PNRA remains on the Hedgeye Best Ideas list as a short.


The street currently expects the trends and issues Panera faced in 2Q13 to disappear by 4Q13, but we view this as highly unlikely.  There is no quick-fix to these issues and we believe they will persist for a while.  We address these issues below and highlight where our views differ from consensus.





More Fast Casual Options – NPD recently reported in its CREST industry tracking service that, for the 12 months ended in May, visits to fast casual restaurants grew +9% year-over-year and the number of fast casual units grew +7%.  While it is unlikely that all the new units are those of direct competitors, this increase will hurt traffic trends on the margin as consumers have more options.


Not The Only Healthy Competition – Not only is Panera seeing more competition in the fast casual space, but also from QSR chains that are upgrading their menus.  This, on the margin, is negative for Panera.  These menu upgrades include items that are being competitively marketed as healthy eating options and are cheaper than PNRA’s core offerings, making them very attractive to consumers.


No Pricing Power – With an average check in the $9-$10 range, PNRA has created a pricing umbrella for non-traditional competitors to take advantage of in order to capture incremental market share.  We have seen this begin to play out, as a number of casual dining chains are now offering lower price points at lunch, typically in the $6-$7 range.







Operational – The company has publicly admitted to having a number of widespread 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.  Our view, in this regard, is not widely shared.  The consensus expectation is for labor costs to be flat as a percentage of sales in 4Q13, a feat that we view as very unlikely.





Panera’s Traffic Problem – We believe PNRA has been too aggressive in its pricing over the past five to six years.  Panera’s pricing umbrella we referred to earlier has resulted in traffic declines for the past three quarters.  While consensus is looking for a conservative -0.6% decline in 3Q13, a rebound to a +0.4% gain in 4Q13 is aggressive.







Still Loved By The Street – The aforementioned issues are manifesting themselves in the components of comparable sales growth, as PNRA traffic trends have been a point of weakness lately.  At 9.8x EV/EBITDA, the stock currently trades at a discount to its QSR peer group trading at 14.x EV/EBITDA.  We believe this discount is justified and expect PNRA to have another rough outing in 3Q13.






Howard Penney

Managing Director


What’s New in Today in Retail (9/26)

Takeaway: Athletic apparel defying gravity. UK Sporting goods picking up. JCP/Equity-Holiday-Martha. WMT NKE BBBY AMZN PVH LVMH



NKE - Earnings Call: Thursday 9/26 5:00 pm

FINL - Earnings Call: Friday 9/27 8:30 am


Takeaway: We’re looking for a modest beat out of Nike this evening -- $0.82 vs the Street at $0.78. While this is positive, we’re not expecting one of those ‘beat by a 25%’ quarters out of Nike. That, plus the fact that it has performed so strongly since being added to the Dow, makes us think that this quarter won’t be a major catalyst for the stock. Fortunately, it is hosting its analyst meeting at it’s WHQ in 2-weeks, which should give investors a lot more to sink their teeth in to.




Takeaway: Athletic apparel sales continue to be extremely robust, which is particularly noteworthy because a) retail in general has been so slow, and b) there’s been a marked slowdown in Athletic footwear.  The strongest and most consistent brands continue to be Nike and UnderArmour.

What’s New in Today in Retail (9/26) - chart3 9 26

What’s New in Today in Retail (9/26) - chart4 9 26

What’s New in Today in Retail (9/26) - chart5 9 26

What’s New in Today in Retail (9/26) - chart6 9 26


UK Survey Shows Strong Growth in Sporting Goods Sales in September 



  • "More than 65 percent of the United Kingdom's recreational goods retailers said sales grew in September, while none reported sales declines, according to the Confederation of British Industry’s (CBI) latest monthly Distributive Trades Survey of 111 retail and wholesale firms."
  • "The survey indicated overall U.K. retail sales in September grew at their fastest pace since June 2012, and exceeded already solid expectations. September marked the third consecutive month of growth retail sales growth in the U.K. with growth reported across a number of sectors. CBI saiid the survey indicates retailers and wholesalers expect retail sales to grow robustly again in October."
  • Key findings of the survey include:
  • 46 percent of respondents reported that sales volumes were up on a year ago, while 12 percent said they were down, giving a balance of +34 percent - the strongest since June 2012 (+42 percent) and exceeding expectations (+26 percent)
  • Retailers expect sales volumes to grow at a similarly strong pace next month (+31 percent)
  • 52 percent of department stores said business volumes were up, while 0 percent said they were down, giving a balance of +52 percent
  • Overall, 22 percent of retailers said that sales volumes were above average for the time of year, while 10 percent said they were below average, giving a balance of +12 percent - the highest survey balance since December 2010 (+18 percent)
  • 36 percent placed more orders with suppliers than they did a year ago and 22 percent placed fewer, with the resulting balance of +14 percent.

