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Retail Callouts (2/2): IDEA LIST, LULU, Tory Burch, UA, DKS, RSH

Takeaway: Idea Bench Update. Tory Burch trading hands for $3.5bn. LULU’s Chip saga updated. Confusing brand messages in Aussie Open Final (UA).

HEDGEYE RETAIL IDEA LIST

Retail Callouts (2/2): IDEA LIST, LULU, Tory Burch, UA, DKS, RSH - 2 2 chart1

CHANGES THIS WEEK

  1. HBI: Removed HBI from our Long Bench. We like the balance sheet story, but now it's printing bad numbers even with the benefit of acquisitions. Not for us.
  2. COH: Took COH off Long Bench. This name was there for all of 2 weeks (an odd call for us). After it bought Stuart Weitzman -- which we think is perhaps the worst deal we've seen in retail in a year, we actually added to our LONG bench. The reason is that COH -- a company whose net income is below levels experienced in the Great Recession, would finally manufacture earnings growth with this deal. But we think that COH will end up having to pay closer to $1bn vs the reported $574mm due to underinvestment by the former owner. This stock might work for a few bucks on the 'less bad' trade. But it should start with a $2-handle.
  3. DG: Removed from Short Bench. Our short bias was a "lose if they win, and lose if they lose" scenario as it relates to Family Dollar. Either DG pays too much (12-13x EBITDA), or it loses and the stock falls back to where it was when it started.  The deal appears to be a non-starter, and DG is only 6% above where it was when the bidding began. With gas prices having fallen so far, there's likely no catalyst on the downside here.

 

EVENTS TO WATCH

Retail Callouts (2/2): IDEA LIST, LULU, Tory Burch, UA, DKS, RSH - 2 2 chart2

 

 

COMPANY HIGHLIGHTS

 

LULU - lululemon athletica Founder Chip Wilson Announces Resignation from Board

(http://tinyurl.com/oamojsn)

 

Takeaway: No surprise here at all. First Wilson traded in his Chairman title in exchange for the Board putting through Laurent Potdevin as new CEO (despite his lack of qualifications). But handing in his Chairman title, in effect, neutered Wilson -- a) could no longer call a Board vote, b) did not have anything close to a majority vote on the Board, and c) was banned from the building except for Board meetings due to his behavior.  Within six months, Wilson sold half of his stake to Advent International at $38 for $845mm. For the record, that investment is now worth $1.38bn not six months later. Wilson has stated publicly that he feels 'handcuffed' to LULU due to his ownership. To his credit, he's a successful entrepreneur at heart, and his family members are trying to start up a retail concept without his 'official' involvement.  It makes all the sense in the world that he'd pull away from the Board, and we wouldn't be surprised to see him sell the rest of his stock in a negotiated transaction -- like with Advent. In fact, if he doesn't, it probably means that the pool of buyers out there is slim, which will worry us.

 

Tory Burch's Growing Value: Firm Now Worth $3.5B

(http://www.wwd.com/business-news/mergers-acquisitions/tory-burch-firm-valued-at-35b-8157064?module=hp-topstories)

 

Takeaway: A good article outlining the ownership of Tory Burch -- something we think equity investors will need to know in 12-18 month's time when the company goes public.  The $3.5bn valuation implied by recent private transactions makes sense to us. Kate Spade is trading about $4.3bn, 23% higher despite the fact that it's footprint is actually a third smaller than Burch.  This isn't a function of KATE being overvalued -- in fact we'd argue the opposite.  Getting in at $3.5bn for Tory appears to be a no-brainer.  We think that the bankers couldn't have made this name more marketable by getting Roger Farrah on board from Ralph Lauren. The Burch/Farrah co-CEO one-two punch is easily good for another 5-10 multiple points -- whether Roger actually succeeds or not. Wall Street will definitely give him the benefit of the doubt (they'll remember his success at RL, and forget his failures at Foot Locker and Federated).

 

Retail Callouts (2/2): IDEA LIST, LULU, Tory Burch, UA, DKS, RSH - 2 2 chart5

 

UA, FAST - Murray/Djokovic Sport Confusing Brand Images

 

Takeaway: We got confusing brand messages in the Final of the Australian Open.


In one corner was Novak Djokovic, who wore his trademark Uniqlo apparel, while donning nondescript white Adidas court shoes. We've grown to accept that, as his primary endorser -- Uniqlo -- does not make shoes.

