Takeaway: While we believe PBPB will be the beneficiary of a recently hot IPO market, we suspect the stock will be on a short leash.

Editor's note: This is a brief excerpt from a report released yesterday by Hedgeye Restaurants Sector Head Howard Penney. For more information about how you can subscribe to Hedgeye research click here.




Potbelly is on deck for an IPO tomorrow.  The company plans to sell 7.5 million shares and recently raised the expected price of its IPO to $12 to $13 per share. 


In this note, we offer up our take on the latest IPO in the restaurant space.  It is important to note, however, that we did not have the opportunity to meet with management nor did we attend any of the company’s road show presentations.


With that said, we believe Potbelly will be the beneficiary of a recently hot market for growth related restaurant stocks.  The offering size is rather small at slightly over $95 million and demand should be high.  A number of veteran restaurant analysts will be comfortable with the CEO, Alwin Lewis, who is a familiar name in the industry.  Lewis spent 13 years at YUM, including a stint as COO, before leaving in 2004 to become the CEO of Sears. 


Potbelly should do fine initially, but it could be on a short leash.  It is a premium player in a very crowded, highly competitive sandwich (sub) market.  Regarding the latter point, all of the company’s direct competitors, including, but not limited to, Subway, Jimmy John’s, Firehouse Subs and Jersey Mike’s, are private companies, which makes direct comparisons difficult to come by. 


Its important to note that IPOs, particularly those from companies with strong growth stories, have fared extremely well lately.  NDLS, for example, gained +104% on its first day of trading.  But, investors expecting another Noodles-like performance should heed caution, as we believe this was more of an aberration than the norm.  In fact, despite their similarities as fast casual operators, the two have stark contrasts.  Potbelly competes in a crowded segment of the industry as opposed to Noodles, which brought more of an innovative, fresh concept to the table.  In addition to competing in a less-crowded Asian segment, we would argue that NDLS is also perceived to be healthier than PBPB.


All told, Potbelly does have compelling unit economics and plenty of room to grow.  The company currently has a domestic base of 286 locations in 18 states and the District of Columbia.  However, the units are incredibly concentrated, as over 50% of its units are located in Illinois, Texas and the District of Columbia.  Furthermore, the company has little presence outside the Midwest and Northeast.  Recent expansion efforts have been strong, as management opened 21 and 31 company-operated shops in 2011 and 2012, respectively, and plan to open an additional 32-35 company-operated shops in 2013.  At this time, the company does very little franchising.


The unit growth story will have to save the day, as the trajectory of same-store sales is below average for a chain this size.  The company’s same-store sales grew +1.5% in 1H13, but traffic declined by -1.1%.  It appears the segment is having a difficult time amid increased competition from peers and convenience stores.  Subway recently saw sales decline -2% this past summer – its first decline in recent memory.




CAG - Removing From Our Best Ideas List

Today we’re removing LONG ConAgra (CAG) from our Best Ideas List, with the stock working against us for a single digit loss since we added it on 2/11/13.


Here’s our updated thinking:

  • We continue to like the synergies with the Ralcorp acquisition but believe the company may have a couple more quarters of growing pains through the re-org
  •  Last quarter’s results (Q1 2014) disappointed (EPS down 16% to $0.37) – we’ll look to next quarter to better gauge a turn-around
  • The loss of the Lamb Weston potato business in the Commercial Food segment was a significant hit to the quarter, and should weigh on Q2 results, as Consumer Foods was hit by competitor promotional activity, weakness in frozen, and the timing of slotting and promotion activity around the launch of new products
  • We like the price point and portfolio advantage of Ralcorp’s cereals, especially for a mid to lower end income earner still impacted by the macro environment; however we expect cereal consumption trends to weaken alongside increased yogurt consumption and more QSR breakfast options
  • As we look ahead, the company reaffirmed its FY EPS guidance of $2.34-2.38, has begun additional SG&A cost management initiatives, has revised merchandizing to push volumes, and the Lamb Weston loss looks to mitigate into its fiscal full year
  • We’ll revisit the name in the coming quarters, and cut the loss today

Matthew Hedrick

Senior Analyst

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What’s New Today in Retail (10/4)

Takeaway: JCP vs RSH – and the winner is…RSH??? URBN building a mini-city. France hates AMZN. Booze & Pharma leading retail. URBN, PVH, HBI, DECK, WMT



RSH - RadioShack Said to Seek Funds in 2013 for Vendor Support



  • "[RSH]...the consumer-electronics seller that lost $139.4 million last year, plans to raise funds by the end of 2013 to persuade suppliers to support its turnaround effort, people familiar with the matter said."
  • "The retailer has enough liquidity to last through 2014 and is arranging new financing to show suppliers that it has all of the capital needed for its turnaround, said the people, who asked not to be identified because the company’s financing negotiations are private. The retailer would seek to raise the cash through debt financing, said one of the people."


