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Video | McCullough on Fox: Fed Has No Idea How to Control Inflation

Hedgeye CEO Keith McCullough weighs in on inflation during Fox Business' Opening Bell.

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Retail Callouts (5/14): KSS, JCP, TGT, SHLD, ANF, KER, URBN, CROX

Takeaway: KSS enters the CEO hunt. We give prospects for top job at KSS TGT JCP. SHLD looks to exit Sears Canada. Yet TGT sticks to egregious targets.

EVENTS TO WATCH

 

THURSDAY

  • WMT - Earnings Call: 4/15, 7:00am
  • KSS - Earnings Call: 4/15, 8:30am
  • JCP - Earnings Call: 4/15, 4:30pm
  • JWN - Earnings Call: 4/15, 4:45pm

 

COMPANY NEWS

 

We'll have separate comments on Macy's and Kate Spade earnings.

 

KSS - Kohl's CEO Planning Management Shuffle

(http://online.wsj.com/news/articles/SB10001424052702303851804579559911754291166?mg=reno64-wsj)

 

  • "Mr. Mansell is planning a management shuffle, according to a person familiar with the matter. And he is also scouting for a new chief merchant who would be a candidate to ultimately succeed him, people familiar with the matter said."
  • "The CEO is seeking to boost growth when the retail industry is struggling with budget-conscious shoppers who are increasingly turning to the Internet for everyday purchases."
  • "Kohl's board is looking for Mr. Mansell, 61 years old, to demonstrate progress on those fronts at a board meeting Wednesday, the day before Kohl's reports first-quarter earnings. At that session, he is expected to describe plans for a broader management reorganization, said a person familiar with the situation."
  • "In April, Kohl's lost its chief merchandising officer, Donald Brennan, who joined the company in 2001 and was promoted to chief merchant in 2010 but had received a weak performance grade, according to regulatory filings. Mr. Mansell has been personally sounding out candidates for the chief merchant's job with an eye to having them eventually succeed him as CEO, several people familiar with the situation said."
  • "Mr. Mansell has reached out to Brendan Hoffman, who earlier this year said he plans to leave his post as CEO of Bon-Ton Stores Inc. when his contract expires in February, these people said. Mr. Hoffman is unlikely to take the job since it wouldn't immediately place him in a CEO role, one of the people said."

 

Takeaway: This tells us that there's now three potential top jobs open at mega-US retailers; Target, JC Penney, and Kohl's. The pool of candidates is not huge, but there are some heavyweights. There's Roger Farah, who has only two weeks left at Ralph Lauren. Bill McComb, who is currently on vacation after turning the dog that was Liz Claiborne into the hyper-growth Kate Spade. Vanessa Castagna, who was the underappreciated architect of the Eckerd-era turnaround at JCP over a decade ago. Let's also not forget Glenn Murphy from Gap. The fact of the matter is that he is a far better CEO than a company like Gap probably deserves. He's done a great job fixing the company, and at age 51 -- has a much bigger and better job left in him.

 

SHLD - Sears Holdings Provides Update On Its Interest In Sears Canada Inc.

(http://searsholdings.mediaroom.com/index.php?s=16310&item=137287)

 

  • "Sears Holdings Corporation announced today that it is exploring strategic alternatives for its 51% interest in Sears Canada, including a potential sale of Sears Holdings' interest or Sears Canada as a whole. In connection with those efforts, Sears Holdings intends to engage an investment banking firm."
  • "Sears Canada's board of directors has advised Sears Holdings that Sears Canada's board and management intend to cooperate fully with Sears Holdings in this process to achieve value for all shareholders."

 

Takeaway: And Target still thinks it can generate productivity in its Canada stores above what it sees in the US with Gross margins 500bp better than US levels. Seriously?

 

OTHER NEWS

 

URBN - Urban Outfitters Getting Active

(http://www.wwd.com/markets-news/intimates-activewear/urban-outfitters-getting-active-7679159)

 

  • "Since March, the apparel and accessories brand developed by Urban Outfitters to cross the fitness, cycle, trail and surf categories has taken over roughly 1,500 square feet inside the retailer’s high-profile stores in New York, Costa Mesa, Calif., Santa Monica, Calif., King of Prussia, Pa., Portland, Ore., San Francisco, Seattle and Hollywood, where Without Walls officially launched with a party in April."
  • "In June, a Without Walls in-store shop will be added at the Urban Outfitters location in New York’s Herald Square before the concept will expand to another four to six doors in the fall and possibly three to six doors in 2015."

