prev

WWW – GONNA BEAT AGAIN

Takeaway: Smoked the qtr with solid setup throughout 2014 and beyond. WWW will beat again, and again..

WWW blew away the consensus by 27% -- coming in at $0.38 vs. expectations of $0.30 – and right in-line with our model sans a slightly higher tax rate. We’re not making any substantive changes to our model, and maintain our view that WWW will beat the company’s stated long-term plan (and consensus) by over 40%.  

 

WWW is easily the most frustrating Retailer/Wholesaler we follow – but it’s also one that offers perhaps the best opportunity. The reality is that the Street latches on to every little negative data point about a specific market for one of WWW’s 16 brands – even if it ultimately does not negatively impact consolidated financial results. Seriously, 80-90% of the questions we field from the investment community have to do with Sperry, despite the fact that it accounts for less than 20% of WWW’s sales. When Sperry first weakened in January, the stock lost $900mm in value, or about 30% of total market cap, because people were afraid of losing 4% of cash flow. And that ignores the potential to turn Sperry’s $450mm in sales into $1bn.

 

Unfortunately, this unbalanced and outsized reaction does not reciprocate to the upside – positive datapoints and anecdotes on any of the brands are often discarded. We’re not arguing that people should give the stock credit for individual wins on the part of the brands in certain product lines or markets. That would be irresponsible and unrealistic. But we also can’t justify it on the downside, either.

 

This tells us that before you touch this stock, you need to ask yourself if you can stomach owning a(nother) portfolio or not. It’s one where you’ll have to deal with a lot of negativity around anecdotes into specific pieces of the portfolio – but you’ll get paid when the company ultimately has to release earnings and show the world that it a) knows how to run a portfolio, b) has far more assets that are winning than assets that are losing. This is all about execution. Pull up a 10-year stock chart. If you want to bet against that, be our guest.

 

But we need far more than a good track record to want to own a stock like WWW. We need superior earnings power, and a disproportionately low valuation.  That’s what we have here. Despite the company’s tepid long-term guidance, we’re coming up with a far superior EPS growth CAGR of 23%. A 17x p/e (14x next year) might seem rich for those who think that WWW is a low-teens grower. It certainly would to us if we had their model. But the problem is that those people have the ‘E’ part of the equation wrong. They were wrong this quarter. And they’re going to be wrong again next quarter. The company might have a heavy hand in setting conservative guidance, but ultimately the truth will come out in the numbers. In addition, with Sperry being down in the upper teens this quarter and the stock reacting instead to the 26% consolidated earnings beat, this gives us a glimmer of hope that maybe the WWW conversation is shifting away from Sperry on the margin.

 

KEY FINANCIAL MODEL ASSUMPTIONS

WWW – GONNA BEAT AGAIN - www1

 

 

HERE'S A NOTE WE PUBLISHED LAST WEEK OUTLINING 3 KEY QUESTIONS FOR MANAGEMENT

 

04/25/14

WWW – 3 KEY QUESTIONS

As we’ve done with a host of other companies recently, here’s our ‘3 Key Questions’ that we’d ask WWW’s CEO if we had a 5-minute one-on-one. The company is reporting its 1Q14 earnings on Tuesday, April 29th, so timing is key here.

 

Here goes…

 

1. Revenue? Please justify your 4-6% top line guidance this year and explain why this is not the ‘year of revenue growth’. If the following narrative is wrong, please tell us why.

  • 2012 was the year of the PLG deal. It was big, and painful initially – no EBIT, just interest from $1.2bn in debt.
  • 2013 was the year of integration. In 1H people moved around, brands were repositioned, and management realigned. Then in 2H the chessboard was largely set, but they had to seal the deal with an SAP implementation, which went without a hitch.
  • Then comes 2014 – which should be all about revenue growth. Your global salesforce, which is the most efficient footwear distribution operation on the planet, has four new major tools (brands) in its toolbox. You’ve been lining up international distribution arrangements over the past 18 months. And while you strike new ones every day (we know it takes time), each of them is cumulative (i.e. signing three per month means that by now there should now be over 40). Aside from each of those arrangements getting more productive, there’s still another 150 that could be added by our estimates.

