PIR | Another Long Walk On A Short PIR

Takeaway: At $8 PIR is trading at 6.5x p/e, 0.4x sales, and 3.5x EBITDA on 2018 #s. We’re willing to stomach the near-term pain with numbers like that

If everyone wants to get bent out of shape on a 2% top line miss for a company that’s been struggling for the better part of 3-years, then they can be our guest. With a beaten-up value stock/show-me story like PIR, we need to see it go, in order, through the four critical stages of retail recovery. Those are 1) capex cut, 2) working capital improvement, after which we can begin to see 3) margin improvement, which will, in turn fuel 4) revenue growth. A company like this can’t go straight from “will it stay in business?” to “accelerated top line growth”. That’s simply not how the retail world works. The company’s capex will be down by 27% this year, we just saw a 16 percentage point positive swing in its sales to inventory spread (see SIGMA below), and that sets up for meaningful margin recovery in FY17 (which starts in four months).  Along the way, we’re still seeing a comp of 2-3%, which ain’t half bad. We still think a year from now people will be looking at $1.25 as very realistic and achievable earnings power for PIR. That implies that at $8 the stock is trading at 6.5x earnings, 0.4x sales, and 3.5x EBITDA. We’re willing to stomach the near-term pain on this one with numbers like that. On the way back up, it’s not unrealistic at all to get to a stock well above $20 if our numbers are right.


PIR | Another Long Walk On A Short PIR - PIR SIGMA


More Details on the Quarter

  • A $0.03 miss in a seasonally weak quarter -- 180bps on the comp line, and merch margins down 380bps. As expected, new CFO Jeff Boyer took down this year’s EPS number by 30% to a range of $0.56-$0.64 as he more than took his lumps (and set beatable targets, we think) in his first call with the company.
  • But for a print as hairy as the one PIR reported tonight, we think the long term margin and earnings story is intact as earnings growth bottoms out at -62% and reaccelerates into positive territory in FY17. Over the past 2 quarters alone the company has had to stomach $22mm+ in added gross margin pressure (about 260bps) with more to come in 2H. That’s on top of the 500bps of margin that have evaporated over the past two years as PIR took its e-commerce business from 0% to 17%.
  • The sales to inventory spread improved by 16 percentage point from the first quarter and marked the best SIGMA reading we’ve seen since 3Q14. Inventory and store distribution will still be an issue for the balance of the year. But, the -10% inventory growth guidance (after the sequential change we saw this quarter) and the commentary surrounding the possibility of DC sq. ft. rationalization is bullish from where we sit.


09/24/15 09:21 AM EDT



Takeaway: This is a great name to buy on an ugly print. Ugly qtr, but financial recovery finally within reach.


We’re not expecting a whole lot of positive news from PIR’s 2Q print (today after the close). EPS is a moving target, and guidance will be light. But when all is said and done we think that the results will show that the financial and operational inflection point for this beaten-down value stock is finally within reach. Are we concerned about a headline miss later today? Yes. We were well aware of these concerns when we added PIR to our Best Ideas list on August 31. Furthermore, we have yet to talk to anyone about this name that is not expecting an ugly quarter. Several analyst notes have already come out calling for a miss, and on top of that, short interest has raced up to 16% of the float – a four-year peak. We think they’ll ultimately be proved wrong.


PIR | Another Long Walk On A Short PIR - PIR shortinterest


A key consideration is that CFO Jeff Boyer will handle guidance for the first time after joining the company in late July. It’s not entirely clear how he will handle guidance…but we can’t imagine that he’ll want high targets his first year on the job. We’ve heard this concern from bears as well “new CFO will lower the bar”. Maybe we’d be concerned if the stock was up 20% over the past quarter, but we’re looking at quite the opposite – a 26% decline since the last earnings report in mid-June, and 12% over the past month.  So will guidance be lower? Probably. But it’s very important to note that Boyer is likely to lower because he wants to, not out of necessity.


Why We Like It – PIR is a beaten-up, ugly value stock…there’s no two ways about it. But with the stock trading at just 0.5x sales – a level it hasn’t sustained in six years -- we think there are two primary questions to ask. 1) Are we going into a major recession? and 2) Is management going to do anything more destructive that would otherwise emulate a major recession? If you answer ‘No’ to both of those questions, then we think it’s a very good risk/reward to buy the stock with $3-$4 down and $20 upside.