 

But it was Andy Murray who was more interesting. After signing a deal with UnderArmour on Dec 30th, he was proudly covered head to … knee in UnderArmour product.  His toes, unfortunately, were still wearing Adidas.   This simply shows the complexity of the footwear business model vs apparel. The day UA announced the deal, Murray was proudly wearing top-of-the-line UA apparel. But five weeks later, UA does not have a shoe that he is comfortable performing in at a major event. That's not a knock on UA -- as it's almost impossible for most brands to work that fast (Nike probably could).  But the design, development and production process might mean that Murray has to wear dual-brands for another few months at least.   On the bright side, UA can blame Murray's loss on Adidas (and believe us, they will).

 

Retail Callouts (2/2): IDEA LIST, LULU, Tory Burch, UA, DKS, RSH - 2 2 chart3

 

Retail Callouts (2/2): IDEA LIST, LULU, Tory Burch, UA, DKS, RSH - 2 2 chart4

 

 

OTHER NEWS

 

DKS - DICK'S Sporting Goods Announces that Chief Financial Officer Andre J. Hawaux will Assume Additional Responsibilities as Chief Operating Officer

(http://otp.investis.com/clients/us/dicks_sporting/usn/usnews-story.aspx?cid=982&newsid=28540&show=1)

 

TGT - Target to seek two-month extension of protection from creditors

(http://www.theglobeandmail.com/report-on-business/target-to-seek-two-month-extension-of-protection-from-creditors/article22718993/)

 

RSH - Chapter 11 as Early as Today

(http://www.wsj.com/articles/standard-general-radioshack-may-act-as-lead-bidder-for-radioshack-1422832873)

 

Neiman Marcus, Office Depot to accept MasterPass

(http://www.chainstoreage.com/article/neiman-marcus-office-depot-accept-masterpass)

 

L Capital Acquires 50% of Ba&sh

(http://www.wwd.com/business-news/financial/l-capital-acquires-50-of-bash-8157435?module=Business-latest)

 

Gucci to Appeal Guess Case in Paris

(http://www.wwd.com/business-news/legal/gucci-to-appeal-guess-case-in-paris-8157356?module=Business-latest)

 

DSW - DSW shifts exec roles, responsibilities

(http://www.chainstoreage.com/article/dsw-shifts-exec-roles-responsibilities)


Monday Mashup: WEN, CMG, DNKN, YUM, BWLD

Monday Mashup: WEN, CMG, DNKN, YUM, BWLD - 111

 

Recent Notes

01/26/15 Monday Mashup: EAT, SONC and More

01/27/15 Shorting the White Space Opportunity

01/28/15 Changes in Latitude, Changes in Attitude

01/29/15 MCD: A New Beginning

01/29/15 EAT: Tough Crowd

 

Events This Week

Tuesday, February 3rd

  • WEN earnings call 8:30am EST
  • CMG earnings call 4:30pm EST

Wednesday, February 4th

  • GMCR earnings call 5:00pm EST

Thursday, February 5th

  • DNKN earnings call 8:00am EST
  • YUM earnings call 9:15am EST
  • BWLD earnings call 5:00pm EST

 

Chart of the Day

Monday Mashup: WEN, CMG, DNKN, YUM, BWLD - 2

 

Recent News Flow

Monday, January 26th

  • WEN introduced its newest LTO, the new Bacon and Blue on Brioche, which features “a blue cheese herb aioli topped with spring mix and three strips of freshly cooked, thick-cut, Applewood Smoked Bacon, all served on a toasted brioche bun.”
  • RRGB announced it is two weeks away from opening its newest restaurant in New Jersey.
  • DNKN announced the completion of its refinancing efforts by replacing the company’s old $1.9 billion senior secured credit facility with a $2.6 billion securitized debt facility.

Tuesday, January 27th

  • BLMN announced the completion of its sale of Roy’s to United Ohana, LLC.

Wednesday, January 28th

  • QSR Tim Hortons confirmed it is laying off an unspecified number of employees, now rumored to be close to 350.
  • PZZA declared a quarterly dividend of $0.14 per common share, payable February 20, 2015 to shareholders of record on February 9, 2015.
  • BWLD announced the opening of its first restaurant in the Philippines.
  • LOCO El Pollo Loco celebrated the opening of its newest restaurant in Katy, TX.  The restaurant is 2,900 square ft. and has seating for 70 guests.
  • MCD President and CEO Don Thompson announced his retirement, effective March 1st.  The board elected Senior Executive VP and Chief Brand Officer, Steve Easterbrook, to replace Thompson as President and CEO.

Thursday, January 29th

  • SONC declared a quarterly cash dividend of $0.09 per common share, payable February 20, 2015 to shareholders of record on February 11, 2015.
  • PLKI appointed S. Kirk Kinsell to its Board of Directors.  Mr. Kinsell has devoted more than 35 years to the hospitality industry and was recently named Chief Executive Officer of Loews Hotels & Resorts.

