Target Reports Disappointing First Quarter

Target Corporation released its first quarter earnings May 22^nd which missed expectations as a result of soft sales in seasonal and weather-related categories.  Target had first quarter revenues of $16.71 billion, consensus was at $16.78 billion. Net earnings fell 28.5% to $498 million, with adjusted GAAP earnings per share, excluding losses to early debt retirement of $0.41 and gain from sale of their credit card business, at $0.82, down 5% from last year’s outstanding performance. Earnings came in short of consensus estimates of $0.85 per share. Targets gross margins increased 50 basis points to 30.7%, from 30.2% in the same period last year, due to changed vendor agreements and the company’s growth strategies.

Target also opened its first 24 Canadian stores in this first quarter and plans to open 124 stores in Canada by the end of its fiscal year. Target’s mobile traffic and sales continue to grow at a triple-digit pace, with mobile traffic representing more than 30% of our digital traffic in the first quarter.  During the earnings call Targets CEO and chairman, Gregg Steinhafel stated, “While we are disappointing in our first quarter performance, we remain confident in our strategy, and we continue to invest in initiatives, including Canada, our digital channels and CityTarget, that will drive Target's long-term growth." For the second quarter the company expects adjusted EPS of $1.09 to $1.19 and full-year adjusted earnings are expected to come in between $4.70 and $4.90 per share, a 15 cent reduction from Target's previous guidance.

Factoring in a 4% fall in Wednesday's trading session, attributed to both an extremely bearish day in the market and a bad quarter release, the market values Target at $44.0 billion. This values the company at merely 0.6 times annual revenues and 15 times last year's earnings. Target currently pays a quarterly dividend of $0.36 per share, for an annual dividend yield of 2.1%. One poor and expected quarter should not be of concern to us, Target Corporation has seen steady long-term growth in the past and I expect it to continue on this path in the future.  

- Kristen Pfaffe

Foot Locker (FL) - Earnings 5/24

Foot Locker reported earnings on 5/24 and beat estimates in both revenue and EPS.  They report Q1 EPS of $0.91 which beat estimates of $0.88 and represented a growth from Q1 2012 of 10% representing the highest quarterly profit ever achieved from Foot Locker Inc. While a revenue growth of 3.8% to $1.64B was in line with estimates of $1.63B. Foot Locker is down 4.99% on the basis of comparable store sales being "flat" this month as well as skepticism moving forward for the company.

Seeing big gains in the Direct-to-Customer business which were up 18.2% in comparable sales while stores were + or - 5% in gains except for the Kids Foot Locker with gains of almost 20% this quarter.  Apparel has seen a mid-single-digit increase in sales overall with a strong double digit gain in the digital sales all across men, women and kids.  Internationally, apparel sales were down however with an improvement in margins.

Store openings and closings had cancelled each other out with an overall slight contraction of store numbers at 3,321 which is down 14 stores from the end of the year.  Holding a strong gross margin at 34.2% has shown an increase of around 20 basis points for the company. Receiving a slightly better tax rate along with an overall lower growth in costs than seen in sales, has led Foot Locker to achieve their highest quarterly earnings ever as stated before.

Ending with $1.1B in cash on the balance sheet as the first quarter is usually the peak of their cash flows seasonally and declining here going forward until the year end holidays, we will see this years cash balance go towards the acquisition of Runners Point Group (RPG) and also a $600 million share buyback program beginning in Q2.  Overall they are expecting a margin improvement of 20 to 30 bps due to sales growth alone

RPG is company that is based out Europe, mainly in Germany.  With this acquisition, Foot Lockers main exposure in Europe will change form Italy over to Germany which I feel is a huge boost for outlook on their European segment.  I feel this is due to the overall view on Europe and Germany being seen as a much stronger area of Europe compared to Italy currently.  Having an established management and store line, as stated by FL's CEO Kenneth Hicks, it isn't a company that is broken and needs to be fixed but rather one that they can expand off of the solid foundation set by the company already.

Lady Foot Locker has put a significant strain on the company and they have been rebuilding this segment to gain market share of 20-30 year old actively athletic women.  They have seen increase in sales of remodeled test stores and doors of Lady Foot Locker which shows they are stepping foot in the right direction and this can be a big booster to their sales going forward as it is in a depressed state currently.

So with the changes and revamps of current segments of Foot Locker, their acquisition of Runners Point Group, and their greater exposure to digital sales, I see Foot Locker as a strong player going forward in the consumer industry however there are certain risks as we see them take on the acquisition, the remodeling of Lady Foot Locker and Q2 sales being high enough to counter balance the usual Q3 slow down.  A position in Foot Locker is still seen as being justifiable but will be monitored stringently.


-Michael R. Rodrigues

FOMC Minutes for April/May

All markets took a sharp downward spiral after the Federal Open Market Committee (FOMC) minutes alluded to the possibility of bond purchases slowing, with one member in favor of slowing the program as early as June of this year, with the next scheduled release on June 18-19. Members of the Fed are apparently open to scaling back the $85B/month Treasury and Mortgage bond buyback program if the economy continues to do well, though Ben Bernanke, the Chairman of the Federal Reserve, voiced that it may be too soon. 