Our Answers:

1) We have some major questions marks as it relates to the economy, but we’re not calling for an all-out recession.


2) This is a company that is no stranger to execution issues, but we don’t think that management is about to do anything more that would cause a downturn in the business (especially w/ new CFO taking the seat in late July). Quite the opposite, in fact. Consider this…

  • Over the past three years, PIR gave up 5 points of margin as it played catch-up with its e-commerce business, which stood at only 1% of sales in 2013. Today it is pushing 17%. E-comm will continue to be a headwind as it grows to the mid-30s (about 130bps of dilution over 4 years), but the combination of merch margin recovery and store base rationalization should more than offset the dilution. We think that ~300bps of the margin recoverable.
  • Interestingly enough, in our survey in this report, PIR’s categories ranked as the ones where consumers are most apt to switch sales online. If there is any company that should have invested in e-comm, it is PIR.
  • We’ve had three straight years of elevated capex as the company built out e-comm capabilities. That rolls off this year, with asset consolidation (closing stores) and multi-year margin tailwinds takes RNOA from trough levels at 19% in FY16E to 31% by 2020. That’s a long tail, but even the slightest sign that we’ve found the bottom should make this stock rally.

Listen to Guys Like CNBC’s Steve Liesman At Your Own Peril

In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough calls out CNBC economics reporter Steve Liesman for his consistently flawed economic analysis, including his Pollyannaish assessment of this morning’s lousy U.S. durable goods report.


Subscribe to The Macro Show today for access to this and all other episodes. 


Subscribe to Hedgeye on YouTube for all of our free video content.


Cartoon of the Day: A Japanese Unicorn!

Cartoon of the Day: A Japanese Unicorn! - Abenomics unicorn cartoon 09.24.2015


Brief excerpt from this morning's Early Look by Hedgeye CEO Keith McCullough:


“So,” since 90 TRILLION Yen in money printing + the 3 arrows of “Abenomics” isn’t working, what did the Japanese announce overnight? “Three More Arrows”!


I seriously couldn’t make that up if I tried. And if a spend more than another sentence on what the 3 “new” policies are, today’s note is going to turn into a joke (1. “Stronger Economy” 2. “Welfare” and 3. “nominal GDP target of 600T Yen”).


Best of luck with that, dudes.


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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.


Takeaway: Post-holiday claims reflect ongoing strength in separations while the rate of improvement remains consistent with the late cycle environment

LATE CYCLE STRENGTH AND CONVERGENCE TO ZERO:  While durable goods, business investment, net exports and goods inflation remain in discrete deceleration alongside the retreat in global growth, the domestic labor market continues to tread a path of late-cycle improvement. 


As we’ve highlighted, Initial Jobless Claims have been the most consistent, lead labor market indicator for the economic cycle with peak improvement occurring ~7 months ahead of the economic cycle peak and coincident with or slightly ahead of the equity market peak.  


As it stands, rolling claims peaked 7-wks ago and while +267K in the latest week remains strong (and largely free of holiday related noise), from a rate-of-change perspective, growth will continue to converge towards 0% over the next couple months as we traverse trough comps.  From there, monitoring marginal changes becomes a lower-intensity proposition as positive growth signals deterioration, at the margin. 


In short, the labor market data remains trend consistent and somewhat of an insular island of strength and while there remains some modest runway left for further improvement, the late-cycle clock tick is getting louder.


Looking across the energy states, indexed claims in the chart below increased week-over-week from 94 to 96 while the index for the whole country fell from 84 to 81 in the period ending September 12. The spread between the series increased from 10 to 15.




The Data

Initial jobless claims rose 3k to 267k from 264k WoW. The prior week's number was unrevised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -0.75k WoW to 271.75k.


The 4-week rolling average of NSA claims, another way of evaluating the data, was -8.8% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -9.0%














VIDEO REPLAY | P & Web IV: What You Need to Know

At 12:00PM ET today we will be hosting a presentation entitled P: Webcaster IV = Powder Keg, outlining our bearish thesis and discussing the implications of the Web IV outcome on P’s business model.



