JCP – Dual Duration Call(s)

Takeaway: Doesn’t matter today but at some point in 12 mos the momentum call will give way to LT EPS/valuation call. Not sure if that’s good or bad.

Conclusion: Even the biggest JCP bears have to give credit to Ullman’s team for executing this quarter. That said, it’s a little scary that key P&L and balance sheet levers were so jacked this quarter and yet JCP still lost $0.75 per share. We think it’s critical to bifurcate duration on the JCP call. The near-term call that will likely take it into the first half of next year is all about revenue and margin momentum, with little valuation support. We have a tough time making that call, even though the reality is that it will probably take this stock to $12 within another two quarters. Then there’s the long-term call where the stock looks outrageously cheap (6x p/e, 3x EBITDA, and 25% FCF yield) on our $1.45 in EPS. But our confidence in those numbers is in the bottom quartile of every name we track. Discounting back by 20% suggests that JCP is trading at 13x today – which is about right for a department store on steady-state earnings. The x-factor for us is JCP stepping up its store closures. We think there’s 300 that should be shuttered. Not just bad locations, but also some good ones where the lease could be bought at a premium. In the end, we think the stock is probably headed higher given momentum, and are not averse to owning it so long as it’s on a short leash. But we’d rather hold out for when the research gives us a higher degree of confidence in the longer-term model.


JCP – Dual Duration Call(s) - JCP financials


Full Details

Even JCP bears will have to give some credit to the company for putting up a 6% comp, 640bps Gross Margin improvement, and a 10% inventory reduction. It’s pretty rare to hit that kind of trifecta in retail – especially for a department store. On the flip side of that, it’s scary to see such tremendous metrics on the P&L – growth of 5% on the top line, 28% gross profit, 6% decline in SG&A, and yet have it still result in a loss of $0.75 per share.


This quarter is the best example yet of the two distinct calls that exist here, based largely on duration.


1) There’s the near-term momentum call. That’s the one that’s playing out now. We hate this call. Not because it doesn’t have merit. The reality is that it absolutely does.  It’s the call that will likely take this stock to the low teens over the next 12 months as JCP continues to regain market share (which we firmly believe will happen based on our survey work), take margins higher, and improve its balance sheet. As it relates to market share, our work suggests that the two retailers most exposed to a revived JCP are KSS and M. Collectively they picked up over $1.5bil of the $5.9bil in sales that JCP coughed up over the past three years. That’s a lot more meaningful for KSS in percentage terms, and we don’t think KSS sees JCP coming.That said, this momentum in business recovery has so little valuation support because the company will continue to lose money for at least another two years.

JCP – Dual Duration Call(s) - JCP market share


2) That takes us to the longer-term (Tail) call. This is one that makes more sense to us, as we can model even a partial productivity rebound with a sub-peak margin, and we build up to $1.45 in EPS by the end of our model (’18). Keep in mind that all JCP needs to do is go from being ‘the worst apparel retailer’ to being just plain bad. While bad isn’t what we typically aim for in scouting out good long candidates, the math checks out. Going from trough sales per sq. ft. productivity levels in 2013 at $110 to $145 in 2018 would mean an incremental $4bil in revenue. As the chart below shows, that would put JCP’s productivity just ahead of where Dillard’s stands today, 22% below Kohl’s and its Agenda of Excellence, and 25% below JCP’s own peak – something it will likely never see again (but doesn’t have to). 

JCP – Dual Duration Call(s) - SPSQFT

One key consideration is that we can model these changes til we’re blue in the face, but if management does not have a plan to get there, then it’s a wasted exercise.  That’s been our concern over the past year with Ullman at the helm. But on today’s conference call, we heard management make the first mention of a strategic plan that we’ve heard since Johnson was given the boot last year. They didn’t say what the plan is, and we have no idea if it will be a good one until we hear it live at the October analyst meeting. But even a mediocre plan is better than no plan.

If we use $1.45 in earnings, $1.6bn in EBITDA, and $2.30 in free cash flow in 2018, the stock at $9 is flat-out cheap across the board (6.4x earnings, 3.1x EBITDA, 25% FCF yield). But the problem is that we’re talking 5-years away. There are some companies where we can build a highly quantified and extremely defendable 5-year model. But our confidence level in our JCP 5-year numbers is low relative to where we stand with other companies. If we simply take up our risk premium on $1.45 in EPS and discount it back by 20% annually, then it suggests that today JCP is trading at about 13x normalized earnings. Maybe 20% is too steep, but we’ll take a conservative stance given that we have no clue what management intends to accomplish after the next two quarters.


