathering volumes down 0.6% YoY in 1Q14.  The key questions are 1) How much capital was invested into these midstream businesses over the last year for flat-to-down volumes?  And 2)  How much of that capital was included in KMP’s sustaining CapEx budget?  Stand-alone CPNO was projected to spend $458MM of growth CapEx in 2013 according to the “Case I Projection” in CPNO’s 4/22/13 8-K.  Excluding CPNO, we estimate that KMP spent ~$400MM in its Midstream Segment (G&P + TX Intrastate) in 2013.  Pro forma, that’s +$800MM in annual growth CapEx, of which a significant portion is likely needed just to maintain midstream volumes.  This maintenance CapEx understatement is another major source of low-quality DCF for KMP and KMI, and is not appreciated by consensus, in our view. 
  • Soft Quarter for KMP E&P……KMP’s CO2 segment EBDA (before items) was down $22MM (-7%) QoQ as both oil production and the realized oil price slipped 2% sequentially.  The Midland Basin crude differential blew out in 1Q and remains at a steeper-than-normal discount to WTI.  KMP doesn’t hedge basis, and is budgeting for a -$1.50/bbl differential vs. the current -$9.25/bbl; that was a minor headwind in 1Q and should be a drag again in 2Q (see chart below).  Encouragingly, SW Colorado net CO2 production ticked up to 0.6 Bcf/d for the first time in more than two years with a Doe Canyon expansion coming online.  The most important data point for KMP CO2 is CapEx, which we won’t have until the 10-Q is out.

KMP 1Q14 Takeaways - km3

  • KMP Gets into the Coal Royalty Biz ……KMP made its first coal royalty purchase in 1Q13, a $25MM acquisition.  We’ll look to the 10-Q for more detail.  As far as we know, KMP will not include a replacement CapEx reserve to account for the fact that coal royalties are depleting assets, just like oil fields.  Every coal royalty acquisition that KMP makes strengthens our conviction on the short side.
  • On KMI's Quarter……Mixed results with EPS of $0.28 missing the budgeted $0.31, but cash available for dividends of $573MM beating the budgeted $552MM.  In the quarter KMI bought back $94MM of stock and $55MM of warrants at an average price of $1.77/warrant. 

Call with any questions,

 

Kevin Kaiser

Managing Director


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