JCP - ceo announcement more bearish than bullish

Takeaway: JCP needed a 'rock star' CEO. Ellison is not that (at least in perception). We think this gives more ammo to the bear debate.

Today’s announcement from JCP does not make us more or less inclined to own the stock here, but as much as we walked away more positive from the analyst meeting last week, this announcement probably gives more for the bears to chew on than the bulls. Here’s why…

  1. At last week’s analyst meeting, Ullman clearly brought greater intensity towards the subject of finding a replacement CEO.  So the timing of the announcement is not a surprise. Though there was at least a fleeting chance that JCP hired a high-profile ‘rock star’ CEO like Glen Murphy (remember how close JCP was to hiring Mindy Grossman from QVC/Nike). Marvin Ellison might be good, but he’s not a rock star (at least in perception).
  2. Ellison has been serving as EVP of Stores at Home Depot where he oversaw a $78bn revenue stream over 2256 stores and 236mm square foot.  At JCP, he’ll be overseeing $12bn in sales, 1112 stores, and 111mm square feet.  Net/net coming to JCP is hardly an insurmountable task given his background. That’s a positive.
  3. We actually like the idea of not bringing a dinosaur department store executive to serve as CEO. But on the flip side, Home Improvement is about as far away from selling Clothes and Shoes as you can get. Inventory is far easier to manage at a store like Home Depot, particularly given that the merchandise does not go out of style every 90 days (to the point of obsolescence). Home Depot is the 900lb gorilla in the retailer/vendor relationship in virtually every category. While at JCP, it holds the cards with only a handful of vendor relationships, and those are with the brands that probably don’t matter. We’re not saying that Ellison can’t make this jump from one category to another, but rather that his success at HD does not guarantee his success at JCP.  
  4. The fact that he is overlapping with Ullman in his new role for nine months is a positive. Transitional blowups are not likely. He’ll be there to learn how to execute on the plan that Ullman set out at the analyst meeting next week. We like that a lot. But if there is one thing that’s clear with the 21% sell-off since the analyst meeting, it’s that the market absolutely does not believe in the plan. So, a new CEO brought in to carry on what is viewed to be an unattainable plan can hardly be viewed as a positive.


In the end, after being extremely vocal about getting Ullman out of his seat early on, we’ve actually grown to respect the fact that he repaired a devastated balance sheet, and set the company on a trajectory of earning money by 2017 – something we think is absolutely achievable (in fact, we think break-even by 2016 is achievable). Still tough to find valuation support in that regard. But Ullman has probably done a better job than most others could. If Ullman/Ellison hits that plan, the stock is likely headed higher. We’ll need to hear more about the transition plan before we have any real conviction on the name. For now, we’re on the sidelines.  

Video | McCullough: Expecting A More Dovish Fed

Monday Mashup: DFRG, EAT and More

Monday Mashup: DFRG, EAT and More - 1


Notable Callouts

  • We removed DFRG and EAT from our Investment Ideas list as shorts in a note last week.  CLICK HERE to access the note.


Recent Notes

10/06/14 Monday Mashup: PBPB, MCD and More

10/09/14 DFRG, EAT: Covering Our Shorts Given Strong Knapp Sales

10/10/14 Estimates Are Heading Higher


Events This Week

Tuesday, October 14th

  • DFRG earnings call 8:30am EST
  • DPZ earnings call 10:00am EST

Thursday, October 16th

  • SAFM Investor Day 9:00am EST


Chart of the Day

Black Box reported the strongest monthly same-store sales and traffic data in September since 1Q12.

Monday Mashup: DFRG, EAT and More - 2


Recent News Flow

Monday, October 6th

  • BWLD downgraded to neutral from outperform at Wedbush with a $135 PT.
  • BKW upgraded to overweight at Morgan Stanley with a $38 PT.
  • MCD downgraded to equal-weight at Morgan Stanley with a $96 PT.
  • JMBA entered into a master franchise development agreement with Quan Hung Gourmet company to develop 35 stores in Taiwan over the next ten years, effectively securing its 11th international market.
  • BAGL JAB Holding Company commenced its tender offer for all outstanding shares of Einstein Noah Restaurant Group at a price of $20.25 per share.

