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EXCELLENT GOLDEN WEEK

As expected, October exploded out of the gate in Macau with average daily table revenues (ADTR) up 38% YoY to HK$1,679MM.  We fully anticipate softer weekly run rates.  Golden Week will not be matched the rest of the month and this coming week is apt to be slower than normal as is typical following the holiday.  Our full month GGR estimate (including slots) remains at YoY growth of 20-25%.  Indeed, October should continue the strong momentum of the past few months.

 

Too early to gain much from the market share numbers this early in the month.  SJM flew out of the blocks with big gains, Wynn and MPEL likely held lower than the market, and LVS/Galaxy look normal.  LVS remains our favorite name among the Macau stocks as the properties should continue to gain market share at least through next year.

 

EXCELLENT GOLDEN WEEK - chart1

 

EXCELLENT GOLDEN WEEK - chart2


CAKE: BULL CASE NOT FULLY BAKED IN

Takeaway: Sales are strong, margins continue to improve and international expansion plans remain underappreciated by the street.

CAKE remains on the Hedgeye Best Ideas list as a LONG.

 

Same-Restaurant Sales Are Strong

Sales trends remain strong at CAKE, as the company continues to outperform the industry.  In fact, CAKE has outpaced industry sales for at least the last 18 months.  That said, the casual dining industry is currently in secular decline and CAKE is not completely immune to any near-term weakness.  This, in addition to a difficult comp in 3Q, could incite some short-term pressure, but we believe the strong likelihood of a rebound in 4Q will allay these fears. 

 

CAKE: BULL CASE NOT FULLY BAKED IN - chart1

 

 

International Expansion

We believe CAKE’s long-term international expansion growth strategy is underappreciated by the street.  This is an attractive opportunity for the company and, to date, performance abroad has been stronger than management originally anticipated, leaving the door open for a potential increase in their current expansion plans. Management expects to open one new restaurant in the Middle East this year, driving the total unit count in the region up to four.  They have also identified other international sites to add to their pipeline, including site in Mexico City and Latin America.  We’ll be looking for a little more color on 2014 international growth plans when the company reports 3Q13 earnings.

 

CAKE: BULL CASE NOT FULLY BAKED IN - chart2

 


Margins Continue to Improve

Restaurant level and operating margins continue to be points of strength for CAKE.  Restaurant level margins, despite ticking down 5 bps in 2Q13, are expected to improve by 64 bps in 3Q13 and another 96 bps in 4Q13.  On top of that, operating margins, which ticked up 1 bps in 2Q13, are expected to fall by 2 bps in 3Q13, before improving by 101 bps in 4Q13. 

 

Overall, the company expects operating margins to improve 50 bps over the prior year.  Strong restaurant level and operating margins can be mostly attributed to the following:

  1. Lower expenses – every line item, aside from G&A, is expected to be better than last year
  2. International expansion – the three Middle East locations have exceeded management’s expectations and continue to deliver impressive volumes

CAKE: BULL CASE NOT FULLY BAKED IN - chart3

CAKE: BULL CASE NOT FULLY BAKED IN - Chart4

 

 

Favorable Food Costs

CAKE should continue to benefit from lower cost of sales due to moderate commodity cost inflation and favorable dairy costs over the prior year.

 

CAKE: BULL CASE NOT FULLY BAKED IN - chart5

CAKE: BULL CASE NOT FULLY BAKED IN - chart6

 

 

Financially Robust

CAKE is expected to generate more than $100 million in free cash flow this fiscal year and, despite ongoing international expansion efforts, management continues to reward shareholders.  Not only does the company boast a 1.28% dividend yield, but the Board of Directors recently authorized up to $125 million to repurchase shares in the latter half of the year.  In aggregate, CAKE is expected to return as much as $200 million to shareholders in fiscal 2013.

