The Daily Kill Sheet Picking Off Profits One Stock At A Time!

December 21, 2011

Daily Kill Sheet For December 21st 2011

Filed under: Uncategorized — Administrator @ 11:58 am

I am using today’s weakness to close out my 11/31 Short trade on Conn’s (CONN, $10.38) with a three-week gain of 7.4%. The market has been volatile and trading volume has been low. I prefer to close the short with a solid gain ahead of any potential January effect. 

December 19, 2011

Daily Kill Sheet For December 19th 2011

Filed under: Uncategorized — Administrator @ 10:30 pm

Take a look at Commercial Metals (CMC $13.82) for a speculative trade. The stock is currently embroiled in a battle between Carl Icahn and the company’s board of directors. Icahn has made an unsolicited bid for the company of $15 a share. Management believes the bid is too low and has instituted a poison pill to block the offer. In response, Icahn says he will fight the pill right up to the Delaware Supreme Court and still wants investors to tender their shares in the hopes that management will relent and remove the takeover pill.

On a valuation basis, the stock is near the lower end of its traditional valuation range on a price to sales, price to book and price to cash flow basis. Even so, the company has reported losses in each of the past two years, and there is no guarantee that the company will be able to hit Street estimates for either this year or next. At the current quote, the stock offers 8.6% upside to Icahn’s $15 target. Meanwhile, the stock also sports a 3.4% dividend yield, thus you get paid to wait for the potential deal to go through.  

The main risk to this investment is that the Icahn loses his fight to have the poison pill removed and drops his offer. If this were to happen, then it’s likely the stock would take a near-term hit and fall back towards its pre-offer price of $11.40. Given this is a speculative position, you can limit your risk for this trade by selling January $12 puts at $0.15. If the stock remains above $12 through the January option expiration (which I believe it will) then you would net a 6.3% return. If the deal falls through and the put was exercised, you would buy the stock at net $11.85 a share.

All said, I believe selling the January $12 puts is a good strategy. While your upside is limited if a white knight steps in and outbids Icahn, the 6.3% return isn’t bad compared to the 8.5% return that would be garnered by buying the stock and having the deal go through on a risk adjusted basis. At this point the odds are 50/50 whether or not Icahn will be able to get the poison pill lifted and also garner the 40.1% of the stock he would need to take control of the company. Meanwhile, the company has taken a number of steps to improve its performance in both the near and long term that should help to boost the share price as the actions take hold and begin to show on the bottom line. 

The company has recently changed both its CEO and CFO and their changes to operations are just now beginning to be seen. Indeed, since October the company has exited their money-losing Croatia operations and has restructured their fabrication business; closing five rebar fabricating locations. Management has also implemented further global headcount reductions; and closed or sold eight construction services locations. Moreover, the new management team is focused on exiting non-core businesses and expanding in higher margin areas.  In this regard, CMC has sold its non-core steel-joist manufacturing operations and expanded its profitable operations in Poland with a focus on value-added merchant and wire rod products.

If the stock was putted to us and we had to buy it for a net $11.85 a share, this would imply a  P/E of  11.4x  the current consensus estimate and only 6.7x the forward consensus. The average P/E for the stock while it is trading at a 52-week low since 1991 (absent four years where the P/E was not meaningful) is 9.0x earnings. Applying the average P/E at a 52-week low to the forward consensus implies a share price of $15.85. Thus, I believe that being putted the stock at 6.7x the forward consensus should be a good entry point from a longer-term valuation stand point. Note, too, that the annual shareholder meeting to vote for new board members isn’t until February 3rd, thus our option expiration will be ahead of this critical vote anyway, thus I am not expecting to have the shares putted to us.

One final point in regards to the safety of this put. This morning, management preannounced first quarter earnings to be in a range of  $0.14 – $0.24, after removing an $0.87 tax benefit and discontinued operations of approx. $0.14. The consensus stands at $0.14. CMC will be reporting earnings on January 6th. Is it possible that the company will guide down earnings expectations on the 6th? Yes. Would it be wise to do so in the face of an upcoming contested director’s election where Icahn is backing three nominees versus management’s suggestions? No. Thus I suspect that the January $12 puts should be safe to sell here for the expectation of a one-month return of 6.3%.

