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WWW | We’re Punting It

Takeaway: WWW has been in our penalty box, and we looked for this print as a last shot to gain conviction it could grow. We found the opposite.

We’re punting this one from our Retail Best Ideas list. The name has been ‘Under Review’ from a research perspective as we were waiting for this quarter as a last shot to gain confidence in the underlying growth story. International expansion of PLG brands, which has been the crux of our thesis, has been tracking at the lower end of what we think is acceptable.  But unfortunately the bigger problem is that the other 70% of the portfolio is in the US, and that business wants to do nothing but decline. The last thing we want to own here is a portfolio of average footwear brands when we’re late in the economic cycle (actually, the only thing worse would be a portfolio of average apparel brands). We’d rather own something at twice the multiple with an asymmetric growth setup.


While this is completely hindsight, we’d point out that in 3Q the company put up a decline of 4.5% in revenue, 17.7% in EBIT, 24.4% in EPS, and -70% in cash flow. Inventory was up 6%, representing a negative 11 point delta in the Sales/Inventory spread. It really has never been worse for WWW in this cycle. Its current SIGMA reading (Quad3) is horrible, and is extremely bearish for Gross Margins in the upcoming quarter.  Its two largest brands, Merrell and Sperry, which account for 40% of sales, have slowed sequentially (on a constant C$ basis – i.e. we’re not dinging it for FX) in each of the past 4-quarters.


WWW | We’re Punting It - 10 20 www chart1  

WWW | We’re Punting It - 10 20 www chart2 


One reason why the value-destructing algorithm is notable is that this company should be throwing off a boatload of cash. And by ‘boatload’ we mean $300mm+. The reality is that this is the first quarter where the TTM cash flow turned down, and we expect that to continue well into 2016. 


Why does this matter? Glad you asked. We have yet to meet anyone who owns WWW who does not think that this story ends in WWW doing another deal. After all, they do a deal at the friction points of almost every economic cycle. But the last thing we’re going to do is stay on board with WWW because of a theoretical backdrop of an accretive acquisition.  Aside from being Thesis Drift – which we won’t succumb to – we’d note that the muted (and now declining) growth in cash flow implies that the company will have to renegotiate its lending agreements to do a deal, and still will only have $600mm-$800mm to spend. That’s nice, but a far cry from when it bought PLG for $1.2bn – effectively growing the size of the company by 66%.


WWW | We’re Punting It - 10 20 www chart3  

WWW | We’re Punting It - 10 20 www chart4 B 

FLASHBACK: Hedgeye's Howard Penney Nails It On Yum! Brands, China | $YUM

Editor's Note: Below is a recent research note on Yum! Brands (YUM) written by Hedgeye Restaurants analysts Howard Penney and Shayne Laidlaw where they speculate YUM would spin-off its China stores. It was a prescient call. Earlier today, the company announced just that. 


FLASHBACK: Hedgeye's Howard Penney Nails It On Yum! Brands, China | $YUM - 10 20 2015 yum 1


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FLASHBACK: Hedgeye's Howard Penney Nails It On Yum! Brands, China | $YUM - 10 20 2015 Yum       


It’s been our long held belief that the Board of Yum! Brands (YUM) has needed to “de-risk” the company from its large China operations.  It now looks like that change is inevitable.  At least there are few large shareholders that hope so!


Yesterday, after the close YUM announced that Corvex’s Keith Meister has joined YUM’s Board of Directors.  This move alone signals a shift in the company’s thinking, which was inevitable following the plunge in YUM’s stock following the company’s recent earnings announcement.  Also, after the close, the company updated its 4Q15 guidance, which contained more bad news.  Fortunately, the updated guidance will take a back seat to the conclusions emerging from the board’s “year-long strategic review.”   YUM said it will announce its decision about a prospective restructuring “shortly”.


Reading between the tea leaves it now appears most likely that YUM will announce plans of a material restructuring on or before its December 10th Analyst Meeting.   


