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We added Panera to the Best Ideas list as a short on 4/5/13 and continue to believe it is positioned as one of the best shorts in the QSR space heading into 2014.  Until the street realizes the near-term severity of the situation, we will maintain our bearish bias. 




The current EPS estimate for 4Q13 is $1.94, well above the $1.86 we are modeling.  We expect to see sales deleverage in the quarter and believe general & administrative costs and occupancy costs will come in higher than the street anticipates.  The street is looking for $666 million in sales in 4Q13.  Considering PNRA’s current operational and secular issues, we expect sales to come in closer to $655 million.  Looking out to 1H14, EPS estimates appear overly aggressive and will likely be revised down in the coming months.




In the 3Q13 earnings call, management acknowledged the bevy of operational issues that the company faces today.  These are largely self-inflicted and range from a lack of kitchen equipment to a lack of seating space in their cafes.  According to CEO Ron Shaich during the 3Q13 earnings call:


 “We analyzed every café to assess its physical capacity levels.  What we found is that approximately 10% of our cafes are capacity constrained and approximately a third of our cafes would be constrained should we have a meaningful lift in transactions.” 


These capacity constraints, coupled with a lack of adequate labor, have stymied PNRA’s same-store sales growth in recent quarters.  Slower speed of service and throughput issues, particularly during peak hours, have led to a less favorable customer experience and, subsequently, declining traffic.  The two charts below illustrate why PNRA is having these issues today.


BEST IDEA UPDATE: SHORT PNRA - pnra labor costs




In an effort to improve throughput, capacity, and service, PNRA is now allocating additional capital to labor and equipment.  We expect these increases on the labor and G&A lines will squeeze margins more than the street is anticipating in the coming quarters, particularly given the company’s soft sales trends.  The fact of the matter is, these are not issues that will be solved in one quarter.  It is a process that will take time.




There are several secular forces working against Panera that didn’t exist a couple of years ago.  Perhaps the most notable is increased competition.  For one, there are now more fast casual options available than ever before.  But it doesn’t end there.  Panera is also seeing increased competition from QSR chains that have been upgrading there menus to include healthier items.  These QSR chains heavily market their products and offer them at a cheaper price point than Panera’s core offerings, making them attractive to consumers.


All told, Panera’s value equation is out of sync.  With cheaper prices offered at quick-service restaurants and aggressive discounting at casual dining chains, PNRA has no pricing power.  With an average check in the $9 to $10 range, PNRA has created a pricing umbrella for non-traditional competitors to take advantage of.  We have seen this play out over the course of the year, as many casual dining restaurants are currently offering meals in the $6-$7 range.  Management is aware of this value issue and is working to fix it, but, once again, this will take time.




These operational and secular issues have manifested in the form of declining comparable sales and traffic trends.  This is always bad, but particularly bad when coupled with an increase in spending.  Margins will inevitably contract and earnings growth will decelerate.  Considering the street’s aggressive expectations, we believe PNRA is well positioned to post a couple of subpar quarters.








What we like most about Panera’s current situation is that management is aware of the company’s issues and is working to fix them.  Chairman and CEO Ron Shaich is a great leader that we believe will eventually be able to get the company on the right track again.  That being said, the team has several initiatives planned for 2014 to right the ship. 


These include investing to improve its café operating experience, reconfiguring product lines, adding labor to cafes, improving speed of service and the customer experience, streamlining its menu offerings, testing lower priced items to improve its value perception, improving product consistency, and ramping up advertising spend to drive incremental traffic.


To be fair, the vast majority of PNRA’s initiatives address our concerns.  But, to believe the effect of these will be immediate is, in our view, misguided.  We can’t help but wonder if the system can handle all of these changes at once.




We understand the bull case.  Panera is a beloved company, management is promptly addressing the issues, and trends will begin to accelerate.  In fact, we don’t completely disagree with this view in the long-term.  However, the bulls are underestimating the length of this turnaround, or regrouping, process.  Increasing expenses, which they must do, while traffic is declining and the secular backdrop is discouraging will undoubtedly negatively affect margins.  We just happen to think it will negatively affect margins more and for a longer time than the street currently expects.






PNRA is a good company that has many factors currently working against it in 4Q13 and through 1H14.  That being said, if management is able to quickly address operational issues and successfully implement the planned demand drivers, we believe trends will accelerate through 2H14 and into 2015.  As it stands, Panera is well positioned for the back half of 2014 – but there will be some near term pain. 



Recent Notes

10/23/13 – PNRA: The Pace of Change?