Takeaway: We’d already gotten a sense about these trends through Foot Locker, and then Sports Direct.  But this definitely confirms the fact that things are getting better in the UK.




JCP - Penney leaning toward $1 billion equity raise



  • "[JCP]  is looking to raise as much $750 million to $1 billion in new equity to build up its cash reserves as the holiday season approaches, according to three people with knowledge of the matter."


Takeaway: What’s odd is that it already has about another $1bn in assets it can access/liquidate before having to issue equity.  Regardless, there are two reasons people are short JCP. 1) Because they think it is a zero. Or 2) Because they think a deal is coming. Once the cash is in hand, the ‘zero’ call is tough to make – at least near-term (especially with the company’s announcement today that it is comping positively). In addition, with liquidity not an issue, the pool of candidates it can tap for the CEO role grows significantly.


JCP - Report: J.C. Penney will hire 35K holiday workers



  • "J.C. Penney Co., Inc. will reportedly hire about 35,000 seasonal workers for the upcoming holiday season. "
  • "J.C. Penney also hired about 35,000 seasonal employees during the 2011 holiday season. The retailer did not release holiday hiring figures last year."

 Takeaway: Doesn’t look like a bankrupt retailer to me.


JCP - J.C. Penney Looks to Unwind Martha Stewart Pact



  • "[JCP] is trying to find an amicable way to unwind a merchandising agreement with [MSO] that has been the subject of a court battle with Macy's Inc., people familiar with the matter said."
  • "A ruling in the case by Justice Jeffrey Oing of the New York State Supreme Court was expected this fall. In a hearing Wednesday, Judge Oing said he planned to issue a decision 'hopefully in a shorter time, rather than a later time.'"
  • "The companies have had discussions about modifying the relationship, the people familiar with the matter said. Under one scenario, Penney would exit categories in which it has a direct conflict with Macy's, including bedding, bath and housewares, which can't carry the Martha Stewart brand, one person familiar with the situation said. Another person cautioned that no deal was imminent."
  • Martha Stewart spokeswoman Claudia Shaum said Wednesday, 'J.C. Penney remains one of our many retail partners. Our agreement with them is in force, and we have no intention of ending it.'"

 Takeaway: If JC Penney wants to ditch Martha, she’s history.


WMT - Wal-Mart Cutting Orders as Unsold Merchandise Piles Up




  • "[WMT] is cutting orders it places with suppliers this quarter and next to address rising inventory the company flagged in last month’s earnings report. Last week, an ordering manager at the company’s Bentonville, Arkansas, headquarters described the pullback in an e-mail to a supplier, who said others got similar messages. 'We are looking at reducing inventory for Q3 and Q4,' said the Sept. 17 e-mail, which was reviewed by Bloomberg News."
  • "Walmart spokesman David Tovar said, 'We are managing our inventory appropriately. We feel good about our inventory position.'" "The order pullback isn’t 'across the board' and is happening 'category by category."

Some subsequent comments

  • "Global exporter Li & Fung defended Wal-Mart as well: 'There has been no cancellation of orders from Wal-Mart and we continue to do business with them as usual. Also, Wal-Mart is continuing to place orders for 2014 as a normal,' said a spokesperson from Li & Fung, speaking to Reuters."
  • David Tovar, Wal-Mart’s vice president of communications called the Bloomberg report 'completely irresponsible.' He added: 'I think they (Bloomberg) are taking a huge leap and drawing a very broad conclusion on one email from one buyer to one supplier.'

ADS - Reebok CEO talks to German newspaper

  • Reebok CEO Matt O'Toole pointed to the fact that the brand's revenue and margins increased for the first time in years in the second quarter. He believes that the brand's margins will continue to improve and revenue will grow steadily.

 Takeaway: This is notable, if true. But let’s keep in mind that just two weeks ago Adidas issued a big negative preannouncement due to top line weakness and product availability.


BBBY Earnings Quantitative Summary

What’s New in Today in Retail (9/26) - chart2 9 26

What’s New in Today in Retail (9/26) - chart7 9 26  2


NKE - Nike to release LeBron 11 iD and Zebra print pants

  • The Lebron's will be available exclusively on starting 10/11 and the pants are set to hit retailers this Friday.