Takeaway: Here's an interesting chart…Short interest as a percent of float for the two most hated retailers -- RSH and JCP.  We know that JCP is a bad business. But guess what…RSH is worse. But the equity market apparently does not agree. While not for the faint of heart, we're comfortable taking the other side of the JCP sentiment. It's main problems are fixable, and we think it has $1.30 in EPS power.


What’s New Today in Retail (10/4) - chart5 10 4


Additional Commentary:



  • "Struggling U.S. retailer [RSH] has received several offers for new financing, including one from current lenders Bank of America...and Wells Fargo...three sources familiar with the matter told Reuters….GE Capital, which tends to make large asset-based lending deals, 'is also in the mix,' two of the sources said."


Takeaway: People lining up to lend to The Shack. Amazing.


JCP - J.C. Penney names insider to head troubled home goods section



  • "Jan Hodges will take on the job of senior vice president, general merchandise manager for the home goods section on November 1, Ullman told employees in a memo this week. Reuters obtained the memo on Thursday...She replaces Paul Rutenis, who left Penney in July after 14 months in the job."
  • "Hodges joined Penney in 1988 and her previous positions have included head of women's accessories and intimates, among other merchandising jobs."


Takeaway: Home has obviously been a problem for JCP since Johnson wrecked it (i.e. he changed the department around so people shop by brand as opposed to category. Sorry Ron, when someone wants new bed linens, they don't want to go to four different parts of the store to see all their options). The simple fact that Home has been leaderless for three months speaks volumes.


JCP - J.C. Penney to launch Disney store within the store




  • "[JCP] is launching a Disney shop inside 565 stores Oct. 4 after launching the shop online Sept. 6...The shops will be 800 to 1,000 square feet."
  • "J.C. Penney also announced that its launching exclusive brands in its kids and baby department in select stores and online. The retailer introduced GiggleBABY, Wendy Bellissimo, baker by Ted Baker, Sally M by Sally Miller and Flowers by Zoe by Kourageous Kids to its offerings. The brands include apparel, bath time products, accessories and other baby gear."


Takeaway: This is not news, but rather a reminder that the shops are kicking off today. Also of note is JCP's advertising and promotional stance on TV, Facebook and Twitter. This compares to virtually no strategy at this time last year.


What’s New Today in Retail (10/4) - chart2 10 4


URBN - Report: Urban Outfitters to build lifestyle village concept in Philly suburb



  • "Urban Outfitters has purchased 6.5 acres in the Philadelphia suburb of Devon, Pa., on which is plans to build a lifestyle shopping village concept, according to Racked Philly."
  • "The report said that the retailer plans to build a Terrain garden center, an Anthropologie, a boutique hotel, two restaurants, and a specialty foods market, along with such other possibilities as a health/spa facility."


Takeaway: Huh? Seriously…I don't get it.


AMZN - France targets Amazon to protect bookshops



  • "France’s parliament has passed a law preventing internet booksellers from offering free delivery to customers, in an attempt to protect the country’s struggling bookshops from the growing dominance of US online retailer Amazon."
  • "On Thursday, Aurélie Filippetti, the culture minister who originally proposed the move, denounced Amazon for its alleged 'strategy of dumping', claiming that the company used offers of free delivery to get around French laws controlling the price of books."
  • "The new law, which will now go for ratification by the Senate, is the latest move by France against US internet companies, which it believes are unfairly using their market power to overwhelm local competition."


Takeaway: Definitely a punch in the jaw to AMZN. It has virtually no recourse. France is notoriously 'foreign retailer unfriendly'.