10/21/13 – PNRA: Stage 1 Denial

 9/26/13 – PNRA: No Quick-Fix Recipe

 7/23/13 – PNRA Short Thesis Playing Out As Expected, Part II

 4/24/13 – PNRA Short Thesis Playing Out As Expected

 4/05/13 – PNRA Hype Makes It Shortable

 3/26/13 – PNRA Happy Camper Facing QSR Wounded Bears

 2/15/13 – PNRA Mix Tapped Out?

 1/30/13 – PNRA Bread Not Quite Baked



Let us know if you have any questions or would like to discuss any of our current ideas in more detail.



Howard Penney

Managing Director







MGM China CEO Grant Bowie has called for a balanced agreement on smoking in casinos.  “Clearly a number of our customers want to smoke. I think the education of the smokers and the ability for the smokers to be part of the solution is important.”  The six casino operators have petitioned the government to scrap casino smoking zones and replace them with smoking rooms without slot machines or gaming tables.  Bowie added that MGM China was considering investment opportunities on Hengqin Island, but had yet to decide whether to take any.



Consumer Price Index for November 2013 increased 5.78% YoY and 0.52% MoM.


All of Us

This note was originally published at 8am on December 05, 2013 for Hedgeye subscribers.

“There is no one left, none but all of us.”

-S.S. McClure


So I was in my homeland (Canada) yesterday meeting with some free-market capitalists and couldn’t help but think of what it felt like when I came to this country in the early 1990s  - liberating.


Other than the Chris Farley looking mayor dude who did crack, Toronto, Ontario seemed void of what dominates our market lives in today’s USA. There’s no “taper-talk.” There are no professional politicians and TV pundits gorging on the uninformed.


As I boarded the plane back to beautiful Newark, New Jersey, I sighed. Then I cracked open a new book, and felt better again. In the preface to Doris Kearns Goodwin’s The Bully PulpitTheodore Roosevelt, William Howard Taft, and The Golden Age of Journalism, she reminds us of what objective research and reporting used to be. I smiled again. This is our opportunity.


Back to the Global Macro Grind


As S.S. McClure well understood, the vitality of democracy depends on popular knowledge of complex questions” (The Bully Pulpit, pg XIV); not using complexity, policy, and demagoguery, as a political Trojan horse to obfuscate the truth.


Albeit I’m just a man with my team in a room, that’s my solemn commitment to you – providing you an objective research view of the truth. To be clear, this is not a position in life I always longed for – it’s simply the position I find myself in.


Even though he went to Harvard, for a long-time I’ve respected Teddy Roosevelt via a paper one of my freshman guidance counselors (who I was older than at the time!) put on my desk when I first got to Yale – The Strenuous Life. If you ever feel like you’ve lost your moral compass, re-read that – and read it again. It does the soul good.


Moving along…


Buying-the-damn-bubble #BTDB may not be chicken soup for your soul, but it has certainly paid the bills in 2013. From a behavioral market practitioner’s perspective, I have developed an affinity for doing precisely the opposite of how I think this ultimately ends. Weird, but it works.


To review, the multi-disciplinary triad of our Global Macro Research Process, there are 3 big parts:

  1. History
  2. Math
  3. Behavioral Psych

History provides us context (economic/market patterns, mean reversion risk, etc.); math (fractal dimensions and risk ranges) signals timing; and behavioral, well, that’s a learning process.


How else would you define what it is that you do? Other than Embracing Uncertainty and constantly re-evaluating your position relative to the information surprise (price, volume, volatility) of the day, is there an alternative to mental flexibility? There isn’t for me. I’m not smarter than the market. And it took me a good long while to accept that.


In terms of our current strategy, quite simply put in our Q413 Macro Theme of #GetActive, it’s to do just that. Unaccountable and un-elected @FederalReserve policy making means we need to engage in unconventional market strategies.


In practice, in our Hedgeye Asset Allocation Model, what does that mean?

  1. At the US stock market highs we moved to 58% Cash (last Friday)
  2. After a 4-day US stock market correction we moved back to 42% Cash

Don’t lose the message of mental flexibility in the absolute numbers. If you want to be in 90% cash or 10% cash makes no difference to the point I am trying to make. It’s how you move on the margin that counts. I call it Fading Beta.


Looking at it from a different perspective (different Hedgeye product  - #RealTimeAlerts):

  1. Last Friday (on green) we moved to 5 LONGS, 5 SHORTS
  2. Into yesterday’s close (on red) we moved to 11 LONGS, and 3 SHORTS

Again, the point here is about the process. My process is far from perfect. But at least I can explain, evaluate, and evolve it. Doing that in an open network of client feedback has made me a more responsible and accountable investor.