 

Retail Callouts (5/14): KSS, JCP, TGT, SHLD, ANF, KER, URBN, CROX - chart1 5 14

 

KER - Puma’s Power

(http://www.wwd.com/footwear-news/people/fn-spy-toms-goes-ape-puma-taps-jadeveon-clowney-7679560)

 

  • "Puma added some firepower to its endorsement lineup. The brand announced that No. 1 National Football League draft pick Jadeveon Clowney is joining its training team. The new Houston Texan will be included in Puma’s new 'Forever Faster' campaign, set to launch later this year."
  • "It will be the first in his multiyear agreement. Clowney, who called his deal with the brand a 'dream come true' in a release, will join fellow NFL players Jamaal Charles and Cordarrelle Patterson on the Puma roster."

 

ANF - Michael Jeffries Pay Drops at Abercrombie

(http://www.wwd.com/business-news/human-resources/michael-jeffries-pay-drops-at-abercrombie-7679608)

 

  • "Abercrombie & Fitch Co. chief executive officer Michael Jeffries saw his total reported compensation decline by more than 70 percent last year to $2.2 million…"
  • "The new pact, which can be terminated by Jeffries or the company with 12 months’ notice after its first anniversary next February, also removed provisions which could have added about $88 million to Jeffries’ severance in the event of a change of control."

 

CROX - Brand Management Veteran Andrew Rees Named President of Crocs Brand; CEO Search Continues

(http://investors.crocs.com/phoenix.zhtml?c=193409&p=irol-newsArticle&ID=1930540&highlight=)

 

  • "Crocs Inc. today announced consumer brand management expert Andrew Rees has been named President of the Crocs brand.  Rees also will assume the role of principal executive officer until the company's search for a permanent chief executive officer is successfully concluded.  Rees will report to the Crocs board of directors.  He is expected to join the company officially on or about June 9th."
  • "Rees joins Crocs from LEK Consulting, a global management consulting firm with offices across Europe, the Americas and Asia-Pacific.  He founded and led LEK's retail and consumer products practice for 14 years, building the practice into one of LEK's major consulting areas."

LEISURE LETTER (05/14/2014)

Tickers: PNK, HOT, SHO, PENN, RCL, NCL

EVENTS TO WATCH

Wednesday, May 14:

Wells Fargo Gaming Conference in Las Vegas (all times EDT)

• 12:05pm MCRI and MNTG

• 12:50pm MGM

• 1:35pm ISLE

 

• Atlantic City April Revenues

• Japan Gaming Conference thru Friday, May 16

 

Thursday, May 15

• Japan Gaming Conference thru Friday, May 16

COMPANY NEWS

INSIDER TRANSACTIONS

  • PNK – CEO Anthony Michael Sanfilippo acquired 23,000 shares of the company’s stock on the open market in a transaction dated Friday, May 9th. The shares were purchased at an average cost of $21.99 per share, for a total transaction of $505,770.00. Following the completion of the transaction, Mr. Sanfilippo now directly owns 180,442 shares in the company.

Takeaway:  Could it have something to do with improving May trends? We're seeing it.

  • HOT – Sergio Rivera, Co-President of The Americas, sold 59,234 shares of Starwood Hotels & Resorts Worldwide stock on the open market in a transaction that occurred on Monday, May 12th. The shares were sold at an average price of $80.00, for a total value of $4,738,720.00. Following the completion of the sale, the insider now directly owns 42,871 shares in the company, valued at approximately $3,429,680.

Takeaway:  Hopefully, the company was on the other side of the transaction.

  • SHO – President John V. Arabia sold 140,000 shares of SHO stock on the open market in a transaction that occurred on Friday, May 9th at an average price of $14.27, for a total transaction of $1,997,800.00. Following the completion of the transaction, the president now directly owns 486,299 shares of the company’s stock, valued at approximately $6,939,487. 

 

GLPI – announced a very large $465 million acquisition of The Meadows Racetrack and Casino in Washington, Pennsylvania - subject to regulatory approval.  Based on the ~9x 2013 EBITDA = $52 million EBITDA. 

Takeaway:  This is a large acquisition and should silence the naysayers. However, the purchased is expected to be funded with the issuance of new equity (we estimate 8 million shares) and debt. While accretive to estimates and overall a positive, the pending equity issuance could create an overhang on GLPI stock.

 

PENN – announced that Argosy Sioux City General Manager Lance George has been named general manager at the new Plainridge Park Casino in Plainville, Mass. The 106,000-square-foot racing and gaming facility, featuring live harness racing and simulcasting and 1,250 slot machines, is scheduled to open in 2015.

Takeaway: Now seems like a reasonable conclusion that the property will be closing sooner (June 30th) rather than later. 

 

RCL (Hostelur) Pullmantur confirmed its Sovereign ship will be moved to Marseille in the coming days to undergo repair work.  Sovereign had encountered an engine failure that caused a reduction in navigation speed.  Pullmantur will reimburse all cruise costs and a 60% discount on the next cruise.