AMZN - Amazon Readies Set-Top Box for Holidays



  • "[AMZN] is taking steps toward releasing a video-streaming device in time for the holiday selling season, according to people briefed on the company's plans."
  • "The set-top box, which would pit the online retailer against a host of established rivals, is a small device that resembles a Roku Inc. player and is similarly styled as a platform to run apps and content from a variety of sources, these people said. It would also serve as a delivery vehicle for Amazon's existing streaming video service—available as part of its Prime membership—which competes with [Netflix] and has been expanding lately."


MFB, HBI - Maidenform Announces Stockholder Approval of Merger Agreement with Hanesbrands



  • "[MFB] today announced that based on a vote tally from the special meeting of stockholders held today, Maidenform stockholders have voted to approve and adopt the previously announced merger agreement under which [HBI] will acquire all of the outstanding shares of Maidenform common stock for $23.50 per share in cash, without interest."


Takeaway: HBI has been ripping, as it should. The accretion will be far better than HBI is guiding.


PVH - PVH Corp. and Gazal Corporation Limited Announce Australian Joint Venture for Operation of Calvin Klein Businesses in Australia



  • "[PVH]...and Gazal Corporation Limited [ASX:GZL]...announced today that they have formed a joint venture, PVH Brands Australia Pty. Limited, which will license from Calvin Klein, Inc... the rights to operate, manage and distribute Calvin Klein brand products in Australia, New Zealand and other island nations in the South Pacific. The license term is 20 years."
  • "Currently, the principal distribution in the region consists of a wholesale and retail Calvin Klein Underwear distribution business operated by Gazal, with product supplied through a wholly owned subsidiary of PVH, and a wholesale and retail Calvin Klein Jeans business operated by two other PVH subsidiaries. The joint venture will combine these businesses and establish a unified approach for enhancing and expanding the distribution of the Calvin Klein brand in the region."
  • "The joint venture is currently scheduled to begin its wholesale and retail operations on February 3, 2014. The joint venture will focus initially on the integration, expansion and enhancement of the existing underwear and jeanswear businesses and will subsequently extend into additional product categories."


Takeaway: PVH is moving forward where WRC did not. Good example of the growth it has ahead of it.


DECK - Teva Opens First Retail Store



  • "Teva...will open doors to its first retail store this week in Orlando, Florida. Located at the Orlando Premium Outlets at Vineland Avenue, the Teva store will showcase a complete selection of footwear for travel and everyday adventure, from sandals and trail shoes to sneakers, boots, and water shoes."


Takeaway: This brand is in trouble. We don't get the decision to ramp retail when the brand is down and out. Maybe a single store in a vacation market like Orlando makes sense for a sandal brand. But please DECK, let's keep the store count low.


JWN - HauteLook Founder to Step Down From CEO Post



  • "HauteLook founder Adam Bernhard is stepping down as chief executive officer of the flash-sale Web site."
  • "Nordstrom said the site will now be run by its president, Terry Boyle, who joined HauteLook as chief operating officer and chief financial officer in 2008 and has been instrumental in growing the business. Boyle will report to Jamie Nordstrom. No ceo will be named."


WMT - India Probe on Wal-Mart Lobbying Inconclusive, Document Shows



  • "An investigation into allegations that [WMT] lobbied Indian government officials ended without any conclusions, according to a government document obtained by Bloomberg."
  • "Wal-Mart has lost senior executives in recent months in India, where it faces a separate government probe and is going through an internal bribery investigation. The Bentonville, Arkansas-based retailer currently operates a chain of 20 wholesale stores in India with billionaire Sunil Mittal’s Bharti Enterprises Pvt."
  • "It is 'not possible for it to conclude in the absence of any material evidence available on record till now that Wal-Mart indulged in any lobbying bribery,' according to the cabinet note summarizing the findings of the investigation. Lobbying is illegal under Indian laws."


Takeaway: A minor win for WMT in its ongoing fight to increase its investment in India. Still nothing on the horizon, however, that would suggest WMT is any closer to a full roll-out.


WMT - Walmart vs. Publix in Battling BOGOs



  • "It now seems that Walmart heard Publix, because it is offering to match BOGOs from food and drug competitors."
  • "'We're always looking for and testing new products and services to meet customers' needs,' Walmart spokesperson Molly Philhours told The Ledger. 'Customers told us they want us to match BOGO offers from other retailers. So that's what we're doing.'"




