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Takeaway: LULU’s decision to eliminate the role of Chief Product Officer and its current occupant makes all the sense in the world to us.

LULU’s decision to eliminate the role of Chief Product Officer and its current occupant, Tara Poseley, makes all the sense in the world to us. Is it because the product in the store looks horrible right now? No. But the company’s lack of a coherent operating plan combined with her consistent inability to prevent competitors from closing the gap in LULU’s core business makes this decision a no-brainer to us.  


While Poseley might well deserve to be sacked, we think that this is really a precursor to CEO Laurent Potdevin getting ousted. Whether he’s making moves to deflect blame and buy some time, or he genuinely thinks these moves will reaccelerate growth – it all really ends the same way – with Potdevin being shown the exit in CY2016.


For starters, a company doesn’t fire its Chief Product Officer when business is just so darn good. Yes, she was hired during the tenure of a lame duck CEO, but it goes without saying that the Board (almost identical to the Board who ousted Chip with the exception of the two Advent members) had a big hand in bringing her in a month and half before hiring Laurent Potdevin to steer the ship.


Posely had been tasked with picking up the pieces after the company’s Luon fiasco in early 2013 that led to the ouster of then CEO, Christine Day, and Chief Product Officer, Sheree Waterson. Now that position has been eliminated (a nice way of saying Posely was fired) for the newly created position of Creative Director who will oversee both Men’s and Women’s product design. That position will be filled by Lee Holman who joined the company as SVP of Women’s Design in the fall of 2014. Holman was previously VP of Apparel Design at Nike, and when he joined LULU, the company did not even deem it worthy of a press release, just a mention in passing on a conference call. At the time he was considered a low-ish profile hire. Has that much changed in a year? Probably not.


The company was in the 7th inning of reworking its go to market calendar and product engine which was set to be completed and rolled out in 1Q16. Safe to say at this point that will at least be pushed out by a minimum of 12 months as Holman and newly created but yet to be filled Chief Supply Chain Officer look to put a stamp on the process improvements.


The company had been guiding to 300bps of merchandise margin recovery in 2016 due to improvements in the go-to-market calendar – specifically from lower air freight, improved raw material management, and better product costing. We think its safe to assume that that benefit will be pushed as well.


Bottom line, this stock was at $40 a year ago, and there’s no reason it can’t get there again. We think there’s a better chance of $12 downside from today’s $52 than $5 up. If the stock doesn’t trade down on this immediately, we’ll get louder on it as a short. There’s more bad news to come.


09/10/15 11:42 AM EDT



Takeaway: This qtr was a mess due to factors far beyond financials. LULU isn’t articulating a cogent plan – bc it probably doesn’t have one.


There’s one major reason why we think this LULU quarter was a huge let down -- and it’s not that inventories were up 23 days while Gross Margins missed by 200bps. Nor is it that LULU added $62mm in revenue year over year, but generated $1mm less in EBIT.  It’s the reality that this company does not know what it wants to be. Virtually every statement out of management on the call had to do with near-term tactical branding, marketing and product plans. All that is fine. It matters on some level – and definitely matters to small scale moves in the stock in the coming quarters. But that’s what we call TREND (in HedgeyeSpeak that translates to 2-3 quarters out – the near-term modeling horizon). This is where LULU lives, unfortunately.


But LULU needs a change of address. This is an extremely powerful brand in a solid, yet increasingly competitive, space. LULU needs to not only be a great brand, but a great company. Then and only then will it be a great stock. We think management is coasting on the power of the brand, by tweaking a legacy operating plan, blindly opening stores, and hoping that nothing else goes wrong. Hope, however, is not a profitable growth process.


LULU needs to live in the TAIL (which we define as 1-3 years). What we need for real wealth creation with this stock is for a clear, concise strategy that insiders rally around and are paid handsomely to implement. People need to look to $4.00 in earnings power, and believe in it. It’s that same strategy that would result in its CEO standing up and saying things that will make Nike, UnderArmour and Athleta quake in their boots (which used to be the case) – not that they are using ‘Sports Psychology on the Pant wall’.  Unfortunately, we truly think that LULU does not have a proactive process to grow its business.


Does The Company Have A Long Term Plan?

Somebody, please, ask virtually anyone in the company if they know their market share in stores and online within an hour’s drive of each store. [Note: our math shows it ranges from 2.5% (Long Island) to 26.7% (Burlington Vt) -- ping us if you want the data]. We don’t think they’ll tell you – because they probably don’t know.


How can a CEO stand up and give credible growth and profitability targets without knowing these basic building blocks?  How can they articulate why they don’t have a wholesale model – something that could be a home run for LULU (i.e. sell where the consumer shops)?  Even the CFO, who we have/had high hopes for, hasn’t created his own identity with the Street – as he’s following the same script of his predecessor who was pushed out.


