BNNY: Reiterating Short Into Earnings

We added Annie’s (BNNY) to our Best Ideas list as a short on 04/07/2014 at $37.16/share.  Since this time, the stock has traded down approximately ~15% while earnings estimates have essentially remained flat.  With the company set to report 4QF14 earnings on June 10th, we are reiterating our short.


To be clear, we believe Annie’s is a strong, resonant brand that is well positioned to grow within the natural and organic segment of the food industry.  This is generally acknowledged by the street, as the company has been awarded a substantial premium valuation to its peer group.  While this gap has tightened since we released our call, it still exists to a notable degree.  BNNY is showing significantly stronger top line growth than its peers, but we have legitimate concerns with the company’s ability to manage EPS in the intermediate-term; a risk that we believe is not fully reflected in stock.


In our view, managing a rapidly growing business is becoming increasingly challenging – a problem the recent Joplin plant acquisition could exacerbate.  While last year’s balance sheet issues give cause for concern, management has done an adequate job tightening internal controls.  What is more concerning to us, however, is increased competition (WWAV, WMT), building margin pressure (cheese, organic grains), a lack of earnings visibility and aggressive estimates. 


We remain bearish on an intermediate-term TREND duration and continue to believe that 4QF14 and FY15 estimates will prove too aggressive as Annie’s incurs some common growing pains.


Research Recap:

New Best Idea: Short BNNY (04/07/2014)

Presentation: Short BNNY (04/10/2014)

BNNY: Intermediate-Term Downside (04/11/2014)


BNNY: Reiterating Short Into Earnings - chart1


Howard Penney

Managing Director


Matt Hedrick



Fred Masotta


Daily Trading Ranges, Refreshed

Takeaway: Almost six months into 2014, what is clearly causal to slowing US consumption growth is #InflationAccelerating.

Editor's note: This unlocked edition of Daily Trading Ranges was originally provided to subscribers on May 20, 2014 at 7:30 a.m EST. For more information on how you can receive these levels every morning in your inbox click here.  


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VIDEO | Keith's Macro Notebook 5/20: VOLUME RUSSELL 2000 EUROPE

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Retail Callouts (5/20): TGT, URBN, ICSC

Takeaway: TGT announces Canada management changes. URBN doesn't blame the weather. Bberg poll says TGT cust. ready to forgive - our data disagrees




  • TIF - Earnings Call, 8:30am
  • PETM - Earnings Call, 10:00am
  • TGT - Earnings Call, 10:30am
  • AEO - Earnings Call, 11:00am
  • WSM - Earnings Call, 5:00pm



  • LB - Earnings Call, 9:15am
  • BKE - Earnings Call, 10:00am
  • BONT - Earnings Call, 10:0am
  • ARO - Earnings Call, 4:15pm
  • ROST - Earnings Call, 4:15pm
  • GPS - Earnings Call, 5:00pm


FRIDAY (5/23)

  • FL - Earnings Call, 9:00am




ICSC - Chain Store Sales Index


Not a terrible reading from this week's ICSC SSS numbers -- +2.4% versus last year. The sequential drop off from last week's 3.9% growth might seem troubling, but the 3.9% was of an extremely easy comp from the prior year. On a 2-year run rate, which is probably more appropriate to do, this week marks a 40bp acceleration.  Not great, but positive on the margin so early in the second quarter for retailers.


Retail Callouts (5/20): TGT, URBN, ICSC - chart1 5 20




URBN - 1Q15 Earnings


Takeaway: Definitely a disappointing quarter for URBN, and as everybody knows, it's all about weakness in the Urban Outfitters concept. One thing we give management all the credit in the world for is that it did not use weather as an excuse -- even though everyone else is. They noted that great companies perform regardless of the weather -- as Anthropologie and Free People did. They expect the same from Urban, which is dragging because of its own problems, not Mother Nature's.  That's the kind of accountability we like to see from companies we invest in.