Interactive Graphic: The Far-Ranging Retail Slump



  • Takeaway: The only parts of retail that are trending up are pharmacies and liquor stores. If that's not a major statement about the state of the consumer, I don't know what is.


What’s New Today in Retail (10/4) - chart1 10 4


Instagram Will Have Ads. Get Over It



  • "Twitter released its initial public offering filing on Thursday evening, sucking the air out of all other tech-related news. That made it the perfect time for Instagram to announce it will start showing advertisements in its news feed, a move with the potential to irk the photo-sharing service’s users."
  • "To start out, it will show ads only occasionally and only from companies that are already members in good standing of the Instagram community. 'Our aim is to make any advertisements you see feel as natural to Instagram as the photos and videos many of you already enjoy from your favorite brands. After all, our team doesn’t just build Instagram, we use it each and every day. We want these ads to be enjoyable and creative in much the same way you see engaging, high-quality ads when you flip through your favorite magazine,' the company wrote in its post."


Bangladesh Garment Factories Often Evade Monitoring



  • "Next Collections Ltd., one of more than two dozen factories owned by one of Bangladesh's largest garment producers, tells buyers its workday runs from 8 a.m. to 6 p.m. On a recent Saturday night, however, bright fluorescent lights flickered well past 10 p.m. as workers inside furiously stitched children's skinny jeans bound for Gap Inc.'s Old Navy stores."
  • "Next Collections...keeps two sets of records and pay slips, according to interviews with nearly a dozen current and former workers and managers, and supported by pay documents reviewed by the Journal and a current manager at the factory group."
  • "Conditions at factories like Next Collections show that even if factories add fireproof doors and shore up cracks, the economics of a garment business that awards short-term contracts to the lowest bidders means factories still face pressure to violate wage and hour policies to compete, according to Charles Kernaghan, director of Institute for Global Labour and Human Rights."


Bangladesh Safety Accord Releases Factory Data



  • "The Accord on Fire and Building Safety in Bangladesh, signed by more than 90 retailers and brands, two global labor federations and several Bangladeshi unions, released comprehensive data on Thursday on 1,566 apparel factories covered by the binding agreement."
  • "The factory data includes names and addresses, the number of stories of each structure where a factory operates, the number of workers at each factory, descriptions of business in the building where the factory operates and the number of accord signatories using each factory."
  • "The five-year binding accord, which counts among its signatories H&M, Carrefour, Mango and Inditex, was launched in the aftermath of two tragic factory disasters that have claimed the lives of more than 1,200 workers. It currently covers more than 2 million Bangladeshi garment workers."
  • "The accord executives also said they plan to launch a Web site with the data on Monday at It will also soon announce a new chief safety inspector, who will oversee factory inspections and renovations."


India could emerge as largest apparel sourcing centre in five years



  • "India could emerge as the largest hub for sourcing of apparel and knitwear garments in the next five years, a top official of Apparel Export Promotion Council has said."
  • "'With China showing more interest in engineering and IT sector and Bangladesh being looked at as a non-compliant country, global players,both in traditional and non-traditional markets are eyeing India's potential for outsourcing with great interest,' A Shaktivel, Chairman, AEPC, told reporters here last night. He said India could emerge as the largest hub for sourcing of apparel and knitwear garments in another five years."

October 4, 2013

October 4, 2013 - dtr



October 4, 2013 - 10yr

October 4, 2013 - spx

October 4, 2013 - dax

October 4, 2013 - nik

October 4, 2013 - euro

October 4, 2013 - oil



October 4, 2013 - VIX

October 4, 2013 - dxy

October 4, 2013 - natgas

October 4, 2013 - gold
October 4, 2013 - copper


Buffett's Fed

This note was originally published at 8am on September 20, 2013 for Hedgeye subscribers.

“The Fed is the greatest hedge fund in history.”

-Warren Buffett


That’s what Buffett told students at Georgetown University yesterday. He was trumpeting “how much money” the Fed makes: “it’s generating $80 billion or $90 billion a year probably… and that wasn’t the case a few years back.”


Now isn’t that just fantastic. One of the greatest financial minds in US history is now marketing a political message that is about as anti Benjamin Franklin as it gets. Anti-savings that is. Where in God’s good name do you think these said “profits” come from?