All we get from the company as it relates to strategic initiatives are 1) Brand, 2) Community, 3) Innovation, and 4) Guest Experience.  The only quantified metric is that LULU will return to a 55% gross margin – something that we don’t think is realistic without meaningful backing by the balance sheet (i.e. more capex to boost profitability). But more importantly, the market is highly unlikely to pay for a passive goal to return to peak profitability when LULU is in a different stage of its growth cycle.


This is a great Brand, for the time being. We really want to get behind this story due to the potential that can be unlocked. But without the backing of a great company – we think this stock is going anywhere but up. We’re glad we pulled the plug in March.




Earlier today we held a conference call with special contributor Daniel Lacalle to discuss Spain’s economy, stock market, and political outlook.





Key take-ways from the call include:

  • Hedgeye’s quantitative outlook on Spain shows its equity index, the IBEX 35, broken across our intermediate term TREND and long term TAIL levels, a bearish signal in our model.
  • Hedgeye’s Growth, Inflation, and Policy (GIP) model shows the Spanish economy in Quad 3 for the remainder of the year – an indication of growth slowing as inflation accelerates, another bearish signal in our factoring process.
  • Spain’s fiscal imbalances remain, with the sovereign debt load near 100% of GDP and a deficit above the 3% target. Politically the government looks poised to tack on spending and issue limited market reforms.
  • Key indicators like Manufacturing Production, IP, PMIs (Manufacturing and Services), Consumer and Economic Confidence, Retail Sales, and Housing indices are all turning over/declining over recent months.
  • A key tell on the health of the Spanish economy is its largest trading partner, France, which is seeing growth go in the wrong direction.
  • Do not confuse ECB President Mario Draghi’s agenda to expand QE with growth, as it will have little impact on the real Spanish economy.
  • There’s high probability that Spanish elections this year (December 20th) result in a narrow win by the PM Rajoy’s ruling Conservative (PP) party, but with a coalition build that includes the Socialists. Expect Spain to revert to its 2008 “ways” when labor market reforms were halted. This is very negative! 
  • As growth slows as debt expands with high unemployment and a rigid labor market, and no prospect for a QE-led recovery, a dangerous cocktail is brewing that could drive economic fundamentals much lower.


Cartoon of the Day: Monkey Business

Cartoon of the Day: Monkey Business - Long financials cartoon 10.21.2015


"But, if you “back out IBM” … and Industrials and Financials … and you don’t back out that Energy Stocks are the best performing S&P Sector Style to be long for Q4 (OCT) to-date at +11.2%, you should be making a ton of sense to your clients," jokes Hedgeye CEO Keith McCullough in today's Early Look.

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BREAKING: Bill Ackman Wishes He Could Hop In Doc Brown's DeLorean And Go Back In Time

In case you didn’t know, today is Back to the Future Day. That of course would be October 21, 2015, the fateful date to which Marty McFly and Doc Brown time-travel in 1989’s Back to the Future Part II to save Marty’s children.



On a related note, our hunch here at Hedgeye is combative hedge fund manager Bill Ackman wishes he could hop in Doc Brown's DeLorean and travel back in time to a date well before his hedge fund, Pershing Square Capital disclosed its mammoth 5.7% stake in Valeant Pharmaceuticals (VRX) which incidentally constitutes a whopping 19% of Pershing Square’s portfolio.


(Continue reading below for our Healthcare analyst Tom Tobin’s detailed report on VRX.)


The stock is getting absolutely hammered today — it’s down as much as 40% — after Citron Research released a note comparing the drug maker to Enron. Ackman has lost billions on his Valeant bet.




Now, we’re just speculating here... but we wager Ackman would also like to take back some words he let slip back in May at the Sohn Investment Conference . That’s where he called Valeant “a very early-stage Berkshire [Hathaway].”


BREAKING: Bill Ackman Wishes He Could Hop In Doc Brown's DeLorean And Go Back In Time - 10 21 2015 ackman


How dare he insult Mr. Buffett’s legacy!


We’ve long been skeptical about the stock and had considered reshorting earlier in the year, but clearly missed that opportunity when the stock was trading closer to $300.  We issued our Valeant Black Book on July 22, 2014 laying out the short case and calling out what we considered to be an unsustainable business model.


That said, we’re proud our Healthcare analysts alerted subscribers to the many “underappreciated risks” we saw in the stock.


From the report:


“Valeant is operating what we believe is an unsustainable business model of serial acquisitions and underinvestment, fueled by debt, that will continue to lead to deterioration in the ongoing business.”


