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HedgeyeRetail COTD: Happy Anniversary Ron Johnson

JCP reached new 52 week lows today and is finally immediate-term TRADE oversold just 2 days prior to the 1 year anniversary of JCP’s biggest hire in history.


With the seismic shift in JCP’s pricing strategy that has left consumers scratching their heads coupled with underappreciated capital investment required to ultimately bring RJ’s vision to life, there’s little to support the stock here over the intermediate-term. It will likely be a while, perhaps a long while, before we revisit the $29.92 strike price at which RJ’s warrants are struck. Lucky for him, he has 5-years to get there. Unfortunately, investors typically operate under a far different duration.


Today, we wouldn't touch it on the long side until it is a mid-teenager. 


HedgeyeRetail COTD: Happy Anniversary Ron Johnson - RJ COTD



Starbucks seems to be acutely aware of past mistakes and we do not expect management to repeat the mistakes that brought the stock under $10 in 2009.  We would not advise buying the stock at this point, however, given that the Street is likely too bullish on EPS for 2HFY12.  The longer-term story for Starbucks remains one of the very best in the space but the likely impact of near-term headwinds leads us to look elsewhere over the TRADE (three weeks or less) and TREND (three months or more) durations.


Starbucks CFO Troy Alstead took the stage today at the William Blair Growth Stock Conference.  Below are the primary takeaways of the presentation:

  • The company now expects $0.44-0.45 EPS in 3QFY12 and $0.46-0.47 EPS in 4QFY12 versus prior guidance of $0.45-0.46 and $0.46-0.48, respectively.  The Street, according to Bloomberg, is expecting $0.46 and $0.49 EPS in 3QFY12 and 4QFY12, respectively.  The revision in guidance is due to costs associated with the Bay Bread LLC acquisition.  Overall, the La Boulange acquisition will be $0.02 dilutive to FY12 EPS and will also dilute FY13 EPS.
  • Investing in La Boulange and Evolution Fresh is going to be a headwind to EPS going forward; there is a potential for capital needs to come in larger than expected given the distribution capabilities that need to be built out to cater for both brands on a national basis.
  • Starbucks see continuing weakness in the EMEA division.
  • Coffee is expected to be a tailwind in FY13



We would not advise clients to buy this stock at this point in time.  We have liked the name for over three years but believe that sentiment has gotten ahead of the fundamental outlook of the company.  Company guidance is indicating that estimates are too high for FY12 and increasing economic uncertainty in Europe could cause actual earnings to come in even lower than the guidance is suggesting.  



Howard Penney

Managing Director


Rory Green


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  • Given the free fall of 2008-2009, these core metrics should be recovering faster
  • Table volume is making lower highs and slots have been consistently in the “slow growth” camp
  • “Return to peak EBITDA” analysis is a pipe dream.  Structurally, LV and most of domestic gaming appear permanently impaired.


The Failure of Washington


The bulls, Tim Geithner and Barack Obama have all failed us, says Hedgeye CEO Keith McCullough. Bank bailouts don’t bode well for the markets – this is clear. The failed policies of the Federal Reserve and the International Monetary Fund are getting us nowhere. McCullough doesn’t like the bailouts and neither do the markets. But don’t tell Christine Lagarde that.


“At the end of the day you can make mistakes, losers can win and I think the entire general population is sick and tired of it and that’s why there’s outflows out of equities. Markets are going lower, not higher,”  says McCullough


Others thought Greece and the uncertainty with the June 17thelections were the market catalyst. That’s great. We’re going to stick to being realists and following the TRADE, TREND and TAIL durations on the S&P 500. Wishful thinking only takes you so far. This is an election year. Does the general public want to follow in the footsteps of Europe? Do they want another Hank Paulson? Not a chance.


KORS: Q4 Report Card


KORS delivered the print and outlook needed for a rebound after underperforming retail by over 20% in the past 3-months. Importantly, not only is strength coming from both retail and wholesale channels, but European sales came in among the strongest in retail with comps up +14% and sequential trends across channels accelerating quarter-to-date. Despite a more constructive outlook for FY13, KORS is still expensive. The reality is that great brands with robust earnings momentum and conservative expectations will always look expensive. We'd still rather buy FNP than KORS. If cap is a concern, then RL. 