Tuesday, October 7th

  • YUM WSJ's Ahead of the Tape column was negative on YUM, citing a same-store sales slump in China due to the recent supply issuer and subsequent publicity surrounding the event.
  • GMCR was initiated buy at Goldman Sachs with a $166 PT. 

Wednesday, October 8th

  • CMG announced a partnership with Slow Food USA to create or support ~100 school gardens in 10 metropolitan areas across the country.
  • BAGL announced the launch of two new gourmet chicken sandwiches (Bavarian Chicken Sandwich, Napa Valley Chicken Sandwich) now available at Einstein Bros Bagels and Noah's New York Bagels nationwide.

 Thursday, October 7th

  • TXRH Chairman and CEO Kent Taylor was named Operator of the Year during the MUFSO Industry Awards Gala in Dallas.
  • TAST completed its previously announced acquisition of 30 Burger King restaurants in North Carolina for ~$20 million in cash.
  • LOCO celebrated the grand opening of its newest restaurant located at 8428 Elk Grove Florin Road at Calvine Road in Elk Grove, CA.  This is the 16th El Pollo Loco in the Sacramento area.

Friday, October 8th

  • DRI Shareholders elected all 12 Starboard-nominated directors to Darden's board.
  • BOBE elected Mary Kay Haben as Non-Executive Chair, while Steven Davis will remain CEO and a director.  Mary Kay Haben joined the Bob Evans board in 2012 and most recently served as President, North America for the Wm. Wrigley Jr. Company from 2007-2011.  She currently sits on the board of The Hershey Company and Equity Residential.


Sector Performance

The XLY (-3.6%) underperformed the SPX (-3.1%) last week.  Both quick-service and casual dining stocks, in aggregate, outperformed the SPX.


Monday Mashup: DFRG, EAT and More - 3

Monday Mashup: DFRG, EAT and More - 4


XLY Quantitative Setup

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

Monday Mashup: DFRG, EAT and More - 5


Casual Dining Restaurants

Monday Mashup: DFRG, EAT and More - 6

Monday Mashup: DFRG, EAT and More - 7


Quick Service Restaurants

Monday Mashup: DFRG, EAT and More - 8

Monday Mashup: DFRG, EAT and More - 9


Call with questions.


Howard Penney

Managing Director


Fred Masotta


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European Banking Monitor: Financials Swaps Continue Widening

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email 




European Financial CDS - Swaps were notably wider across Spanish Banks and Russia's megabank, Sberbank. We are intrigued with Russia as falling oil prices coupled with the effects of ongoing Western sanctions appear to having a significant weakening effect on Russia's economy. The average CDS profile across the EU bank complex is moving in the opposite direction of Euribor-OIS, our preferred gauge of systemic risk for the European banking system. In other words, while the systemic risk measure appears to be declining, the average individual risk measure across European banks is rising. Stay tuned.


European Banking Monitor: Financials Swaps Continue Widening - chart1 euro CDS


Sovereign CDS – Sovereign swaps were mixed with Spain widening the most at +6 bps to 79 bps. On balance, however, the average change for the week was just +1 bp. 


European Banking Monitor: Financials Swaps Continue Widening - chart2 sovereign CDS


European Banking Monitor: Financials Swaps Continue Widening - chart3 sovereign CDS


European Banking Monitor: Financials Swaps Continue Widening - chart4 sovereign CDS


Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 1 bps to 10 bps.


European Banking Monitor: Financials Swaps Continue Widening - chart5 Euribor OIS Spread



Matthew Hedrick



Ben Ryan







Keith's Macro Notebook 10/13: Vix | Oil | Gold

LEISURE LETTER (10/13/2014)

Tickers: CZR, LVS, VAC


  • Oct 15: LVS Q3 earnings 4:30 pm , pw 12611335
  • Oct 16: Hedgeye cruise pricing survey (mid-October)


CZR – appointed Keith Causey as chief accounting officer.  Mr. Causey replaced Diane Wilfong, who left the company “to pursue another opportunity”, Caesars said in a press release. Mr Causey will have responsibility over all corporate accounting and internal audit functions for the parent. He joined Caesars from U.S. car maker General Motors Corp, where he served as executive director, global business services – finance.