 

Sector Performance

Monday Mashup: WEN, CMG, DNKN, YUM, BWLD - 3

 

Monday Mashup: WEN, CMG, DNKN, YUM, BWLD - 4

 

Quantitative Setup

From a quantitative perspective, the XLY remains bullish on an intermediate-term TREND duration.

 

Monday Mashup: WEN, CMG, DNKN, YUM, BWLD - 5

 

Casual Dining Restaurants

Monday Mashup: WEN, CMG, DNKN, YUM, BWLD - 6

 

Monday Mashup: WEN, CMG, DNKN, YUM, BWLD - 7

 

Quick Service Restaurants

Monday Mashup: WEN, CMG, DNKN, YUM, BWLD - 8

 

Monday Mashup: WEN, CMG, DNKN, YUM, BWLD - 9


Keith's Macro Notebook 2/2: China | Oil | UST 10YR

 

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


the macro show

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LEISURE LETTER (02/02/2015)

TICKERS: 1680.HK, RCL, NCLH, CCL

 

EVENTS

  • Feb 3:  GLPI 4Q CC
  • Feb 3: WYNN 4Q CC
    • ; pw: 57961245
  • Feb 12: MPEL 4Q CC
    • (1866) ; pw: MPEL
  • Feb 17: MGM 4Q CC
    • ; pw: 8870181

HEADLINE STORIES 

GGR - Macau GGR for January came in at  28.74 billion MOP (27.90 HKD, 3.60 USD), down 17.4% YoY. 

Takeaway: Slightly worse than consensus in-line with Hedgeye

 

Cruise 2015 Wave color – 

  • Jean Paugh, manager at All About You Travel Unlimited in Rockledge, Fla. “It’s been a good first month of the year; we sort of picked up where we left off in December.”  Paugh said a number of cruise lines jumped the gun by introducing promotional specials for Wave season in December or even November, which has helped drive early Wave business.  A variety of destinations are in demand, Paugh said, ranging from Florida cruises for clients who don’t mind repeating itineraries, to Alaska and beyond.
    • The soft spot for Paugh is Europe. While river cruises are still doing well, as are luxury cruises, the higher airfares to Europe have put a damper on midmarket demand. “It’s the Mediterraneans and Baltics, that’s what’s really soft with us so far,” she said.
  • Other sellers report a different experience. “We’re selling a lot of Europe,” said Karen Kimmey, owner of OK Travel Agency, in Chicago.
  • Cruise lines were advertising more, especially Viking River Cruises, which was a sponsor of the U.S. Figure Skating Championship on TV in mid-January.
  • Shari Marsh, owner of a Cruise Holidays franchise in Raleigh, N.C., said her sales for January were up 50% from last year. “Europe is selling really, really well,” she said. But there’s a catch. “I’m scared to death because a lot of people will go ahead and book, but they don’t do air right away,” Marsh said. “I’m worried what people will say when I circle back around and tell them what the air prices are.”
  • “I’m seeing we’re having a tough time with Europe,” said Ross Spalding, president of Crown Cruise Vacations, an Ensemble agency in Princeton, N.J.
    • Spalding said the Jan. 7 terrorist attack in Paris and subsequent events “are causing people to hold off just a little...We are about half of where we were last year for the first few weeks.”   
    • Spalding said he has to sell considerably more Caribbean cruises to make up for lost European sales, “although the offers these suppliers have out there are pretty darn aggressive in Europe.”
  • Ken Muskat, executive vice president of sales at MSC Cruises said the company’s Wave season promotion of reduced deposits, onboard spending credits and a complimentary beverage package in some cases is driving an increase in call volume compared with last January.
    • “The large majority of the bookings are associated with the Wave offer,” he said. “Europe is doing well. We’ve been very focused on Europe for a while,” he said, using a package that combines a cruise, airfare and a two-night stay in a hotel pre-cruise.
    • Muskat said MSC recently reduced its peak season rate on the package for departures out of Barcelona. “You really can’t get on your own the air, a two-night hotel stay and a seven-night cruise for the price we’ve got out there,” he said.
    • Muskat said he sees that happening, as well: “We’re probably this year focused on sending more North Americans to more of our ships that are deployed in Europe than ever before.”

Article HERE

 Takeaway:  While there are some mixed reactions, Europe continues to be a concern with many agents.  MSC's comments signal more promotions ahead for the European sailing season which will drive bookings at the expense of lower pricing. 