 

CAKE: BULL CASE NOT FULLY BAKED IN - share rep1o

 

 

ROIIC Treading Upward

While the majority of metrics analysts look at fall in and out of favor over time, one metric that has outlasted the test of time for every company is also, to no surprise, one of our favorites – Return On Incremental Invest Capital (ROIIC).  After an impressive stretch in 2010, CAKE’s ROIIC TTM fell rapidly over the course of 2011, before bottoming out in the middle of 2012.  From that point, we have been seeing, and believe we will continue to see, gradual and steady improvement in this trend.

 

CAKE: BULL CASE NOT FULLY BAKED IN - chart8

 

 

Sentiment

Sentiment on CAKE is very low – yet another reason we continue to like this call.  Illustrated in the chart below, 33.3% of analysts rate CAKE a Buy, 63.0% rate CAKE a Hold, and 3.7% rate CAKE a Sell.  Furthermore, short interest in the stock is currently 11.90% of the float.

 

CAKE: BULL CASE NOT FULLY BAKED IN - chart9

CAKE: BULL CASE NOT FULLY BAKED IN - chart10

 

 

Valuation

At 8.8x EV/EBITDA, CAKE is trading in line with its Casual Dining peer group.  We believe this valuation is fair and justified by the company’s international expansion plans, improving ROIIC, and robust financial profile. 

 

CAKE: BULL CASE NOT FULLY BAKED IN - chart11

 

 

 

Howard Penney

Managing Director

 


Not Good: SP500 Levels, Refreshed

Takeaway: This correction is not like the ones we bought (we shorted this one).

This note was originally published October 03, 2013 at 10:49 in Macro

POSITION: 6 LONGS, 8 SHORTS @Hedgeye

 

I don’t always go net short, but when I do, I prefer Down Dollar and #GrowthSlowing.

 

This morning’s ISM Services report was the 1st of the major leading indicators (SEP #) in our model confirming what both the bond and currency markets continue to confirm – on the margin (from YTD growth accelerating highs in JUL-AUG), US growth is slowing.

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE resistance = 1704
  2. Immediate-term TRADE support = 1671
  3. Intermediate-term TREND support = 1660

 

In other words, this correction is not like the ones we bought (we shorted this one). With Bernanke banning economic gravity on the long end of the curve and the USD getting crushed, you shouldn’t have expected me to execute any other way.

 

It’s just our process.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Not Good: SP500 Levels, Refreshed - SPX


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European Banking Monitor: Stable for Now

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

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European Financial CDS - EU bank swaps tightened further on the week. Spanish, Italian and French banks all came in notably. On average, swaps tightened by 10 bps last week and are lower by 27 bps, on average, vs the prior month. One of the few EU Financials that posted deterioration was Sberbank of Russia, which saw swaps widen by 14 bps WoW.

 

European Banking Monitor: Stable for Now - zz. banks

 

Sovereign CDS – The real trade here remains shorting the US and being long the PIIGS. US Swaps widened 10 bps (+31%) again last week bringing the level to 41 bps. The M/M change has risen to +19 bps (+85%). For reference, US swaps peaked at 64 bps in late-July 2011, the last time the US Govt budget process was in total dysfunction. Meanwhile, Italian, Spanish, Portguese and Irish swaps were all notably tighter on the week.

 

European Banking Monitor: Stable for Now - zz.sov1

 

European Banking Monitor: Stable for Now - zz. sov2

 

European Banking Monitor: Stable for Now - zz.sov3

 

Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bp to 14 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. 

 


WWW: Smoke In Mirrors. Buy The Event

Takeaway: WWW will annihilate 3Q, and guide down 4Q. Not bc it has to but bc it wants to. Our thesis is on track regardless of the print. We're buyers

Conclusion: We think that two things are a near certainty when WWW reports 3Q numbers on Tuesday morning. 1) First, the company will annihilate 3Q earnings expectations. 2) Immediately following, it will guide down for 4Q. We think that it will guide as such because it wants to, not because it needs to. We’d use any weakness around a sloppy guide to add to an existing position, or better yet, use as an opportunity to build a position if you’ve otherwise been waiting on the sidelines regretting not being involved while watching it go from $40 to $58 over the past year. Our thesis hinges around WWW earning $5.65 in three years, which compares to the consensus at $4.25 (we’re 33% ahead of the Street).  All of our research suggests that this thesis is on track – regardless of what the company says tomorrow on its call. We’re buyers on the event.