Retail Callouts (5/20): TGT, URBN, ICSC - chart2 5 20


TGT - Target Announces U.S. and Canada Leadership Changes to Drive Company’s Transformation



  • "Target today announced a number of leadership changes in the U.S. and Canada that will further the company’s efforts to drive U.S. traffic and sales, improve its Canadian operations, and advance its ongoing digital transformation."
  • "Effective immediately, Tony Fisher, president, Target Canada, will depart the company. Mark Schindele, senior vice president, merchandising operations, will assume the role of president, Target Canada. In this position, Mark will report to Kathee Tesija, chief merchandising and supply chain officer, whose responsibilities include Target Canada."
  • "To bring further strategic counsel and deep Canadian market expertise to the team, Target will also be naming a non-executive chair in Canada. In this newly created advisory role, the non-executive chair will provide counsel and support to the president of Target Canada to ensure all strategies and tactics align with the Canadian marketplace."
  • "In the U.S., Target is also elevating three senior merchandising leaders and realigning the team to better leverage functional expertise as the company focuses on driving improved performance."
    • "Trish Adams has been promoted to executive vice president, apparel and home
    • Jose Barra has been promoted to executive vice president, essentials and hardlines
    • Keri Jones has been promoted to executive vice president, merchandising planning and operations"


Takeaway: Let me get this straight…you fire the President of Target Canada two weeks after you fire Steinhafel, and a day before you report the quarter. We'll use our powers of deductive reasoning to assume that Target Canada isn't performing to plan (this was one of the factors we outlined when we analyzed the Canadian market in our Best Ideas Short Call last month). What we're interested to know is who is making these headcount decisions. We know that TGT's CFO is serving as the interim CEO, but we'd be surprised if Mulligan was making such major organizational decisions. This is probably coming straight from the Board.


TGT - Target Customers Ready to Forgive and Forget, Poll Finds



  • "Following a data breach over the holiday season that affected millions of shoppers, only 7 percent of customers plan to reduce spending at the chain over the next year, according to a Bloomberg National Poll. The survey, conducted May 8-11, also found that Target’s decision to replace its chief executive officer this month had little effect on consumers’ desire to shop at the chain."
  • "Despite the turmoil, 85 percent of customers expect to shop about the same amount at the chain over the next year, the survey found. Seven percent will spend more, and 7 percent will shop less. One percent had no opinion. The results had a margin of error of as much as 4.5 percentage points."
  • "About half of customers are confident that Target will be able to keep credit and debit-card information safe from here on in, the survey found. The removal of Steinhafel, meanwhile, made no difference for 84 percent of the 1,020 people polled. Eight percent said they would likely make more purchases at Target after the CEO change, while 7 percent it would reduce their spending."


Retail Callouts (5/20): TGT, URBN, ICSC - chart3 5 20


Takeaway: The key data point in this study is that only 50% of TGT customers are confident that Target will be able to keep credit card data safe. Not a glaring endorsement from the customer. Bloomberg's visitation statistics are good for headlines, but they fail to capture the sequential change in consumer sentiment. Our data spanning 3 surveys over a 9 month window shows that shopping intent is going the wrong way for TGT.




TGT - Gregg Steinhafel Exit Package Totals Nearly $16M



  • "Gregg Steinhafel will receive about $15.9 million in severance and other benefits following his dismissal as chief executive officer of Target Corp."
  • "According to Target’s definitive proxy, Steinhafel, upon signing an agreement that includes a nonsolicitation clause and a release of claims, will be eligible for $7.2 million in severance payments, plus $10 million in a deferred compensation plan and, based on Target’s closing stock price as of May 5, restricted stock units with a grant date fair value of $4.1 million."
  • "Subtracted from that total of $21.3 million are $5.4 million in supplemental pension plan payments forfeited in exchange for his severance."


9983 - Uniqlo Lets Consumers Design Their Own T-Shirts



  • "Uniqlo on Monday introduced a new service that lets consumers develop their own T-shirts. Called UT Me, it enables them to use a smartphone or tablet computer touchscreen and a new Uniqlo app to create unique graphics and text, which are printed onto a T-shirt in their size."
  • "The T-shirts are delivered to customers’ homes, though they can also pick them up in person by visiting Uniqlo’s store in the Ginza district of Tokyo, which has been equipped with a T-shirt printer to demonstrate the service until August."
  • "The service, available only in Japan for now, charges 1990 yen per shirt (about $19.60), plus 450 yen for delivery, excluding tax. For now, customers can have any color T-shirt, as long as it’s white, though the company says other hues are a possibility eventually."