What will get us really excited?


If they articulate a plan to close stores – a lot of them. Our analysis shows that there’s about 300 stores that should be closed. The company has not agreed with us in the past. But we think that changing dynamics in the real estate landscape is creating opportunities for JCP to jettison its less profitable stores, and get out of malls where it simply does not belong. Here’s a hypothetical example we whipped up for the Cherry Hill Mall in NJ. Currently JCP is one of three anchor tenants in an A mall. It’s likely doing only $165/ft, which is far too low for that property. The problem is that JCP’s customers don’t shop there. The property owner is generating $10mm in income today based on the existing productivity, but if it buys out the JCP lease, and converts to higher productivity concepts (such as Restoration Hardware, Cheesecake Factory, and Whole Foods, for example) the implied REIT income goes up to $24mm per year. Clearly, there’s enough to buy out JCP at a steep premium and still have money left over to build some walls to subdivide the store. As a frame of reference, JCP has about 140 ‘A’ mall locations.


JCP – Dual Duration Call(s) - JCP 4


JCP – Dual Duration Call(s) - JCP 5


Stock Report: CurrencyShares British Pound Sterling (FXB)

Stock Report: CurrencyShares British Pound Sterling (FXB) - HE II FXB table 8 14 14


On 8/13/14 we issued a buy signal on the GBP/USD (via the etf FXB) in our Real-Time Alerts with the cross reaching our immediate-term TRADE oversold level ($1.67) within our bullish long-term TAIL view (support = $1.65).


At the time of our signal the GBP/USD had corrected -2.2% M/M and took a leg down following the BoE’s release of its August Inflation Report. We believe the weakness reflected:

  • UK wage growth that fell -0.2% in Q2 Y/Y (the first decline since 2009)
  • BoE Governor Mark Carney rhetorically pushing out expectations for a rate hike to at least late 1H 2015 (though no specific guidance was given)

Despite the near term correction, the GBP/USD is up +12% since it troughed on 7/5/13 and we expect the cross to continue to be supported higher based on healthy underlying fundamentals into 2H, especially versus what we expect to be economic weakness (below consensus) and dovish policy out of the Eurozone and U.S.


INTERMEDIATE TERM (TREND) (the next 3 months or more)

Over the intermediate term TREND, we expect strong fundamentals to drive a strong Pound:

  • Low Unemployment: the UK unemployment rate to drop below 6.0% by year end (the most recent reading fell 10bps M/M to 6.4%, the lowest level since 2008)
  • Strong Growth, especially versus peers: the BoE revised up its expectation for near-term growth to 3.5% in 2014 (vs ~1% for the Eurozone)
  • Managed Inflation: the tax of inflation has moderate and CPI (currently at 1.9% Y/Y) is near the 2.0% target

Stock Report: CurrencyShares British Pound Sterling (FXB) - chart


On central bank policy, we expect a more dovish policy response from the ECB and Fed versus the BoE that should be supportive of the Pound versus the USD and EUR:

  • Janet Yellen’s commentary suggests she remains an uber dove: (See Reuters article with current and former Fed officials indicating that Yellen and core decision-makers at the U.S. central bank are determined not to raise interest rates too early and risk hurting the fragile U.S. economy). We’ll be watching her Jackson Hole commentary beginning August 21 for a confirming dovish outlook.
  • ECB’s Mario Draghi looks poised to issue QE over intermediate term. Following the June announcement of the issuance of the TLTRO programs to unlock lending, come Fall he may begin QE-lite purchases (via ABS). A hike in rates (after cutting in June) appears highly unlikely over the next year plus given underlying weak fundamentals and inflation expectations that are likely to miss on the downside.  

Essential to our thesis on FXB is expectations around economic growth and the policy stance of central bankers. If and when these expectations shift, so will we, however under the current set-up, we expect the British Pound to be a relative winner, especially versus the USD and EUR. 


Stock Report: CurrencyShares British Pound Sterling (FXB) - HE II FXB chart 8 14 14

PATIENCE OR PENURY: The Jobless, Wage-less, Investment-less Recovery?

Takeaway: Below we parse the historical macro and labor market data and contemplate where we are in the current cycle.

Mania & Myopia:  Historical data investigating the strength and intertemporal dynamics of recoveries following financial crises suggests it takes ~8 years to return to pre-crisis income levels/economic activity. 