 

A beat is already priced in. After all, WWW has beat 19 of the past 20 quarters – and the one quarter it missed was by a penny (less than 2%). But we think that we'll see both a top line and Gross Margin beat -- and upside by as much as $0.20 to the Street’s $1.01.  If we see any less, it’s likely be to be due to higher SG&A spending to facilitate growth in WWW’s PLG brands outside the US. We’re ok with that.

 

WWW: Smoke In Mirrors. Buy The Event - WWW chart1

 

Let’s bring on the accountability check.

It’s time for some basic math and an accountability check on WWW.  At the start of the year, the company said the following about the recent ‘PLG’ acquisition (Sperry, Saucony, Keds, Stride Rite) and its impact on earnings.  ‘Included in the fiscal 2013 guidance is GAAP accretion from the PLG acquisition in the range of $0.40 to $0.50 per share. Given the seasonality of the PLG brands, we expect modest accretion in the first fiscal quarter, slight dilution in the second fiscal quarter, strong accretion in the third fiscal quarter, and modest accretion in the fourth fiscal quarter.’  This means the first and second quarter roughly wash each other out and most accretion comes in 2H, which makes sense because a) the seasonality of the business lends itself to higher profitability in the second half, and b) the deals that WWW is striking with international distributors are cumulative in nature, and pick up over time as it relates to impact on the P&L.

 

Now, with the first half of the year already put to bed, WWW has realized $0.58 per share in accretion from the acquisition – which is huge. But the company managed to convince Wall Street that 2H would now be dilutive to earnings.  Huh?  How could that logically and mathematically be possible?

 

The way we look at it, this is a whole lot of smoke and mirrors.  WWW is saying that it pulled forward some demand from 3Q into 1Q, and that it pushed some costs from 2Q into 3Q – and as such, what was the most accretive period of the year becomes dilutive. It’s ironic that the company does not identify what those shipments are, or quantify how much they are impacting its financials.

 

This is another example of the company artfully managing the Street’s expectations. When all is said and done, we think it’s not unrealistic for WWW to print anywhere between $0.20-$0.40 per share in upside in 2H.

 

 

OUR THESIS

The Street is grossly underestimating the revenue growth opportunity as the legacy WWW scales its recently acquired brands over its global infrastructure.  We think WWW can and will add $1bn in sales to its $2.7bn base over 3-years. Under its former owner, Sperry, Keds, Saucony and Stride-Rite only generated 5% of its sales outside of the US, and most of that was in Mexico and Canada. Legacy WWW, on the other hand, is the most global footwear company in the world (yes, even more so than NKE and AdiBok), with 65% of units sold outside the US through an elaborate network of seamlessly-integrated third-party distributors. Given that the infrastructure is already in place, the incremental sales should be brought on close to a 20% incremental margin, versus 8% margin today. Similarly, minimal capital is needed on the balance sheet to grow these brands, making the growth trajectory over the next 3-5 years very ROIC accretive. As a result of the excess cash, the company will have the resources to systematically pay down the $1.2bn in debt it took on to do the PLG deal. Our math suggests an incremental 5-6% earnings growth from delivering alone. The stock might look expensive at 20x earnings and 12x cash flow, but the street’s numbers are low by an incremental 10% per year. We're at $5.65 to the Street's $4.25 three years out.  We’d buy aggressively on a pullback, but are not so sure that will happen. We think WWW is a $100+ stock over 2-years.

 

WWW: Smoke In Mirrors. Buy The Event - WWW chart2

 

WWW: Smoke In Mirrors. Buy The Event - WWW chart3


MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW

Takeaway: US sovereign swaps continue to spike, rising another 10 bps last week. Meanwhile, EU sovereign swaps & EU bank swaps continue to tighten.

