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Bad News for Bricks & Mortar

Takeaway: We think that online shopping as a percent of total went parabolic this year.

Takeaway: This reading is simply bad. Numbers are still growing, which is good, but the growth rate isn't even in the same ball park as what we saw over the past two years. Our sense -- which unfortunately we cannot yet quantify -- is that this shows a dramatic shift to online shopping both pre and post holiday. Yes, we've been shopping online for years. But we think that online as a percent of total went parabolic this year.

 

When we look at the 2013 holiday season in retrospect, it will be known as the point in time when bricks & mortar really started to take it on the chin.

 

Bad News for Bricks & Mortar - bri

 

What this also goes to show is that so many 'sales monitoring' data sources that the Street has relied upon for years are losing relevance -- fast.

 

(Editor's Note: This is a complimentary research excerpt from Retail Sector Head Brian McGough.)

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THE BULLS, THE BEARS, AND THE MONGRELS

In this note, we look at a select group of stocks in the Restaurant space from both a fundamental and quantitative perspective.  As you will see, sometimes (though not often) our fundamental view does not align with the quantitative setup.

 

 

THE BULLS: BULLISH ON A FUNDAMENTAL & QUANTITATIVE BASIS


AFCE – AFC ENTERPRISES

Fundamental Setup:  We have not written on AFCE in quite some time.  Over the years, AFCE has taken several strategic steps to strengthen its competitive position including investing behind developing a robust brand image.  The operating structure is one of the strongest in the industry and the stock has performed accordingly.  We believe AFCE will continue to trade at a premium multiple relative to its peers.

 

Quantitative Setup:  AFCE – bearish TREND (40.57 resistance); bullish TAIL (needs to hold 36.88 support)

 

 

CMG – CHIPOTLE MEXICAN GRILL

Fundamental Setup:  Chipotle is one of the best managed restaurant companies in the space and we’re confident they will be able to mitigate any oncoming margin pressure.  Last quarter, we wrote that CMG was well-positioned for the balance of the year and, after reviewing 4Q13 trends, we have little reason to believe this will not be the case.  We continue to expect 4Q13 to be another strong quarter.

 

Quantitative Setup:  CMG – looks like a good long – Bullish Formation w/ TREND support = 496

 

 

DRI – DARDEN RESTAURANTS

Fundamental Setup:  The fundamentals for DRI are the worst in the casual dining space (barring Ruby Tuesday).  As a result, the company will be forced to make some significant changes to the operating structure of the company.  We continue to see significant upside in the name under a new operating structure.

 

Quantitative Setup:  DRI – Bullish Formation – got through the event risk holding 51.39 TREND support

 

 

KKD – KRISPY KREME

Fundamental Setup:  We like the KKD story.  It is a small cap growth company with a growing global footprint and the potential to double in size over the coming years.  It’s a volatile stock that will see large swings in sentiment given the company’s checkered history.  That being said, we believe it’s very likely KKD will wind up in the hands of a bigger company.  The company’s aggressive growth plans and strong balance sheet make it an attractive acquisition target for a foreign company.

 

Quantitative Setup:  KKD – 18.16 is long term TAIL support, I like it if that holds

 

 

WEN – WENDY’S

Fundamental Setup:  Due to the successful new product momentum and the recent announcement of strategic operational initiatives, we believe the company is well positioned for 2014.  While there will likely be volatility around same-store sales trends, the new operating model will allow for continual improvement in the operating structure of the company.

 

Quantitative Setup:  WEN – best looking long on the entire list; TREND support = 8.24 needs to hold

 

 

YUM – YUM! BRANDS

Fundamental Setup:  YUM is our favorite long in the big cap QSR landscape and one of the best positioned stocks heading into 2014.  The main risk to our thesis continues to be persistent volatility in China, although we believe this is largely played out.  In our view, easy comparisons, new unit growth, and positive earnings momentum will lead to margin and multiple expansion over the next several quarters. 