COMPANY NEWS

Macau Legend/1680.HK  said it has received all the necessary permits from the Macau government to open its 444-room Harbourview Hotel. The hotel is having a soft opening on Monday and an official opening on February 11.  The hotel will not have any gaming. But it is connected by bridge to the firm’s Babylon Casino.

 

Macau Legend added in their Monday filing:  “As the redevelopment of the Macau Fisherman’s Wharf progresses, the board expects that more gaming tables would be granted by the DICJ to the company on an incremental basis to support the redevelopment of the Macau Fisherman’s Wharf.”

Takeaway: The number of additional tables Macau Legend receives is absolutely critical to its long-term growth targets.

 

Landing Mainland China real estate developer Landing International Development Ltd said there would be a groundbreaking ceremony on February 12 for its new US$2.2 billion casino project to be located on Jeju Island in South Korea. It will be called ‘Myth-History Park’.  

 

According to building permits granted by the Jeju government, Landing Jeju is permitted to develop and construct “a gaming and integrated resort with a total gross floor area (GFA) of approximately 306,763 square metres [3.30 million sq. feet]” added the filing.

 

It would include “premium hotels and villa hotel and other conferencing and exhibition facilities, a gaming facility, a theme park and shopping and other entertainment and tourism facilities” plus condominiums, villas, bungalows and other accommodation facilities with a GFA of approximately 132,265 square metres.

 

NCLH - customers who book a cruise of three nights or longer can choose from one of four value-added perks that include a free Ultimate Dining Package, a free Ultimate Beverage Package or up to $300 in on-board credits. The fourth option is to bring along extra passengers in a cabin for free when there already are two paying passengers (up to the limit allowed in the cabin). The option only is available on select sailings.

Article HERE

Takeaway: New Norwegian Wave deal

 

CCL -  According to Carnival UK’s executive vice president of operations, David Noya, "There is a lot of interest and bookings for the new ship, and since we launched the new ads, we are on track for our biggest ever wave for P&O. We’re seeing a lot of newcomers – people who are totally new to cruise, as well as people that have cruised before.”

Article HERE

Takeaway: Bookings are doing well for P&O Cruises UK possibly due to an earlier Wave. There hasn't been any commentary on pricing, which we think is slowing in the UK.

 

RCL - According to RCL Senior Vice President, Sales, Trade Support and Service Vicki Freed, there will be a new rotational dining program for RCL. Under the new program, guests will dine at different complimentary restaurants each night of their cruise based on their rotational schedule.  At each restaurant, guests will have the same wait staff and table mates each evening.

 

The new rotational dining program will begin with Anthem of the Seas, but there is no indication yet if it will spread to Quantum of the Seas, Oasis of the Seas and/or Allure of the Seas.

Article HERE

 Takeaway:  We think this modification is due to the negative feedback regarding the implementation of the Dynamic Dining on Quantum.


RCL latest Weekend WoW deal

Article HERE

 

CCL – Carnival aired its first-ever Super Bowl TV commercial entitled "Come Back to the Sea" – a 60-second spot combining stunning cinematic images of the ocean and stirring words from President John F. Kennedy to create an emotional storyline about people's universal connection with the sea.

Article HERE

 

Montage Laguna Beach - Strategic Hotels & Resorts Inc. bought the 250-room Montage Laguna Beach from an affiliate of Ohana Real Estate Investors, a Redwood City investment firm funded by Pierre Omidyar, the founder and chairman of eBay. Ohana still owns the Travelodge Laguna Beach and the Montage Beverly Hills, among other properties. The sale was for $360 million.

Article HERE

Takeaway: This luxury property was sold at a California record of $1.44m average price per key.

 

WYN - Wyndham Hotel Group, announced it has acquired Dolce Hotels and Resorts, a provider and manager of group accommodations with a portfolio of 24 properties and over 5,500 guestrooms across seven countries in Europe and North America, for $57M in cash.

Article HERE

 

INDUSTRY NEWS

Las Vegas - According to cheaptickets.com, 2015 LV hotel prices are down 5% YoY over the Spring Break period. 

Article HERE

 

Macau – The average daily wage of construction workers increased by 6.1% QoQ in 4Q 2014, and the average daily wage of local construction workers was up by 8.2%.

Article HERE

 Takeaway:  Higher construction worker wages is another headwind 

MACRO

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:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.


European Banking Monitor: No Follow Through on Euro-QE; Swaps Widen

Takeaway: Last week's enthusiasm over ECB asset purchases was short-lived as investors remain concerned about EM collapse risk.

