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May 28, 2015

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KORS: Adding To Long Idea List

Takeaway: It’s not broken. It’s not COH (it’s more like RL). The cash flow offers tremendous support. Downside risk here is low relative to upside.

We’re adding KORS to our Core Ideas list as a Long. The truth is that we think both KORS and KATE should be bought on the massive selloff we saw following KORS’ print and guide. Let’s be clear – these are two dramatically different companies that are in different stages of their maturation curve.  But horrible market sentiment towards what is perceived to be the ‘luxury handbag space’ is unabashedly shellacking anything touching the category (except, interestingly enough, wholesale distributors like Macy’s). We think that has left both names flat-out cheap, with catalysts to the upside as the year progresses. While KATE remains one of our Top Ideas, we’re officially adding KORS to our Long Idea list. (Note: Longs, in order, RH, KATE, NKE, WWW, KORS. Shorts, KSS, HIBB, FL, TGT).


KORS: Adding To Long Idea List - kors financials


Here’s a couple of quick bullets on what we’re thinking on KORS…



  • We recently issued an Idea Vetting Book on KORS [Materials: CLICK HERE, Replay: CLICK HERE], where we came away concerned about the return trajectory, but more positive about what was priced in over the near-term. With today’s correction, we think the catalyst for the shorts has been outed, downside support is material, and there’s upside to the name if KORS even comes close to hitting numbers.
  • KORS is not ‘going the way of COH’. Coach is a one-trick pony that built a business for one consumer, in a singular category, in one primary channel, in one geography. That’s not scalable. KORS built a high-end brand serving multiple consumers, in numerous categories, in several different channels of distribution, in most regions of the globe. Unfortunately, the business size and margin structure is similar, but that’s happenstance. These are different models. Are we enamored by the ‘jet-set’ KORS consumer? It’s not as appealing to us as KATE’s. But we’ll take it over COH any day.
  • There’s still a lot of growth here – just not in the US. If the US business stays flattish over 3-years, then we still get to a consolidated top line growth rate of about 9%. Is that KATE-like, no such luck. But the punchline is that this brand trajectory looks a lot more like Ralph Lauren (global growth) than it does Coach (stagnant in US).
  • There’s no question that margins are coming down. But when we model HSD top line and 22%% EBIT margin by 2018 compared to 29% last year, we get to $4.40, $4.80, $5.13, and $5.50 through 2018.
  • Not impressed with high-single digit EPS growth – even at 10x current year earnings?  Then you should probably look at the cash flow.
  • KORS should generate $2.85 per share in free cash flow this year – assuming the midpoint of company guidance – which we think this very reasonable. It’s got a 5% free cash flow yield today, and 10.4% on 2018.  This company could repo 5% of its stock this year, a number that goes up to 10% within 3-years assuming muted modeling assumptions.   
  • Sentiment has come close to bottoming out for KORS. We’ve seen several Sell-Side analysts capitulate – adding to elevated short interest levels (that seemingly picked up today).

KORS: Adding To Long Idea List - 5 27 KORS Sent


Takeaway: Last night Hormel Foods announced it will acquire Applegate Farms for $775mm.

There is no shortage of “old line” food manufacturers looking to acquire growth brands.  


Last night Hormel Foods announced it will acquire Applegate for $775mm.  The strategic fit make sense given Applegate's strong brand position in the natural and organic prepared meats category, a segment in which Hormel has limited exposure.


Hormel expects the acquisition to be neutral to FY15 EPS and accretive by $0.07-0.08 per share in FY16.  The accretion will likely come from revenue synergies and not cost savings.  Hormel will likely improve the top-line growth profile, as Applegate will benefit from expanded sourcing and increased distribution.


Not surprisingly on the back of this news we are seeing a positive reaction to some of the other names that could also be in play: LNCE, WWAV, JJSF and PF.  We would also note that HAIN is not responding as favorably to recent M&A news. 


We continue to believe that HAIN is not a target, due to the structure of the company and collection of brands that do not participate in the “organic category.”


Below is a one page summary of the Hormel/Applegate deal:

A MAJOR MOVE IN THE ORGANIC SPACE - HRL acquires Applegate chart 1

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McCullough: Markets Don’t Lie, People Do

Hedgeye CEO Keith McCullough weighs in with his latest market and economic take during his appearance on Fox Business with Maria Bartiromo this morning. He also offers his thoughts on the government recalculating GDP and inflation numbers.


LEISURE LETTER (05/27/2015)



  • May 28: MGM Annual General Meeting: Proxy "Fight"
  • June 4: CCL special press announcement in NYC


SGMS - The Company's Bally, WMS, and Shuffle Master-branded games will account for 44% floor share of new gaming devices, and Plainridge will be the first casino in the country to implement a Bally play-management system for responsible gaming, which is a voluntary option for customers and is required by the Massachusetts Gaming Commission. 

Takeaway: Plainridge will open with a mix of new and old games - we believe the ratio is close to 60/40. Thus, we think SGMS's floor share is ~25% of total games or 300-350 units.