Since November, the United States economy has added an average 208,000 jobs, up from an average of 138,000 in the six months prior to November. Unemployment has fallen to a four-year low to 7.5%, though it is still at an abnormally high level, far from where they would like it to be. Sectors that are more elastic to interest rate changes have shown positive results when interest rates have been kept low, a testament to the positives brought forth by the program. 

Members of both sides of Quantitative Easing (QE) seemed to be divided in many of the large issues, with QE backers stating the risks of deflation, while QE detractors warned about the markets creating false gains leading to a new asset bubble. They do believe, however, that real Gross Domestic Product (GDP) growth would outpace the “potential output of 2013”, and continue realizable growth into 2015. Longer-run term inflation remaining stable coupled with a negative outlook on expected energy prices, led the FOMC to believe that inflation will remain flat through 2015. Participants outside the fed had mixed feelings on these statements, raising concerns that although we are growing as an economy, we seem to be gradually slowing down and taking our foot off of the pedal. 

Consumer spending has been up, with some areas of the country showing stronger figures than others. The policies created by the Fed seem to have created significant strides in some departments, with equity and housing prices on an upward trend juxtaposed with expanding credit health, but they seem to be far outpacing job placements, a possible problem for the future.

The uncertainty of what to do in the coming months and the instability between Fed members put the markets into a frenzy today (5/22/2013). The S&P 500, Dow Jones and NASDAQ index fell 83 basis points, 52 basis points, and 111 basis points, respectively. Most of UASBIG Portfolio took a hit, with the only two companies staying positive on the day being Spirit Airlines (SAVE), up $0.29 or 0.99%, and Bank of the Ozarks (OZRK), up $0.02 or .04%. The largest detractors of the portfolio today are Target Corp (TGT), Joy Global (JOY), and Amtrust Financial Services (AFSI), falling 4.01%, 3.61% and 2.95% respectively. All indices and most of the portfolio had been up early on the day before eventually nose diving.

Spirit Airlines (SAVE) Analyst Conference

Yesterday (5/20) Spirit Airlines (SAVE) hosted an analyst conference day. Spirit continued to voice its objectives for the year as well as its longer term plans in keeping customers happy, and reiterated how the best way to keep customers returning to Spirit is to keep costs for customers down. Spirit boasts the lowest fares and the lowest total costs to fly in the entire industry, and its a la carte pricing in regards to tickets and add-ons is a major driver in this.

A continued initiative that Spirit is focusing on is reducing its CASM (Costs per available seat mile). It plans to combat price inflation in the coming years by continuing to expand their fleet with more costs efficient A320, and beginning to include A320neo's when they begin to come available in 2016. Fuel accounts for approximately 40% of all expenses, so working towards more fuel efficiency should keep margins strong amidst price inflation in other areas.

Spirit is also looking to improve its customer image moving forward, as they believe too many people believe that Spirit doesn't care about its customers. Although not planning on launching any major marketing campaigns, it is looking to be more flexible with customers regarding deadlines including voucher deadlines amongst others. Also, as a result of a recent survey that showed 80% of fliers listed price as most important, Spirit is looking to move its image from having the lowest fare to emphasizing having the lowest total price in the industry. That stems from a feeling amongst fliers that having the lowest fare doesn't equal the lowest price as a result of nickel and diming customers along the way. Spirit believes focusing on this will continue to improve their passenger volumes at a rate faster than the industry average.

Finally, Spirit is continuing to look to expand into new markets. Currently they have about 400 markets that they hope to move into down the road, and currently are looking to expand at a rate of approximately 3 new markets per year. Spirit is focused on expansion, but also keeping customers happy in their current markets. They believe that rapid expansion into new markets in the past has hurt their on-time arrivals percentage, as it has lagged approximately 10 percent behind the industry. They believe this is attributable in part to expansion outpacing fleet capacity, something they hope to correct moving forward, while still balancing expansion into new markets.

Spirit traded up approximately 1.9% today, closing at 29.32. Moving forward, we reiterate our BUY rating on Spirit Airlines (SAVE) with a price target of $33.80, representing approximately 15 percent upside over their current price.

Vodafone Earnings - VZ

Vodafone posted the largest fall in main revenue, forcing it to keep a dividend from its U.S. arm to compensate for a drop in southern Europe. Rapid growth in Verizon, a solid performance in emerging markets and cost cuts however helped the group to offset some of the weakness and report slightly better than expected profit and earnings per share. Vodafone will keep its dividend payment from Verizon rather than returning it to shareholders.

