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# RH: \$8.00 in 2018?

Takeaway: People are asking the wrong questions about RH. THE key question is when it will earn \$8.00 per share. We think the answer is 2018.

Conclusion: People are asking the wrong questions about RH. THE key question is when it will earn \$8.00 per share. We think the answer is 2018.

It was absolutely painful listening to analysts grilling management on the RH Q&A wanting to be spoonfed precise guidance in the coming quarters. We love math as much as anyone – probably more. But seriously…this is a company that should earn about \$1.50 per share this year, and people are asking for guidance on items that account for maybe a nickel a share?  Here’s a better question… How long will it take for RH to earn \$8.00?

Our current math suggests that we’ll see that number around 2018. That’s \$6.50 in incremental earnings in 5-years. Put a different way, that’s a 40% earnings CAGR. Use that as ammo next time anyone tells you that RH is too expensive or that ‘they already missed it’. If you want to use a simple PEG on today’s 12-month forward earnings, you’re looking at a \$90 stock within 1-year based on our model. 2-years is \$125, 3-years is \$175. You get the idea… If you want to review the detailed modeling assumptions, join us for our Best Ideas call on RH in 2-weeks. (We did one at the IPO at \$32, and while the stock has worked, we think that the thesis has evolved to an even greater unrealized degree.)

Now…here are a couple of puts and takes on the quarter.

1)      The print itself was solid. Right in line with our model with adjusted EPS coming in at \$0.49 vs the Street at \$0.42.

2)      Revenue was in-line with our above-consensus estimate, but the composition was off. RH comped 26%, which was well-below our expectation of near 40% and the consensus of 29%. But the RH Direct business (not in the comp) came in meaningfully higher, accounting for 47% of total sales. They washed each other out. But people will always want to see the comp higher. I guess it just sounds better. This ordinarily wouldn’t matter – but with a 9.4% run in the stock 10-days leading into the quarter – the company really needs perfection to keep the treadmill going. 26% is sub-perfect.

3)      On the flip side of that, RH guided up 3Q revenue by nearly 7% -- setting expectations for higher comps (high 30s). No one is upping revenue guidance in the consumer space these days. The confidence management has in its business is extreme.

4)      RH eliminated the Fall Source Book – the 8 pound catalogue package that your mailman hates delivering. We give the company all the credit in the world given the sheer costs associated with the mailers and limited economic benefit. The marketing dollars will be spent with more experiential forms of advertising.

5)      Combining the higher comp expectation for 3Q with the cost saves from the elimination of the mailer, RH raised EPS guidance to \$0.27-\$0.29 vs. the Street at \$0.16. Again, a huge delta in guidance change.

6)      RH appears to be on a track of Gross Margin recovery. After weakness in 1H, 3Q GM should be closer to flat, with full recovery by 4Q.

All in, the reported numbers were excellent. The cadence of strategic change to achieve the long-term earnings growth we’re looking for was there. The revenue composition combined with investors badgering management about guidance to a greater degree than usual is not going to help the stock. But we’re talking a very short window. 2H square footage is accelerating, comp is improving, and gross margins are on the rebound. And all of this is in the context of what we think is an extremely favorable 5-year growth trajectory.

# MCD: Still Not Lovin' It

Takeaway: Global sales surprise, but U.S. sales disappoint. We remain bearish on MCD.

This note was originally published September 10, 2013 at 13:17 in Restaurants

MCD reported August global same-store sales growth of +1.9% versus +3.7% in 2012.  However, the two-year trend ticked up 245 bps sequentially.

The U.S. and Europe regions showed same-store sales growth of +0.2% and +3.3%, respectively.  The U.S. missed consensus expectations by 60 bps, while Europe beat by 340 bps.  The two-year trends accelerated sequentially to +1.6% in the U.S. and +3.2% in Europe.  The APMEA region reported same-store sales growth of -0.5% versus +5.7% a year ago, beating consensus expectations by 40 bps.  The two-year trend accelerated sequentially to +2.6%.

Overall, August sales were slightly better than we had expected—but not enough to change our fundamental view.  Although Global sales were better than estimates, U.S. sales disappointed and remain a point of concern for us.  MCD continues to refer to the U.S. environment as “persistently challenging,” which, interestingly enough mirrors the chatter we have been hearing from a majority of the larger casual dining companies more so than that of other QSRs.