Takeaway: The shoes make sense. The pants, however....


What’s New in Today in Retail (9/26) - chart8 9 26

What’s New in Today in Retail (9/26) - chart9 9 26


LVMH - Future of Marc Jacobs at Louis Vuitton in doubt



  • "Marc Jacobs may be on the verge of leaving Louis Vuitton when his contract ends next month as designer's future at the French luxury brand remains unresolved, an industry source told Reuters."
  • "'His contract may not be renewed,' the source told Reuters on condition of anonymity, without going into further detail. The French magazine Challenges this week said his departure had already been approved internally."
  • "Marc Jacobs helped develop Louis Vuitton's women and men's ready-to-wear lines and runs his own eponymous brand which ranks among the most profitable smaller fashion subsidiaries within LVMH, fuelled by demand in the United States and Japan."


AMZN - Amazon to take on 15,000 new seasonal UK staff for Christmas crunch



  • "Amazon has announced it is hiring more than 15,000 seasonal staff across the UK to meet customer demand in the runup to Christmas."
  • "The US internet retailer, which is expanding operations in the UK, said it expected hundreds of the temporary staff would later be able to take up permanent jobs."
  • "Amazon said it was creating a variety of roles across its eight 'fulfilment centres' and its Edinburgh customer service centre.""
  • "Amazon said that last year it hired 10,000 seasonal staff in the runup to the festive season and by the end of January had offered roles to 1,000 temporary workers."


GOOG, WFM, TGT, SPLS - Google Brings Retail Delivery Service to San Francisco Bay Area



  • "Google announced on Wednesday that it will expand its same-day retail delivery service, Google Shopping Express, to cover all residents of San Francisco and the southern Peninsula part of the Bay Area."
  • "The service allows users to shop from a number of large chain stores, including Target, Staples and Whole Foods, as well as some regional and local retailers, the company said."
  • "In conjunction with the expansion, Google also launched iOS and Android apps for Shopping Express, allowing for mobile-based purchases to be delivered to users’ homes until nine in the evening."
  • "Google isn’t the only one testing a same-day delivery retail program. EBay is working on eBay Now, which aims to deliver retail goods within an hour. And Amazon continues to test its 'Fresh' grocery delivery service with Los Angeles and Seattle residents."

What’s New in Today in Retail (9/26) - chart1 9 26


PVH - PVH Expands Van Heusen Traveler for Fall



  • "Van introducing a full travel-inspired collection that is targeted to a man on the go. Called Van Heusen Traveler, the multicategory collection is flowing into Kohl’s, J.C. Penney and Macy’s stores now for fall. A limited number of items had been tested for spring."
  • "Retail prices are $19.99 for core crewnecks, $24.99 to $34.99 for shirts and $250-$300 for suit separates with out-the-door prices of $129 to $149, and pants are priced at $70-$80 with out-the-door prices of $34.99 to $39.99."


COLM - Columbia Sportswear Company Announces Appointment of Franco Fogliato as Senior Vice President of Europe



  • "[COLM]...announced today the appointment of Franco Fogliato as senior vice president of Europe, reporting directly to president and CEO Tim Boyle, effective November 4, 2013."
  • "Fogliato, 44, will be responsible for establishing and executing sales, distribution, and marketing strategies for the company's Columbia Sportswear(R), Mountain Hardwear(R), and SOREL(R) brands, sold through more than 5,000 wholesale customers across Europe."
  • "Mr. Fogliato brings 17 years of European sales and marketing experience in the action sports and outdoor footwear and apparel industries. Since 2004 he has served as general manager of Europe for the Billabong Group...and as a member of company's executive board."




Denim Imports On The Rise



  • "After declining 5% in 2012, total blue denim apparel imports are up 1.2% so far in 2013. A slight decline in the men’s segment has been more than offset by strength in women’s."
  • "Import data from the Office of Textiles and Apparel, or OTEXA, show that in the first seven months of 2013, imports of denim totaled $2.27 billion. Total units rose 1.4% to 23.8 million dozen (286 million units), resulting in an average cost per unit of $7.94, virtually flat with last year."
  • "China and Mexico are the largest sources of U.S. denim imports, with 29.7% and 25.8% of total dollar volume, respectively. So far this year, China’s share has increased by .1 percentage points, while Mexico’s has grown by .5 points. The fastest growing trading partners in denim apparel are Bangladesh, whose jeans are also the cheapest, and serve the fast fashion business, and Indonesia, which has grown its U.S. jeans business by 7.8% in the first seven months of the year."