What We Liked:

  • Nearly every metric came in better than expected with the sole exception of tax rate disrupting an otherwise solid earnings algorithm of +58% top-line translating into +80% EBIT and +65% EPS growth (would have been +80% at expected 40% rate).
  • Owned retail stores continue to drive top-line growth with store productivity approaching $1,400/sq. ft. among the best in retail and comps coming in above the originally guided range as well as Q1 outlook of ~35% coming in 2x Street expectations and above our above consensus +32%E. In addition, store growth of ~70 in FY13 is modestly higher than the 68 we had modeled and the Street at 64. With the retail channel accounting for 2/3 of FY13 growth in our model (see table below), this is perhaps the most notable takeaway in the quarter.
  • Margins were up sharply following a warehouse transition and 1x costs associated with the IPO last quarter driven primarily by significantly better gross margins in addition to SG&A leverage. While much of the  improvement in gross margins can be attributed to greater retail and int’l mix accounting for over 100bps of the +180bps expansion, wholesale improved as well providing an added boost. With a 5pt sales mix shift to retail in F13, we expect channel mix to provide at least a 100bps tailwind. As such, we think the company’s outlook for margin contraction in FY13 is conservative.
  • KORS’ initial FY13 outlook suggests significantly stronger sales and earnings growth than expectations with
    full-year comp growth of at least 20%, revenues +30%-40%, and EPS growth of 40%+ compared to comps in the mid-teens and earnings expectations in the low 30s settling one of the biggest concerns headed into the quarter.

What We Didn’t Like:

  • Perhaps the biggest negative in the quarter is the sales/inventory spread, which eroded 18pts to -2% with inventories up 60% outpacing sales growth of 58%. We’re willing to give them a pass as swings here can be expected to support aggressive store growth, but this is undeniably gross margin bearish near-term.
  • Expenses were leveraged in the quarter; however, we expect slight deleverage in FY13 as the company adds headcount to support global growth and related infrastructure. Adjusting for IPO related 1x expenses in FY12, we’re modeling ~60bps of operating margin expansion driven by +70bps gross margin expansion offset by modest SG&A deleverage.
  • In addition, CapEx is headed higher. CapEx has been running at 6.5%-7.5% of sales over the last three years and is expected to increase to 9%-10% in F13 to support store growth and various infrastructure investments. While this will subdue FCF generation over the intermediate-term, the reality is that the company is investing when it should to grow what is a nascent brand overseas and drive top-line growth even if at the expense of further upside to earnings growth. UA is a great example of a company that executed a similar strategy over the past year proving that top-line preservation is more critical than margin expansion in a brands’ early growth stage.

All in, KORS is expensive and likely to remain so over at least the intermediate-term. We’re shaking out at 40% revenue growth in F13 and 26% in F14 and $1.20 and $1.57 in EPS respectively.


Casey Flavin

KORS: Q4 Report Card - KORS Rev Table


Accountability and Outlook: Here’s a look at KORS’s variance between guidance and actual, as well as
initial outlook for F13 vs expectations:


KORS: Q4 Report Card - KORS outlook


Highlights from the Call:


Expense Expectations:

  • Marketing spen - are spending 'a lot of money in the social media space' - has been solid sales driver thus far
  • Looking to hire a COO and add'l headcount to grow global business - expect expenses to reflect these      efforts by 2H F13
  • Will have more detail re e-commerce plans over next 6-months - re bringing in-house
  • Most expenses related to warehouse transition already incurred, now a matter of increasing utilization

Europe & Comp Growth:

  • The brand is resonated at retail at both free standing stores and at department store business
  • Seeing sequential acceleration vs. last quarter
  • Dealing with individual landlords, slower going re opportunistic growth - expect greater ability to flex growth at wholesale
  • At wholesale, apparel will be larger than accessories due to stores that are focused there vs accessories
  • Accessories will be the lead in KORS owned stores
  • Will be stronger positioned this time next year as one of the leading players in UK, France, Germany, Italy and Spain, etc as a leading accessible lux player
  • Europe strength a reflection of getting product to the region
  • Expect NA to have higher comps over LT due to greater brand awareness
  • Expect NA and Europe to comp ~20% in F13, Japan slightly lower 

Demographic - Customer:

  • Hasn't changed since IPO - still ~35 years-old women
  • After Europeans, South Americans are the strongest global consumer - KORS doesn't currently have any stores there

Category Performance:

  • Monogram has already reached 25% as percent of sales - sooner than expected, very conscious to not let it grow too large
  • Accessories at 75% achieved that threshold sooner than expected as well - likely to grow to 80%-85% of revs over time
  • Small leather goods continues to be the strongest performing category

Margins - Store Performance:

  • Very little differentiation in comp store performance b/w stores that are 1,3,5 yrs old 
  • Full price stores are highly productive, not seeing tremendous differentiation between full-price and outlets in terms of productivity
  • Wholesale gross margins also improved in the quarter
  • Marketing by region - spending at much higher levels in Europe and Japan relative to more mature brands
  • View is they have to 'act bigger than they are' when marketing to a market