Despite a flurry of recent initiatives regarding new items and menu changes propelling the stock higher, we remain comfortable with our thesis.  In fact, we’ve had a rather bearish take on this news, as we believe these initiatives could add to the operational complexities of McDonald’s stores.  Please see our recent note “MCD: A Pending Mighty Disaster” for more thoughts on this topic.

We continue to believe there is a disconnect between investors’ expectations and the company’s fundamentals.  MCD will present tomorrow morning at the Goldman Sachs Global Retailing Conference.  We’ll post on anything incremental following the presentation.

Howard Penney

Managing Director

HPenney@hedgeye.com

# What Happens If #EOW Fails?

Dubai is ripping. Again.

The country’s stock index surged +8.5% today after Obama said the US would put a Syrian strike on hold if they surrender its chemical weapons. (Evidently, the United Arab Emirates likes the no-action in Syria call too.)

UAE is up over 55% year-to-date now. Can you begin to imagine what happens if the world doesn't come to an end? Lots to consider.

Because despite Nasdaq up over 20% YTD, every downtick in US growth stocks still has everyone and their sister on the edge of their seats worried about it.

#EOW?

(Editor's note: This is a brief excerpt from Hedgeye CEO Keith McCullough's morning research. For more information on how you can begin receiving our research, please click here.)

## real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

# MCD: U.S. SALES DISAPPOINT

MCD reported August global same-store sales growth of +1.9% versus +3.7% in 2012.  However, the two-year trend ticked up 245 bps sequentially.

The U.S. and Europe regions showed same-store sales growth of +0.2% and +3.3%, respectively.  The U.S. missed consensus expectations by 60 bps, while Europe beat by 340 bps.  The two-year trends accelerated sequentially to +1.6% in the U.S. and +3.2% in Europe.  The APMEA region reported same-store sales growth of -0.5% versus +5.7% a year ago, beating consensus expectations by 40 bps.  The two-year trend accelerated sequentially to +2.6%.

Overall, August sales were slightly better than we had expected—but not enough to change our fundamental view.  Although Global sales were better than estimates, U.S. sales disappointed and remain a point of concern for us.  MCD continues to refer to the U.S. environment as “persistently challenging,” which, interestingly enough mirrors the chatter we have been hearing from a majority of the larger casual dining companies more so than that of other QSRs.

Despite a flurry of recent initiatives regarding new items and menu changes propelling the stock higher, we remain comfortable with our thesis.  In fact, we’ve had a rather bearish take on this news, as we believe these initiatives could add to the operational complexities of McDonald’s stores.  Please see our recent note “MCD: A Pending Mighty Disaster” for more thoughts on this topic.

We continue to believe there is a disconnect between investors’ expectations and the company’s fundamentals.  MCD will present tomorrow morning at the Goldman Sachs Global Retailing Conference.  We’ll post on anything incremental following the presentation.

Howard Penney

Managing Director

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

Keith McCullough – CEO

Obama 'could pause Syria attack plans' (via BBC)

WTI Falls a Second Day on Sign of Diplomatic End to Syria Crisis (via Bloomberg)

Dubai Index Rallies Most Since 2009 on Syria Strike Delay (via Bloomberg)

Japan Readies Stimulus to Cushion Blow of Sales-Tax Increase (via Bloomberg)

China Warns of Jail for Viral Posts Deemed Libel (via NYT)

Daryl Jones – Macro

Young analyst draws Wall Street ire taking on Kinder Morgan (via Reuters)

Josh Steiner – Financials

BofA Cuts Jobs as Mortgage Slump Traps JPMorgan, Wells Fargo (via Bloomberg)

Jonathan Casteleyn – Financials

France to Submit Syria Chemical Weapons Proposal to UN (JC note: If a settlement is negotiated over Syria...the markets should unwind that big 3% drop in the S&P 500 in August … via Bloomberg)

Brian McGough – Retail

Clog Maker Crocs Drops After Cutting Third-Quarter Forecast (BM note: Can \$CROX do anything right? Just goes to show how a powerfully fading trend in a brand's core market can decimate its financials. via Bloomberg)

Howard Penney – Restaurants

Olive Garden Thinks Tapas Are Cool, Proves Tapas Are Not Cool (via Atlantic Wire)

McDonald’s Selling Steak for Breakfast in Menu Overhaul (via BBW)

Papa Murphy’s debuts new restaurant design (via NRN)

# The M3: HO AND NAGACORP TO BUILD IN RUSSIA; SANDS, MGM, SJM JOCKEY FOR JAPAN; SJM TRIPLES IN COTAI

THE MACAU METRO MONITOR, SEPTEMBER 10, 2013

RUSSIA SIGNS GAMING DEAL WITH LAWRENCE HO macaubusiness.com

Lawrence Ho and his Russian partner, First Gambling Co of the East, received approval to develop a US\$700MM casino resort in the Primorye zone located in the Far East region of Russia. Ho's partner has invested about US\$70MM into the project.  Tourism officials expect between 8-12 million, primarily Asian visitors to the region annually.