Participating Dialing Instructions

  • Toll Free:
  • Toll:
  • Confirmation Number: 13620143
  • Materials: CLICK HERE



  • Challenging Business Model: Limited operational leverage despite operating under lower Pureplay rates
  • Pandora vs. SoundExchange: A review of the Web IV proceeding, the key tenets of each of their arguments, and why P is losing the key debate
  • Powder Keg: We’ll detail a range of potential outcomes, and the limited wiggle room P has without having to restructure its business model
  • Fool's Gold: Why the Copyright Register's decision is not a preliminary victory for P; all it means is that P is just treading water.


**This event will be followed by another presentation with special guest David Oxenford, Counsel to Webcasting Companies at 2:00PM ET. This will be a Fire-Side Chat on the relevant Web IV statutes and the Services' arguments.

[Caterpillar? Hedgeye's Van Sciver Called It] $CAT: Dear Barron’s, “Snap”? Yes. “Back”? Not So Much.

Editor's Note: This unlocked institutional research note was originally published August 08, 2015 by our Industrials Sector Head Jay Van Sciver. As you may have seen, Caterpillar (CAT) shares are down -7% today and have fallen -25% in the last three months. Van Sciver has been the bear on CAT since he launched coverage in 2012. Please email our sales team if you’d like access to Van Sciver’s research at


[Caterpillar? Hedgeye's Van Sciver Called It] $CAT: Dear Barron’s, “Snap”? Yes. “Back”? Not So Much. - z cat cartoon


  • Looking For Short Re-Entry:  We hope that CAT shares pop on this naively bullish article so that we can add them back as a Best Ideas short.
  • Timing Has Wrong Decade: The resources-related capital investment cycle is closer to 30 years than 3 years, and we have visibility into declining capex beyond the article’s posited rebound timing.
  • Losses Can Persist For Years, And Haven’t Started:  It is not unusual for commodity-related capital equipment manufacturers to lose money for many years, CAT/JOY/BUCY included.
  • Apparently Not A Joke:  We have confirmed that it isn’t April Fool’s Day, raising the issue of what was meant by “But companies can control the degree to which margins deteriorate.”
  • No Mention of Oil Exposure:  CAT does more than mining equipment, which might form the basis of a credible bullish argument.  And the article seems confused about CAT's Yen exposure.
  • Next Step Lower:  We see Used Equipment/Cat Financial as the next shoes to drop, as described in detail in our recent CAT Black Book.



CAT/JOY Customers Are Going Bankrupt, And The Author Apparently Hasn’t Heard Of Caterpillar Financial.


We have been negative on CAT since launching Hedgeye Industrials in mid-2012, citing a commodity capital investment bubble, overvaluation/ peak margins, and a bizarrely misguided management team. Ever since, a parade of bottom callers have been attempting to time the turn in resource-related capital spending.  As we see it, the ‘major’ cycle in resource-related capital spending is not 3 years, as the article suggest, but more like 30 years.  There was a peak somewhere around WW2, another in around 1979, and the latest in, say, 2011.  On that basis, we would look for the next peak in, say, the 2030s.   How long do they expect readers in the periodicals demographic to live?


[Caterpillar? Hedgeye's Van Sciver Called It] $CAT: Dear Barron’s, “Snap”? Yes. “Back”? Not So Much. - z cat JVS 1



In our June 2015 CAT Black Book we examined the next shoes to drop at CAT.  From what we monitor, there is an alarming build in the inventory of used equipment in key categories.  Cat Financial receivables are generally backed by used equipment values.  With miners and energy companies – CAT & JOY’s customers – now going bankrupt and/or curtailing capacity (think coal, iron ore, fracking services), a meaningful snapback in the shares seems unlikely. 


Instead, we expect a hard hit to Caterpillar Financial, and investors typically hate losses at captive finance subsidiaries.  Have you seen the list of Cat Financials’ major mining accounts?  Apparently, Barron's hasn’t.  We include part of it below.



Some Specific Problems With Article


No Meaningful Upturn This Decade:  If you don’t agree with us that the mining/commodity capital investment cycle will remain under pressure for years to come, consider, first, capital spending estimates for miners.  On this basis, we have yet to hit bottom.  


[Caterpillar? Hedgeye's Van Sciver Called It] $CAT: Dear Barron’s, “Snap”? Yes. “Back”? Not So Much. - gaq2



Or, simply consider Bucyrus’s long-term margin history.  Last round, it was bad for twenty years.  One has to ask if CAT management did the same high quality due diligence for the BUCY deal that they did for ERA.  Not only did they overpay, but the business may generate losses for CAT (“decretion”?).  CAT even divested the distributorships, which presumable earned steadier service revenue. 


