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KATE | Best Comp in Retail (Again)

Takeaway: A rare ‘bulletproof’ quarter for KATE – numbers and communication. Our thesis is playing out, and we’re sticking with it as a Best Idea.

INVESTMENT SUMMARY AND CONCLUSION

In January of last year, we issued a note stating that ‘KATE Put Up the Best Comp in Retail’. Roughly a year later, we’re saying the same exact thing. Sure, a 14% number this year might not seem eye-popping, but a) it went up against an incredibly difficult 28% in 4Q14, and b) virtually every company in the space has sharply decelerated since last year. KATE is leading, again. This is a rarity for us to say, but the quarter, and the conference call were both bulletproof, at least based on the standards KATE has set in the past.

 

We’re not making any meaningful changes to our model, as our thesis is unchanged, and the story is progressing as expected. We like the fact that the company is starting to talk about (gasp!) E-P-S as a financial metric. That’s been our contention for the past six months, that an actual earnings base after seven years of losses would give investors a more tangible valuation metric, as opposed to the ‘adjusted EBITDA’ numbers that no one really trusts anyway.

 

The current 25x p/e on current year numbers might seem like a stretch. But the earnings growth rate for the next three years is 40-50%. Using a multiple with a 50% discount to growth in 2017, we get to a $40 stock. We don’t want to get greedy with a high-beta high-multiple stock in this tape where its style factors are so clearly out of favor. But when all is said and done, we think the company will continue to execute, and valuation will prove supportive for this stock to work.

KATE | Best Comp in Retail (Again) - 3 1 2016 KATE earn table

 

1)  Topline: The way we are doing the math on 2015 (adding back Fx and quality of sale initiatives) we get to 21% revenue growth in NA and 6% Intl (14 percentage point headwind from Fx). Despite the noise associated with a lot of shifting pieces on the top line due to international agreements, etc. – KATE reported 18% revenue growth vs. reported growth of 7%. Putting that into the context of the segment is dead talk, commentary out of COH which has reported decelerating category growth in NA premium handbag & accessories market from HSD a year ago to flat in the quarter ended in December, and a pullback in the promotional posture a 13% comp is downright impressive. In fact it’s the best number in retail we saw printed in 2015.

 

But, let’s be clear about one point…2015 was a bridge year for KATE. With promotional cadence planned flat in ’16 in the NA market (at both wholesale and retail after a significant pullback), new international agreements ramping up after a year of reorganization, and 14 new licensed product categories launched in late 2015/early 2016, we expect to see sustained comp growth. KATE’s guidance was markedly bullish on the comp line at low-mid teens, and keep in mind that KATE has blown these numbers out of the water in past year. In 2014 and 2015 the company initially guided to 10%-13% and HSD comp growth, but printed 24% and 13% in each year, respectively. We expect that trend to continue.

 

2)  Margins: The growth algorithm for KSNY this year looked like this: 8% reported adjusted revenue growth leveraging into 38% adjusted EBITDA growth. As good as that looks on both an absolute basis (profitability rate up 350bps)  and relative to expectations (reported 16.7% EBITDA margin vs. guide of 15.7%), if we adjust the 2014 number for the Kate Saturday/Jack Spade liquidation we get to a reported EBITDA margin of 15.9% (see chart below). That means we saw just 80bps of leverage in the core business on 18% revenue growth.

 

Keep in mind that the target for 2015 was 15.7% meaning that to hit the target for 2016 of 18-20% we would need to see 230-430bps of leverage in 2016. Updated guidance now implies only 190-300bps of leverage in 2016, when it appears that the majority of the outperformance in 2015 relative to the targets guided to was due to outperformance on the sales line. Or put another way, KATE didn’t push out costs to hit this year’s numbers. Plus, we should start to see the benefit of in-house sourcing (30-50bps this year) continued growth of higher margin international distribution agreements, a growing (higher margin) licensing category which was just 2% of sales in 2015, and general corporate leverage on a higher sales base. We won’t get greedy in 2016 on the EBITDA side, as KATE continues to invest in order to fuel the top line. But, maybe the bigger takeaway is that the company targets of 18.6%-20% are just stopping points on the way to the mid-20s.

KATE | Best Comp in Retail (Again) - 3 1 16 KATE Margin waterfall


FLASHBACK: An Update On Hedgeye Energy Analyst Kevin Kaiser's MLP Short Calls

Takeaway: It pays to listen to Kevin Kaiser.

Earlier today, maverick Hedgeye Energy analyst Kevin Kaiser hosted a short call on Summit Midstream Partners (SMLP). 

 

Kaiser was the original bear on MLP stocks, like Kinder Morgan (KMI) and Linn Energy (LINE), while virtually all of the conflicted, sell-side analysts on Wall Street remained bullish. Below is an update from a post of Kaiser's short calls from our original post, "A Cautionary Tale: Energy Analyst Kevin Kaiser's MLP Warning and 8 Short Calls.