NCLH - has ended a controversial ban on passengers taking food out of its ships' buffets and other eateries to consume in their cabins. Norwegian president and COO Andy Stuart tells USA TODAY the company heard an earful from passengers who were upset after the policy went into effect several weeks ago.


Takeaway: NCL better be careful with these new onboard changes. Consumers are not stupid.


AYA  - Amaya approved to list on Nasdaq Global Select Market under symbol "AYA", commencing on June 8th.


MSC - MSC Cruises is launching its first TV advertising in the U.S. today. A commercial called “In the Summertime” will air on a variety of lifestyle and news cable channels. ”As we plan for the Divina to sail year-round from Miami starting in November 2015 and then our next-generation new-build, the MSC Seaside, to come to Miami in 2017, you’ll see a significant increase in MSC’s marketing efforts, which we expect will generate even more excitement from travel agents and consumers for our ships.” commented said Bonnie Levengood, senior VP of marketing.


Takeaway: Despite low support, MSC is not devoting less resources to the Caribbean market. 


Francis Lui commentary - “I will never say there are too many tables,” said Francis Lui Yiu Tung, hastily adding in a reference to the Macau government – which decides these things against the backdrop of a market wide gaming table cap – “I think 150 is very acceptable (for Galaxy Macau)”.


Francis Lui did however indicate a difference of opinion between some Macau officials and the city’s six casino operators on the topic of a proposed total ban on casino smoking likely to happen next year. As presently envisaged, it would include abolition of enclosed and specially ventilated smoking lounges currently to be found on mass market floors.


The executive however warned that tourism was “very important”, and preventing some patrons from smoking meant “there will be huge losses”. “We need to listen more,” stated Francis Lui. He added there were “many options” short of a complete ban. Francis Lui added that the six local operators were “working together” to propose alternatives to a complete ban, although he didn’t specify what they were.



China trading accounts - New trading accounts opened for Shanghai and Shenzhen A-share stock markets hit 2,621,395 last week, up 10.1% from a week earlier, and the number of actively traded accounts rose 10%, data from China Securities Depository and Clearing Corporation Limited showed.


Takeaway:  New Chinese stock account openings continue to rise and we've proven statistically that it investing in the stock market and gambling in Macau can be substitutes for each other. #headwind


Taiwan - Chinese mainland authorities have ruled out the possibility of its citizens being allowed to gamble in Taiwan, as casinos are mooted on one of a number of Taiwanese islands which have recently been made more accessible to mainland tourists.


Mainland regulations and cross-Strait agreements between the mainland and Taiwan are consistent in prohibiting mainland tourists from gambling in Taiwan, said Fan Liqing, spokesperson with the State Council Taiwan Affairs Office, at a regular press conference on Wednesday.


Gambling is banned on the mainland and on the island of Taiwan, though the Taiwanese island of Matsu has approved construction of casinos.


Meanwhile, the president of Taiwan’s legislature, Wang Jin-pyng, has pledged to move forward with plans to allow a casino to open in the Kinmen Islands, reported the government-run Radio Taiwan International. Wang however said that the decision on whether to build casinos on Kinmen would be up to investors. 



Takeaway: Taiwan would become an afterthought if Mainland Chinese can't gamble there.


Scam - A Singaporean has been charged in the Philippines after he allegedly tried to cheat a casino of US$30 million (S$40.3 million) in gambling chips using a fake telegraphic transfer. Dominic Sim is believed to have got $8 million worth of gambling chips from Solaire Resort and Casino in Manila in February last year - $3 million of which the casino has since managed to recover.


A Solaire Resort and Casino representative told The Straits Times yesterday that Sim was a junket operator who first partnered the casino in 2013. -



US$32 billion mega-theme park for Zhuhai - A mega-theme park is reportedly to be established in neigboring Zhuhai. The 200 billion yuan (US$32 billion) project is to be jointly funded by U.S. entertainment giants Time Warner and DreamWorks Studios, according to Mainland Chinese media outlets China Business News and China Real Estate Business newspaper.

Citing a source close to the Guangdong Provincial Development and Reform Commission, Chinese-language news outlet China Business News reported that the first phase of the project, which is set to be located in Hezhoubei in the Doumen district of Zhuhai, involves an investment of 80 billion yuan, and has already been approved by authorities.



Q1 2015 Macau retail sales and Q2 outlook - The value of retail sales dropped by 11% YoY in 1Q 2015, according to data released by the Statistics and Census Service (DSEC). Sales of Watches, Clocks & Jewelry was hit particularly hard (-31% YoY). 


With regard to business outlook for 2Q 2015, about 18% of retailers anticipate that sales volume will increase from the 1Q, 49% expect sales volume to remain stable, while 33% foresee a decrease. Concurrently, about 77% predict stable retail prices, 15% predict a decrease, while 8% expect an increase in retail prices.


Takeaway: The majority of retailers foresee 2Q to be unchanged QoQ.


Macau unemployment - unemployment rate (1.7%) and the underemployment rate (0.3%) for February-April 2015 remained at record low.  


Hedgeye Macro Team remains negative on 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.

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