JCP – What JCP Needs To Say

Takeaway: There’s a gap between what JCP should say vs. what it will say on Wednesday. All it needs to say is “break even in 2016.”

Ullman & Co have a pretty easy job at this Wednesday’s JCP analyst meeting. Expectations are low, and this company has not articulated a long-term plan since Ron Johnson took center stage and then proceeded to destroy $8.6bn in shareholder value – or 87% of JCP’s market cap. Talk about easy comps. We don’t think it will take much to get people excited.


There’s sure to be information overload on Wednesday, but there’s only a few simple messages we want to hear.

  1. “Sales productivity of $140 by 2016”, up from $108 today. This includes Store productivity going from $98 to $120, and JCP adding another $500mm in e-commerce sales (much of which we think will come from Kohl’s).
  2. “Positive Earnings by 2016”. This would actually be a huge news event for JCP given that the consensus has JCP losing money…well…forever. We think that positive in 2017 is very likely, but 2016 is certainly possible.
  3. “Close 300 Stores”.  Our math suggests 300 stores that need to be closed. We identified each of them in an analysis in May, and outlined some of the salient points below. We’d peg a 25% or less chance in getting this announcement on Wednesday. But we don’t see how Ullman can stand up there with a straight face and say that the company is currently running the optimal fleet size. It’s too close to the holiday for him to send a message to 25% of his rank and file that they might not have jobs anymore. We expect some acknowledgement of a small number of store closures on Wednesday, with a far greater announcement coming in the new year.



We’re in the process of compiling one of our Deep Dive Black Books and will be hosting a call next week. We’ll be discussing several things, including…

a) What the Department Store landscape should look like (operationally and financially) when we enter the next economic cycle.

b) Detailed Revenue analysis for all the Department Stores – by category, consumer, and demographic.

c) Detailed Results of our latest Consumer Survey on the department stores.

d) Real estate deep dive – including overlap with stores that are likely to go away.

e) E-commerce – growth and profitability prospects for the companies and industry.


Here’s one chart as it relates to JCP that we thought was worth sharing. Each time we conduct our Consumer Surveys, one thing we ask the 1,000 department store shoppers is to rank which are their ‘go to’ stores in each product category. We don’t necessarily look at the results compared to one another, as Macy’s will obviously get more votes across the board than Lord & Taylor or Bon-Ton, for example. But we can gauge the incremental change for each company from one survey to the next (in this instance, 1Q14 to today).


There’s only one company that improved its ranking in every single product category – and that’s JCP.


JCP – What JCP Needs To Say - jcpgrid



Here are a few select highlights of the JCP Real Estate Analysis we conducted in May.   

1. Real Estate Approach: We did this analysis from the vantage point of a) optimizing JCP’s fleet, and b) seeing what the revenue impact would be for KSS. In order to properly assess the potential, we analyzed every JCP market to see where the most likely closures are, and whether or not they overlap with KSS. For starters, we did not simply map out store locations (a feat in itself) and draw a circle around each point on the map to gauge overlap by market. We mapped out a 15-minute driving radius around every store, which as you can see by the chart below is very different for every single store location in the country. This shows Tallahassee, FL, which has two locations where JCP and KSS overlap perfectly, and another location where JCP exists without KSS as a competitor. We did this in every market in the US.


JCP – What JCP Needs To Say - jcp2


2. Productivity Analysis. This next chart shows us what the implied sales per square foot range is for JCP’s 1089 stores. What we know is that in the US, JCP has 0.47% share of wallet in apparel, home furnishings and other relevant retail goods across its portfolio in aggregate – again, we’re looking at all expenditures within a 15 minute drive of its stores. If we apply that ratio to each market, we get implied sales/square foot levels ranging from $8 to nearly $1,000 (Manhattan). We know that share is likely to vary by market, so we’re not trying to say that these are the exact productivity levels of each store. But directionally, we think we’re right. And that direction tells us that 782 stores, or nearly 72% of JCP locations, are running below the system average of $98/square foot.

JCP – What JCP Needs To Say - jcp3

3. 300 Store Closures: We think that JCP needs to close 300 locations, at a minimum. We know that the demographic profile in the surrounding area of JCP stores in aggregate is about $66k in annual household income. We also know that JCP just identified 33 stores that it is closing. We analyzed those locations, and the demographic profile is $54k annually – that’s 18% lower than the portfolio average. So we looked throughout the system of JCP stores and looked to see how many other stores fit that profile. There are 300. If these stores are closed, the average income statistic goes up for the whole portfolio by 7% to $70k.  The 300 stores closed have implied sales/square foot of less than $38 annually. There are still almost 500 stores above $38 and yet still below the system average. 