BREAKING: Bill Ackman Wishes He Could Hop In Doc Brown's DeLorean And Go Back In Time - 10 21 2015 tobin 


Here's a brief update on our thinking from Hedgeye Healthcare analyst Andrew Freedman:


“It was only a matter of time before Valeant’s debt-fueled acquisition binge would come to an end.  If you look at what the underlying assets are worth and subtract the debt, you get an equity value that is closer to $20. 


We spent the better part of six months researching Valeant, and there were no shortage of red flags. To name a few: Alternative pharmacy channels, inventory accounting on the Aesthetics assets, FDA investigations, price increases and questionable organic growth rates…


Trying to reconstruct the financials of Valeant’s business was near impossible given the acquisitions/divestitures and number of reclassifications… a huge part of the long thesis was a “Trust Me” story with management and that didn’t cut it with us.” 


BREAKING: Bill Ackman Wishes He Could Hop In Doc Brown's DeLorean And Go Back In Time - 10 21 2015 ron


CLICK HERE to access Tobin's institutional research report on Valeant.


(If you’d like to learn more about our institutional research offerings please ping sales@hedgeye.com.)

Lazard (LAZ) | Chasing Returns...We are Heeding PE Activity and Expanding Merger Premiums

Takeaway: LAZ should put up decent earnings tomorrow and will be generally upbeat on its CC. A diagnostic of the market however is not as bullish.

Lazard (LAZ) is set to report earnings tomorrow in what we expect will be a solid print. With the large $67 billion AT&T/Direct TV transaction having closed in the period and limited proxy disclosure about the associated fee, revenues have upside within the result. Consistent with the rest of the industry, there will also be "constructive" language on the conference call regarding the state of the industry, however we have always ascribed to this guidance only being valuable in the very short run for a couple of quarters.


When zooming out for a broader perspective, the M&A market has chugged along in 2015 but we think expectations of further gains into 2016 are hopeful at best. Looking at merger premiums across cycle, takeout multiples on global transactions are setting new all-time record premiums at 11.9x EBITDA (in 1Q15) and 1.8x sales in the most recent quarter. Historically, the M&A market has been most profitable to investors in the space with low take-out multiples and investing ahead of a jump in merger activity. Simply put, whether M&A participants are strategic or financial, investors are chasing returns with expanding premiums increasing the risk of putting in a high water mark in activity. The prior highs in consideration values were in second half of 2007 with EBITDA premiums of 11.1x in 3Q07 with revenue multiples at 1.7x in 4Q07.


Private equity (PE) participation levels continue to pick up and since we flagged new cyclical highs in PE participation rates last quarter (new highs since the Financial Crisis but not new all-time highs), several blockbuster deals involving financial buyers have been announced. Yesterday, BlackStone purchased Stuy Town/Peter Cooper village from Tishman Speyer for $5.3 billion (in a near mirror valuation of the original '07 sale by Metlife for $5.4 billion) and Dell/Silver Lake is looking to pull in EMC for $67 billion in the biggest technology deal ever. We haven't re-run our PE participation rates for 4Q15 until we get more representative data further into the quarter, but odds at this point call for an even higher percentage of financial buyers of overall activity. 


While the top of the market will only truly be available in hindsight, we can comfortably say that expectations for Lazard already reflect a continuation of current trends and that the story is already modeled for growth on growth. Street estimates assume an +8% top line assumption for 2016, which is very healthy considering apparent late stage markers including PE percentages and an all-time high in merger premiums. EPS estimates also sit at an optimistic $3.69 for next year (but have come down from near $4 since the start of the year and our flagging of the asymmetry in the story). Importantly, with the firm's running NOL's from its IPO having now been marked to its balance sheet as of 2Q15, the company's tax regime is moving from 20% to the "high 20's" which imply that the firm will have to increase revenues by +3-9% alone to offset this operating item. Our estimates continue at near ~$3 flat which imply nearly 20% downside to fair value of $36-$39 per share at 12x our estimate. Importantly LAZ shares continue to screen as one of the highest rated in the Financial sector with extremely low short interest and high sell-side ratings/estimates as outlined within our Sentiment Monitor (see Monitor HERE). Thus despite some rationalization of recent out year numbers, shares are still poised for downside in our view.