December 13, 2011

Daily Kill Sheet For December 13th 2011

Filed under: Uncategorized — Administrator @ 9:38 am
Best Buy has reported third-quarter earnings of $0.47 a share, $0.05 worse than the consensus estimate.
Earnings quality was poor. Note that I removed $150 million in restructuring charges and $55 million in gains on the sale of an asset from the presentation. After removing the gain and charges, quality was marred by two non-operational factors which added $0.03 to the results. First, a lower-than-expected tax rate added $0.02 versus expectations. A lower-than-expected share count also added a penny.
Operationally, the top line came in 1.7% below Street expectations, and lead to most of the miss. The gross margin was weak versus the tear sheet average by 41 basis points, while SG&A; expense as a percent of sales came in 24 basis points better than the tear sheet average.
Importantly, inventories were down 8.4% on a year over year basis, even though sales increased 2%. The tight inventories could help to arrest the fall in the gross margin in the upcoming quarter, though the tight inventory could cut into sales during the company’s busiest time of the year.
Revenues rose 1.8% year over year to $12.1 billion versus the $12.15 billion consensus revenue estimate. 
For the full year, the company is guiding earnings to a range of $3.35 – $3.65. The consensus stands at $3.44. The company now expects full-year revenues to range between $51.0 billion and $52.5 billion. The consensus revenue estimate stands at $51.8 billion.
All said, I am reiterating my 11/2 short call on the stock. Pricing continues to fall for flat screen TV’s which will likely keep pressure on margins. Moreover, the large cut in inventory ahead of Christmas could hurt sales in late December and early January. All said, BBY, in my opinion, is struggling with too much floor space as many products that they sold in the past are now becoming obsolete or dropping in demand (VCR tapes, desk top computers, CDs, boom boxes). Online sales are also cutting into important categories such as gaming and music sales. With that said, I expect margin pressures to continue going forward until the company can lower its square footage or find a product niche to make up for the product that is now declining in popularity.

December 8, 2011

Daily Kill Sheet For December 8th 2011

Filed under: Uncategorized — Administrator @ 11:01 pm

Costco Wholesale (COST) has reported first-quarter earnings of $0.73 per share, $0.07 worse than the consensus estimate.

Essentially the report was in line given that the company had two charges amounting to $0.07 a share. The first charge amounted to $24 million and related to the settlement of an income tax audit of the company’s 50% owned Mexico joint venture. The impact on net income attributed to Costco was $12 million, or $.03 a share. Also hurting results was a $17 million charge, or $.04 a share, for contributions to the Yes on 1183 Coalition in support of an initiative reforming alcoholic beverage laws in Washington State. These contributions were not tax deductible under U.S. tax laws. Both of these charges are nonrecurring in nature and thus their impact should be removed from the operating earnings presentation.

Revenues rose 12.5% year over year to $21.18 billion versus the $21.29 billion consensus revenue estimate. Comparable-store sales were +10%. The average transaction size increased 6% while traffic growth jumped 4%.

Comps By Geography:

United States: +10.0%
International: +11.0%
Total: +10.0%

Gasoline price inflation added 400 basis points to the U.S. comp, while currency translation added 100 basis points to the international comp. Absent these influences, the total comp would have been up 7%.

Operationally, after adjusting for the charges, the gross margin declined 35 basis points on a year over year basis, while SG&A; expenses as a percentage of sales improved 26 basis points, reflecting operating leverage from the strong comp. The operating margin was weaker by 15 basis points due to the gross margin decline.

Inventories were well controlled increasing 11.2% year over year compared to the 12.5% increase in sales.

 No earnings guidance was given in the release.

Overall, results were essentially in line with expectations. Note that currency translation gave less of a tailwind to results this quarter than it has over the past year. Management noted that part of the slowing they saw in the rate of growth in membership fees was due to the lower positive impact from currency translation, thus we could see a slowing in that metric going forward. All said, my estimate for fiscal 2012 remains $3.80, a nickel below the consensus estimate. I expect the tailwind from currency translation experienced last year to be a bit more muted this year, and thus my weaker-than-consensus estimate. For fiscal 2013, my first crack at it is $4.35, $0.06 below the forward consensus.