So, with Merrell reaccelerating under Gene McCarthy’s leadership (the guy is money), Keds on its way to becoming one of the top 5 brands in the portfolio ($110mm today on its way to $400mm), Sperry not pulling a face-plant this Spring like so many seem to be hoping for, and international finally being a driver for the new brands – at a time when Europe is undeniably strengthening for most Consumer companies, how can this year NOT be a year of significant revenue growth? Your guidance of 4-6% revenue growth seems ridiculous (see point below on your inability to give good guidance).

 

2. Why do you give guidance? You stink at it. Sorry to sound harsh, but the reality is that you guide down nearly every quarter, and then come back 13 weeks later and print earnings above where the consensus was in the first place. In theory, earnings growth will ultimately drive the stock price, but all too often your ‘earnings beat’ is never appreciated by the market because you’re simultaneously trying to set a low hurdle for the next quarterly report. Even your long-term guidance is flawed. You gave 5-year revenue and profit projections that suggest $3.70 in EPS.  But your EPS figure is $2.90. And what about that $1bn in free cash flow you should generate over that time period? That alone should pay down nearly all your debt, and save $0.30 per share in interest expense (that’s 21% EPS accretion). Add all that up and we get to EPS that’s 45% above your guidance.  So the question is why not either a) give guidance in the ballpark of what you know you can really hit or b) get out of the guidance game – one that you so rarely win.   


WWW – GONNA BEAT AGAIN - WWW guidance 0429

 

3. Why do you allow the conversation around the WWW story to revolve around Sperry? You have a $2.7bn revenue base, and less than $500mm of that is Sperry. Yet it is impossible to find a Wall Street research note (except ours) where Sperry is not discussed in the first bullet point. We know Wall Street can be short-sighted and myopic, but seriously, you have to control the conversation. Our math suggests that there’s $80mm at risk if the boat-shoe trend in the US rolls over (which is not happening this Spring as some feared), but another $300mm opportunity outside the US as the brand finally taps markets it’s been absent from pretty much forever. Anything wrong with our logic? If not, please take ownership of this debate, because certain parties on Wall Street that love to hate you are having a field day with it.

 

OUR LONG TERM THESIS

This is the most global footwear company in the world (legacy WWW). It sells about 65% of its units outside the US, and has seamless and sophisticated systems (SAP) such that all distributors speak the same language. The PLG brands, which we think are better quality overall, sell only 5% overseas, and that's simply because its former owner (Collective Brands) spent capital first on Sperry, then on US Payless stores, and did not have anything left in the kitty for international distribution of PLG brands. So now WWW can scale this superior content over its existing lean/mean infrastructure. We think it will drive an incremental $2bn in revenue over 5-years and an extra 400bp of margin. In the end, we get to earnings power of about $4.20, which is 45% ahead of what management guided at its recent analyst meeting. We're the first to admit that WWW probably won't make you rich here, as it will likely take a good 3-4 years to double. But in the meantime you're paying less than 12x next year’s earnings for a 22% EPS grower -- and this company has one of the best track records of anything in consumer.


NCLH 1Q 2014 CONF CALL NOTES

In the face of lower yields in the Caribbean, fuel cost savings and the new share repurchase program are the offsets. Street remains overwhelmingly bullish. 