JCP – What JCP Needs To Say - jcp4

4. Revenue Impact of Closures. Our math suggests that these stores would only result in about $550mm-$600mm in revenue loss to JCP. Importantly, KSS only overlaps in 42% of these markets. Our research shows that KSS took about 19% of the $5.4bn in sales JCP hemorrhaged over the past three years. If we apply a 20% share gain level to this analysis for KSS, it suggests about $73mm, or less than 0.4% to KSS in comp. If you want to get more aggressive and assume that KSS takes 100% of that revenue (which WMT won’t allow) you’re looking at about 1.9% in comp to KSS. We think something far below 1% is closer to reality. Here’s the sensitivity analysis below.


JCP – What JCP Needs To Say - jcp5


Cartoon of the Day: A Sad Song

Cartoon of the Day: A Sad Song - bubble cartoon 10.06.2014

Small caps. Tech stocks. IPOs. And more. There are bubbles everywhere, and it’s why #Bubbles is one of Hedgeye’s three core Macro Themes this quarter.



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Food for Thought in the Restaurants Sector

Takeaway: Prices at the grocery store are rising faster than they are at restaurants. Here's what that means.

We have a favorable data point for restaurants, says Hedgeye's Restaurants sector team.


The restaurant value spread, which measures the difference between food at home and food away from home, has widened over the past three months.


In the past, we've seen evidence that when this spread widens, same-store sales for many restaurants improves.


Check out this chart below.


Food for Thought in the Restaurants Sector - Restaurant Value Spread



Monday Mashup: PBPB, MCD and More

Monday Mashup: PBPB, MCD and More - 1

Notable Callouts

  • We removed PBPB from our Investment Ideas list as a short in a note last week. CLICK HERE to access the note.
  • We are removing MCD and BKW from our Investment Ideas list as shorts, due to the improvement we are seeing in same-store sales trends across the sector.

Recent Notes

09/29/14 Monday Mashup: BLMN, SBUX and More

09/30/14 Is the Sales Environment Improving for Restaurants?

10/01/14 PBPB: Closing Best Idea Short

10/02/14 Restaurant Sector Valuation

10/02/14 Bullish on Bloomin'

10/03/14 Employment Numbers a Positive for Restaurants

Events This Week

Wednesday, October 8th

  • YUM earnings call 9:15am EST
  • RT earnings call 5:00pm EST

Thursday, October 9th

  • PLKI Investor Day 9:00am EST

Friday, October 10th

  • DRI Annual General Meeting 9:00am EST

Chart of the Day

A favorable data point for restaurants: the restaurant value spread, which measures the difference between food at home and food away from home, has widened over the past three months.


Monday Mashup: PBPB, MCD and More - 2

Recent News Flow

Monday, September 29th

  • SONC announced the hiring of industry veteran Harold Ceron as senior VP to lead company drive-in operations.  Ceron comes to SONC from 7-Eleven where he served as Managing Director, Europe and Latin America.  Prior to 7-Eleven, Ceron spent nearly 20 years at Yum! Brands.
  • BAGL was acquired by JAB Holding Company for $20.25 per share in cash.  Greenlight Capital agreed to tender its shares in support of the transaction.
  • DFRG announced the opening of its newest Del Frisco's Grille in North Bethesda, Maryland, making it the 14th Del Frisco's Grille in the system.
  • RRGB announced it is two weeks away from opening its two newest restaurants in Bronx, NY and South Florida.
  • DIN Applebee's launched the #FanFavoriteSweeps campaign to give one fan a trip to Phoenix.  The challenge requires contestants to snap a selfie with their favorite 2 for $20 dish from a menu that includes: Grilled Chicken Wonton Tacos, Quesadilla Burger, Bourbon St. Chicken & Shrimp, Shrimp 'N Parmesan Sirloin and Crosscut Ribs.
  • COSI announced a planned rights offering from which it expects to receive ~20.0M.
  • WEN launched the #BBQ4Merica campaign to help spread awareness of their new BBQ offerings, including its new BBQ Pulled Pork Sandwich, BBQ Pulled Pork Cheeseburger and BBQ Pulled Pork Cheese Fries.
  • BAGL was downgraded to hold from buy at Jefferies.