 

Quantitative Setup:  YUM – back into a Bullish Formation w/ TRADE breakout line = 74.41

 

 

THE BEARS: BEARISH ON A FUNDAMENTAL & QUANTITATIVE BASIS


BLMN – BLOOMIN’ BRANDS

Fundamental Setup:  Admittedly, we may be biased against a business model that has proven multiple times that it simply does not work in the casual dining industry – but why wouldn’t we?  Bloomin’ Brands is another company that doesn’t make sense to us.  Contrary to what management teams like to tell you, the majority of multi-concept structures in the casual dining industry tend to create operational inefficiencies that only worsen over time.

 

Quantitative Setup:  BLMN – just broke TREND support of 24.28

 

 

MCD – MCDONALD’S

Fundamental Setup:  MCD remains on the Hedgeye Best Ideas list as a short.  From a fundamental perspective, MCD is in secular decline.  At the end of 2013, senior management began to address some of the issues we’ve been harping on for the past year – but they didn’t go far enough to fix the business.

 

Quantitative Setup:  MCD – bullish TRADE (95.97 support); bearish TREND (97.29 resistance)

 

 

PBPB – POTBELLY

Fundamental Setup:  At the heart of it, Potbelly is a single daypart, low margin, low return sub shop with declining traffic and little competitive advantage over its most basic competitors.  Admittedly, these are not quite the qualities we’d expect to find in a company that is trading at a P/E of 73.8x and 19.1x EV/EBITDA on a NTM basis.  But, this is precisely what we have here.  To be clear, we believe Potbelly is a solid company with a strong management team, but it should not be trading at these levels.

 

Quantitative Setup:  PBPB – lower-highs and lower- lows; bearish TREND developing (needs more time)

 

 

RRGB – RED ROBIN GOURMET BURGERS

Fundamental Setup:  We remain cautious on the casual dining segment and, despite strength in 2013, feel it is one of the weaker players in the space.  Being short RRGB in 2013 was our biggest mistake of the year.  Our short thesis was predicated on the company not delivering on improving traffic (which happened), but we misjudged the potential for a significant increase in average check.  We are encouraged by the quantitative breakdown.  We will look to get more active on the short side of this overpriced name.

 

Quantitative Setup:  RRGB – just broke its TREND (74.22), so this looks like the best new short on the list

 

 

SBUX – STARBUCKS

Fundamental Setup:  Despite loving the long-term prospects of the company, we published a note yesterday heeding caution to investors in the short-term: “Our recent store visits in the Northeast suggest that the holiday season has not been as robust as anticipated.  If this is the case, we believe the trickle-down effect on slowing same-store sales are not yet fully reflected in the current share price.  With revenue growth decelerating, valuation close to a 3-year high and the likelihood that earnings will be revised down over the coming months, we see some short-term downside in the stock.“

 

Quantitative Setup:  SBUX – looks like a short developing; TRADE bearish w/ 79.41 resistance

 

 

THE MONGRELS: MIXED ON A FUNDAMENTAL & QUANTITATIVE BASIS

 

BKW – BURGER KING WORLDWIDE

Fundamental Setup:  BKW is another name we’ve been negative on that hasn’t worked.  Its 99% franchised business model and global growth opportunity has trumped the fundamentals of its U.S. business, which are lackluster at best.  We believe BKW’s strategy in the U.S. has led them to mimic MCD’s menu.  The problem is, this type of menu didn’t work out well for MCD, so why is this good news for BKW?  Shorting a raging bullish formation might not be the best strategy, but it sure is tempting.

 

Quantitative Setup:  BKW – raging bullish formation, so you’d need a catalyst – TREND support = 20.98

 

 

BWLD – BUFFALO WILD WINGS

Fundamental Setup:  We’re not a fan of this name.  That being said, it has been a blockbuster stock for the past two years.  We can make a strong bearish case for the stock, but timing is crucial with this name.  We will be looking to get more active on BWLD in 2014.

 

Quantitative Setup:  BWLD – wouldn’t short this unless $134 TREND breaks

 

 

PNRA – PANERA BREAD

Fundamental Setup:  While management has verbally addressed many of the issues the company faces, it is still in the early stages of fixing these operations.  The street loves to love this company and its competitive position in the market place.  While our quantitative signal may disagree, PNRA remains on the Hedgeye Best Ideas list as a short for fundamental reasons.

 

Quantitative Setup:  PNRA – back to bullish TRADE and TREND w/ TREND support = $174ish

 

 

 

Feel free to call with questions.

