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BLMN: Closing Best Idea Short

We added Bloomin’ Brands (BLMN) to our Best Ideas list on 11/27/2013 at $26.71/share.  Since this time, 2014 EPS estimates have been revised down from $1.33 to $1.22 and the share price has acted accordingly (down ~20%).  With this note we are removing Short BLMN from our Best Ideas list.

 

In our view, Bloomin’ still has issues but we feel our short thesis is largely played out.  At 8.02x EV/EBITDA (NTM) and 16.66 P/EPS (NTM), Bloomin’ screens rather attractively relative to other casual dining companies.  With that being said, we continue to believe casual companies in general are quite expensive.

 

Considering an attractive relative valuation and reset expectations, we believe the short setup is no longer favorable from a risk/reward perspective.  Decelerating two-year same-store-sales trends and stagnant margins continue to give us cause for concern, but staying short at these levels is no longer compelling. 

 

Despite our move to the sidelines, we continue to believe 2015 estimates for 19% EPS growth on 7% revenue growth are too aggressive.

 

Research Recap:

New Best Idea: Short Bloomin’ Brands (11/27/2013)

BLMN: A Bloomin’ Mess (01/13/2014)

BLMN: Beat & Guide Down (02/25/2014)

BLMN: Still Bearish (05/09/2014)

 

BLMN: Closing Best Idea Short - 1

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


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Retail Callouts (5/14): KSS, JCP, TGT, SHLD, ANF, KER, URBN, CROX

Takeaway: KSS enters the CEO hunt. We give prospects for top job at KSS TGT JCP. SHLD looks to exit Sears Canada. Yet TGT sticks to egregious targets.

EVENTS TO WATCH

 

THURSDAY

  • WMT - Earnings Call: 4/15, 7:00am
  • KSS - Earnings Call: 4/15, 8:30am
  • JCP - Earnings Call: 4/15, 4:30pm
  • JWN - Earnings Call: 4/15, 4:45pm

 

COMPANY NEWS

 

We'll have separate comments on Macy's and Kate Spade earnings.

 

KSS - Kohl's CEO Planning Management Shuffle

(http://online.wsj.com/news/articles/SB10001424052702303851804579559911754291166?mg=reno64-wsj)

 

  • "Mr. Mansell is planning a management shuffle, according to a person familiar with the matter. And he is also scouting for a new chief merchant who would be a candidate to ultimately succeed him, people familiar with the matter said."
  • "The CEO is seeking to boost growth when the retail industry is struggling with budget-conscious shoppers who are increasingly turning to the Internet for everyday purchases."
  • "Kohl's board is looking for Mr. Mansell, 61 years old, to demonstrate progress on those fronts at a board meeting Wednesday, the day before Kohl's reports first-quarter earnings. At that session, he is expected to describe plans for a broader management reorganization, said a person familiar with the situation."
  • "In April, Kohl's lost its chief merchandising officer, Donald Brennan, who joined the company in 2001 and was promoted to chief merchant in 2010 but had received a weak performance grade, according to regulatory filings. Mr. Mansell has been personally sounding out candidates for the chief merchant's job with an eye to having them eventually succeed him as CEO, several people familiar with the situation said."
  • "Mr. Mansell has reached out to Brendan Hoffman, who earlier this year said he plans to leave his post as CEO of Bon-Ton Stores Inc. when his contract expires in February, these people said. Mr. Hoffman is unlikely to take the job since it wouldn't immediately place him in a CEO role, one of the people said."

 

Takeaway: This tells us that there's now three potential top jobs open at mega-US retailers; Target, JC Penney, and Kohl's. The pool of candidates is not huge, but there are some heavyweights. There's Roger Farah, who has only two weeks left at Ralph Lauren. Bill McComb, who is currently on vacation after turning the dog that was Liz Claiborne into the hyper-growth Kate Spade. Vanessa Castagna, who was the underappreciated architect of the Eckerd-era turnaround at JCP over a decade ago. Let's also not forget Glenn Murphy from Gap. The fact of the matter is that he is a far better CEO than a company like Gap probably deserves. He's done a great job fixing the company, and at age 51 -- has a much bigger and better job left in him.

 

SHLD - Sears Holdings Provides Update On Its Interest In Sears Canada Inc.

(http://searsholdings.mediaroom.com/index.php?s=16310&item=137287)

 

  • "Sears Holdings Corporation announced today that it is exploring strategic alternatives for its 51% interest in Sears Canada, including a potential sale of Sears Holdings' interest or Sears Canada as a whole. In connection with those efforts, Sears Holdings intends to engage an investment banking firm."
  • "Sears Canada's board of directors has advised Sears Holdings that Sears Canada's board and management intend to cooperate fully with Sears Holdings in this process to achieve value for all shareholders."

 

Takeaway: And Target still thinks it can generate productivity in its Canada stores above what it sees in the US with Gross margins 500bp better than US levels. Seriously?

