"Yesterday’s Fed statement had a wiggle," Hedgeye CEO Keith McCullough wrote in today's Early Look. "It adjusted (just a bit, but on the margin is what matters) for the recent marked-to-market change in inflation. Very few at the Fed want to raise rates as nature’s pace of #deflation is accelerating."
Takeaway: And another...
Timeline on new CEO search?
Timing of the timeshare spin?
How to drive unit growth? ideas on the market?
Mkt share increase in 7 of the 10 brands?
Restructuring costs? 54 million? Transitioning that into additional savings? how?
When will HOT be 100% fee driven?
IHG and WYN rumors?
Buyback this Q? only 100mm but asset sales over 500mm, why not buyback more shares?
Strategic review and CEO search a distraction to owners and developers?
Likelihood of more asset sales despite uncertainty with new CEO search?
Expanding distribution? what is ideal? how will you get there?
Corporate travel? Trends seen this year and the trajectory?
Momentum building for select service? How do you get out to scale?
How many Sheratons need to come out of the brand to keep consistency in the brand?
Additional restructuring costs in Q3?
Any black out dates for buybacks? did you buyback enough?
Both General Mills (GIS) and WhiteWave Foods (WWAV) are on the Hedgeye Consumer Staples Best Ideas list as LONGS.
We know what the obvious reaction is going to be to this deal. GIS’s management would never do a deal like this and there is a significant amount of dilution. It’s just not a realistic possibility, or is it? It’s true that this deal would be dilutive, but this is a unique opportunity for a transformational transaction that would overshadow the dilution. Given the strategic rationale for bringing together two high quality companies in the food space, we are confident the street will look past the 10-20% dilution in year one and two, and focus on the long-term potential it would provide GIS.
This is a transformational, portfolio shaping transaction that will change the way GIS operates forever. Acquiring $3.5bn in rapidly growing sales is exactly what we called out GIS needs to do in our GIS Black Book. If GIS were to take on WWAV it would be the beginning of other substantial changes at the company. Management still needs to divest the anchor brands attached to the portfolio, the self-identified 28% of non-priority brands representing $5.4bn in sales.
On a pro-forma basis GIS would overnight become the largest global natural and organic company with $4.2bn in natural & organic revenue. Once the transformation is complete the pro-forma total company would be generating mid-single digit organic volume growth, rather than the low-single digit growth GIS produces on its own.
Naturally, there is also going to be a significant amount of skepticism around the possibility of this deal coming to bear given, GIS’s perceived sleepy corporate culture. At age 61, GIS Chairman and CEO Ken Powell, has a significant opportunity to cement his legacy in the food industry as one of the most dynamic CEO’s.
The following is an overview of how the GIS/WWAV deal would unfold.
These companies are more similar than people think, just at different stages of maturity. Both operate multinational corporations focused on growth globally. GIS is building out a yogurt business in China, while WWAV recently launched a joint venture in dairy-free drinks under the Silk brand. Although GIS has strong growth brands, the company in total has hit a growth plateau recently and is currently working on growing its portfolio. This is where WWAV comes in, providing immediate growth, and an abundant amount of international expansion possibilities.
GIS already plans to get their natural & organic portfolio to $1bn by 2020 organically, this transaction will allow for greater learnings to help GIS’s core portfolio to grow even faster. The perception of GIS will begin to change as they acquire WWAV and divest less desirable brands. Imagine GIS actually being perceived as a health company, the company will gain a lot of appeal from both consumers and Wall Street.
GIS NATURAL & ORGANIC
GIS is going to be a healthier company with or without WWAV. The company has been adamant about changing the consumers perception of their brands by taking out artificial colors and flavors, going gluten free, and innovation towards cleaner ingredient decks.
Revenue synergies are going to be a big aspect of this deal. The strong equity that WWAV’s brands have will help to support growth among GIS brands. Cost synergies will be big as well; we imagine some cuts coming from the GIS side, in order to retain the strong talent at WWAV. WWAV knows how to run a natural & organic company and we would hope that instead of absorbing the brands, GIS would create a new division for only natural & organic products and have WWAV personnel run it. We believe this would maximize the benefit.
These two companies solve each other’s issues.
MANAGEMENT TEAM REDESIGN
GIS shouldn’t just want the brands, WWAV has an enormous amount of talent that needs to be retained. Gregg Engles is a phenomenal CEO at WWAV, although he wouldn’t be promoted to CEO at GIS (we think he should some time down the road) he would be a perfect fit as COO of U.S. Retail. A noticeable switch on this chart is the resignation of Ken Powell, current CEO of Chairmen, coupled with a splitting of the CEO and Chairman positions. Jeff Harmening the current COO of U.S. Retail, would work well as the CEO of this improved GIS, he has strong experience across the organization.
This is one of those transactions we get very excited thinking about. The new General Mills would be a powerhouse in the industry with some of the best brands and people the industry has to offer.
HEDGEYE’S ORIGINAL LONG THESIS
LINKS TO BLACK BOOKS:
Takeaway: What matters most -- KATE stepping in front of KORS in earnings queue.
KATE - Thoughts on 2Q Earnings Timing
There's a lot going on this morning, but from our perspective there is one thing that matters and that is the timing of the KATE 2Q release. The fact that KATE is stepping up ahead of KORS in the queue (it’s the first time KATE has reported ahead of KORS in a 2nd quarter since 2012 -- KORS 3rd quarter as a public company) tells us that the company wants to be out in front of KORS to delineate the good from the bad. That means that a) the company feels good about the trends in its business and b) management is playing a little bit of offense which is a step in the right direction for the IR department. Separating itself from the noise is a good move by the company and should give those pressing the short headed into the quarter due to concerns on the 'space' something to worry about.
SHOO - 2Q15 SIGMA
GNC - 2Q15 SIGMA
SKX - 2Q15 SIGMA
Petco Said to Be Interviewing Banks for IPO Later This Year
Xcel Brands Raising More Money, Moving to Nasdaq
Joe’s in Breach of Forbearance Agreements
TGT - Target doubles down on denim
Menswear retailer acquires all Jones New York stores in Canada; to expand
Takeaway: Claims bounced in the latest week but remain extremely low. Energy states have recoupled to the US and were flat in the latest week.
Following last week's 42 year low in claims, SA claims, not surprisingly, rose by 12k. Nevertheless, claims remain at a very low 267k in the latest week. Year-over-year improvement in rolling NSA claims held steady at -7.8%, but, as we have flagged repeatedly, should begin to converge towards zero from a Y/Y rate of change standpoint in the coming months as comps run into the sub-300k environment that began in the Fall of 2014.
Meanwhile, the improvement/re-convergence in energy state claims versus the country as a whole has sustained itself for a second week. The now nominal spread between the two series was essentially flat W/W as we show in the below chart. However, chatter has re-emerged around another spike in energy layoffs as energy prices have fallen off again in the past month.
Prior to revision, initial jobless claims rose 12k to 267k from 255k WoW, as the prior week's number was not revised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -3.75k WoW to 274.75k.
The 4-week rolling average of NSA claims, another way of evaluating the data, was -7.8% lower YoY, which is consistent with the same reading in the previous week.
The 2-10 spread fell -2 basis points WoW to 159 bps. 3Q15TD, the 2-10 spread is averaging 167 bps, which is higher by 9 bps relative to 2Q15.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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.