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 

 

------ 

 

Key Takeaway:

 

The ECB’s asset purchase high was short-lived as global markets resumed their decline shortly after the news. The collapse in energy prices continues to destabilize select economies raising the specter of a financial crisis. We watch closely both TED Spread and Euribor-OIS for indications of rising global systemic risk in the banking system both at home and in Europe. TED Spread has quietly crept up to 25 bps from 21 bps a month ago, but that magnitude of change is not especially noteworthy. Meanwhile, Euribor-OIS is essentially unchanged.

 

Belgium cut rates, Russia cut rates, and the ECB is buying bonds.  Global central banks are trying to stimulate growth, but markets are falling.  Perhaps investors have built up a tolerance to central bank drugs.  As that seemed to be the case last week, short-term risk measures in our heat map below came out mostly in the red.

 

European Financial CDS- Swaps widened across the board in Europe last week.  Greek spreads blew out following Syriza’s election victory.  Syriza’s win again raises concerns around austerity/Grexit. Concerns that Spain could follow a similar electoral path pushed out spreads for most Spanish banks.  Russia's Sberbank saw its spreads widen by a further 67 bps after the Bank of Russia unexpectedly cut interest rates on fears of an impending recession. This conflicts with six rate increases over the past year as the central bank is stuck between a rock and a hard place. This past week, Russia’s rate policy shifted from fighting inflation and supporting the Ruble to stimulating economic activity.

 

European Banking Monitor: No Follow Through on Euro-QE; Swaps Widen - chart1 financials CDS

 

Sovereign CDS – Sovereign swaps were mostly wider last week as global markets fell amid waning enthusiasm over ECB asset purchases. French sovereign swaps tightened by -6.9% (-4 bps to 47 ) while Spanish sovereign swaps widened by 13.1% (10 bps to 87).

 

European Banking Monitor: No Follow Through on Euro-QE; Swaps Widen - chart2 sovereign CDS

 

European Banking Monitor: No Follow Through on Euro-QE; Swaps Widen - chart3 sovereign CDS

 

European Banking Monitor: No Follow Through on Euro-QE; Swaps Widen - 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 was unchanged at 9 bps.

 

European Banking Monitor: No Follow Through on Euro-QE; Swaps Widen - chart5 euribor OIS

 

 

Matthew Hedrick

Associate

 

Ben Ryan

Analyst

 

 


China, Oil and the UST 10YR

Client Talking Points

CHINA

China: slowing? Yes. But that was a good thing for stocks in DEC inasmuch as buying the dip has been bad for the last 5 days of trading (Shanghai Comp down for 5 straight days = 8% correction, breaking @Hedgeye 3223 TRADE support). 

OIL

Oil had a big ramp into the bell on Friday as most thing sensitive to USD not going straight up (U.S. GDP miss stopped its climb) were up, but failed @Hedgeye immediate-term resistance of $48.34 and is -2.2% (WTI) this morning, with next support $43.61. 

UST 10YR

UST 10YR Yield has already crashed -24% year-to-date (started the year at 2.17% and is 1.66% last), so we’ll take the #deflation win as everyone in this league is using the same balls! Next big data point for the bond market is jobs day Friday.

Asset Allocation

CASH 56% US EQUITIES 2%
INTL EQUITIES 4% COMMODITIES 2%
FIXED INCOME 32% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1.  Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.

TLT

As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT). We believe the TLT has plenty of room to run. We strongly believe the dynamics in the currency market are likely contribute to a “reflexive deflationary spiral” whereby continued global macro asset price deflation and reported disinflation both contribute to rising investor demand for long-term Treasuries, at the margins.

HOLX

Hologic (HOLX) is a name our Healthcare Sector Head Tom Tobin has been closing monitoring for awhile. In what Tom calls his 3D TOMO Tracker Update (Institutional Research product) of U.S. facilities currently offering 3D Tomosynthesis, month-to-date December placements signaled a break-out quarter after a sharp acceleration in October and slight correction to a still very high rate in November. We believe we are seeing a sustained acceleration in placements that will likely drive upside to Breast Health throughout FY2015. Tom’s estimates are materially ahead of the Street, but importantly this upward trend in Breast Health should lead not only to earnings upside, but also multiple expansion and a significant move in the stock price.

Three for the Road

TWEET OF THE DAY

Yield Spread (leading indicator for US growth) remains at 12 months lows

@KeithMcCullough

QUOTE OF THE DAY

Whenever Tom Brady is asked to name his favorite Super Bowl win, his reply is “the next one.”

STAT OF THE DAY

The home ownership rate is now at its lowest level since 1994, down to 63.9 percent in the final quarter of 2014.


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