 

OTHER NEWS

 

URBN - Urban Outfitters Getting Active

(http://www.wwd.com/markets-news/intimates-activewear/urban-outfitters-getting-active-7679159)

 

  • "Since March, the apparel and accessories brand developed by Urban Outfitters to cross the fitness, cycle, trail and surf categories has taken over roughly 1,500 square feet inside the retailer’s high-profile stores in New York, Costa Mesa, Calif., Santa Monica, Calif., King of Prussia, Pa., Portland, Ore., San Francisco, Seattle and Hollywood, where Without Walls officially launched with a party in April."
  • "In June, a Without Walls in-store shop will be added at the Urban Outfitters location in New York’s Herald Square before the concept will expand to another four to six doors in the fall and possibly three to six doors in 2015."

 

Retail Callouts (5/14): KSS, JCP, TGT, SHLD, ANF, KER, URBN, CROX - chart1 5 14

 

KER - Puma’s Power

(http://www.wwd.com/footwear-news/people/fn-spy-toms-goes-ape-puma-taps-jadeveon-clowney-7679560)

 

  • "Puma added some firepower to its endorsement lineup. The brand announced that No. 1 National Football League draft pick Jadeveon Clowney is joining its training team. The new Houston Texan will be included in Puma’s new 'Forever Faster' campaign, set to launch later this year."
  • "It will be the first in his multiyear agreement. Clowney, who called his deal with the brand a 'dream come true' in a release, will join fellow NFL players Jamaal Charles and Cordarrelle Patterson on the Puma roster."

 

ANF - Michael Jeffries Pay Drops at Abercrombie

(http://www.wwd.com/business-news/human-resources/michael-jeffries-pay-drops-at-abercrombie-7679608)

 

  • "Abercrombie & Fitch Co. chief executive officer Michael Jeffries saw his total reported compensation decline by more than 70 percent last year to $2.2 million…"
  • "The new pact, which can be terminated by Jeffries or the company with 12 months’ notice after its first anniversary next February, also removed provisions which could have added about $88 million to Jeffries’ severance in the event of a change of control."

 

CROX - Brand Management Veteran Andrew Rees Named President of Crocs Brand; CEO Search Continues

(http://investors.crocs.com/phoenix.zhtml?c=193409&p=irol-newsArticle&ID=1930540&highlight=)

 

  • "Crocs Inc. today announced consumer brand management expert Andrew Rees has been named President of the Crocs brand.  Rees also will assume the role of principal executive officer until the company's search for a permanent chief executive officer is successfully concluded.  Rees will report to the Crocs board of directors.  He is expected to join the company officially on or about June 9th."
  • "Rees joins Crocs from LEK Consulting, a global management consulting firm with offices across Europe, the Americas and Asia-Pacific.  He founded and led LEK's retail and consumer products practice for 14 years, building the practice into one of LEK's major consulting areas."

LEISURE LETTER (05/14/2014)

Tickers: PNK, HOT, SHO, PENN, RCL, NCL

EVENTS TO WATCH

Wednesday, May 14:

Wells Fargo Gaming Conference in Las Vegas (all times EDT)

• 12:05pm MCRI and MNTG

• 12:50pm MGM

• 1:35pm ISLE

 

• Atlantic City April Revenues

• Japan Gaming Conference thru Friday, May 16

 

Thursday, May 15

• Japan Gaming Conference thru Friday, May 16

COMPANY NEWS

INSIDER TRANSACTIONS

  • PNK – CEO Anthony Michael Sanfilippo acquired 23,000 shares of the company’s stock on the open market in a transaction dated Friday, May 9th. The shares were purchased at an average cost of $21.99 per share, for a total transaction of $505,770.00. Following the completion of the transaction, Mr. Sanfilippo now directly owns 180,442 shares in the company.

Takeaway:  Could it have something to do with improving May trends? We're seeing it.

  • HOT – Sergio Rivera, Co-President of The Americas, sold 59,234 shares of Starwood Hotels & Resorts Worldwide stock on the open market in a transaction that occurred on Monday, May 12th. The shares were sold at an average price of $80.00, for a total value of $4,738,720.00. Following the completion of the sale, the insider now directly owns 42,871 shares in the company, valued at approximately $3,429,680.

Takeaway:  Hopefully, the company was on the other side of the transaction.

  • SHO – President John V. Arabia sold 140,000 shares of SHO stock on the open market in a transaction that occurred on Friday, May 9th at an average price of $14.27, for a total transaction of $1,997,800.00. Following the completion of the transaction, the president now directly owns 486,299 shares of the company’s stock, valued at approximately $6,939,487. 

 

GLPI – announced a very large $465 million acquisition of The Meadows Racetrack and Casino in Washington, Pennsylvania - subject to regulatory approval.  Based on the ~9x 2013 EBITDA = $52 million EBITDA. 

Takeaway:  This is a large acquisition and should silence the naysayers. However, the purchased is expected to be funded with the issuance of new equity (we estimate 8 million shares) and debt. While accretive to estimates and overall a positive, the pending equity issuance could create an overhang on GLPI stock.

 

PENN – announced that Argosy Sioux City General Manager Lance George has been named general manager at the new Plainridge Park Casino in Plainville, Mass. The 106,000-square-foot racing and gaming facility, featuring live harness racing and simulcasting and 1,250 slot machines, is scheduled to open in 2015.