So why can’t we do that running America? Wasn’t the whole marketing pitch “Yes We Can”? Or, somewhere along the way towards truth, did we put political reputations and excuse making ahead of your country’s learning process?


How do you ever learn if you’re constantly on a quest to prove that you’re never wrong? If there’s one question I’d ask one of the most conflicted and compromised outcrops of Big US Government Intervention (the power of the Fed), that would be it.


And that’s all I have to say about that. It’s time to grind and get on with my day. It’s time for you to get on with yours. Thanks again for taking the time to read what I have to say. Teddy wrote it much more eloquently, but you’ll get the point:


“… our country calls not for the life of ease but for the life of strenuous endeavor. The twentieth century looms before us big with the fate of many nations. If we stand idly by, if we seek merely swollen, slothful ease and ignoble peace, if we shrink from the hard contests where men must win at hazard of their lives and at the risk of all they hold dear, then the bolder and stronger peoples will pass us by, and will win for themselves the domination of the world. Let us therefore boldly face the life of strife, resolute to do our duty well and manfully; resolute to uphold righteousness by deed and by word; resolute to be both honest and brave, to serve high ideals, yet to use practical methods. Above all, let us shrink from no strife, moral or physical, within or without the nation, provided we are certain that the strife is justified, for it is only through strife, through hard and dangerous endeavor, that we shall ultimately win the goal of true national greatness.”


Our immediate-term Global Macro Risk Ranges (see our Daily Trading Range product for all 12):


UST 10yr Yield 2.76-2.85%

SPX 1788-1811

DAX 9128-9411

USD 80.45-80.91

Pound 1.62-1.64

Gold 1217-1259


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


All of Us - Macro Process Triangles


All of Us - Virtual Portfolio

the macro show

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Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.


Takeaway: We were wrong in calling for investors to tactically take profits Abenomics Trade on 11/27. Carry [trade] on…

On NOV 27, we published a note titled, “THREE COMPELLING REASONS WHY YOU SHOULD TAKE PROFITS IN THE ABENOMICS TRADE NOW” in which we called for a 3-6M correction in the Abenomics Trade (i.e. short JPY/long Japanese equities); while we don’t want to get caught up in overreacting to today’s FOMC decision to commence tapering, that is no longer a view we have any conviction in.


In the note specifically, we analyzed three catalysts in support of that now defunct thesis:


  1. The Fed will likely dominate headlines with surprising levels of dovish monetary policy amid a 3-6M monetary and fiscal policy vacuum in Japan.
  2. Sentiment towards Japanese equities amongst foreign speculators has reached euphoric levels.
  3. Speculators have recently adopted an overwhelmingly bearish position on the yen. Historically, the USD/JPY cross has faded hard from such aggressive swings in the net length of the futures and options market. Moreover, what’s bullish for the yen has been almost perfectly bearish for Japanese stocks.


Clearly, catalyst #1 – which was easily the most important of the three – has now been voided. As such, we are no longer as concerned as we were about the lopsided nature of consensus positioning – which has actually gotten worse (i.e. even more net short) since that note was published.


In the spirit of keeping score (timing is the most important factor in any investment thesis we present to subscribers), the USD/JPY cross has appreciated a solid +2.1% since then, while the Nikkei 225 Index has appreciated +0.9% since then (not inclusive of what is likely to be a huge melt-up overnight).


Thankfully we weren’t brash enough ignore the existing quantitative signals by making a call to buy the yen or short the Nikkei. Wrong is wrong, however. Now it’s time to move on and trade the market that we’re being presented with today.  


As such, while you’re likely to see a near-term correction in the USD/JPY cross as event-driven funds take profits, we now expect what we’ve been expecting since early in the fourth quarter of 2012: the USD/JPY cross is on its way to 125 (and counting) over the intermediate-to-long term.


Giddy-up – Kuroda’s just getting started (in recent statements, he’s actually been setting the table to incrementally ease monetary policy by mid-Spring of 2014). Meanwhile, it appears (for now at least) that the central planning law firm of Bernanke, Yellen, Dudley and Bullard LLP is running out of gas. That’s very bearish for the JPY in the context of the intermediate-to-longer-term monetary policy outlook in Japan.


Enjoy the rest of your evenings,




Darius Dale

Associate: Macro Team



Fed Tapers, Pigs Fly

Takeaway: Buy-the-Damn-Bubble #BTDB anyone?