Retail Callouts (5/20): TGT, URBN, ICSC - chart4 5 20


PVH - Total Pay Up for PVH's Emanuel Chirico in 2013



  • "An upswing in PVH Corp. chief executive officer Emanuel Chirico’s stock awards helped neutralize a decline in his cash take last year as his total compensation increased by nearly half, to more than $18 million."
  • "The numbers on Chirico’s pay were included in PVH’s definitive proxy, which also revealed that Helen McCluskey, the former ceo of The Warnaco Group Inc. and a PVH director since the sale of Warnaco to PVH in early 2013, wouldn’t stand for reelection to the board at the company’s annual meeting next month."


GPRO - GoPro Files for $100 Million Initial Public Offering 



  • "GoPro Inc. filed paperwork Monday with the Securities & Exchange Commission for a $100 million initial public offering."
  • "The filling reports GoPro earned net income of $60.6 million on sales of $985.7 million in 2013, up 87.4 and 87.6 percent respectively from 2012. The company’s stock would be listed on the NASDAQ and trade under the symbol GPRO."
  • "The company expects to use the net proceeds from the offering for general corporate purposes, including working capital, and to fully repay its term loan under a credit facility, which had an outstanding balance of $111.0 million as of March 31, 2014. It may also use a portion of the net proceeds to acquire or invest in complementary businesses, technologies or assets."

LEISURE LETTER (05/20/2014)

Tickers: DRH, SHO, WOLF, CCL


Tuesday, May 20 - Wednesday 21

  • East Coast Gaming Congress

Tuesday, May 20 - Thursday May 22

  • G2E Asia - The Venetian Macao


 Thursday May 23

  • Codere 1Q conf call

 Thursday May 27

  • Aristocrat F1H 2014 conf call



DRH - Director Gilbert T. Ray sold 15,797 shares on Friday, May 16 at an average price of $11.88. Following the transaction, Mr. Ray now directly owns 43,653 shares in the company, valued at approximately $518,598.

SHO - SVP, Treasurer & Secretary Lindsay Newton Monge sold 7,521 shares of Sunstone Hotel Investors stock on Monday, May 19 at an average price of $14.22. Following this transaction, Mr. Monge now directly owns 90,841 shares in the company, valued at approximately $1,291,759.

Takeaway: There is clearly a wide dichotomy between the view from the C-Suite (bottom of the fifth inning in the lodging cycle) told to investors and how C-Suite insiders trade their company stock. Recent insider activity for lodging is clearly biased to the "sell" side.  

WOLF - will break ground Wednesday on a new Great Wolf Lodge in Garden Grove, CA (near Disney) that will feature a 121,000-square-foot indoor water park – the company’s largest – along with a 603-room hotel and conference center.  The $250 million development is scheduled to open in late 2015.

Takeaway: New competition for the "happiest place on earth"...


CCL –  (Seatrade Insider) Holland America Line will transfer the 1,258-passenger Ryndam and Statendam to P&O Cruises Australia in November 2015, making the company the biggest year-round operator in Australasia by increasing its fleet from three to five ships.  Stein Kruse, CEO of Holland America Group, said these ships are definitely not replacement vessels for Pacific Dawn, Pacific Jewel and Pacific Pearl.  He insisted P&O Cruises Australia will be a five-ship company ‘for the foreseeable future.’  Kruse said Australia is ‘far away from overcapacity’ and believes the additional ships will increase the number of fly-cruise passengers from the US, Europe and Asia.  Holland America Line’s 99,500gt Pinnacle-class ship for 2,660 passengers, due for delivery in February 2016, will replace the capacity of the two ships moving to Australia.

Takeaway:  Another bold decision that could bring dividends.  Although the demographics are not as favorable (54% of Australia's ~23 million people are between the ages of 25-64), CCL is exploring the newer cruise markets to make room for the new HAL ship.   