Takeaway:  A couple more small incidents like this will materially impact yields.

 

Blue Star Line (Travel Pulse) Titanic II: 'Ship of Dreams' Comes Closer to Reality

Blue Star Line said it has signed memorandum of understanding appointing China’s AVIC as its latest Titanic II project partner. AVIC will promote the Titanic II project and coordinate Titanic II sponsors from mainland China. CSC Jinling Shipyard, a Chinese shipyard where Palmer currently builds cargo vessels for his Australian mining interests, will build the new ship.  The 1st project development phase has been completed.  The ship's source market is China and is scheduled for deployment in 2018.

Takeaway:  This joke ship may be built after all

 

NCL  – (Channel 5 Belize) Minister Hulse shocked by thumbs down given to NCL project

The multi-million dollar Norwegian Cruise Lines tourism project in southern Belize has been all but given a green light by the Government of Belize.  But government’s approval is not the same thing as welcoming arms everywhere. The Belize Tourism Industry Association has filed a lawsuit against the Government of Belize, and there is word that the Placencia Village Council has unanimously voted against the project.

Takeaway:  Relatively small project running into complications

INDUSTRY NEWS

Macau Gaming - Macau casinos will be handed a deadline of July 1, 2014, to eliminate illegal China UnionPay mobile swipe card devices or face a crackdown on the city's multimillion-dollar illegal cash-transfer business.

Takeaway: We doubt the casinos currently have "illegal" mobile swipe devices on their gaming floors given all the news leading up to this pronouncement as well as the operators wanting to maintain a clean image heading into concession renegotiations. 

 

Hotel Transaction - RIU Hotels & Resorts will acquire a luxury 252 room hotel in the French part of the Caribbean island of St. Martin for $45 million and then rebrand the property Rui Palace St. Martin.  Average price per key: $179k.

Takeaway: Seems like a reasonable price without knowing the amount of additional capex investment and expected ADR under the RIU flag. 

 

Ski Industry – Dick Bass announced he sold a majority interest in the Little Cottonwood Canyon (owner of Alta and Snowbird) resort to Ian Cumming, a businessman familiar with Utah’s ski industry since his family owns Park City Mountain Resort (PCMR).  Depsite the change in ownership, the company is proceeding with plans to break ground in July on the two-year Hidden Peak project, to build more biking trails on the mountain, and to renovate the Snowbird Center and Cliff Lodge.

Takeaway: We find it very interesting that neither publicly traded ski resort company (MTN nor SNOW) were the buyers.  Given PCMR's ongoing litigation with Vail over management of Canyons Resort, the PCMR angle may have just become more interesting.

 

European travel – (Hostelur) 54% of Europeans plan to travel during summer vacation this year, flat YoY.  This was an improvement from the previous two years, which recorded declines.  Average budget for the summer holidays is stable, with the UK leading the way.  

Takeaway:  Steady is usually a good sign for the leisure industry, especially in Europe

MACRO

Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning 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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Teaching Americans a Policy Lesson

Client Talking Points

UST 10YR

The 10-year yield smoked to fresh year-to-date lows 2.57% on a #ConsumerSlowing Retail Sales (24% of GDP) report for April (newsflash, it wasn’t just the February weather). Buy either inflation or slow-growth-yield-chasing, not high multiple growth stocks, IWM, QQQ.

COMMODITIES

It’s a tasty morning for the #InflationAccelerating theme as oil (both Brent and WTI) confirm a TREND breakout to the upside and Gold makes another higher-lows after holding Hedgeye TREND support of $1,271.

EUROPE

Interesting morning for Europe as Scottish employment hits its best level since 1992 on #StrongPound, but the 2014 leaders in European Equities lag (Portugal -1.7%, Italy -0.3%, making lower-highs too). Is this as good as the news gets? Sell in May? Meanwhile, Bank of England Governor Mark Carney is teaching Americans a policy lesson – let a currency strengthen and an economy does alongside it.

 

Asset Allocation

CASH 12% US EQUITIES 6%
INTL EQUITIES 10% COMMODITIES 26%
FIXED INCOME 24% INTL CURRENCIES 22%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

OC

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.

DRI

Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road

TWEET OF THE DAY

After closing down almost 1% yesterday, Russell 2000 is -7.2% since March #GrowthSlowing @KeithMcCullough

QUOTE OF THE DAY

"The way to get started is to quit talking and begin doing." - Walt Disney

STAT OF THE DAY

Unemployment in Scotland fell by 18,000 to 178,000 between January and March while employment reached its highest level since records began in 1992. The jobless rate was 6.4%, which was below the average of 6.8% for the whole of the UK. (BBC)



Truth and Good?

