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BEST IDEAS UPDATE

Starbucks (SBUX)


Starbucks has been on the Hedgeye Real Time Alerts list since 4/21/09, when we added it as a LONG.

 

SBUX continues to be the best run company that we follow and the long-term TAIL seems unlimited.  Impressive FY3Q13 results only enhance this view.  Despite the stock trading at the high end of its historical consensus forward earnings and cash flow multiples, we believe there is more upside in store.  The three bullish factors we remain focused on include rapid unit growth in China, expansion into new segments of the global food and beverage industry and a commodity tailwind that we anticipate will continue well into FY15. 

 

At 15.1x EV/EBITDA, SBUX is trading significantly above its QSR peer group at 12.4x EV/EBITDA, but we believe this premium is warranted.  Sentiment on the street is high, and this, along with the development of La Boulange are two of our main concerns.  While we can argue that the street is not bullish enough on SBUX, we cannot brand La Boulange a success just yet.

 

BEST IDEAS UPDATE - SBUX US

 

BEST IDEAS UPDATE - SBUX EMEA

 

BEST IDEAS UPDATE - china

 


The Cheesecake Factory (CAKE)


We added CAKE to the Hedgeye Best Ideas list on 2/11/13 as a LONG.   

 

Despite reporting disappointing 2Q13 results, the underlying fundamentals of the company remain strong.  We expect 3Q13 to be a challenging quarter for all casual dining companies and CAKE is no exception, as the company faces slowing industry trends and a tough comp.  However, we believe sales will rebound strongly in 4Q13 and carry on into 2014. 

 

At 8.7x EV/EBITA, CAKE is valued in line with its Casual Dining peer group trading at an 8.8x multiple.  While short interest is currently 11.09% of the float, we believe the international story is underappreciated by the street.  International locations have exceeded expectations and management plans to open another three Middle East stores this year.  For each Middle Eastern restaurant that is open for a full-year, we expect $0.01 in incremental annual earnings per share.

 

BEST IDEAS UPDATE - CAKE RIHANNA

 

 

Panera Bread (PNRA)


We added PNRA to the Hedgeye Best Ideas list on 4/5/13 as a SHORT.  

 

Reflected in 2Q13 results, PNRA is facing a bevy of issues.  The company’s position as a healthy QSR option that is relatively free of competitors is gradually changing.  An increasing number of Casual Dining chains are now offering lower price points and other QSR chains are upgrading their menus.  These menu upgrades include items that are being competitively marketed as healthy eating options and are cheaper than PNRA’s core offering.  This means one thing for PNRA: more competition.

 

But this isn’t the only issue that PNRA is facing.  The company has admitted to having numerous and varying operational issues, ranging from a lack of kitchen equipment to a lack of seating.  Capacity issues have dampened lunch time transactions and management has struggled to drive peak hour throughput.  Therefore, we believe the labor line favorability the company has seen lately will wane, as PNRA will have to invest increased labor in some of its cafes in 2H13.

 

The aforementioned issues are manifesting themselves in the components of comparable sales growth as PNRA traffic trends have shown weakness lately.  At 9.8x EV/EBITDA, the stock currently trades at a discount to its QSR peer group at a 12.4x EV/EBITDA.  We believe this discount is justified and expect PNRA to have another rough outing in 3Q13.

 

BEST IDEAS UPDATE - PNRA system

 

BEST IDEAS UPDATE - PNRA COMPANY

 

 

McDonald’s (MCD)


We added MCD to the Hedgeye Best Ideas list on 4.25 as a SHORT.  

 

July sales numbers recently reported by MCD confirm that the company continues to struggles amidst a difficult macro and increasingly difficult competitive environment.  The company has a lot of work to do in order to improve its operational performance and we fail to see any indication that this will transpire soon.  We previously laid out our thoughts on the path management must take in order to generate sustainable revenue and operating growth in our note titled, “MCD – Difficult Decisions Looming?” 

 

Management’s Plan to Win strategy has proven stale, as new products are not working and operational throughput issues persist.  We believe MCD’s attempts to diversify away from core competencies have, to some degree, brought about these issues.  In addition to operational problems, the company faces three near-term issues: flat-to-declining markets, a lack of pricing flexibility and increasing competition.  To touch on the latter, companies like Wendy’s, Chipotle and even Taco Bell have been pressuring McDonald’s sales as they have been able to successfully do what McDonald’s has not: appeal to Millenials.  As the competitive landscape continues to change, MCD must figure out how to appeal to this cohort.

 

Short interest is only 0.92% of the float and at 10x EV/EBITDA, MCD is trading significantly below its QSR peer group at 12.4x EV/EBITDA.  We believe the aforementioned operational and near-term issues validate this discount.

 

BEST IDEAS UPDATE - global

 

BEST IDEAS UPDATE - MCD USA

 

BEST IDEAS UPDATE - MCD EUR FINAL

 

BEST IDEAS UPDATE - MCD APMEA FINALL

 

 

 

Howard Penney

Managing Director

 


WWW Bolsters Our Bullish Call

Takeaway: WWW hires the most eligible bachelor in global footwear. There is no other way to slice this than hugely positive. WWW remains a top pick.