With the great recession officially ending in June of 2009 we are now 62 months into the current expansion and have traversed most of the expected period of subdued growth. 


As we’ve noted, the frustration and impatience on the pace of the recovery that pervades media reports and pundit commentary offers an interesting juxtaposition against the almost universal acknowledgement that balance sheet recessions and the back end of long-term credit cycles invariably augur protracted periods of sub-trend growth


Imagine if all the spurious activity, all the sunken search and opportunity costs, all the manic speculation around the monthly NFP number were, instead, diverted towards infrastructure development or figuring out how to effectively teach our kids applied math.  Anyway…..


The chart below remains unnerving, but not particularly surprising.


PATIENCE OR PENURY: The Jobless, Wage-less, Investment-less Recovery? - Post Recession GDP Progression



The Jobless, Wage-less, Investment-less Recovery?

The chart trifecta below shows earnings growth and the employment and investment level over prior economic cycles.  The fact that employment, investment and earnings have all failed to return to prior levels underpins the emergent secular stagnation and employment hysteresis theories.   


We won’t explore the principal demographic (population growth/LFPR), credit cycle (demand amplification), and productivity (slower output growth = slower growth in compensation for that output) arguments driving secular trends in each – here, it’s sufficient to simply re-highlight where we are currently vs cycle precedents. 


As can be seen, the reality isn’t particularly surprising and the collective economist concern not unfounded.  


PATIENCE OR PENURY: The Jobless, Wage-less, Investment-less Recovery? - Ave Hourly Earnings


PATIENCE OR PENURY: The Jobless, Wage-less, Investment-less Recovery? - Emp to Pop Ratio


PATIENCE OR PENURY: The Jobless, Wage-less, Investment-less Recovery? - NDPI   of GDP



Late Mid-Cycle Slowdown or Late Cycle Roll-over? 

The logical question born out of the dour macro realities highlighted above, together with a bond market pricing in slower growth and smaller cap/consumer facing/early cycle equities significantly underperforming is this:   


Does the market/macro roll-over with improvement in the chief labor and economic aggregates never materializing or is there still some runway in the current cycle?


We approached that question from a fundamental perspective in the table below by profiling the economic cycles of the last half century and the surrounding labor market dynamics.


Across each of the lead labor measures, we remain below average levels observed over the prior seven cycles.  Of the six employment measures profiled, Initial claims sits as the best leading indicator of the economy with claims troughing approximately 7 months before the official peak in the economic cycle on average (note that we are using rolling 3-month averages in the labor/market data).  With headline (& NSA) rolling claims making lower lows at present, at face value, it suggests the current cycle hasn’t fully crested.    


The data is always good until it isn’t, the market is not the economy and the current cycle is unique in many respects (financial crisis, magnitude of central bank intervention, demographic inflection, reversal in LT interest rate cycle, etc) but the data mosaic is suggestive: 


Historical financial crises analysis suggests a more subdued, but more protracted recovery (vs typical business cycle oscillations) and a parsing of the historical labor data suggests the next economic peak isn’t yet imminent.   


PATIENCE OR PENURY: The Jobless, Wage-less, Investment-less Recovery? - Eco labor Cycle Profile 2




Much of the debate of the last half year has centered on the underlying tightness of the labor market and read through for inflation and prospective policy.  Conventionally, wages are viewed as a lagging indicator, with wage inflationary pressure building as the labor supply declines and the economy moves towards constrained capacity.


This canonical view of wage inflation certainly makes conceptual sense, but the empirical data is somewhat equivocal. 


The best (& only) LT data set on real wage growth – which focuses on production and nonsupervisory workers - shows real wage growth has been flat/negative for most of the last 4 decades with the current post-recessionary trend in real wage growth comparing favorably with those observed over the last half century. 


Further, whether we can return to the historical 3-4.5% level of nominal wage growth in the face of an aging workforce, declining labor supply, lower productivity and lower credit growth remains a bigger “If” now than ever before.    


PATIENCE OR PENURY: The Jobless, Wage-less, Investment-less Recovery? - Real Hourly Earnings Post recession progression


PATIENCE OR PENURY: The Jobless, Wage-less, Investment-less Recovery? - Nominal Hourly Wage Growth 



Surveying Slack & Common Sense Q&A:  

Ultimately, whether a return to prior cycle levels in wage growth is an accurate barometer of the underlying health of the labor market is probably less important than the fact that the Fed has anchored on wage inflation as a key gauge of labor market slack and key driver in reaching/overshooting its stated inflation target. 


