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KSS Short - Why JCP is the Risk (And Opportunity)

Takeaway: We will be hosting a call titled KSS Short: Why JCP is the Risk (And Opportunity) on Tuesday May 13th at 1pm ET.

We will be hosting a call titled KSS Short: Why JCP is the Risk (And Opportunity) on Tuesday, May 13th at 1:00pm ET to discuss our current short thesis on KSS. We will detail some of the underappreciated dynamics that currently exist between Kohl's and JCP.   

  

KSS Short - Why JCP is the Risk (And Opportunity) - KSS JCP Call

 

HIGHLIGHTS WILL INCLUDE:   

 

A) Results of our latest consumer survey on department stores
B) Explore incremental trends in e-commerce
C) A deep dive into each company's real estate profile examining where the greatest risk/opportunity exists for store closure and subsequent share shifts

 

SPECIFIC TOPICS WILL INCLUDE:  

  • One of the biggest risks to being short KSS is JCP shuttering a third of its stores
    • What is the typical market for a JCP store closure (based on historical precedents)?
    • How many more of those markets exist?
    • What does KSS overlap look like in these markets?
    • What is the revenue opportunity for KSS?
  • Consumer Survey updates on the rate at which sales are coming back to JCP, and which retailers are winning/losing
  • Visitation trends at each department store and how they are changing sequentially
  • Analysis of recent e-commerce traffic on an absolute level for KSS and JCP, but also relative to competitors like M, JWN, DDS, TGT, SHLD and others
  • Why we think that dot.com is a risk for KSS on a longer term basis

CALL DETAILS

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 294741#
  • Materials: CLICK HERE

Please contact for more information.


Retail Shocker: 89% Wouldn’t Care if Target Left Canada | $TGT

Takeaway: Whether or not you believe in the validity of these straw polls, it’s hard to ignore the opinion of 10,000+ people.

Retail Shocker: 89% Wouldn’t Care if Target Left Canada | $TGT - target15

 

Vote: Will you miss Target if it leaves Canada?


Retail Shocker: 89% Wouldn’t Care if Target Left Canada | $TGT - chart2 5 7

Takeaway From Brian McGough:

This is a snap of a poll we found on Canada's Globe and Mail site. Whether or not you believe in the validity of these straw polls, it’s hard to ignore the opinion of 10,000+ people. A quick note on the sample, we stress-tested the system to see if we could vote multiple times (which would therefore inflate the negative sentiment) - but, no dice. These results seem like they're for real.

 

It's particularly interesting that those who say they will miss Target in Canada totals 11%. Given that 11% of Canadian citizens had shopped at a Target in the US in the 12 months prior to Canada's opening it leads us to believe that a good chunk of the 11% who say they will miss TGT Canada were already established US shoppers.

 

To us this means that 1) Target Canada has yet to establish meaningful brand equity outside of its carry over customers from the US, and 2) customers missing Target in Canada is mostly a function of convenience.

 

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Editor's Note: This is a complimentary research excerpt from Hedgeye Retail sector head Brian McGough. Follow McGough on Twitter @HedgeyeRetail

Subscribe to Hedgeye.


Cartoon of the Day: Flying South

Takeaway: Twitter shares have been bludgeoned 27% over the past five days. Our Internet & Media analyst Hesham Shaaban has been the bear on TWTR.

Cartoon of the Day: Flying South - Twitter cartoon 5.7.2014


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Quick Take on ARP Deal = Dilutive

This morning Atlas Resource Partners (ARP) announced that it will acquire a 25% non-operated interest in the Rangely Field in NW Colorado from Whiting Oil & Gas (WLL) for $420MM in cash.  Rangely is an old oil field undergoing CO2 injection, currently producing ~2,900 boe/d net to ARP (90% oil, 10% NGLs), with production in decline at 3 - 4% per annum.  Chevron is the operator.

 

Estimated Deal Metrics

P/2015e EBITDA = 7.8x

P/2015e EBIT =11.0x

P/Current Production = $145,000/boe/d

P/PDP Reserves = $16.80/boe

P/PV-10 = ???

 

By our estimates and calculations, the acquisition is dilutive to both ARP and ATLS.

 

Importantly, Whiting USA Trust II (WHZ) owns a 4.6% working interest in Rangely, and disclosed that 2013 expected total CapEx net to its interest was $3.3MM in 2013 and will be $2.9MM in 2014 (see WHZ 2012 and 2013 10-Ks).  The vast majority of this CapEx is capitalized CO2 and other maintenance activity.

 

"The underlying properties include a 4.6% working interest in the Rangely Weber Sand Unit. Capital is expended each year to purchase CO2 for injection in the field, and capital is also expended for the drilling of additional wells to optimize field recovery. According to information provided by the operator, the 2014 estimated capital expenditures are $2.9 million allocated to the underlying properties’ interest and are comprised of development drilling activities, plant and equipment expenditures and CO2 purchases" (WHZ 2013 10-K, pg. 46). 

 

That means that CapEx net to ARP's 25% working interest equates to $17.9MM and $15.8MM in 2013 and 2014, respectively.  The field produces 1.0MMboe per year net to ARP, putting total CapEx/boe at $16.00 - $18.00.