The two most likely events are:

  1. A decision on the new operating structure of the China Division with a possible spin-off (to trade on the Hong Kong exchange)
  2. A material leverage recapitalization


Other possible events include:

  1. A sale/IPO of Pizza Hut
  2. A split of the company into three companies (KFC, PH and TB)


The most important event will be to limit the company’s exposure to the volatility in the China business and return the company to being a high margin high return asset-light global franchise business model.  Currently, YUM is trading at 11.7x NTM EV/EBITDA versus 15.6x for its global asset light peer group and 12.5x for McDonald’s.


We can still value YUM close to $100, but the multiple assumptions behind that can be called into question give the current macro environment in China.  That being said we can still see this stock getting back to $90.


We look forward to hearing what the YUM Board of Directors has to tell shareholders.


 FLASHBACK: Hedgeye's Howard Penney Nails It On Yum! Brands, China | $YUM - 10 20 2015 yum 2


Cartoon of the Day: Bull In a Car

Cartoon of the Day: Bull In a Car - QE cartoon 10.20.2015


"At first risk happens slowly," Hedgeye CEO Keith McCullough often reminds subscribers. "Then all at once."

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McCullough: Short Euro Over Yen


“If you only remember one thing when you’re trading currencies or risk mitigating central planning, it’s critical to always position for the next most incremental actor in the currency war,” said Hedgeye CEO Keith McCullough in this excerpt from today’s edition of The Macro Show. Asia Analyst Darius Dale added additional commentary on Hedgeye’s proprietary model and why European monetary policy could be more dovish than Japan’s.

Retail Callouts (10/20): AMZN Adds 20k Employees For Holiday, ICSC - Decelerating 2yr

Takeaway: AMZN bucks trend, takes Holiday employment up 25%. ICSC worst 2yr reading in 20 weeks.

AMZN - Increasing Employee Count by 25% for Holiday


AMZN has doubled its seasonal employee count in just 4 years  to 100k workers as the rest of retail -- particularly the department store space -- has pulled back the reins in earnest. Footprints at most of the group don't look much different when compared to 3 years ago, but the big difference is the holiday surge in online sales. According to IBM, E-comm sales were up 10.3% and 14% in 2013 and 2014, respectively, during the Holiday season. Which is ~3.5x what the industry has done in aggregate. And because it's become a disproportionate percent of growth during the season it only makes sense that employee counts would march higher in order to meet the Holiday surge at fulfillment centers. But that hasn't happened most likely because store hiring plans are down and with e-comm specific hiring up. Holiday sales forecast across the industry (NRF, Deloitte, AlixPartners, RetailNext, etc.) have been less than optimistic with each of the prognosticators projecting growth rates below last year’s 4.1%, and Holiday hiring plans reflect that. All except AMZN, of course, who is bucking the trend at +25%. 


Retail Callouts (10/20): AMZN Adds 20k Employees For Holiday, ICSC - Decelerating 2yr - Morning 10 20 chart1


ICSC/Redbook - No acceleration after 17 weeks of tough compares. 2nd weakest ICSC reading of the year at 1%, 2yr trend line decelerates 100bps. Worst 2-year reading we've seen in 20 weeks.


Retail Callouts (10/20): AMZN Adds 20k Employees For Holiday, ICSC - Decelerating 2yr - Morning 10 20 chart2

Retail Callouts (10/20): AMZN Adds 20k Employees For Holiday, ICSC - Decelerating 2yr - Morning 10 20 chart3


ETH - Guides 1Q EPS inline with street. Flat revenue, says written sales accelerating.



AutoNation Names Kaveh Khosrowshahi to Board of Directors




McCullough: Long Bond, The Elephant Stomping Around in the Room


On Fox Business earlier this morning, Hedgeye CEO Keith McCullough discusses monetary policy and more with Wall Street Journal chief economics correspondent Jon Hilsenrath and Mary Ann Bartels, CIO of Bank of America Merrill Lynch GWIM. In discussing whether the Fed would keep rates lower for longer, McCullough said:


"If you’re a CIO and you told everyone that rates would surprise to the downside, you’re doing your job. You’re giving [clients] a much lower volatility profile and they would have a big position in the Long Bond. To me that’s the elephant stomping around in the room." 

 McCullough: Long Bond, The Elephant Stomping Around in the Room - 10 20 2015 Fox bus

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