Indian Shopping Rushes Online



  • "Consumers across India are increasingly opting to shop online and retailers are joining the e-commerce space to keep up. Branded apparel has seen a year-on-year growth of 84 percent, according to a 2013 Internet Economy Watch Report by IAMAI, with 27.5 percent of apparel retailers taking up online sales."
  • "The online shopping industry in India is fast catching on, not just in the larger metros but also in the smaller cities. The market is currently estimated at Rs 52,000 and is growing at 100 percent per year, ASSOCHAM notes."
  • "With more than 100 million Internet users in India, half of which are choosing to make purchases online, both retail and consumer goods stores are getting into the e-commerce market, the survey noted."


Garment Industry Gets an Eco-Friendly Makeover



  • "Greenpeace began its Detox Campaign in 2011 with the goal of challenging major clothing brands and retailers to cease all discharge of hazardous chemicals from their supply chains and products."
  • "Since then, 15 big brands including Nike, Adidas, Puma, H&M, Marks & Spencer, C&A, Li-Ning, Zara, Mango, Esprit, Levi’s, Uniqlo, Benetton, Victoria’s Secret, G-Star Raw and Valentino have publicly committed to the cause."
  • "The first goal of the eco-group is to eliminate or substitute all hazardous chemicals from the manufacturing processes of its members. Other objectives ZDHC aims to achieve by 2020 include developing a process to screen and get rid of chemicals in the industry, create common chemical assessment tools and offer guidelines on best practices for supply chain stakeholders."

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Down Rates = Down Stocks (in both China and the USA). China doesn’t like Down Dollar inasmuch as I don’t. The Shanghai Composite was down almost -2% overnight. It has now corrected -4.5% from its September high. The A-shares are getting interesting to us on the long side for the first time in years.


In case you somehow missed it, the US Dollar is hanging on by its toe-nails at this point. "Toe-nails" being the year-to-date lows and the long-term TAIL risk line of $79.11 support, So the question now becomes whether or not the Japanese can be even more dovish (from here) on the margin than this Bernanke/Yellen circus. October taper talk? That would help.


Rates Down = Stocks (and growth expectations) Down. After FIVE straight S&P 500 down days, more people are beginning to agree with me now on that. Growth and inflation expectations are embedded in a sovereign bond yield’s TREND. The 10-Year U.S. Treasury TREND support is 2.55%. TRADE resistance now is 2.76%. #ToughSpot

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.


Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road.


Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road


BREAKING: US GDP Growth for Q213 2.5% - might be as good as it gets for 2013 @KeithMcCullough


I will simply say that I disagreed with the decision of the committee and argued against it. Here is a direct quote from the summation of my intervention at the table during the policy “go round” when Chairman [Ben] Bernanke called on me to speak on whether or not to taper: “Doing nothing at this meeting would increase uncertainty about the future conduct of policy and call the credibility of our communications into question.” I believe that is exactly what has occurred, though I take no pleasure in saying so. 

- Federal Reserve Bank of Dallas President Richard Fisher


The number of Americans filing new claims for jobless benefits fell last week to near a six-year low, a promising sign for the labor market. Initial claims for state unemployment benefits dropped 5,000 to a seasonally adjusted 305,000, the Labor Department said this morning.


Peak a long way off but no regional market has more upside than LV Locals.



I read some of the BYD sell side notes coming out of G2E and it appears most of the analysts are missing the boat.  The story does not remain negative same-store revenues in AC and the regional markets and still sluggish Las Vegas locals growth.  That was yesterday’s news.  Tomorrow’s story is a sequential improving top line in LV, leveraging a lower cost structure, cost cutting in the regionals, and stability.  The takeaway?  BYD should be beating estimates beginning in Q3.  Unfortunately, the sell side heard what they wanted to hear.  We think the buy side heard something new.


So how sustainable is BYD’s good fortune.  Well, for the moment, LV locals top line growth should be modest.  However, the macro – especially the most important variable of housing prices – is moving fast.  Remember that the LV housing market was among the hardest hit and in terms of casino revenues, no gaming market suffered more from the economic downturn than the LV Locals.  Psychologically, the rise of housing values above outstanding mortgages should provide a big lift to consumer confidence.  That lift could come fast and impact casino revenues quickly and dramatically.  One local economist we spoke to estimated that every 1% increase in housing prices generated $750 million to the Nevada economy.