“Today, I want to tell you about an investment opportunity with potential high cash flow, a superior structure, a unique sharing agreement, and low risk.” 1983 Prudential-Bache Energy Income Fund marketing video


Between 1983 and 1991 Prudential-Bache Securities raised $1.4 billion from the sale of 35 “energy income fund” limited partnerships to more than 130,000 individual investors.  The yield chase was on as interest rates fell in the wake of the early ‘80s inflation scare, and Wall Street was eager to fill the demand with new products that commanded high fees and commissions.  Prudential-Bache brokers touted the limited partnerships to their retail clients as high-yielding, tax-advantaged, low-risk investments…

 

Truth and Good? - kevpru

 

Of course, what seems too good to be true proved to be just that.  By the late ‘80s distributions began to trail false promises as hefty fees ate into the income and asset values fell.  Some of the partnerships borrowed money to maintain the payouts, but it wasn’t a sustainable solution.  Eventually, most of the partnerships slashed distributions and collapsed.

 

In the class action lawsuits that followed, the plaintiffs alleged that Prudential-Bache “misrepresented and omitted material facts concerning cash distributions to investors by creating the appearance that the partnerships were distributing monies derived from operating income when in reality the distributions were returns of capital…

 

---

 

I traveled to Omaha, Nebraska two weeks ago to pitch the bear case on Master Limited Partnerships to a group of value investors.  Buffett couldn’t fit me into his schedule, but I was lucky enough to meet with seasoned money managers cut from the same cloth. 

 

These guys understood the MLP basics – tax-exempt energy companies with high current yields, etc. – but not much more.  So I walked through a few of the more surreptitious aspects of the story: the enormous “incentive” fees that many MLPs pay to their General Partners; the conflicts of interest and limited fiduciary duties; the gimmicky accounting; the serial capital raising; and the valuations.

 

I was showing the group how, since its inception, retail-favorite LINN Energy (LINE) has lost more than $1.4 billion while paying out $3.1 billion in distributions, when a salty Australian in the back blurted out, “The whole thing seems like a big Ponzi scheme to me.”  I shrugged, “My compliance officer doesn’t let me use that word.”

 

MLPs are essential to the build-out of energy infrastructure that’s needed to support the recent US hydrocarbon production boom – the story is real – but that doesn’t mean all will profit.  The building of the American railroads in the late 19th century was ripe with self-dealing and stock schemes.  James Surowiecki of “The New Yorker” called it, “one of the biggest cons the country has ever seen, with huge losses for investors and huge fortunes for the moguls.  Still, we ended up with a national transportation system.”

 

It’s been said that there are no new eras, only new errors – most things in finance are cyclical.  We look at the fees that some of the largest MLPs are paying to their GPs today and wonder if this time will be different.  How long can a business that pays two-thirds of its income to its manager survive?


It’s a unique instance of information asymmetry.  MLPs are mostly owned by retail investors – not surprising given the exorbitant fees that they hand over to the wealthy individuals and institutions that own their GPs.  A well-informed investor is unlikely to give his money to a hedge fund manager who defines his own performance, collects a 50% performance fee, and owes limited fiduciary duties to his investors.  Would you invest in that fund?  I hope not.  Giving your money to that hedge fund is a liability, but with the Alerian MLP Infrastructure Index currently trading at 2x the earnings multiple of the S&P 500 (see the Chart of the Day below) despite lower returns on equity (~8%) and higher leverage (~42% debt/capital), that’s still way out-of-consensus.

 

But we’re OK with that.  It’s a lonely view but we’re not contrarian merely for the sake of it – there’s ample justification for being negative on certain MLPs, and perhaps the timing is right as we enter the later innings of the US infrastructure growth boom, and the Federal Reserve weans markets off of the morphine drip.

 

Over the past year, we’ve expressed this view with reasonable success with negative calls on the E&P MLPs (most notably, LINN Energy), Kinder Morgan Energy Partners (KMP), and Boardwalk Pipeline Partners (BWP), while the MLP indices marched to new all-time highs.  Our most recent work delves into the numerous issues of Atlas Energy LP (ATLS) and its limited partnerships (ping to see that research).  In the first conference call after we published our note, one Atlas executive declared that because his stock has not fallen, “Truth and good have prevailed!” 

 

Of course, I’m the bad guy.  Well, for now at least…

 

Kevin Kaiser

Managing Director

 

Truth and Good? - Chart of the Day

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.56-2.65%

SPX 1

RUT 1094-1133

VIX 11.99-14.32

Pound 1.67-1.69

WTIC 100.85-102.81

Gold 1 

 


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