 

As you can see, he nailed it.

 

FLASHBACK: An Update On Hedgeye Energy Analyst Kevin Kaiser's MLP Short Calls - kaiser calls

 

Editor's Note: To access Kevin Kaiser's research email sales@hedgeye.com


S&P 500 Earnings Are Almost All In. The Verdict Isn't Good

Takeaway: Only three sectors in ten have positive earnings growth of the 485 S&P 500 companies that have reported earnings.

S&P 500 Earnings Are Almost All In. The Verdict Isn't Good - SPX earnings snow

 

Nearly all of the companies in the S&P 500 have reported earnings. It's not's looking good. Below is some related analysis and key chart Hedgeye CEO Keith McCullough highlighted to subscribers this morning:

 

"Imagine consensus blamed the following reality for terrible U.S. Equity returns in the last 6 months: 485/500 S&P companies have reported an aggregate Sales decline of -4.5% (and an earnings year-over-year decline of -8.5% on non-GAAP numbers); that made-up EPS decline is right inline with the year-to-date decline of the Russell 2000 of -8.7%."

 

S&P 500 Earnings Are Almost All In. The Verdict Isn't Good - z spp

 

**Notice only 3 sectors in 10 have positive earnings growth. 

 

Ask a permabull about this next time you hear them spouting off about the "great" outlook for S&P earnings. 

 

 


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More Draghi Cowbell Coming?

Takeaway: In February, 13 of 17 European PMI readings are contracting. Here's what that means for the ECB.

Q: Is European growth stalling?

A: It's getting hard to argue to the contrary.

More Draghi Cowbell Coming?  - draghbo

 

So far this February, 13 of 17 European PMI readings are contracting:

 

The warning signs are all there. The PMI pullback looks even more drastic when looking at the rate of change.

 

So ... what does that mean heading into the March 10th ECB meeting? We'll let you be the judge. Here's a Bloomberg chart showing the doves versus the hawks: 

 

Click to enlarge.

MORE COWBELL!

 

More Draghi Cowbell Coming?  - z cow

 

Click here to watch Hedgeye CEO Keith McCullough in this special (FREE) edition of The Macro Show.


SECTOR SENTIMENT RUN

Our monthly sentiment run is a behavioral, market-based gauge of investor sentiment in the Materials Sector. Any relative performance measure is tied to the benchmark S&P 500 Materials Sector INDEX (GICS). Further screening methodologies are included in the link to the deck below.

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CLICK HERE to access the March Sector Sentiment Run presentation.

 

Key Call-Outs:

 

Positive Sentiment

Negative Sentiment

 

  • Looking at short-interest, 7 of the top 12 least shorted names are in the Gold Mining & Chemicals space with large-cap Diversified Metals and Miners being the most heavily shorted (FCX, AA, TCK, AWC, FMG). Gold Miners are the least heavily shorted sub-sector
  • 8 of the top 12 with the lowest buy ratings are in the Metals & Mining space, with 5 of the 8 being Gold Miners
  • Combining consensus “buy” ratings and short-interest, Diversified Chemicals, Specialty Chemicals, and Forest Product names have the most positive relative sentiment when combining both metrics. Diversified Metals and Mining, Aluminum, & Commodity Chemicals have the most negative sentiment.
  • With the outperformance in precious metals YTD, relative outperformance, declines in volatility premiums, and net futures and options positioning all suggest the market views Gold Miners much more favorably vs. the beginning of 2016. Looking at the gold market, contract positioning has gone from a consensus net short futures and options position moving into 2016, to a consensus long position in gold (TTM and 3 year z-scores are tracking +2.4 and +2.4 respectively) with futures open interest up 22.4% month-over-month. With the lack of hedging and existence of leverage in the space, each tick in the gold price is leverage won or lost. In the case of the more leveraged names (Barrick, Newmont), a long position is a highly correlated way to be leveraged long of the gold price. This highly correlated leverage to the price of gold likely explains the lack of short-interest in the space. 
  • The largest sector divergences in growth metrics (TOP-LINE, OPERATING, BOTTOM LINE) exist in the mining space. We expect a downward revision in sell-side estimates in the space as many mining company expectations still need to be taken down while some are already discounted.  

 

 


CHART OF THE DAY: This Late Cycle Indicator Just Hit A 17 Month Low

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.

 

"... For #behavioral evidence of that reality, look no further than one of our better new short selling ideas – US Housing (ITB). Signed contract activity for “Pending Home Sales” contracted another -2.5% sequentially in January. That’s a 17 month low in rate of change terms…"

 

CHART OF THE DAY: This Late Cycle Indicator Just Hit A 17 Month Low - 03.01.16 Chart


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