 

 

CONF CALL 

  • 23% increase in 1Q capacity
  • Getaway/Breakaway in 1Q:  good pricing, onboard revenue improvements 
  • 1Q:  Driving price at the expense of occupancy
  • 2014:  Wave Season in normal pressure.  Brutal winter/polar vortex hurt consumer spending and reason for lower yield guidance 
    • Most agents we contact with said the cold winter helped bookings 
  • 1Q:  Incremental dry dock- Norweigan Spirit dry dock of 3 weeks
  • 1Q:  Additional $2MM in onboard cost upgrade, also increased security for Norweigan Jade due to incident
  • 1Q weighted cost of debt:  3.8%;  should improve at Escape and Bliss enter fleet as financing is cheap
  • Income tax benefit:  change in corporate structure
  • Rolling over strong net yield comps from 2013
  • In a promotional environment
  • 2Q:  38% in Caribbean, 23% Europe, 11% Bermuda, 10% Alaska
  • European market:  improved pricing/occupancy
  • Alaska:  Norweigan Sun unique itinerary doing well; stronger pricing/bookings
  • Epic:  decision to move to Barcelona in April 2015
    • Removing transatlantic voyage, further improving yields

 

Q & A

  • Timing of share buyback:  feel stock not reflective of company potential particularly as cash builds in 2H 2014
  • Pricing comparisons:  800/900 bps different from other players
  • 1Q:  give up a little bit on load 
  • Asia:  on their radar
  • Genting ownership:  no new news, cleared requirement with HKSE;  stock right where they want it to be
    • Comfortable sitting and waiting but not happy about stock price
  • Caribbean trends:  Wave season did not start out robust;  booking trends since mid-Feb improved (some due to promotions); feel a little better about landscape
  • Europe:  quite confident trend going right direction but off of very low comps; could see a couple more years of nice growth
  • Want to get past Q2
  • Q4 too early to tell
  • Net yield downward revision:  driven by price, not onboard
  • Getaway:  $5MM fuel improvement 
  • 2015 deployment:  Europe (21%), Caribbean (45%)
  • One competitor had been holding price but NCLH would not be 'reckless' in holding price for empty cabins
  • Escape decision to homeport in Miami:  Epic redeployed to Europe.  Caribbean 2015/2016 capacity roughly flat
  • Book load factors:  highly favorable (esp Europe:  Baltic/Canary/Med); on par with Hawaii;  heavily booked in Canada/New England;  Caribbean:  still has opportunity
  • Pricing by region:  Europe (up double digits);  Alaska (low single digit);  Hawaii( doing well); Canada/New England (priced well);  Caribbean (lower than where they want to be)
  • Net yield reduction:  Caribbean is the reason
  • Core fleet vs 2 new ships:  contraction in overall industry but Getaway/Breakaway still maintain double digit premiums
    • We saw this in our pricing survey where the core fleet pricing is dropping faster than that of Getaway/Breakaway.
  • Industrywide Caribbean capacity in 2015:  cautiously optimistic; will be better environment in 2015.
  • Any share repurchases not included in guidance
  • Fuel efficiency:  seeing in organic fleet ($2.5m),  Getaway $5-6m better
  • Q3:  solidly booked, environment looks good

LEISURE LETTER (04/29/2014)

Tickers: MGM, BEE, NCLH

 

EVENTS TO WATCH 

Tuesday, April 29

  • Las Vegas March revenues out
  • NCLH Q1 – 10am , Passcode: 22334128
  • VAC Q1 – 10am , Passcode: 4679876
  • MGM Q1 – 11am , Passcode: 20455736

Wednesday, April 30

  • PNK Q1 – 8am , Passcode: 27759612
  • GLPI Q1 – 9am
  • MGAM Q1 – 9am  
  • MAR Q1 – 10am , Passcode: 10575194
  • H Q1 – 1130am , Passcode:  11561402
  • BYD Q1 – 5pm , Passcode:  44440004

Thursday, May 1

  • GENTING Q1 
  • WYNN Q1 – 430pm , Passcode:  17666834
  • HST Q1 – 10am
  • OEH Q1 – 10am , Passcode: 22074904
  • FCH Q1 – 12pm , Passcode: 28469900
  • BYI FQ3 – 430pm
  • EXPE Q1 – 430pm