They come out of American savings accounts. Even the Fed itself (St. Louis Fed) reminds us that the “growth rate of real GDP has been higher on average when the personal savings rate is rising than when it is falling (Gilder, pg 72).” The Founding Fathers wanted our children to respect their piggy banks, not some un-elected money printer clipping our hard earned coins.


Back to the Global Macro Grind


As George Gilder goes on to absolutely nail this topic in his new book, Knowledge and Power, “the entrepreneur is the savior of the system because he capitalizes himself. He is his own most important capital… socialists believe their mission is to seize capital for the masses…” (Gilder, pg 77)


That’s what Mr. Buffett should be marketing. It’s time to get our money out of the Fed’s hands and back into the hands of The People. We know how to generate returns. We’re the ones who are going to be doing the hiring when we make money. All the Fed’s “profits” do at this point is tax the American consumer. It’s called Down Dollar driven inflation. It’s regressive.


Moving on… where the rubber meets the road here is in terms of the purchasing power of your hard earned currency. While I was disgusted with Bernanke’s decision to debauch the Dollar again this week, that doesn’t mean he’s going to win this war for good. In the last 24 hours, both the data (economic gravity) and Mr. Market are fighting back:

  1. US Dollar Index is up +0.2% this morning to $80.41 (holding long-term TAIL risk support of $79.11)
  2. Gold and Silver are down -1% and -2.4%, respectively (both are still bearish TREND and TAIL in our model)
  3. Oil (Brent) failed to breakout above our immediate-term TRADE resistance line of $110.94/barrel

Economic data? Yes, as in the stuff Bernanke has un-objectively ignored since almost every high-frequency US economic data series we follow started to accelerated in July.

  1. JOBS: non-seasonally adjusted rolling US Jobless claims hit yet another YTD low (-16.4% y/y) yesterday!
  2. ORDERS: the Philly Fed’s “New Order” component ripped a +21 SEP vs +5 in AUG
  3. HOUSING: US Existing Home Sales hit a 6-month high yesterday

Now most Fed apologists (which are mostly those who get paid by A) Government Power and/or B) Down Dollar) will whine about the impact of #RatesRising on the “housing’s recovery” instead of focusing on what really drives housing demand – confidence.


Although US Savings are at generational lows, US Net Worth is currently tracking at an all-time high. We’d argue that’s been largely driven by real (inflation adjusted) #GrowthAccelerating more so than anything else. US Home Prices up +12.4% y/y obviously helps, but the demand for housing won’t be impacted until the 30-yr mortgage rate blows through 6% (it’s at 3.79% today, get over it).


In other words, the greatest threat to US growth recovering is the government intervening in the economic cycle. There has never been a sustained US economic recovery that didn’t coincide with:


1.       Strengthening US Dollar

2.       Rising US Interest Rates


Why doesn’t every discussion about the Fed start and end with that?


While Buffett might love the impact Bernanke has on his P&L (fat net interest margins are driven by marking the short-end of the curve at 0% - that pays insurance companies (Berkshire) in size), I’d like to remind him that the “greatest hedge fund manager in history” is also the only un-elected central planner in US history to attempt to ban the economic cycle.


What is an economic cycle?


$USD/Interest Rates Higher --> Energy/Commodities/Inflation lower --> Real Consumption Growth Higher  --> Pro-Growth Equities Higher


With all due respect Mr. Buffett, why don’t you and your pal, Mr. President, want the rest of us “middle classers” to have that?


Sadly, there are very few leaders in Washington who have my back on this. That’s one of the reasons why I have the highest CASH position in the Hedgeye Asset Allocation Model since July 23rd. I don’t trust this rally to all-time highs anymore.


The biggest thing Bernanke lost this week was whatever was left of the trust I had in someone at the Fed doing the right thing. The timing was perfect. And he chose politics instead. If growth slows from here, Gold help him. Because history won’t.


Our immediate-term Risk Ranges (we have 12 of them in our Daily Risk Range product) are now:


UST 10yr Yield 2.70-2.81%

SPX 1709-1730

VIX 12.91-14.62

USD 80.20-81.25

Brent 107.62-110.94

Gold 1346-1398


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Buffett's Fed - Chart of the Day


Buffett's Fed - Virtual Portfolio


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