FL - The Last Straw

Takeaway: Moving FL up to our Core Short list. Key issue “what he no longer sees that is making him go”. Similarities to Murphy/GPS are startling.

Conclusion: We’re moving FL up from our Short Bench to our Core Shorts.  The announcement of Ken Hicks retiring as CEO is the icing on a cake that was already baking. To be clear, we don’t think that FL is in trouble because Ken Hicks is leaving. We think that Ken Hicks is leaving because Foot Locker is in trouble. The juxtaposition here with Glenn Murphy leaving GPS last month is striking. Both of them; a) are seasoned executives, b) joined their respective companies within a year of the last recession (and trough margins), c) have hit home runs with zero square footage growth retailers, and d) are leaving for no apparent reason. How can this be anything other than a negative signal for where we are in the retail margin cycle? We’ve been harping over and over again about how we are in year six of a six year cycle. We can’t help but think that these two gentlemen are validating that premise.

 

Another point…one thing that kept us on the sidelines about pushing the FL short case was all the talk of an LBO. Even though we thought it was ridiculous, the reality is that the math works for someone gullible enough to straightline current margins into perpetuity. But would Hicks be walking out the door if the company was being shopped to buyers? Probably not.

 

 

As background, we added Foot Locker to our Idea Bench in August as a short. Trends look fine today, as better product from Nike and UA on top of more efficient store formats are pushing productivity past old limits. But sometimes limits push back. Today FL is operating in excess of $500/ft, which is about 25% higher than historical peak, margins are setting new peak levels at 11% this year, and the stock is trading at 15x forward earnings (close to peak).

 

Since August, three things have happened, all of them negative.

1)       Europe has started to soften for many retailers on the margin, including footwear and apparel.

2)      Nike and UnderArmour both put up stellar consumer-direct comps, with e-commerce readings literally off the charts. We’ve never seen the athletic brands so blatantly aggressive in growing outside of the traditional wholesale channel.

3)      Ken Hicks stepped down. This is the icing on the cake. The guy was money for FL, and for shareholders. The stock has been a 4-bagger since he was appointed in Aug 2009. He has beat two sets of long-range objectives in half the time intended. We know that he has groomed Johnson and other top talent to take his role in as seamless a manner as possible. But it’s just not enough.

 

We’ll be back with more detailed analysis on our short thesis.

 

FL - The Last Straw - 11 4 2014 6 02 45 AM



Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more

REPLAY: Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more

Premium insight

[UNLOCKED] Today's Daily Trading Ranges

“If I could only have one thing of the many things we have it would be my daily ranges." Hedgeye CEO Keith McCullough said recently.

read more

We'll Say It Again: Leave Your Politics Out of Your Portfolio

If your politics dictates your portfolio positioning, the Democrats and #NeverTrump crowd out there have had a hell of a week.

read more