CCL – Power Failure Strands Costa Cruise Ship in Port Cruise Critic

 Costa Deliziosa had a power failure in Valencia and will remain in port until the cause of the outage is identified and fixed.  The blackout lasted for "a few hours" before technicians managed to restore power and essential services.  Although it remains unclear exactly how long repairs will take, Costa has told passengers scheduled to sail on an upcoming 13-night Eastern Mediterranean cruise from Civitavecchia (for Rome) on May 20, that the ship will not sail as scheduled.

Takeaway:  Get your act together Costa, you're having a decent year


China to pilot digital exit-entry permit to HK, Macau Macau News

According to the Ministry of Public Security of China, China will issue smart cards to gradually replace the current paper permits for those commuting between the mainland and Hong Kong and Macau.  The ministry plans to pilot the new permit in Guangdong, a province in south China adjacent to Hong Kong and Macau, and local police agencies will accept applications for the e-permit starting May 20.

Takeaway: Anything that smooths the transfer of people is good for Macau.

Illinois Gaming Expansion – Illinois Democratic Representative Bob Rita of Blue Island sent a letter to House Speaker Michael Madigan and Republican leader Jim Durkin looking to gain support for his plan – the first proposal adds five casinos (including one in Chicago) and slots at horse tracks; while the second calls for a mega-casino in Chicago.  Illinois faces an estimated $1.8 billion revenue shortfall unless lawmakers make permanent an income tax increase that is scheduled to roll back in January.

Takeaway:  More talk, no action


Massachusetts Gaming Expansion - Foxwoods Casino Resort and the investment group Crossroads Massachusetts LLC are upping the ante and betting on finding 120-acres of waterfront property to expand their proposed destination resort project by more than three times its present size. Fall River and Foxwoods are taking advantage of an extended deadline of Sept. 23 to submit an application for the license to work on a better project and host community agreement.

Takeaway: Sounds like Foxwoods is attempting to compete with the proposed Wynn Everett development.  


AAA survey –  36 million Americans, +1.5% YoY, will travel 50 miles or more for Memorial Day.  The travel period in the report covers Thursday, May 22, through Monday, May 26.  Gas prices are expected to stay the same as last year's national average of $3.63 per gallon.

Takeaway: Good news for leisure travel and bookings


Asia Unrest

  • Vietnam/China - the territorial dispute and protests over China's decision to move an oil rig into disputed waters of the South China Sea spiraled into riots last week in which foreign-owned factories were burned and looted.
  • Thailand - Thailand's army declared martial law nationwide on Tuesday to restore order after six months of street protests that have left the country without a proper functioning government

Takeaway:  Global geopolitical unrest is increasing.  Some Chinese travel agents have already suspended Vietnam tours.  China also at territorial odds with Philippines and Japan and curbing tourism to Malaysia/Singapore.


Singapore - Q1 2014 GDP of 4.9% missed consensus estimates of 5.5%.  The expansion in GDP during the January-March period was lower than the government's initial estimate of 5.1%. 

Takeaway: Not encouraging news for the mass gaming segment


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.


Shockingly Low Volume

Client Talking Points


Yesterday’s UP-day volume was shockingly low. The total US Equity market volume was down -21% and -41% versus its one- and three-month averages, respectively. TREND remains no-volume on UP-days versus accelerating volume on DOWN-days.


The Russell2000 bounced on no-volume yesterday to A) lower-highs, but B) below both my TRADE (1133) and TREND (1155) lines of resistance – at -4.4% year-to-date into the fifth month of the year, that’s not good. Neither is US #GrowthSlowing.


The ex-dividend drop in Italian stocks yesterday sees follow through this morning as most European Equity markets continue to make a series of lower-highs. Inflation finally ticked up in the UK too (that’s new) – thanks (ECB President) Mario Draghi.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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.


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.



Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road


OIL: higher again this morning as Brent holds $108.60 support #InflationAccelerating @KeithMcCullough


"It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change." - Charles Darwin


Target cut about $8 million from former CEO Gregg Steinhafel's 2013 pay package after ousting him from the job. But he is still making $13 million for his work last year and walking away with a severance package totaling $15.9 million. (CNN)

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