This note was originally published August 23, 2013 at 13:16 in Retail

Don’t overlook WWW’s announcement today that it hired Gene McCarthy as President of the Merrell brand. It’s a very material announcement, and one that bolsters our bullish call on WWW.

WWW Bolsters Our Bullish Call - merr5 

  1. McCarthy is one of the most successful footwear executives in the world, with a pedigree stretching from Nike, to Reebok, to Timberland, and UnderArmour. WWW is extremely lucky to have nabbed him.
     
  2. Merrell is about $550mm in revenue, or 20% of WWW’s total sales. Yes, it is WWW’s biggest division, and we think that he will have a meaningful impact given that Merrell has been a drag on WWW’s results. It needs the help. He is the kind of individual that can take this to being a $1bn brand, instead of someone that will be content with 3-5% growth annually.
     
  3. But we think that WWW brought McCarthy in with much bigger plans in mind -- whether they are saying it or not (watch what they do, not what they say). Keep in mind that he was brought in to fix the Yellow Boot business at Timberland in April 2006. But by December 2007 he was already Co-President of the parent company. The guy ‘gets it’ when it comes to brand building, and it was a waste for TBL to isolate his talent on only a quarter of the company’s business.
     
  4. But then why did he seemingly fail at UA?  We thought it was a big deal when Kevin Plank hired McCarthy away from Timberland to run UA’s footwear business. But in the end, it did not really work, and we were proved wrong.  We think the problem was two-fold. A) The footwear business at UA needs more capital. It needs more R&D, and more distribution resources both inside and outside of the US. WWW has that already. B) The chemistry between Plank and McCarthy simply did not work. They’re both very ‘type A’, and there was definitely a clash – especially when it came to arguing as to whether the company needed more resources to make the footwear business work

 

Unless WWW paid an ungodly sum of money to get McCarthy on board them team, which is unlikely, there is no way to slice this announcement other than overwhelmingly positive.

WWW Bolsters Our Bullish Call - mcgough

 


Morning Reads on Our Radar Screen

Takeaway: A quick look at some stories on Hedgeye's radar screen.

Keith McCullough – CEO

Capital Flight Drains Reserves as Rupee, Rupiah Fall (via Bloomberg)

Fukushima operator to seek foreign advice on toxic water (via Reuters)

Japan Sales-Tax Decision Due by Early October (KM note: Important macro catalyst … via Bloomberg)

Tweets printed by home-built ticker-tape machine (via BBC http://www.bbc.co.uk/news/technology-23812365)

 

Morning Reads on Our Radar Screen - Bovespa floor

 

Kevin Kaiser – Energy

Working Round the Clock Is a Poor Use of Time (via FT)

Nuverra Environmental: A Sinking Ship With Default Risk (KK note: Rare - a solid SeekingAlpha piece … via Seeking Alpha)

More U.S. oil is moving via truck, barge and train than at any point since 1981 (via WSJ)

 

Howard Penney – Restaurants

McDonald's Operator Tips Mighty Wings Return (via HuffPost)

Filmmaker Lucas-controlled trust buys USD10 million in Starbucks stake (via IVCPost)

 

Jonathan Casteleyn – Financials              

Fed Officials Rebuff Coordination Calls as QE Taper Looms (Contrary to popular belief when the Fed stops QE signaling a recovering USA it is GOOD for the global economy … via Bloomberg)

Server Crash Spurs 3-Hour Nasdaq Halt as Data Link Lost (JC note: Kudos to $NDAQ for not pointing fingers even though it sounds like $NYX system's started last week's issue  … via Bloomberg)


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MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE

Takeaway: Keep and eye on Indian banks, as they're crossing decidedly into the danger zone, and doing so at an accelerating rate.

Key Takeaways:

 

* Indian Financial CDS - Indian banks are beginning to show some signs of serious stress. All three major banks have crossed the "Lehman Line" (+300 bps) and are showing no sign of retreat. Last week, they rose a further 49-69 bps, putting them all north of 350 bps currently. 

 

* High Yield – Rates rose another 9 bps last week, ending the week at 6.55% versus 6.46% the prior week. After troughing briefly on July 22nd at 5.91%, rates have been steadily climbing since. Our firm's view on rates is that they'll continue to grind higher making higher highs and higher lows. Historically, we've seen Financials far more correlated with high yield than they are currently. This is a good sign, as the market is differentiating systemic credit risk from risk of rising rates.

