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PREMIUM INSIGHT

About Everything: Medicaid for the Middle Class?

About Everything: Medicaid for the Middle Class? - neil cover

In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses how America's biggest health insurers are bailing out of the exchanges—with ominous consequences for the future of private insurance. 


FRAN | Our $0.03

Takeaway: Bullet-proof recovery into a sandbagged 3Q. Setting up short-side in 13 weeks. One to watch.

Here’s the deal…

Whenever a Retailer, durable or non-durable Brand in any pocket of the broader space (about 180 companies as we see it) puts out numbers, we always analyze it as a team in detail as if we were sitting in a seat on the Buy-Side. Most of this ‘back and forth’ amongst the four of us never sees the light of day as it relates to research notes, simply because there is not necessarily a call to be made, in our opinion. There are, however, a number of names/events that spark our interest due to some change on the margin in TRADE, TREND or TAIL duration, but may not necessarily carry major investment significance – yet, at least. Here’s us sharing the very raw interaction.

 

Let us know what you think.

 

FRAN

 

TRADE: Beat by 52%, and yet EPS ‘only’ grew 24%. Forecast accuracy has never been FRAN’s strong point. But in fairness, it raised its own bar in 3Q by taking UP guidance by 17% at the mid-point. Golf clap there as this is a rarity in retail.

TREND: The earnings algorithm in the latest quarter was exceptional (see chart below) with 9% revenue growth translating to 24% EPS growth and FCF more than doubling. Importantly, the compares in the algorithm are extremely easy in 3Q, and the company’s earnings guidance in 3Q implies a 35% decline vs last year, which is simply too conservative given the TREND. Furthermore, the SIGMA setup is bullet-proof, meaning that inventories are correcting while margins are stabilizing – which invariably leads to a positive Gross Margin inflection.

TAIL: The company definitely knows its customer and has a fairly stable and predictable revenue stream. That’s a plus. But it already has nearly 650 stores, which is dangerously close to the 700 mark that is a benchmark for most specialty retailer. We’re not saying it can’t go higher – and in fact – it will whether it should or not. But valuation should naturally be under pressure as it hits the top end of historical retail standards. The same goes for productivity, which stands at an enviable rate of $590 per foot. The downside is that said productivity has been locked between $580 and $600 for the better part of three years. E-commerce is an obvious plus, as the Francesca’s brand stands a chance at making it in a successful e-comm model, but that has yet to be proven at only 4% of sales. All in, this is a company with a slowing long-term top line trajectory, is down to 15% margins from an (overearning) peak of 26% – but there’s no reason margins can’t go lower.

 

This does not strike us as an overt short. But one to keep an eye through a sandbagged 3Q and momentum/recovery from May’s blow-up, +60% already since that event. We’re going to mark the calendar to revisit this one in another 13 weeks.

 

 

Sent: Wednesday, September 07, 2016 8:54 AM
To: Retail Team
Subject: FRAN #'s 

 

FRAN 2Q16 – Beat, up 14% pre-market

EPS beat by 52%, reported $0.27 vs street $0.18. Up 24% YY

Reported flat comp, 420 bps above street -4.2%. Up from -4% in 2Q15

Rev came in above street by 5.6%.  Was up 9% YY

GM% 30 bps above expectations. Down -64 bps YY

EBIT margin  up 52 bps YY, 436 bps above street

SG&A as a % of sales down -116 bps to 31.9%, -408 bps below street

 

Very positive SIGMA move. Sales/inventories spread +11.6%, up from 0.8% in 1Q16

Avg ending inventory per boutique down 9% YY

 

Q3 Guidance:

EPS $0.16-$0.19 vs street $0.15

Revenue $114M-$118M vs street $110.2M

Assuming a +MSD in comp vs street (1.2%)

 

Raised FY Guidance:

EPS $0.96-$1.03 vs street $0.87. Raised from prior $0.86-$0.96

Rev $473-455mm vs street $468mm. Raised from prior $460-480

Comp down LSD to +LSD vs street (1.3%). Up from prior guidance (-3%)-flat

 

FRAN | Our $0.03 - 9 7 2016 FRAN chart1

FRAN | Our $0.03 - 9 7 2016 FRAN chart2

FRAN | Our $0.03 - 9 7 2016 FRAN chart3

FRAN | Our $0.03 - 9 7 2016 FRAN chart4

FRAN | Our $0.03 - 9 7 2016 FRAN chart5


Poll Of The Day: If You Had to Buy-and-Hold ONE ITEM For a Year Which Would You Choose?

What do you think? Cast your vote. Let us know.

 

Poll Of The Day: If You Had to Buy-and-Hold ONE ITEM For a Year Which Would You Choose? - z poll99

 


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

*TODAY* BlackStone Group (BX) | Economic Gravity - Adding to Best Ideas List as a Short

Takeaway: We are hosting a new Best Ideas call today at 11 am EST to discuss BlackStone Group as a short idea.