Below we survey the current trends in measures of existing labor slack. In short, all the charts look the same with the prevailing trend remaining one of ongoing, albeit painstakingly slow, improvement.    


Is the labor market probably tighter than the FOMC gives lip service to?  Yes. 


Would they rather overshoot target (particularly with ROW disinflation likely to continue prevailing) and play catch up?  Yes, probably. 


Is patience probably still a better prescription than panic and manic punditry with regard to the current labor market trends and the prospects for the current cycle?  It would appear so.     


PATIENCE OR PENURY: The Jobless, Wage-less, Investment-less Recovery? - Available Workers per Job Opening


PATIENCE OR PENURY: The Jobless, Wage-less, Investment-less Recovery? - ST Unemployment


PATIENCE OR PENURY: The Jobless, Wage-less, Investment-less Recovery? - NFIB Hard to Fill Index


PATIENCE OR PENURY: The Jobless, Wage-less, Investment-less Recovery? - NFIB Compensation Index


PATIENCE OR PENURY: The Jobless, Wage-less, Investment-less Recovery? - Quits vs Confidence


Christian B. Drake



Early Look

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Another tough quarter for Singapore gaming with a resumption of growth elusive.


Q2 2014 was another disappointing quarter for the Singapore casinos with declining hold adjusted GGR and EBITDA.  Singapore Macro isn’t helping nor are a few extraneous issues such as the Malaysian airplane disappearance.  Unfortunately, the outlook looks more challenging – at least through the end of 2015. Growth is proving elusive and we wonder if Singapore will ever be a growth market again given the casino supply growth throughout Asia.  In conclusion, the lack of Singapore growth could continue to provide an overhang on the stock of LVS and obviously, Genting Singapore. 



  • Higher MBS hold boosted Singapore gross gaming revenues 5% YoY in Q2 2014 to S$1.93 billion.  Also, both MBS and RWS had easy Q2 hold comps - 2.5% and 2.6%, respectively.  On a QoQ basis, Singapore GGR declined 12% in Q2 2014.
  • MBS GGR share is in-line with 3 year average. 


  • Adjusting for hold (based on average since inception for both properties) for both periods, GGR fell for the 3rd consecutive quarter, -5% YoY or S$1.83 billion.  (MBS:  -10%, RWS: flat)




  • VIP Rolling chip volume tumbled for the 3rd consecutive month, falling 8% to S$32.23 billion. 
  • MBS continues to lag on VIP volume share - its 40% share is the lowest since Q4 2010.  Its S$13 billion is the lowest quarterly VIP volume since Q1 2011.
  • Q2 2014 market hold was 3.13%
  • Market historical hold since inception was 2.88%




  • Mass revenue dropped another 3% YoY in Q2 2014, the 4th consecutive quarterly decline with volumes down 9% YoY.
  • Thanks to its success on the slots/ETGs, MBS holds a commanding 58% mass (including slots) win share. 




  • Net non-gaming revenue fell 5% YoY in Q2 2014 the 3rd consecutive quarterly decline 
  • Genting Q2 2014 REVPAR declined 3% compared with a 1% decline in the upscale hotel comp set.  Q2 is seasonally a weak quarter.
  • MBS Q2 2014 REVPAR rose 8% YoY compared with 5% growth in the luxury hotel comp set.


  • Revisions on several Singapore macro data points in the past few weeks continue to show a weak macro picture




  • Comps will continue to be difficult on the VIP side in Q3 2014.  VIP win and rolling chip volume grew 72% and 34%, respectively in Q3 2013.
  • LVS and Genting both expressed caution with extending credit to VIPs.  Genting’s large bad debt expense in Q2 2014 indicates a shaky lending environment that will lead to greater prudence in the coming quarters.
  • Mass play is also struggling.  Even with more mass tables and greater investment in the premium mass segment from LVS, this segment has been declining to stagnant since Q1 2012.  Singapore visitation has shrunk this year, although Genting mentioned there has been a greater mix of higher spend visitors.   With many headwinds (macro, currency, travel fears stemming from the airline/ferry disasters), it would be tough for the mass market to achieve growth in 2H 2014. 

Cartoon of the Day: Muscle vs. Russell

Takeaway: The 2014 Macro Score: Long Bond $TLT +14% vs Russell 2000 -2%

Cartoon of the Day: Muscle vs. Russell - Russell 2000 cartoon 08.14.2014