Tuesday, September 30th

  • PNRA was added to the US 1 list at Bank of America Merrill Lynch with a $185 PT.
  • DRI proxy advisory firm Egan Jones reaffirmed its recommendation that shareholders vote "FOR ALL" of Darden's director nominees.
  • PZZA introduced its latest menu addition, the Ultimate Meats Pizza, featuring pepperoni, salami, sausage, Canadian bacon and hickory smoked bacon.  The Ultimate Meats Pizza can be had for just $12 through October 26th.
  • BJRI opened its newest restaurant in Cedar Park, TX. The restaurant Is approximately 7,400 square feet, seats 225 guests and features BJ's extensive menu.

Wednesday, October 1st

  • PNRA upgraded to buy at Wunderlich Securities with a $185 PT.
  • Restaurant Sector upgraded to bullish from cautious at Stifel Nicolaus.
  • NDLS announced new fall limited time only items, including the new Buffalo Chicken Mac & Cheese and the new Fig & Pig Flatbread.  The company also added the Alfredo MontAmore to its permanent menu and announced it will celebrate National Noodle Day on October 6th with its "Lucky Bowl" giveaway.

Thursday, October 2nd

  • DRI reported September comps (Olive Garden +0.6%, LongHorn +3.2%) and guided 2Q EPS to the upper end of its original $0.26-$0.28 range.
  • LOCO celebrated the grand opening of its first Houston, TX restaurant.
  • KKD announced CFO Douglas Muir will retire in CY15 and plans to remain in his current role until a successor is in place and to provide support during the transition.

Friday, October 3rd

  • CBRL declared a quarterly dividend of $1.00 per share payable on November 5, 2014 to shareholders as of October 17, 2014.  The board also authorized a new $25 million share repurchase plan.
  • JACK Qdoba unveiled a new simplified menu and pricing structure at its restaurants in which "extras" (including guacamole, 3-Cheese Queso and Queso Diablo) will no longer be charged as extra.  Guests will now pay a single set price for their favorite entrée and will be able to load on flavor without paying the additional cost.
  • SBUX announced that Jeff Hansberry, President of CAP, assumed the role of President of Evolution Fresh effective September 29th, 2014.  Hansberry will return to the company's headquarters in Seattle.

Sector Performance

The XLY (-0.7%) outperformed the SPX (-0.8%) last week.  Both casual dining and quick service stocks, in aggregate, outperformed the XLY.


Monday Mashup: PBPB, MCD and More - 3


Monday Mashup: PBPB, MCD and More - 4

XLY Quantitative Setup

From a quantitative setup, the sector remains bearish on an intermediate-term TREND duration.


Monday Mashup: PBPB, MCD and More - 5

Casual Dining Restaurants

Monday Mashup: PBPB, MCD and More - 6

Monday Mashup: PBPB, MCD and More - 7

Quick Service Restaurants

Monday Mashup: PBPB, MCD and More - 8

Monday Mashup: PBPB, MCD and More - 9


Howard Penney

Managing Director


Fred Masotta


Restoration Hardware: Stealth Revenue Driver

Takeaway: The company's new financing program plus growth in in-house interior design gives us greater confidence in our long-term revenue model.

This note was originally published October 03, 2014 at 09:04 in Retail

Last night (Thursday night) RH announced a long-term financing program that we think is positive news for its top line. The company already offers a credit card, but that carries a much higher interest rate (24.99%) and is a shorter-term financing bridge for consumers. With the new RH program, consumers can finance purchases at 5.99% for a duration ranging from 24 months to 7-years.


Restoration Hardware: Stealth Revenue Driver - chart1 10 3 14


There's no question for us that this is a positive for RH's top line. In our latest RH consumer survey, we asked 1,000 consumers how important it is for a furniture store to offer store credit -- on small, medium and large purchases.  Interestingly, it is 'Very Important' to only 13.6% of consumers for 'Small Purchases' and only '18.8% for 'Medium Purchases'. But once we get into the 'Large Purchase' classification, it is 'Very Important' for 41.7% of customers. Even 33.4% of the $100k+ demographic said that it Very Important to their purchasing decision.


Restoration Hardware: Stealth Revenue Driver - chart2 10 3 14


An interesting note is the screen shot below that 'advertises' consumers to meet with RH designers. This is the first time we EVER saw this advertised by the company. Approximately 40% of RH's business comes from designers, but they are largely third party designers. These are people that are hired by a customer and shop dozens of stores, where they pick and choose assortments that work -- maybe including RH, maybe not.


Restoration Hardware: Stealth Revenue Driver - CHART4 10 3 14


But now RH not only has a massive product assortment (i.e. 3,300 pages), but a stepped-up in-house Interior Design team AND  a superior long-term financing program. Add all that up and you get a stealth revenue driver that will build meaningfully.  We're not taking up our estimates (which are already high on the street by a country mile) but these factors give us more confidence that the company will get there.

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