Key Takeaways:

We're watching for interbank risk measures to rise as an indicator that the markets are becoming genuinely nervous. TED Spread, Euribor-OIS and Shifon are the three we watch actively. As of Friday's close, none of them were showing any signs of a breakdown.

 

* Sovereign CDS – The real trade here remains shorting the US and being long the PIIGS. US Swaps widened 10 bps (+31%) again last week bringing the level to 41 bps. The M/M change has risen to +19 bps (+85%). For reference, US swaps peaked at 64 bps in late-July 2011, the last time the US Govt budget process was in total dysfunction. Meanwhile, Italian, Spanish, Portguese and Irish swaps were all notably tighter on the week. 

 

* European Financial CDS - EU bank swaps tightened further on the week. Spanish, Italian and French banks all came in notably. On average, swaps tightened by 10 bps last week and are lower by 27 bps, on average, vs the prior month. One of the few EU Financials that posted deterioration was Sberbank of Russia, which saw swaps widen by 14 bps WoW.

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 4 of 13 improved / 1 out of 13 worsened / 8 of 13 unchanged

 • Intermediate-term(WoW): Positive / 8 of 13 improved / 3 out of 13 worsened / 2 of 13 unchanged

 • Long-term(WoW): Negative / 1 of 13 improved / 4 out of 13 worsened / 8 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 15

 

1. U.S. Financial CDS -  The biggest mover on the week was GS with swaps widening by +8 bps. On the other end of the spectrum, MGIC saw its swaps tighten by 11 bps. Surprisingly, swaps overall were largely unfazed by the US Govt shutdown. Overall, swaps widened for 15 out of 27 domestic financial institutions.

 

Tightened the most WoW: AXP, CB, MTG

Widened the most WoW: TRV, GS, LNC

Tightened the most WoW: AXP, ALL, COF

Widened the most MoM: MBI, AGO, RDN

 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 1

 

2. European Financial CDS - EU bank swaps tightened further on the week. Spanish, Italian and French banks all came in notably. On average, swaps tightened by 10 bps last week and are lower by 27 bps, on average, vs the prior month. One of the few EU Financials that posted deterioration was Sberbank of Russia, which saw swaps widen by 14 bps WoW.

 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 2

 

3. Asian Financial CDS - Asian Financials were largely uneventful last week. Chinese banks were nominally tighter, dropping an average 2 bps W/W. Japanese financials were mostly unchanged with the biggest movers at +5 bps (Mizuho) and -3 bps (Nomura). Indian banks were also mixed. Two out of three widened, but IDB Bank of India tightened 9 bps to 340 bps.

 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 17

 

4. Sovereign CDS – The real trade here remains shorting the US and being long the PIIGS. US Swaps widened 10 bps (+31%) again last week bringing the level to 41 bps. The M/M change has risen to +19 bps (+85%). For reference, US swaps peaked at 64 bps in late-July 2011, the last time the US Govt budget process was in total dysfunction. Meanwhile, Italian, Spanish, Portguese and Irish swaps were all notably tighter on the week.

 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 18

 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 3

 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 4

 

5. High Yield (YTM) Monitor – High Yield rates were almost unchanged, falling a modest 0.2 bps last week, ending the week at 6.29% versus 6.30% the prior week.

 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 points last week, ending at 1807.

 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 6

 

7. TED Spread Monitor – The TED spread fell 1.3 basis points last week, ending the week at 22 bps this week versus last week’s print of 23.34 bps.

 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 7

 

8. CRB Commodity Price Index – The CRB index rose 0.2%, ending the week at 286 versus 286 the prior week. As compared with the prior month, commodity prices have decreased -1.5% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bp to 14 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: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 2 basis points last week, ending the week at 3.13% versus last week’s print of 3.15%. 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: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 10

 

11. Markit MCDX Index Monitor – Last week spreads widened 3 bps ending the week at 89 bps versus 86 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: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 11

 

12. Chinese Steel – Steel prices in China fell 0.2% last week, or 6 yuan/ton, to 3488 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: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 232 bps, 2 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.6% upside to TRADE resistance and 1.0% downside to TREND support.

 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 


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