 Deal multiples on EBITDA and Revenue have expanded to new all-time highs including the last cycle peak of 2007. This implies that acquirers are reaching for transactions, a less healthy sign versus moderate, mid cycle valuations:


Lazard (LAZ) | Chasing Returns...We are Heeding PE Activity and Expanding Merger Premiums - chart 1 valuations



While a top will only be recognizable in hindsight, 2015 activity has now surpassed 2007 with the recent mega deals in the beverage (Anheuser Busch/SAB Miller) and tech sectors (Dell/EMC):


Lazard (LAZ) | Chasing Returns...We are Heeding PE Activity and Expanding Merger Premiums - Deal Making Pace


Cyclical private equity (PE) activity is also being pulled into the market, with PE activity hitting the highest levels since 2007. Over 23% of global M&A announcements involved a PE fund in 3Q15, the highest level since the 30% in 1Q07:


Lazard (LAZ) | Chasing Returns...We are Heeding PE Activity and Expanding Merger Premiums - final first chart 


Most recently some of the biggest transactions have been financially driven with private equity participants in the recent Stuy Town/Peter Cooper transaction and also the recent Dell/Silver Lake deal:


Lazard (LAZ) | Chasing Returns...We are Heeding PE Activity and Expanding Merger Premiums - PE details final


Lazard's merger pipeline (all deals "pending" from our data venders) continues to be robust from a dollar value standpoint (however having put in a peak in 2Q14). Currently, we only show 5 absolute deals in Lazard's backlog however the over $100 billion Anhesuer Busch/SAB Miller looms large with $70-$100 million in fees for Lazard and another advisor:


Lazard (LAZ) | Chasing Returns...We are Heeding PE Activity and Expanding Merger Premiums - Pending Dollar Volume and Count


While Street estimates continue to compress we are still close to the $3 per share range flat for 2016 versus Consensus nearly +20% higher. Our fair value at 12x our estimate is $36-39 per share. 


Lazard (LAZ) | Chasing Returns...We are Heeding PE Activity and Expanding Merger Premiums - Earnings Comp


LAZ shares continue to screen as some of the highest rated in the financial sector with our Sentiment Monitor applying values to short interest and sell side ratings. The higher the Sentiment number, the lower the short interest and the higher the sell side rating:


Lazard (LAZ) | Chasing Returns...We are Heeding PE Activity and Expanding Merger Premiums - Sentiment Monitor


Private Equity Historically Marks the Peak

LAZ - As Good As It Gets...Modeled For Perfection

Moelis (MC) Pre-IPO Black Book

GHL - Removing Greenhill From Best Ideas list

GHL - The Best Way to Capitalize on an Improvement in M&A

Hedgeye Black Book - M&A Market to Positively Inflect in 2014



Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA

P: Thoughts into the Print (3Q15)

Takeaway: P will need to show more to move this stock after its recent run on 2Q results and the headfake from the Register. That won't be easy


  1. WHAT A RUN: P is up over 30% since it's 2Q15 release and the Register's decision on Merlin admissability; collectively two events that don't really mean much.  Remember that P was trading at a 2-yr low on bombed-out sentiment pre-release, then the stock ripped on a ~1% revenue beat on 2Q results and 3Q guidance.  Then the Register ruled that Merlin was admissable, which many viewed as a preliminary Web IV victory for P without actually considering the Register's stated rationale for allowing Merlin, or the second part of its decision regarding Pureplay admissability as evidence to test for statutory influence (see 3rd note below).
  2. NOW WHAT? We see an asymmetric setup to the downside following P's recent run, and suspect P will need to guide high for 4Q (organically) or it will gap down. That will be a challenge on expectations for accelerating ad revenue growth (scenario analysis below), and sub revenue growth that is not fully considering the aniversary of the Pandora One price increase.  Further, we continue to expect active listeners to decline y/y sometime in 2H, but we're not sure if P's recent promotions will buoy that metric in 3Q; particularly its ad-free listening day in September (P's reported users as those in the last month of the quarter).  But even if we're wrong here, we don't expect the street to chase the print this close to the Web IV decision (≤ Dec 15th).
  3. WHAT WE'RE KEYING IN ON: Listener Hours and clarity around any settlement regarding pre-1972 recordings; both related to Web IV.  Regardng Listener Hours, the more P enters 2016 with, the more drastic (disrputive) measures it must take to reign in costs if Web IV goes against it.  Regarding the settlement, if P is actually settling for $90M as the NY Post suggests (link), then it will have less than $150M in cash following the Ticketfly acquisition.  That is a dangerously low cushion prior to any clarity on Web IV, suggesting that the decision behind Ticketfly is either reckless confidence on the outcome, or P is preparing to blow up its model ahead of an expected defeat, and needs another story to pitch the street before the decision is released.  

P: Thoughts into the Print (3Q15) - P   4Q15 Ad Scen 2


Let us know if you have any questions, or would like to discuss further.  See notes below regarding Web IV developments and the Ticketfly acquisition.


Hesham Shaaban, CFA




P: Dumb or Defeated? (Ticketfly)
10/07/15 11:02 AM EDT

[click here]


P: It's All About the Benchmarks (Web IV)
10/02/15 12:22 PM EDT
[click here]


P: Fool's Gold (Web IV)
09/21/15 02:05 PM EDT
[click here]


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