December 6, 2011

Daily Kill Sheet For December 6th 2011

Filed under: Uncategorized — Administrator @ 10:26 am

Take a look at The Buckle (BKE) for a short trade here. The stock closed yesterday with a bearish engulfing pattern after running up nearly 13% in the prior five trading days. The share price was driven by stronger-than-expected comps, which caused some short covering and likely drove some new longs into the name. Even so, there are some fundamental problems facing the company that should cap any further gains here and will likely lead to a near-term pullback.

To start, the company reported third-quarter earnings on November 17th that beat the consensus by $0.02. Even so, the stock sold off as the beat was driven by better than expected revenues only. Both the gross margin and the operating margin declined on a year over year basis pointing to the fact that BKE saw no operating leverage from the higher-than-expected sales. The gross margin was down only 10 basis points year over year while SG&A; expenses as a percent of sales also increased 10 basis points. Normally, such a small variation in the operating margin wouldn’t concern me given the strong top-line results, however the third quarter marks the second consecutive quarter where inventories are increasing at a faster rate than sales. To make matters worse, the rate of increase for inventories is also accelerating versus the increase of sales.

With that said, the malls are very promotional right now with most retailers discounting to draw in traffic. Given the rising inventory at BKE, it’s likely that they too will have to discount. Over the past few months, The Buckle has been able to deliver strong comps due to its ability to raise prices. Indeed, in November Average Unit Retail was up 7.0%, while the comp increased 6.5%. This implies that transaction were down for the month and that the comp was driven by increased price. The decline in transaction for BKE was the first since September of 2010. Given that the malls are becoming more promotional here, it’s likely that margins will either compress at BKE or that comp sales will slow as pricing comes under pressure to compensate for competitor’s actions.

On a technical basis, the stock closed yesterday with a bearish engulfing pattern, which is a reversal pattern. Moreover, three of my favorite technical indicators are also pointing towards a pullback in the shares. The TRIX indicator has just done a bearish crossover, while the Williams %R ratio suggests that the stock is near-term overbought here. Finally, the Elder Ray ratio is also suggesting that shorts can be safely entered near the current quote. With that said, my near-term price target is $37.50, implying about 8% downside to my target.

December 2, 2011

Daily Kill Sheet For December 2nd 2011

Filed under: Uncategorized — Administrator @ 7:52 am

Two things were made clear in yesterday’s earnings and comp releases. 1. promotions drove sales in November. 2. Companies that cater to higher income clientele fared better than those serving lower income consumers. Looking ahead, I expect this trend to continue. Saks, Macy’s and Nordstrom’s all reported better comps than either Kohl’s Target or JC Penney. Meanwhile, The Buckle out comped The Gap Wet Seal and Cato Stores, three chains whose price points are more geared to middle to lower income consumers.

At this point, Nef Value Research has seven open retail trading positions in our portfolio; 2 longs and 4 shorts. Below are short updates on our positions as well as an additional long idea that I am adding this morning.

Yesterday Charming Shoppes reported a third-quarter loss of $0.08 a share, a penny better than the consensus estimate. Revenues fell 7.3% year over year to $429.7 million versus the $446.36 million consensus revenue estimate. Comparable store sales declined 4% year over year, but were flat for the Lane Bryant chain, the company’s core brand.

In the release, management announced plans to divest its Fashion Bug brand and accelerate growth of the Lane Bryant brand. The divestiture of the struggling Fashion Bug business is a positive in my opinion. The brunt of the company’s program to close under-performing stores was made up of stores from this chain any way, and it has been clear for some time that management believed that the company’s best chance for recovery was to focus on Lane Bryant

The divestiture of Fashion Bug coincides with the board’s decision to do a comprehensive strategic review of the company’s operations. The review will focus on optimizing the company’s  cash position and maximizing the potential of the flagship Lane Bryant brand, as well as evaluating additional alternatives to enhance shareholder value. Barclays Capital was hired as a financial adviser. By divesting the under-performing Fashion Bug business and exploring alternatives to enhance shareholder value, the company could be signaling that it is open to a buyout. 

The stock currently trade at 1.15x book, which compares favorably to the industry median of 1.84x and the S&P; 500 which trades at 2.22x. An offer near the industry median would imply a share price of about $6.55 a share. A more likely scenario, however, is that the Fashion Bug business will be divested first, and then an offer could be made for the remainder of the company. Note, too, that CHRS has about $157 million in cash on the books, an amount slightly greater than all of its outstanding debt. At this juncture, the Deep Value Portfolio is sitting on a 57% gain in the stock. 