[Caterpillar? Hedgeye's Van Sciver Called It] $CAT: Dear Barron’s, “Snap”? Yes. “Back”? Not So Much. - gaq3



Resource Industries, CAT’s mining exposed segment, hasn’t reported losses yet, and we expect it to in 2H 2015.  


[Caterpillar? Hedgeye's Van Sciver Called It] $CAT: Dear Barron’s, “Snap”? Yes. “Back”? Not So Much. - gaq4



More Than “Using Machines Longer”:  Idling fleets and liquidating used equipment is a more serious issue.  It is still getting worse, notably in North American coal, Australian mining, and Latin American mining, from what we monitor.   When we presented our most recent CAT Black Book in June, there were 432 used off-road trucks (typically used in mining) listed for sale worldwide, a number that has increased to 461 in just the last month and a half (brutal extrapolation).  In 2012, near the peak of the investment cycle, used mining equipment was extremely hard to come by – just listen to our May 2015 call with Michael Currie  (former Finning mining executive).


[Caterpillar? Hedgeye's Van Sciver Called It] $CAT: Dear Barron’s, “Snap”? Yes. “Back”? Not So Much. - gaq5



Cat Financial, Oil Exposure Not Even Mentioned:  Sure, CAT has low net debt if all of those Cat Financial receivables are netted out.  Have you seen the borrowers?  We hit on the magnitude of the Resource Industries exposure in our Black Book, which we think is more in line with revenue than what is disclosed in the “Mining” portion of the portfolio.  “Mining” is “large mining customers worldwide”, and apparently was formerly categorized with “Asia Pacific”, as if that somehow made less sense than mixing regional and non-regional portfolio exposures.  As we understand it, the disclosed “Mining” receivables are by no means all of what our readers would consider mining exposure. The list below excludes the riskier “Project Finance” counterparties.  


[Chart removed. Please ping our sales team for access.]



Recent Coal BankruptciesIf you read through the Arch Coal bankruptcy filing, you will find Joy Global and at least three CAT dealers (Carter, Wyoming and Walker) on the list of creditors.  We understand that coal mines often lease some of their equipment, and presumably CAT or its dealers can repossess that equipment and remarket it. The second step (remarketing) should be quite challenging.  


[Caterpillar? Hedgeye's Van Sciver Called It] $CAT: Dear Barron’s, “Snap”? Yes. “Back”? Not So Much. - gaq7



Commodity Comeback?  Commodities may bounce around, but there is oversupply, we think, in key categories like iron ore.  We have presented these charts before; ping us if you don’t see the problem.


[Caterpillar? Hedgeye's Van Sciver Called It] $CAT: Dear Barron’s, “Snap”? Yes. “Back”? Not So Much. - gaq8



Gold longs better hope that investors don’t lose faith, since they buy ~40% of annual supply, and the cost curve is fairly steep.


[Caterpillar? Hedgeye's Van Sciver Called It] $CAT: Dear Barron’s, “Snap”? Yes. “Back”? Not So Much. - gaq9



Management Control & Buybacks:  “But companies can control the degree to which margins deteriorate.”  Is this the author’s first day?  The article isn’t positive on the capabilities of CAT management.  Yes, let’s invest in a company run by a management team that overpays itself, makes disastrous acquisitions & allocates capital poorly, and can’t figure out where its business is going.  Seems like a plan.  The article also neglects the management compensation structure in discussing the motivation for share buybacks.  Those buybacks were of overvalued shares, in our view.  We think CAT management touts its decrimental performance because it is so hard to find anything else positive to highlight.


Sources Dubious:  We won’t put Joel Tiss’s or Vishal Shah’s CAT recommendation history in here, but we do not think that the percentage of Buy ratings is particularly useful metric.  With a long-cycle name like CAT, value buyers probably need to wait beyond disgust until the name is long ignored.  And, while we show part of our July 2012 note below, and could show many others that look good retrospectively, we certainly acknowledge that we get stuff wrong, too.


[Caterpillar? Hedgeye's Van Sciver Called It] $CAT: Dear Barron’s, “Snap”? Yes. “Back”? Not So Much. - gaq10




We hope that CAT shares pop on this naively bullish Barron’s story so that we can add it back as a Best Ideas short.





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