 

As ARP disclosed, the field is in decline.  That means that every $ of CapEx AND MORE that ARP incurs here is truly maintenance CapEx.  We don't know what the reported maintenance/growth CapEx split will be yet - we will listen for that info on the ARP CC tomorrow morning - though we suspect that ARP will allocate a significant % of the budget to growth CapEx.  If so, how can that be justified?  G-CapEx on a field that is in decline...?

 

Assuming the current WTI strip, a 3.5% annual production decline, the midpoints of guided LOE expense and price differentials, a 7.0% production tax, and no additional OpEx (transportation?  G&A?), we estimate that the acquired assets will generate $53.8MM of EBITDA net to ARP in 2015.

 

We assume M-CapEx of $16.7MM (~$16.50/boe).

 

Other key assumptions include 50% debt/equity financing, a 9.25% interest rate on the new debt (the same rate that ARP issued senior notes at in 2013), new ARP units issued at $20.00, and a $2.50 LP distribution in 2015 (vs. the 2014 guidance of $2.40 - $2.60), putting ARP in the 50/50 IDR split.

 

The result is mild dilution for both ARP and ATLS.

 

A key tenet of the ATLS bull case is that ARP can grow via accretive acquisitions.  We believe the bull case is flawed.  

 

Quick Take on ARP Deal = Dilutive - arp1

 

We'll have more color on ARP and ATLS after tomorrow's CC (which we expect to be uber-promotional!).

 

Kevin Kaiser

Managing Director


Why You Should Tread Carefully In Consumer Staples Right Now | $XLP

Takeaway: The sector is loaded with a premium valuation (P/E of 19.4x).

Why You Should Tread Carefully In Consumer Staples Right Now | $XLP - wallstreet2

 

Last week, Consumer Staples (XLP) traded in-line with the broader market, rising 0.9%. XLP is up 2.68% year-to-date versus the SPX at 1%.

 

Our Consumer Staples team continues to believe that the group is facing numerous headwinds, including:

 

  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating, and Q2 2014 theme of #ConsumerSlowing.
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth.
  • The sector is loaded with a premium valuation (P/E of 19.4x) > see chart below.
  • Less sector Yield Chasing as Fed continues its tapering program.
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index (recently rescaled for cosmetic and not component reasons) has not seen any real improvement over the past 6 months.

As Hedgeye CEO Keith McCullough tweeted earlier today, “We remain short of consensus US growth expectations.”

 

Why You Should Tread Carefully In Consumer Staples Right Now | $XLP - chart44

 

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Editor's Note: This is an excerpt of a research note that was originally provided to subscribers on May 5, 2014 by Hedgeye Consumer Staples analyst Matt Hedrick. Follow Hedgeye's Consumer Staples sector @HedgeyeStaples.

SUBSCRIBE TO HEDGEYE.


MACAU APRIL DETAIL

As you already now, April gross gaming revenues (GGR) increased 11% YoY but as always, the devil is in the details. 

 

 

The bad news is that VIP revenues grew only 1%.  Hold percentage recovered in the 2nd half of the month and actually finished right around normal levels and in line with April 2013.  The good news is that Mass performed very well, up 34% YoY. 

 

Here are some takeaways:

 

Market

  • Mass revenues grew 34%, slightly below the average growth for the last 12 months – April Mass faced a difficult 2 yr comp
  • Rolling Chip (RC) volume and VIP revenues grew only 1%
  • RC volume grew at the slowest rate in over a year
  • Slots were disappointing, up only 3%
  • Assuming consistent hold in both periods, GGR would’ve grown 12% YoY 

MACAU APRIL DETAIL - MA1

 

MACAU APRIL DETAIL - MA2

 

LVS

  • GGR grew only 13% YoY – the slowest rate in 2 ½ years
  • The LVS properties held very well on VIP – 50bps above normal - even higher than last April which was also above normal
  • Still, VIP revenues fell 4% and RC dropped an alarming 12%, the company’s worst performance since the dreary days of 2009
  • One would expect high hold to negatively impact volumes but not this much
  • Mass grew 35%, the slowest rate since August 2012 

WYNN

  • GGR grew 26%, the 3rd highest rate in a year and a half
  • WYNN’s GGR growth led the market.  I thought the property was at full capacity?
  • WYNN held normal on VIP but well above April 2013
  • Higher hold pushed VIP revs above market growth although RC volume was flat
  • Surprisingly, Mass growth of 52% led the market
  • WYNN remains our favorite Macau stock

 MGM

  • MGM held around normal but well above last year
  • YoY GGR growth was solid, driven by Mass, which grew 47% YoY, the 2nd highest growth rate
  • RC actually declined 4%.  MGM’s RC business could be under more pressure if Wynn Macau decides to get more aggressive on commissions advancement to junkets
  • The weak VIP business pushed market share below recent trend

MPEL

  • Held well above normal on VIP (70bps higher) and 20bps above last year
  • GGR fell YoY for only the 2nd time in a year and a half
  • RC volume is the problem – down 21% YoY – we’ve been hearing of liquidity issues with some of the junkets
  • Mass grew in line with the market 

Galaxy

  • Mass grew only 16% - the slowest in the market
  • Galaxy was the clear winner in the VIP race with RC volume growing 27%
  • VIP hold was below normal and last April yet VIP revs still managed 21% YoY growth

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