Nope. I did not see this taper coming. Caught me by total surprise.  


It was the right move by the Fed (just happened to be 3 months too late). It’s funny, I’ve never been more wrong on a macro event, and more right being long the market (we had 8 LONGS on in Real-Time Alerts, 1 SHORT) at the same time.


It’s called being right for the wrong reasons.


Fed Tapers, Pigs Fly - ben




The Fed is one big Gong Show. No two ways about it. None of this central planning stuff makes any sense. Accept that and trade your way out of whatever you need to.


As Andrew Huszar (He’s the former Fed MBS guy I interviewed the other day on HedgeyeTV and author of WSJ op-ed “Confessions of a Quantitative Easer”) tweeted, “The December taper is clearly a legacy move for Bernanke. Don't read more near term moves into it. Yellen was QE3's biggest advocate.”


Being flexible when the macro game changes is more critical than ever. Since I'm not as smart as most pundits, I need to (and do) change my mind faster than the consensus herd.


On a related note, can you say all-time high? As we’re fond of saying here at Hedgeye, all-time is a long time. 1811 on the S&P 500? Buy-the-Damn-Bubble #BTDB anyone? .


There are great short selling opportunities now in bonds (or stocks that are like bonds - hint: MLPs…check out our Hedgeye Energy Ace Kevin Kaiser for some insight on that mess). Fed tapering is bad for bonds -we will cut the asset allocation to that Bernanke Bubble back to 0%.


The volatility in the Fed's decision making as of late should perpetuate more market volatility. The VIX is making another higher-low; don’t get stuffed chasing the highs. No way I buy Gold on this.


Bernanke remains focused on The Lagging Economic Indicator (unemployment rate); Basically Bernanke is recapping all the Q313 data that he missed - i.e. he should have tapered in September.


Meanwhile, the Fed is increasing its growth forecasts just as Hedgeye is cutting ours; and the Fed is cutting its inflation forecasts just as Hedgeye is raising ours.


Bottom line? The entire bubble is going squirrel. An epic end, to an epic year. 

FDX: Express Margin Evidence



FedEx may have missed consensus for the quarter, but from what we can see, it was mostly due to the impact of the late Thanksgiving holiday on FedEx Ground’s margin.  Estimating the impact of the early Thanksgiving holiday was particularly difficult going in, as we had noted (Metrics Changing?).  The slight raise in guidance suggests that management expects holiday volume to merely shift to FY 3Q.  The Express margin showed good headline gains and is the real focus for many investors.  We will wait for the detail and disclosure in the 10-Q (likely tomorrow afternoon) for a fuller analysis.



A Few Highlights


Express Margin:  The Express segment margin showed solid (+1.4 percentage points YoY) improvement, driven presumably by fuel, headcount reductions and lower overhead costs.  FedEx Express also showed a 16 basis point improvement in its ex-fuel Margin YoY, despite the new USPS contract, holiday shift and other potential headwinds.   In our view, it’s the Express segment margin expansion that counts and it reasonably promising in the release. 


Intercompany Cost Reallocation:   The reallocation of intercompany expenses remains a driver of the YoY improvement of the Express margin.  Last quarter, overhead declined YoY, which was not the case this quarter.  That raises some questions around cost reshuffling vs. cost reductions, but the effect does not appear large enough to be a game changer.


Trade Down Easing?:  This quote from the press release was interesting to us: “Within the IP category, average daily volume for the lower-yielding distribution services declined while IP average daily volume, excluding these distribution services, increased 1%. FedEx International Economy® average daily volume grew 10%.”  The phrase "trade down" was not even in a conference call question, at least that we heard.


Guidance Change:  The guidance move was small, but in the right direction.  There was no particular reason to look for a large guidance change in this quarter.  The bump appeared geared toward reassuring investors about the FedEx Ground holiday timing issue.


Sticking With What Is Working


We have 'liked' FDX shares since our November 2012 Black Book ("When Will Then Be Now? Soon"), presenting FDX (and Deutsche Post) as a top long idea.  Our thesis centered on the potential for the Express division to be made significantly more profitable.  At the time, FedEx Express was 'free' in our valuation, presenting an attractive risk/reward. After a near 60% rally in FDX shares since then, we still think FedEx Express has some additional value to be recognized by the market.  Importantly, we now have some evidence that they are making progress - albeit slow.  We will also wait for better detail in the 10-Q tomorrow, as we were surprised by some of the incremental disclosures last quarter.

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