*TODAY* BlackStone Group (BX) | Economic Gravity - Adding to Best Ideas List as a Short - cover invite smaller

 

Rate of Change Decelerating: BlackStone is a market leader in all four of its business lines and a well liked and respected company which make it a dangerous stock in our view. The core factors that drive shares are starting to decelerate with distributable earnings sourced by net accrued performance fees now declining which is forcing the stock down in lock step. We calculate to make the Street's estimates next year that BX will have to expend 66% of its year end accrued performance fees, over 20 points higher than the balance expended for 2016 distributions and above the all time high of accrued fees paid out in 2015. 

 

Big Data Points to a Hyper Cyclical: The causal factors of BX stock price and internal fundamentals point to a hyper cyclical stock with positive coefficients to all market indices, consumer confidence, and nonfarm payrolls. Negative betas are evident to corporate credit costs, the U.S. unemployment rate, and both equity and fixed income volatility. With the economy entering late cycle territory and the path of least resistence higher for both vol and unemployment trends, we think investors risk overstaying their welcome remaining long the stock compared to the growing risks of shares inflecting lower with the economy.

 

Earnings Quality Will Matter Again:  The entire Alternatives group ranks poorly as Non GAAP accounting beneficiaries which make results look stronger than they really are. The entire earnings quality measure of the S&P 500 has been deteriorating since 2009 and is now back to the worse levels since 2007. The S&P 500 is now averaging a GAAP-to-Non GAAP ratio of 77%, which means that there is a -23% discount between adjusted and GAAP results. The Alternatives are much worse averaging a 59% ratio, or a GAAP discount of -41%. When the tide turns and investors look for safety in defensive stocks, we think the Alternatives group will fail to qualify for that category and will experience substantial declines on a flight to quality. 

 

Fair Value? Our base case valuation for BX shares is $20, or ~25% downside from current levels with a $15 per share valuation in our Bear case scenario, or -40% downside.

 

CALL DETAILS - Wednesday, September 7th at 11 am EST

  • Toll Free Number:
  • Toll Number:
  • UK: 0.
  • Conference Code: 13642040
  • To Automatically add to your Outlook Calendar Click HERE
  • For the Events Page and Live Video Link and Event Materials Click HERE

 

Please let us know of any questions.



Jonathan Casteleyn, CFA, CMT 

 

 


Joshua Steiner, CFA

 

 

Patrick Staudt, CFA

 


September 7, 2016

Want more from Daily Trading Ranges? CLICK HERE to submit up to 4 tickers you'd like to see on the list. 

 

  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
1.61 1.51 1.55
SPX
S&P 500
2,166 2,189 2,186
RUT
Russell 2000
1,232 1,257 1,253
COMPQ
NASDAQ Composite
5,196 5,284 5,275
XOP
SPDR S&P Oil & Gas Explore
35.21 37.98 37.84
RMZ
MSCI US REIT
1,225 1,249 1,242
NIKK
Nikkei 225 Index
16,339 17,158 17,081
DAX
German DAX Composite
10,503 10,744 10,687
VIX
Volatility Index
11.65 14.40 12.02
USD
U.S. Dollar Index
94.23 96.49 94.82
EURUSD
Euro
1.11 1.13 1.11
USDJPY
Japanese Yen
99.80 104.38 102.02
WTIC
Light Crude Oil Spot Price
42.77 45.90 44.83
NATGAS
Natural Gas Spot Price
2.61 2.89 2.72
GOLD
Gold Spot Price
1,311 1,360 1,354
COPPER
Copper Spot Price
2.02 2.12 2.08
AAPL
Apple Inc.
105.60 109.00 107.70
AMZN
Amazon.com Inc.
751 791 788
JPM
J.P. Morgan Chase & Co.
65.90 67.99 67.44
INTC
Intel Corp.
35.19 36.70 36.57
LVS
Las Vegas Sands Corp.
52.28 56.15 54.73
CMG
Chipotle Mexican Grill
395 435 414

Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, along with our intermediate-term (TREND) view.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.


CHART OF THE DAY: Worst ISM Services Since 2010

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. 

 

CHART OF THE DAY: Worst ISM Services Since 2010 - el 09.07.16 chart

 

"...Seriously. That was the worst ISM Services report since 2010 and the largest sequential decline in New Orders (leading indicator) in 104 months and this character at the San Francisco Fed, John Williams, came out intraday saying “the economy is strong” and needs rate hikes.

 

What, precisely, does “the economy is strong” mean? At Hedgeye we deal in real-time and space terms using this thing called the 2nd derivative as a leading indicator for future “levels.” In other words:

 

A)     The economy is either accelerating or

B)      The economy is decelerating

 

It’s not that complicated."


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