Takeaway: Accounting personnel changes are rarely a positive but we're not hearing of any accounting issues. 


CZR Rio All Suites Hotel & Casino Las Vegas To Close?  rumors are circulating Las Vegas that Caesar's sold the Rio for $400 million.  We do know that Caesar's advised employees in late September of the transition to a new owner and offered current employees opportunities to transfer elsewhere with the Caesar's organization.  However, neither CZR's nor the buyer has advised the Nevada Gaming Commission any ownership changes or closure, nor have WARN letters been received by current Rio employees.

Takeaway: As part of the overall restructuring, something will happen with the Rio. 


LVS – outgoing President and Chief Operating Officer, Michael Leven, will become Georgia Aquarium CEO on January 1, 2015.  Mr. Leven previously served as CEO of the Aquarium in 2008-2009.


AC.FP(Les Echos) As previously reported, Starwood Capital is attempting to sell Louvre Hotels Group.  Accor estimated the value of Louvre at about 1.2 to 1.5 billion euros based on ten times the operating Louvre Hotels EBITDA (EUR 110 million) - a lower price based on Lourve's exposure to the economy and budget lodging segments. However, Accor could face anti-trust issues. Also, Louvre Hotels partner since 2011, Chinese Jinjiang Inn made ​​an offer which was less than 1 billion euros, but it was rejected by Starwood Capital.

Takeaway: Sounds to us like the call for "last, best and final offers" so expect the winning bid announcement soon.


VAC – announced today the completion of a securitization of a pool of approximately $250 million of vacation ownership loans. Two classes of Notes were issued by the Trust: approximately $216 million of Class A Notes and approximately $24 million of Class B Notes. The Class A Notes have an interest rate of 2.25% and the Class B Notes have an interest rate of 2.70%, for an overall weighted average interest rate of 2.29%.

Takeaway: The capital markets remain very favorable for time share securitizations with very low risk premiums - a positive tailwind for HLT and WYN.


Macau Health Officials All Indoor Spaces Smoke Free (GGRAsia)

Macau’s Health Bureau confirmed in a statement that its aim is “totally banning smoking in all enclosed spaces open to the public in the city”. The casino industry has always argued that VIP gambling rooms in Macau are not “open to the public”. As a result such areas have so far been exempted from tobacco restrictions imposed in phases on the main floors of Macau’s casinos since January 2013.  Under the latest rule changes on October 6, smoking on casino main floors is only allowed in enclosed smoking rooms that do not contain any gaming tables or slot machines. Nonetheless, the principle of VIP room smoking in Macau seems to be under increasing pressure. “The Health Bureau will continue to collect data and opinions to enhance policy control,” it said in the statement. It said it will also “collect opinions from the general public, the gaming industry and its staff” before proceeding to revise the law on smoking in 2015. The Health Bureau said that it aims “to achieve the goal of totally banning smoking in all enclosed spaces open to the public in the city.”

Takeaway: During our visit to Macau last week, a few of our contacts indicated it was inevitable that the VIP rooms will ultimately be smoke free.


Macau Hotel Occupancy Falls During Golden Week (Macau Business)  The average occupancy rate of Macau’s more expensive hotels during The golden week of National Day holidays was lower this year than last, the Macau Government Tourist Office says. The office’s data show that between October 1 and 7 the average occupancy rate of three-star, four-star and five-star hotels was 87.2%, 1.5% points less than in the corresponding period last year. The data show the average room rate in such hotels fell to MOP1,892 (US$236.80), or 2.2% less than a year earlier.

Takeaway: Golden Week, not so Golden for Macau gaming operators.


