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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


A Quick Thought on Victoria's Secret "Free Shipping" | $LB

Takeaway: Hedgeye's Brian McGough thinks Victoria Secret's "free shipping" offer is a continuation of a trend that will plague the rest of retail.

Victoria's Secret (LB) has used the Free Shipping offer as an offensive weapon in the past (they were one of the first to do so, actually), but this is a continuation of a trend that we think will ultimately plague the rest of retail.

 

A Quick Thought on Victoria's Secret "Free Shipping" | $LB - vs3

 

While LB is a high-end brand with a very loyal customer base, we would note that even a powerhouse like Victoria's Secret can't easily absorb free shipping costs due to a relatively low average basket size.

 

It's high-ticket retailers like Nordstrom (JWN) and brands like Nike (NKE) and Ralph Lauren (RL) that could absorb shipping costs without a material hit to their margins. 

 

A Quick Thought on Victoria's Secret "Free Shipping" | $LB - vs2


RHP: Q3 2014 EARNINGS PREP

Takeaway: RHP should report a solid Q3 and clarification of diluted share count will be welcome

Consensus estimates, management guidance and commentary, and questions for management in preparation for the earnings release tomorrow

 

 

Please see our note: http://docs.hedgeye.com/HE_RHP_EarningsPrep_11.3.14.pdf



Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

KATE – Best Idea Flash Call (Wednesday)

Takeaway: KATE: Best Idea Flash Call Wednesday, 11/5 at 11:00am ET.

We’re hosting a Flash Call on Wednesday, November 5th at 11:00am ET to outline why we added KATE  to our Best Ideas list as a long. We’ll review, in detail, our thesis across durations (Trade, Trend and Tail) and will explore where the stock should go as well as where we could be wrong ahead of the company’s print (on Thursday the 6th).

 

Key Topics Will Include:

1) Bottom-up category growth model. Penetration and growth potential in handbags, apparel, footwear, accessories, etc…

2) Where KATE is in its store maturation curve, and the implied impact on comp. 

3) A look at earnings and profitability under a real reporting structure – one that we think it will adopt within 2-years – as opposed to the opacity that exists in the model today.

4) Property strategy relative to other brands, and cost implications.

5) Process by which KATE could jettison Jack Saturday.

6) Scenario analysis for updated guidance to long-term model – both the risk and the upside.

7) Where we could be wrong in having KATE as one of our Best Ideas on the long side.

 

Participant Dialing Instructions

Toll Free Number:

Direct Dial Number:

Conference Code: 213986#

Materials: CLICK HERE


Cartoon of the Day: #CurrencyBurning

Takeaway: This is going to get really ugly.

Cartoon of the Day: #CurrencyBurning - campfire cartoon 10.31.2014


Will Plunge In Oil Prices Crush Vladimir Putin and Russia?

Takeaway: Putin's got some major problems.

Russia remains one of our preferred country shorts on Oil Deflation. We shorted it last Thursday in Real-Time Alerts. Russian equities are in full-blown crash mode now down -22% year-to-date.

 

Our macro team is doing a lot of work right now on whether or not Japan and Europe opting to devalue will ultimately result in eventual Russian economic collapse.

 

It’s an important question to ask as oil trades below $80, and Vladimir Putin’s Russian budget is reportedly based on oil trading at $100.

 

Will Plunge In Oil Prices Crush Vladimir Putin and Russia? - 11.03.14 Oil vs. Russian Equities


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