Given the stock is now trading above 1x book value, I am moving my recommendation to a HOLD here. Remember, while our parameters are very strict on entry points based on valuation and financial strength, our sell parameters allow us to hold stocks trading above book value. At this point, we will only sell the stock if our financial strength criteria are not met, or if the stock were to trigger our trailing stop. I am also going to tighten our trailing stop from 45% to our more normal 20%. Originally I had set the trailing stop at 45% because the stock was trading for less than $2.75 a share and very small moves in the absolute price could have triggered the trailing stop. Now that we are up nicely on the stock, the tighter stop will help us to protect our gains.

Abercrombie & Fitch – Oddly enough, I made a typo in yesterday’s morning comment where I said we had an open position in ANF. We do not. We closed out our position in Abercrombie on the 15th ahead of their earnings release with a 6.3% loss. As I said in my original note on ANF, ” I DO NOT want to hold the stock into the earnings release. While I suspect that the company could beat the consensus this quarter, I have my doubts about the chance for optimistic earnings guidance.” We were in ANF for a bounce ahead of their earnings release and that was it. When the stock failed to recover, we sold ahead of earnings and took our speculative loss. Unfortunately, I forgot to write the sale onto my call sheet and thus when I was writing up yesterday’s note I mentioned ANF as one of our longs. Sorry for the over site. 

Christopher & Banks – The Deep Value Portfolio continue to hold CBK and it remains a Buy for new accounts. Similar to Charming Shoppes, we had a 45% trailing stop on  CBK. And a good thing, too, for right now we are sitting on a 25% loss in the shares. Again, we used a 45% stop because the stock was tr
ading at such a low dollar value that relatively small changes in absolute value could have stopped us out too easily before our catalysts had time to work. Originally, we had bought the stock ahead of its last earnings release given its valuation, and the fact that cash on the balance sheet represented 73% of its market cap. 

When the company reported earnings the next day, they beat expectations however management cautioned that their fall product wasn’t selling well and that the company would be discounting heavily in the third and fourth quarter to move bloated inventory and ready the stores for Spring. True to their word, the last three times I have been channel checking in New Hampshire and Massachusetts I have noticed 70% off signs out prominently in front of their stores. These discounts were up from the 50% off signs that had been up near the beginning of the quarter.All said, I don’t expect to see a positive margin surprise at CBK over the next couple of quarters.

In mid November, management announced that they had completed a strategic review and that they would now be closing 100 stores to help them return to profitability quicker. Moreover, they announced they would be downsizing the corporate staff leading to layoffs to about 7% of the headquarters staff. These are positive steps, in my opinion, although the company will be taking charges over the next couple of quarters that could impact earnings quality.

At the current quote, CBK remains within the buy criteria of the Deep Value Portfolio and I am reiterating my Buy recommendation on the stock. The company is aggressively trying to clear inventory and the store closing program coupled with the corporate staff cut backs and other measures to cut costs put the company in the very early stages of a turnaround. Remember, when we buy stocks in the Deep Value Portfolio we are not wearing rose colored glasses. These stocks have problems, otherwise they would not be trading for under 1x sales and below book value. The stocks we purchase for the portfolio, however, due have overt signs of financial and balance sheet strength that is oftentimes being overlooked by the Street. Patience is our friend here. The low valuations gives us some downside cushion while we wait for the positive catalysts to play out. For CBK, we will likely not see the positive impact on earnings until the advent of the Spring selling season. As the company’s turn around plays out, we have a good chance of seeing the stock double from the current quote.

Given I wrote up both the CONN short idea and the AEO short idea this week, there is no real need to update you on their positions right now. Both are shorts at their current quotes in my opinion. To see my reasoning go back to the reports I sent you earlier in the week. It’s 5:00 in the morning and I am still writing this report so go reread them while you drink your morning coffee.

As for AAP and BBY , there is nothing really new to report here. Black Friday had the usual glowing reports on TV about the great deals people were getting on TVs and other electronics. While that’s good for consumers, it likely adds margin pressures to BBY. With that said, I remain comfortable with my short positions on both stocks. Shoot me an IM if any of you want me to resend you a copy of those original short ideas.