SANDS AND MGM SCOUT CASINO SITES IN JAPAN AS TOKYO GETS OLYMPICS macaudailytimes.com.mo

LVS and MGM are scouting sites for casino development in Japan as confidence of gaming legalization being passed received a boost with Japan's selection to host the 2020 Olympics. Speculation is that the country's Olympic

selection makes the development of casino resorts more attractive, as they will enhance existing entertainment and accommodation offerings, create jobs and draw about US\$10BN in sales to bolster the economy.

Other operators including, Caesars and MELCO, have also shown interest in developing a casino resort in Japan should gaming become legalized.  Potential Japanese development partners include Mitsui & Co., Mitsubishi Corp., Itochu Corp, Sega Sammy Holdings Inc. and Konami Corp.

SJM chief executive Ambrose So Shu Fai told Bloomberg that while the company surveyed sites for casinos on the Penghu and Kinmen islands, their preference is for developing a casino-resort in Japan – preferably in Osaka – if gambling is liberalised there later this year.

SJM TO BUY STAKE IN PLOT TO TRIPLE MACAU CASINO RESORT SIZE macaudailytimes.com.mo

SJM is finalizing the terms of the the purchase of a stake in a neighboring plot which will enable the operator to triple the size of its planned casino development on Cotai. “By combining the two pieces of land, we’ll have a bigger site to develop a full-fledged resort,” So said.

TOKYO FINANCIAL SERVICES FIRM INVESTS IN PONTE 16 macaubusiness.com

SBI Macau, a financial services firm listed in Tokyo, exercised a five-year-old option paying HK\$130MM (US\$16.8MM) to take an indirect stake in casino investor Success Universe Group Ltd, which controls 49% of the Ponte 16 casino-resort. Last week, Success Universe announced that it had repurchased HK\$219MM of stock from pachinko hall operator Maruhan Corp.

CAMBODIA'S NAGACORP PLANS CASINO-RESORT IN RUSSIA macaubusiness.com

Nagacorp plans to invest US\$350MM to develop a casino in Primorye located in Russia's Far East region to open sometime after 2018.  The casino resort would encompass at least 1,000 hotel rooms, 100 gaming tables, and over 500 slots.

PROSPECTIVE HENGUIN BUYERS ENTER A ZONE OF UNCERTAINTY www.scmp.com

Land prices in Henguin have soared since plans were unveiled to transform the island into a cultural and tourism center. Sea of Dreams, the first development offered for sale, will have 1,800 units ranging from 87 to 220 square meters targeting overseas buyers as Henguin is not covered by the central government's home purchase restrictions.  First batch sales are expected to fetch HK\$31,400 per square meter.

Secretary for Transport and Public Works Lau Si Io has given a contractor four weeks to resume work on the Light Rapid Transit railway on Taipa. Work on a depot and transport hub near Macau Jockey Club came to a standstill due to a dispute between Transportation Infrastructure Office and its contractor Top Builders Group Ltd.

'HIDDEN-FEE' PACKAGE TOURS BANNED FROM NEXT MONTH macaubusiness.com

Starting October 1, 2013, China will ban "zero-fee" package tours to Macau, prohibiting travel agents from arranging the tours that force tourists to shop at designated shopping centers. The ban should lead to a higher quality of visitor according to Macau Brand Enterprise Chamber of Commerce president Choi Kai Weng.

GUANGDONG STUDYING A FREE-TRADE ZONE TO INCLUDE HONG KONG AND MACAU www.scmp.com

Guangdong authorities are studying a plan to create a free-trade zone covering parts of the province, Hong Kong and Macau. The discussions, which are still in their infancy, proposed plans to bundle the new zone with three existing special development zones in Guangdong. Those zones - earmarked as pilot free-trade zones - are Qianhai in Shenzhen, Hengqin Island off Zhuhai , and Nansha in Guangzhou. If formed, the new zone would cover more than 1,000 square kilometres, making it much bigger than Shanghai's 28.78 sq km zone.

# Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

• LONG SIGNALS 80.30%
• SHORT SIGNALS 78.51%
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