Friday, May 2

  • April Employment Report
  • HT Q1 – 9am , Passcode: 1398938

Tuesday, May 6

  • RHP Q1 – 10am , Passcode: 25122491
  • SHO Q1 – 12pm
  • TRIP Q1 – 430pm

COMPANY NEWS

MGM – CEO Jim Murren was interviewed by the famous Robin Leach and the Las Vegas Sun regarding MGM's new tourism/guest venues/experiences along the Strip.  Murren promised "the transformation will grow to include all of his company’s properties on the Strip."  (Las Vegas Sun)

Takeaway:  Seems like an attempt to refocus the investment thesis away from room rate growth, which slows post Q1.  We remain skeptical of a sustained, v-shaped Las Vegas recovery. 

 

BEE – announced it closed a new $300.0 million stock secured credit facility with an accordion feature allowing for additional borrowing capacity up to $400.0 million. The facility's interest rate is based upon a leverage-based pricing grid ranging from LIBOR plus 175 basis points to LIBOR plus 250 basis points.  Initial pricing will be LIBOR plus 200 basis points, which is a reduction from the previous facility's pricing of LIBOR plus 275 basis points.  The facility has a four-year term with a one-year extension available to the Company. The facility is secured by an equity pledge in direct and indirect subsidiaries that own, lease or operate five of the company's assets: the Four Seasons Jackson Hole, Four Seasons Silicon Valley, Marriott Lincolnshire, Ritz-Carlton Half Moon Bay and Ritz-Carlton Laguna Niguel hotels.  Deutsche Bank Securities Inc. and JP Morgan Securities LLC served as Joint Lead Arrangers and Joint Book Running Managers for the facility.

Takeaway:  Similar capacity, modestly lower rate which reflect the company's overall improved balance sheet. 

  

NCLH – kicked off a five-day promotion on Hawaii sailings. The Hang Ten offer gives customers a $100 per cabin on-board spending credit when booking a seven-day voyage around the islands on the Pride of America. Customers get an additional $100 credit when signing on for a longer cruisetour.  The credits are in addition to air credits of up to $400 and military, Latitudes Rewards and AARP discounts that also are available on select sailings.

Takeaway:  Are Hawaii promotions heating up as well?

  

INDUSTRY NEWS

Around 350 thousand tourists to visit Macau during Labor Day holiday Macau News

According to Macau Government Tourist Office (MGTO) Director Maria Helena de Senna Fernandes, the number of tourists visiting Macau during the holiday period would be more or less the same as last year, adding even the number of hotel room reservations may increase during the holiday period, it will not be enormous. In 2013 a total of 342,000 tourists entered Macau over the Labor Day holiday (April 30 to May 2), according to official data.

Takeaway:  Golden Week is the prize anyway.

 

Macau Infrastructure - a new automobile tunnel, called Ka-Ho Tunnel, a project that will link the east of Cotai to the northeast tip of Coloane island - is expected to start in the third quarter of this year and last for at least 2 years. The tunnel construction project, which cost the project from over 254 million patacas (US$31.8 million) to about 540 million patacas. The proposed construction period ranges from 900 days to 930 days.  The two-way tunnel, comprising four lanes, will have its northern entrance start near the Rua da Central Térmica de Coloane in eastern Cotai. The tunnel will be connected to the area near Ka-Ho Port, the northeastern tip of Coloane island where Macau Oil Terminal and Macau Cement Manufacturing Co Ltd are located.

Takeaway:  As frustrating as the infrastructure delays have been, they are happening and should contribute to long term double digit Mass growth.

 

New Mexico Tribal Gaming -  The New Mexico Gaming Control Board reports that slots gambling at tribal casinos declined 0.1 percent last year compared to 2012.  Total tribal net win was $758.6 million in 2013 compared to $759.7 million the prior year.  The nine tribes and pueblos that have renegotiated their 2001 compacts pay the state between 3 percent and 9.75 percent of their net win.

Takeaway: Modestly better results than other jurisdictions but still flat and not positive growth. 