 

 

Financial Risk Monitor Summary

 • Short-term (WoW): Negative / 1 of 13 improved / 5 out of 13 worsened / 7 of 13 unchanged

 • Intermediate-term (WoW): Positive / 5 of 13 improved / 3 out of 13 worsened / 5 of 13 unchanged

 • Long-term (WoW): Negative / 3 of 13 improved / 3 out of 13 worsened / 7 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 15

 

1. U.S. Financial CDS -  Morgan Stanley widened 8 bps last week, making it the ugly duckling. Most of the other large cap names were uneventful. Insurers were similarly little changed. MGIC saw its swaps widen by 33 bps to 449 bps, though Radian tightened by 2 bps. Overall, swaps widened for 19 out of 27 domestic financial institutions, though the average and median change WoW was +4 and +1 bps, respectively.

 

Tightened the most WoW: BAC, WFC, GS

Widened the most WoW: MMC, AXP, GNW

Tightened the most WoW: MET, PRU, AIG

Widened the most MoM: MBI, AGO, AXP

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 1

 

2. European Financial CDS - Swaps were mostly wider last week on EU financials. One callout includes Sberbank of Russia backing up another 22 bps to 261 bps, now wider by 54 bps MoM. We continue to find this puzzling in light of the ongoing rise in crude oil. However, a possible explanation is the growing tension in the Syria/Middle East conflict.

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 2

 

3. Asian Financial CDS - Indian banks are beginning to show some signs of serious stress. All three major banks have crossed the "Lehman Line" (+300 bps) and are showing no sign of retreat. Last week, they rose a further 49-69 bps, putting them all north of 350 bps. China and Japan were quiet last week.

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 17

 

4. Sovereign CDS – Portugal was the only sovereign mover of note last week, widening 35 bps to 471 bps. Elsewhere around the world, swaps ranged from 1 bp tighter (Ireland) to 3 bps wider (Japan). 

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 18

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 3

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose another 9 bps last week, ending the week at 6.55% versus 6.46% the prior week.

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.0 points last week, ending at 1800.

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 6

 

7. TED Spread Monitor – The TED spread rose 1.1 basis points last week, ending the week at 23.4 bps this week versus last week’s print of 22.3 bps.

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 7

 

8. CRB Commodity Price Index – The CRB index rose 0.3%, ending the week at 291 versus 290 the prior week. As compared with the prior month, commodity prices have increased 1.4% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread was again unchanged last week at 12 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 15 basis points last week, ending the week at 3.36% versus last week’s print of 3.21%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 10

 

11. Markit MCDX Index Monitor – Last week spreads widened 8 bps, ending the week at 96 bps versus 88 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 11

 

12. Chinese Steel – Steel prices in China rose 1.2% last week, or 42 yuan/ton, to 3610 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 244 bps, -5 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.9% upside to TRADE resistance and 2.1% downside to TREND support.

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


JCP: Consumer Trend and Liquidity Conference Call

Takeaway: We're hosting a conference call on Thurs Aug 29th to discuss our consumer survey on JCP, and it's implication on liquidity.

JCP: Consumer Trend and Liquidity Conference Call - JCPdialin 08.29.13

 

Please join us for a conference call titled  "JCP: Where is The Consumer and The Cash?" on Thursday, August 29th at 11:00am EDT.The call will take an in-depth look at consumer trends and analyze J.C. Penney's (JCP) current liquidity situation.

 

   

THESIS:

We continue to have a net positive bias on JCP, but we cannot get fully on board while there is zero long term strategy at the company. We would look for an opportunity to get involved on the long side with the passage of time (and de-risking of the balance sheet), or a regime change to a new CEO – even if it means leaving a few dollars on the table.

 

 

CALL DETAILS WILL INCLUDE:  

  • We'll debut the results of our extensive consumer survey of JCP shoppers to gain insight into the following:
    • Why consumers left JCP (or spent less while they were there).
    • If they left, where did they take their business (KSS, M, GPS, Other, or Nowhere?)
    • Are they gone forever, or can JCP win them back?
    • What does JCP need to do to win back the business? Are they doing it under Ullman?
    • What do consumers think of redesigned stores, and does it impact their decision to return to JCP?
    • We will present our liquidity sensitivity analysis, and while JCP will cut it close at times, we don't think it is at risk of a material liquidity event.
    • Discuss how liquidity ties in to the timing of a shift to a permanent CEO.
    • Take a detailed look at Gross Margin, which is the one line on the P&L that we think could improve sooner than later.

  

 

DIAL-IN DETAILS:

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 173225#
  • Materials: CLICK HERE (Slides will download approximately one hour prior to the start of the call) 

 

 

CONTACT

For question please email .   

 


MACAU SLOWS BUT STILL ON PACE

Macau daily table revenues averaged HK$886 million this past week, up 14% YoY, but down 11% WoW.  We are projecting full month GGR (including slots) YoY growth of 16-18%.  We have heard anecdotally that VIP win percentage was low this past week (especially at MGM) but is fairly normal for the full month.  Mass and VIP volumes continue to look very healthy.

 

In terms of market share, MGM took a big hit WoW but is still relatively in-line with trend.  LVS and MPEL remain above their respective 3 month trends.

 

MACAU SLOWS BUT STILL ON PACE - 1

 

MACAU SLOWS BUT STILL ON PACE - 2


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