We can’t predict when that will happen but we can give you some “return to peak” estimates.  BYD’s LV locals EBITDA is roughly half of where it was at the 2006 peak.  BYD only needs a 35% increase in revenues in that market to double its EBITDA there to get back to peak.  With a doubling of that EBITDA stream, BYD’s equity value would almost double as well.  We’re not projecting this as a near-term event.  However, we think the perspective is instructive and the magnitude unlike any other return to peak analysis with the exception of MGM.  But the sell side already loves that one.

Take Profits

This note was originally published at 8am on September 12, 2013 for Hedgeye subscribers.

“In faith there is profit.”

-Saikaku Ihara


In blind faith (in government and/or your research process), there are also losses. So make sure you keep moving out there. The history of your money in public markets is that politicians and/or Mr. Market are always looking to take it away.


The aforementioned quote comes from an epic chapter in the late Jack Weatherford’s The History of Money titled “Knights of Commerce”, where he chronicles the history of The Knights Templars who, at one point, “became businessmen who ran the world’s greatest national banking corporation.” (pg 65)


Then along came a French plunderer (King Philip IV) and that was about it for the Knights. “Phillip took the management of his finances out of the hands of the Templars and established the Royal Treasury at the Louvre… Philips desperate need for money arose after he tried a trick that Nero had pulled a thousand years earlier: he debased the silver currency of his realm.” (pg 68)


Back to the Global Macro Grind


Both Gold (-1.6% to -20% YTD) and Silver (-2% to -26% YTD) are being debased (again) this morning. So you have to be careful in defining what you think “money” is. In the intermediate-term, the value of all moneys is cyclical. And you have to risk manage that.


Or at least that’s how I roll. I don’t really trust that the value of anything that trades on anything that is attempted to be centrally planned has a super secret biblical “value.” Every morning we wake up to politicians trying to mess with our profit plan.


The plan remains that the plan is going to change – and with that, let’s get on with our day. Here’s this morning’s setup:

  1. US Equities = immediate-term TRADE overbought within a bullish intermediate-term TREND
  2. Japanese, German, and British Equities = immediate-term TRADE overbought within bullish TRENDs
  3. Government Bonds (Treasuries, JGBs, Bunds, and Gillts) = immediate-term TRADE oversold within bearish TRENDs

In other words, being long stocks (and short bonds) for the last few weeks has been fantastic – so take some profits.


While it’s a pretty straight forward communication process to tell you when I am buying things while people are freaking out on red, sometimes I confuse people when I then turnaround and sell some of what I bought.


I don’t take offense to that as I am often confusing myself! That’s where embracing the uncertainty (signals) in my process leaves me at this stage of my career. I listen to the risk management signals before I listen to the little squirrels in my head.




To boil this process down to the bare Mucker bones:

  1. When a stock, bond, currency, or commodity is immediate-term TRADE overbought, I sell some
  2. When a stock, bond, currency, or commodity is immediate-term TRADE oversold, I buy some

That’s it. So easy a hockey player can do it.


And by making every mistake I make out loud for the last 5 years (over 2,000 long/short positions #timestamped on a spreadsheet in the public domain), it’s helped me learn how to make less mistakes faster.


No, that doesn’t mean I won’t make a big mistake like I did yesterday (I should have sold Restoration Hardware (RH) on the immediate-term TRADE overbought signal into the print, and bought it back on the red reaction).


It just means that I usually understand what I did wrong and why.


What makes this whole “taking profits” exercise all the more confusing is this un-cooperative little critter called research. I’ve built my entire research team (27 analysts) on a platform that is looking to make intermediate to long-term calls on stocks, bonds, currencies, and commodities. That means (sometimes) the immediate-term signal conflicts with the longer-term picture.


Sound familiar?


You bet it does. I don’t care if you are a day trader or someone who has bought and held since Nero. What is happening right here, right now, affects you in some way, shape, or form. If it doesn’t, you aren’t reading this anyway.


Back to the RH example. Brian McGough’s long-term view on Restoration Hardware (RH) is that the company will earn $8.00/share. So, even if the signal said it was immediate-term TRADE overbought at $80, why would I sell some of that? Well, that’s pretty straightforward too. Because it just had a 12% down day after signaling immediate-term TRADE overbought!


The risk management lesson here is that there is only a chance to take profits if you have faith that your process is repeatable. You have to understand why you make every move. Otherwise you’re just guessing. And one day, Mr. Market will take all those profits away.


Our immediate-term Risk Ranges are now as follows (we have 12 Big Macro ranges in our Daily Risk Range product too):


UST 10yr Yield 2.86-3.03%

SPX 1662-1695

VIX 13.17-14.98

USD 81.41-82.09

Yen 98.75-100.91

Gold 1341-1391


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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