Take a look at Macy’s on the long side for a trade. The company recently reported November same-store sales of +4.8%. This was above the quarterly guidance the company had earlier given of a range of 4.0% – 4.5%.  Looking ahead to December, Macy’s faces an easier comparison versus November’s. Indeed, the company reported a November comp of +6.1% in 2010 versus only a 3.9% comp in December. The easier compare also comes at a time when there is one additional day between Black Friday this year versus last. It’s likely this extra day could add 50 to 150 basis points to the comp in December. All said, if Macy’s can produce another above-guidance comp in December, then it is likely that these could be some EPS upside versus the fourth-quarter consensus estimate. Macy’s has beaten the consensus in 18 out of the past twenty quarters, while matching it one and missing it once…a good track record and an indication that management gives very conservative guidance.

At a P/E of 10.7x the forward consensus estimate Macy’s shares are inexpensive here. Over the past nineteen years the stock has traded above 14x earnings in every year but two (2002 when the multiple only reached 13.8x  and 2010 when the multiple at its 52-week high reached 12.95x. Given I expect earnings estimates for the fourth quarter and next year to be moving up, I believe there is a good chance we can see multiple expansion in Macy’s shares as we head into the Spring. With that said, my six-month price target is $45 based on 14.2x the current forward consensus estimate ($3.16) and 14x my $3.20 2012 estimate. This implies about 40% upside to my target. If going into next year the multiple were only to expand to today’s multiple on 2011’s earnings, then the stock would still have 15% upside from the current quote. In the months ahead, if the company continues to increase guidance, then I see no reason not to expect some multiple expansion. Thus, I am recommending a Buy on Macy’s shares with a $45 price target. 

 For aggressive traders, you may want to wait for the stock to pullback and test the gap before filling your position. The Williams %R, a momentum indicator is currently pointing to the stock being slightly overbought. Given I am treating this call as an investment rather than a fast-money trade I am not too concerned with the Williams here. I am using a 15% trailing stop on this liquid retail stock.

December 1, 2011

Daily Kill Sheet For December 1st 2011

Filed under: Uncategorized — Administrator @ 9:30 am

Essentially all of the retailers have now reported comps for November and results are pretty much in line with my view that the strong will get stronger while the weak will remain that way. Saks, Macy’s and Costco and Limited all beat expectations, similar to what they have been doing. Meanwhile, The Gap, Steinmart, Talbot’s, Aeropostale, and Cato had weak sales similar to the trend of the past few months.

One of the bigger surprises of the morning was the weak comp from Kohl’s. The company saw total sales drop 4.5% while their comp declined 6.2%. While weather surely played a part in the miss, the magnitude of the miss clearly points to either a pricing or fashion problem thrown in to boot. Looking ahead, I expect KSS will likely get more promotional as the holiday season progresses, which will likely put some pressure on margins.

At this juncture, I want to increase my short exposure to the group here. At the moment we have three retail longs (ANF, CHRS and CBK) and three shorts (BBY, AAP and CONN).

American Eagle Outfitters (AEO) is a good short candidate here. The company reported third-quarter earnings yesterday that left a lot to be desired. Although EPS came in line with the consensus estimate on a +5% comp, share earnings were still down 6.8% on a year over year basis. While bulls will point to the +5% comp as a sign that operations are turning around, I’d say that it is more a result of massive discounting. While sales jumped 11% year over year, the gross margin declined 450 basis points. While operating leverage to the positive comp did allow SG&A; expenses as a percentage of sales to improve 170 basis points year over year, it just wasn’t enough to make up for the weak gross margin.

Looking ahead, I expect this trend to continue into the fourth quarter as well. Inventories surged 39.6% year over year at AEO easily surpassing the 11% sales gain. The company will likely have to discount heavily to move the bloated inventory, which will likely continue the pressure on margins. At this point, AEO is trading at 13.1x the forward consensus estimate of $1.06. An aggressive share repurchase program and lower tax rate both play a factor in the stronger outlook for next year. At this point, operations are not really showing improvement in my opinion, and it’s likely that expectation for next year are too optimistic. With that said, I would expect to see the stock’s multiple to contract as investors discount the company’s earnings quality. My near-term price target for AEO is $12.50 implying a 10.1% return to my target. The stock price popped yesterday at the open as the inline results lead to some short covering. Even so, the stock price faded throughout the day as the market digested the weak operating results. Look for the stock to weaken further in the coming weeks as promotions become more intense at the mall.

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