Chinese Mainlanders Spend 70% Less During Golden Week – (Chinese News Services) Consumer spending by mainland tourists on luxury goods in Macau, Hong Kong and Taiwan during the National Day Golden Week recorded a drop of 70%, accounting for only 5% of total expenditure by mainland tourists on high-end products beyond the Chinese border. Total spending by mainland tourists on luxury goods across the border declined by almost 22% year-on-year, amounting to US$3.2 billion from the US$4.1 billion of the same period last year, according to a report by the World Luxury Association.

Takeaway: Slower consumer spending the result of slower economic growth or crackdown on luxury spending?


China's Corruption Crackdown Continues

(People's Daily) Three former senior officials in central China's Hubei Province were expelled from the Communist Party of China (CPC) and sacked from their public posts for corruption, said the provincial CPC discipline watchdog on Saturday. The three were Zhang Qinyun, former member of the party committee and general manager of Hubei Daily Media Group, Xing Jinghua, former head of the CPC Publicity Department of Jingzhou City and Wang Hongqiang, former deputy director of the standing committee of the People's Congress of Yichang City. The three were all accused of accepting huge sums in bribes and have seriously violated discipline, said the Hubei Provincial CPC Discipline Commission.


(Global Post) Zhao Shaolin, former member of the standing committee of the Communist Party of China (CPC) committee of east China's Jiangsu Province, is being investigated for "suspected severe disciplinary and law violations," according to the top anti-graft body.Zhao was also secretary-general of the provincial Party committee, said a statement released Saturday by the CPC Central Commission for Discipline Inspection on its official website.


(Shanghai Daily) Thousands of Party and government officials have been punished for offenses related to gambling since the middle of last year, according to a central government report. The 7,162 officials were from more than 30 cities and provinces, with east China’s Zhejiang and Guangdong in the south reporting the most cases — 1,575 in Zhejiang and 1,127 in Guangdong. Punishments ranged from warnings to administrative punishments but no further details were released. A crackdown on gambling by officials has become a major thrust of the government’s anti-corruption campaign.

Takeaway: No slowdown in corruption campaign although a crackdown on illegal gambling outside of Macau could be a positive for Macau.


Universal Parks & Resorts Beijing ( US entertainment firm Universal Parks & Resorts will invest more than US$3 billion (S$3.8b) in a joint venture with Chinese partner Beijing Shouhuan Cultural Tourism Investment Co, to build a 120 hectares (296 acres) movie theme park in Beijing, scheduled to open in 2019. The park, which will feature characters and scenes from Hollywood blockbusters such as Harry Potter and the Transformers franchises, will be located in the city's eastern district of Tongzhou. The project has been approved by the National Development and Reform Commission, China's top economic planner. The Beijing project will become Universal's fifth theme park after Los Angeles, Orlando, Osaka and Singapore. It is expected to rival a Disney park in Shanghai, which has been under construction since 2011 and is scheduled to open next year.

Takeaway: Universal Parks going to Beijing, making an integrated resort bid in Japan increasingly unlikely.


Tropical Storm Gonzalo – maximum sustained winds are near 60 mph with higher gust, strengthening is expected during the next 48 hours and Gonzalo is forecast to become a hurricane tonight or Tuesday.  A hurricane watch is in effect for Puerto Rico, Vieques & Culebra, U.S. Virgin Islands, and British Virgin Islands while a tropical storm warning is in effect for Guadeloupe, St. Martin, St. Maartin, St. Barthelemy, Barbuda, Antigua, St. Kitts, and Monserrat.

Takeaway: Expect significant cruise rerouting.

LEISURE LETTER (10/13/2014) - TS Gonzalo


China Growth Target (21st Century Business Herald) reported a number of Chinese government officials think 7% is an appropriate target for GDP growth next year. Both a PBoC and MoF officials voiced support for a 7% growth target in GDP at a Chinese Academy of Social Sciences meeting. The paper estimated the M2 growth target would be 11% next year, given a 2% inflation target.


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  We're seeing bottoms up slowing in Europe cruise pricing in our monthly survey. Europe has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely. Following CCL's earnings release, we recently turned negative on those stocks based on the negative European thesis. 


Hedgeye Macro Team remains negative on consumer spending and believes in muted inflation, a Quad Four set-up.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is 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.

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