Vodafone had a 4.2 percent quarterly fall in organic service revenue, broadly in line with forecasts but much worse than the 2.6 percent it recorded in the third quarter and the largest drop (quarterly) since the company started using this in 2003. In Italy service revenue fell 12.8 percent, while in Spain revenue fell 11.5 percent. The group also took a 1.8 billion pounds impairment charge on its Italian business, taking the total writedowns for Spain and Italy for the year to 7.7 billion pounds. Full year margins on core earnings were down 0.5 percentage points on an organic basis to 29.9 percent. Its adjusted operating profit was above guidance, up 9.3 percent to 12 billion pounds

$1 = 0.6570 pounds

Atwood Oceanics Announces Contract Extension, updated model - new Price Target

Atwood Oceanics, Inc. announced last week that it has successfully secured a 1-year contract extension for one of its rigs, the Atwood Aurora until February 2015.  The Atwood Aurora is a jack up rig that is currently operating in offshore Cameroon, and this contract is essentially a continuation of its previously secured contracts.  The drilling rig will bring in a day rate of $193,000 (if the 15% Cameroon withholding tax is applicable at the time), or $164,000 if the withholding tax is not applicable.  Effectively, any excess taxes applicable to this rig's operations are paid for by the customer, and it will be bringing in revenue that is above what the Aurora is currently earning, and also above the day rate that is specified in its first contract extension.

This contract helps to alleviate some of the worry surrounding downward price pressure in the drilling industry.  It shows that companies are actively looking to expand operations in major offshore areas.

I have updated the model and uploaded a copy to Dropbox.  The investment thesis is still intact, and ATW has a new 12-month price target of $63.89, representing a 15% upside over today's closing price of $55.77.

-Nick Randone

Verizon Wireless Dividend To Be Paid June 25

Verizon Wireless, a joint venture of Verizon Communications Inc. and Vodafone Group  PLC, will pay out $7 billion to its owners before the end of next month. Verizon, which owns 55% of the partnership, has been publicly pushing Vodafone to sell its 45% stake in the massive mobile phone company.  Based on their ownership, Verizon Communications will receive $3.85 billion in cash and Vodafone will get $3.15 billion. The dividend will be paid on June 25, according to a regulatory filing.

At this time, with its dominance in the telecom industry and managements ability to enhance shareholder interests, we plan to hold the stock. However, we will be analyzing the stock in the next couple days to see whether it is best to sell or continue to hold our position.

Actavis Rises 12.2% After Confirming Merger Talks With Warner Chilcott (WCRX)

Actavis Pharmaceuticals (ACT) confirmed merger talks with Warner Chilcott (WCRX), a nearly $5.0B specialty pharmaceuticals company, on Friday May 10^th, 2013. Warner Chilcott focuses their attention on Women’s Healthcare, urology and gastroenterology of branded pharmaceutical products. Their U.S. Sales accounted for 70.8% of their total sales for the first quarter of 2013. On a year over year basis, revenue was down 13.6%, attributed mostly to a decrease of $35.0MM in revenue for ACTONEL, a drug used to treat osteoporosis, and management decision to cease shipments of ASACOL 400mg, an anti-inflammatory drug, and transition to a similar drug in DELZICOL. Although revenues were down significantly, the low costs incurred for the first quarter of 2013 led to flat growth in GAAP net income and EPS, reporting $113.0MM and $0.45 respectively. Non-GAAP EPS, however, fell 20.7% to $0.92 when compared to $1.16 in the same period last year. Despite negative growth on both top and bottom line, Warner Chilcott did beat estimates. Reported revenue of $593.0MM and Non-GAAP EPS of $0.92 beat average street estimates of $588.1MM and $0.85, respectively. Warner Chilcott had total cash balance of $290.0MM and total debt of $3,682.0MM. 

This seems like a perfect opportunity for Actavis as they have been vocal about expanding into Women’s Healthcare, a specialty of Warner Chilcott. Additionally, Warner Chilcott’s tax structure can benefit Actavis in the long-term, in terms of tax rates. Analysts state that Warner Chilcott’s debt, comprised mostly of $2,425.0MM term loan borrowings under the senior secured credit facilities and $1,250.0MM of senior notes at 7.75% due in 2018, give Actavis flexibility in financing options for the deal while concurrently keeping their debt multiples stable. Many analysts within the sector, particularly within the generic pharmaceuticals industry, believe that company mergers and takeovers are inevitable, as organic driver and growth is becoming more and more rare. EPS accretion is estimated in a range of 20.0% - 50.0%, assuming the deal goes through. 

UASBIG suspects that deal talks between the two companies are due mainly to these two factors: 1) as Actavis looks to move into the Women’s Healthcare space, they would like to acquire a company with hallmark products and cost-effective strategies. Warner Chilcott’s tax-structure coupled with their specialization in Women’s healthcare products make them very attractive to Actavis; and 2) four recent FDA approvals between February and April. These approvals include two new oral contraceptives, with one expected to launch commercially by August of this year. Following this news, Goldman Sachs Analyst, Jami Rubin, raised their price target from $110.00 to $122.00, but maintains their neutral rating. Actavis ended the day at $119.86, an increase of 12.2% when compared to the previous day close of $106.81. Warner Chilcott price targets were raised to $20.00 from $16.00 and $21.00 from $18.00 by Jefferies and Susquehanna International Group, respectively. Warner Chilcott ended the day at $18.01, up 20.0% when compared to the previous day close at $15.01.

Update: 5/13/2013 12:18 PM - Actavis reiterated as a BUY at Buckingham Research Group. Price target raised to $140.00 from $125.00