Takeaway: Now seems like a reasonable conclusion that the property will be closing sooner (June 30th) rather than later. 

 

RCL (Hostelur) Pullmantur confirmed its Sovereign ship will be moved to Marseille in the coming days to undergo repair work.  Sovereign had encountered an engine failure that caused a reduction in navigation speed.  Pullmantur will reimburse all cruise costs and a 60% discount on the next cruise.

Takeaway:  A couple more small incidents like this will materially impact yields.

 

Blue Star Line (Travel Pulse) Titanic II: 'Ship of Dreams' Comes Closer to Reality

Blue Star Line said it has signed memorandum of understanding appointing China’s AVIC as its latest Titanic II project partner. AVIC will promote the Titanic II project and coordinate Titanic II sponsors from mainland China. CSC Jinling Shipyard, a Chinese shipyard where Palmer currently builds cargo vessels for his Australian mining interests, will build the new ship.  The 1st project development phase has been completed.  The ship's source market is China and is scheduled for deployment in 2018.

Takeaway:  This joke ship may be built after all

 

NCL  – (Channel 5 Belize) Minister Hulse shocked by thumbs down given to NCL project

The multi-million dollar Norwegian Cruise Lines tourism project in southern Belize has been all but given a green light by the Government of Belize.  But government’s approval is not the same thing as welcoming arms everywhere. The Belize Tourism Industry Association has filed a lawsuit against the Government of Belize, and there is word that the Placencia Village Council has unanimously voted against the project.

Takeaway:  Relatively small project running into complications

INDUSTRY NEWS

Macau Gaming - Macau casinos will be handed a deadline of July 1, 2014, to eliminate illegal China UnionPay mobile swipe card devices or face a crackdown on the city's multimillion-dollar illegal cash-transfer business.

Takeaway: We doubt the casinos currently have "illegal" mobile swipe devices on their gaming floors given all the news leading up to this pronouncement as well as the operators wanting to maintain a clean image heading into concession renegotiations. 

 

Hotel Transaction - RIU Hotels & Resorts will acquire a luxury 252 room hotel in the French part of the Caribbean island of St. Martin for $45 million and then rebrand the property Rui Palace St. Martin.  Average price per key: $179k.

Takeaway: Seems like a reasonable price without knowing the amount of additional capex investment and expected ADR under the RIU flag. 

 

Ski Industry – Dick Bass announced he sold a majority interest in the Little Cottonwood Canyon (owner of Alta and Snowbird) resort to Ian Cumming, a businessman familiar with Utah’s ski industry since his family owns Park City Mountain Resort (PCMR).  Depsite the change in ownership, the company is proceeding with plans to break ground in July on the two-year Hidden Peak project, to build more biking trails on the mountain, and to renovate the Snowbird Center and Cliff Lodge.

Takeaway: We find it very interesting that neither publicly traded ski resort company (MTN nor SNOW) were the buyers.  Given PCMR's ongoing litigation with Vail over management of Canyons Resort, the PCMR angle may have just become more interesting.

 

European travel – (Hostelur) 54% of Europeans plan to travel during summer vacation this year, flat YoY.  This was an improvement from the previous two years, which recorded declines.  Average budget for the summer holidays is stable, with the UK leading the way.  

Takeaway:  Steady is usually a good sign for the leisure industry, especially in Europe

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.


Teaching Americans a Policy Lesson

Client Talking Points

UST 10YR

The 10-year yield smoked to fresh year-to-date lows 2.57% on a #ConsumerSlowing Retail Sales (24% of GDP) report for April (newsflash, it wasn’t just the February weather). Buy either inflation or slow-growth-yield-chasing, not high multiple growth stocks, IWM, QQQ.

COMMODITIES

It’s a tasty morning for the #InflationAccelerating theme as oil (both Brent and WTI) confirm a TREND breakout to the upside and Gold makes another higher-lows after holding Hedgeye TREND support of $1,271.

EUROPE

Interesting morning for Europe as Scottish employment hits its best level since 1992 on #StrongPound, but the 2014 leaders in European Equities lag (Portugal -1.7%, Italy -0.3%, making lower-highs too). Is this as good as the news gets? Sell in May? Meanwhile, Bank of England Governor Mark Carney is teaching Americans a policy lesson – let a currency strengthen and an economy does alongside it.

 

Asset Allocation

CASH 12% US EQUITIES 6%
INTL EQUITIES 10% COMMODITIES 26%
FIXED INCOME 24% INTL CURRENCIES 22%

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

After closing down almost 1% yesterday, Russell 2000 is -7.2% since March #GrowthSlowing @KeithMcCullough

QUOTE OF THE DAY

"The way to get started is to quit talking and begin doing." - Walt Disney

STAT OF THE DAY

Unemployment in Scotland fell by 18,000 to 178,000 between January and March while employment reached its highest level since records began in 1992. The jobless rate was 6.4%, which was below the average of 6.8% for the whole of the UK. (BBC)


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