MACRO

China Economic Growth - The International Monetary Fund raises its economic growth forecast for China but warns that its financial system faces risks due to the rapid expansion of debt. The IMF’s 0.3 percentage point increase to 7.5 percent in its growth outlook for China.

Takeaway: Surprising but not a negative.

 

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.


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.


Bullish Call On Lorillard Remains Despite Ho-Hum Quarter | $LO

Takeaway: Despite a lukewarm quarter, our long-term bullish outlook remains unchanged.

Here are some key takeaways from a research note that was originally sent to subscribers on April 25, 2014 by Hedgeye Consumer Staples analyst Matt Hedrick. Follow Consumer Staples on Twitter @HedgeyeStaples.

 

Bullish Call On Lorillard Remains Despite Ho-Hum Quarter | $LO - real cig and e cig

KEY TAKEAWAYS

  • Lorillard reported Q1 2014 results on 4/24 that were lukewarm, missing Street estimates on the top and bottom lines, however the stock closed up on the day.
  • Our long-term bullish outlook remains unchanged and built on 1) The strength and profitability of its advantaged menthol portfolio; 2) Our belief in the limited menthol regulatory risk over the longer term; and 3) Upside growth in its blu e-cigarette business that commands leading share in the United States.
  • LO had impressive price/mix of +5.8% to offset total cigarette volume decline of -2.9% (outperforming the total industry at -4.0%). Total LO retail market share in the quarter rose 30 basis points to 15.2%, its highest level ever and its first quarter above 15%, and Newport’s share grew 40bps to 13% while LO’s share of the menthol market was flat year-over-year at 40.7%, but improved 80bps sequentially.
  • blu E-Cigs: Net sales for blu declined -10.5% y/y to $51 million, versus flattening growth across the entire category (slowing to +10% in the quarter). The loss was a contribution of lower prices of its rechargeable kits and a pipeline inventory build versus the previous year quarter. LO announced a $10-20MM spend over next 6 to 9 months to rebrand the U.K.’s SKYCIG as blu and continue to support incremental brand building for blu in the U.SIn the U.K. as in the U.S., the longer term strategy of the e-cig business is clearly not selling blu at break-even or a loss, however in the near term the company is willing to take the charge and investment now to win long term brand loyalty in a category with huge growth potential -- we support this strategy.

SUBSCRIBE TO HEDGEYE.


Vanishing Volume

Client Talking Points

KOSPI

The Korea Composite Stock Price Index broke our intermediate-term TREND line of 1983 support (it closed down -0.23% overnight at 1964) – see our macro analyst Darius Dale’s bearish research note yesterday on South Korea heading into what we call “quad 3” in our GIP model (stagflation).

UK

UK continues its playbook follow through as tighter monetary policy = stronger currency = stronger purchasing power, home price appreciation, confidence, etc… and UK GDP ramps to +3.1% year-over-year in Q1 (double the USA which you’ll get tomorrow – oh, the UK had “weather” too). $1.68 GBP/USD last continues to look great.

VOLUME

Our reading of total US equity market volume weakened (down -7% and -20% versus the one-month and three-month volume averages, respectively) on yesterday’s +0.3% SPX bounce. Both the Nasdaq and Russell were down on the day (-6.5% to -7.5%, respectively) from their bubble highs. Tread carefully out there.

Asset Allocation

CASH 30% US EQUITIES 0%
INTL EQUITIES 10% COMMODITIES 20%
FIXED INCOME 20% INTL CURRENCIES 20%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds.  Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

OC

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.

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: Corn and Oil up another +0.5-6% this morning #InflationAccelerating @KeithMcCullough

QUOTE OF THE DAY

"Your assumptions are your windows on the world.  Scrub them off every once in a while, or the light won't come in." - Isaac Asimov

STAT OF THE DAY

Shares of Facebook have slumped 10% since the company released a widely celebrated first-quarter earnings report a week ago. (MarketWatch)


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.

next