 

Howard Penney

Managing Director

 

 

 


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MACAU: DECEMBER DETAIL BETTER THAN HEADLINE

Adjusting hold to normal for both periods, December GGR would’ve grown a whopping 26% (off of a tough 20% compare) rather than the nominal 18% growth disclosed last week.  Of course, Mass led the way with 35% growth vs “only” 12% VIP revenue growth.  However, Rolling Chip volume actually grew over 23%.  The better than advertised December gives us more comfort in our January projection of 22-28% YoY growth.

 

Here are some Market and Operator takeaways from December:

 

Macau Market

  • Estimated VIP hold (adjusted for Direct VIP) was only 2.85% versus normal of 3.00% and 3.14% last year
  • The December comp of +20% was the most difficult since April
  • Even slot revenue participated, up 10% 

LVS

  • December was an outstanding month for the best positioned operator
  • LVS came within 60bps of share of overtaking SJM as top dog, driven in part to low hold
  • VIP hold (adjusted for Direct VIP) was higher at 3.3% vs 3.2% last year and normal of 2.8%
  • Mass share was slightly above trend but Rolling Chip share was well below trend due in part to the House playing lucky
  • GGR grew 31% YoY, 2nd only to Wynn
  • Mass growth of 57% led the market

WYNN

  • WYNN is a growth story again! As we’ve discussed, Wynn Macau has made a more aggressive marketing/promotional push the last few months.
  • YoY growth led the market for the first time in years, despite lower than normal VIP hold
  • Mass growth of 30% was the property’s 2nd highest in 2 years
  • Encouragingly, Wynn’s Rolling Chip growth led the market
  • Mass and Rolling Chip share came in above recent trend

MPEL

  • Share climbed above trend in December due to high hold – 50bps and 40bps above last year and normal, respectively
  • Mass share was higher than trend while Rolling Chip continues to trend lower – possible losing share to LVS and Wynn
  • GGR grew 25% YoY
  • RC was up only 2%
  • We think MPEL could be a market share loser in 2014

MGM

  • Hold fell well below last year but was close to normal
  • Mass revenue actually declined YoY – 1st time in 4 years -  no doubt as a result of Wynn’s aggressive Mass push
  • VIP volumes remain strong

GALAXY

  • Mass growth of “only” 28% was the lowest in 4 years
  • Rolling Chip volume growth remained strong
  • Market share was the 2nd lowest of 2013, due in part to low VIP hold 

SJM

  • VIP hold fell below last year's and normal, resulting in below trend market share
  • GGR grew only 8%, 2nd slowest behind MGM
  • On a YoY basis, SJM grew Mass 26% - the highest growth rate in nearly 2 years

MACAU: DECEMBER DETAIL BETTER THAN HEADLINE  - macau


THE M3: E-TABLE CAP; MGM COMMENTS; RESORTS WORLD MACAU

THE MACAU METRO MONITOR, JANUARY 7, 2014

 

 

GOVT STUDIES E-TABLE CAP, CLOSING SLOT PARLOURS Macau Business

According to Secretary Tam, the government is considering a cap on electronic gaming in casinos and restricting the operations of slot machine parlours.  It is unclear if Mr Tam was referring to electronic table games with a live dealer, slot machines or both.  Tam said the government wanted to close all slot machine parlours outside casino premises.  A formal request to close slot parlours and the cap on “live” tables would be reviewed in tandem with the renewal of casino concessions next year and in 2016.  The cap on live tables may continue after 2022, Tam said.

 

GAMING: MASS MARKET AND ELECTRONIC TABLES EXPECTED TO GROW Macau Daily Times

MGM Macau’s Executive Director of Business Development – Casino Market, Michael Jensen said, “We expect that the market-wide growth of VIPs would probably be between 10-15%, and growth in the mass market may be between 25-30%, from a market perspective.”  Jensen said that they have been progressively increasing the minimum bets across the mass floor, and will continue to raise the amount in 2014. “The main reason for that is, particularly, the lack of supply or the lack of tables available for the mass market”.   As for the revenue during the Chinese New Year period, Jensen refused to predict the percentage growth for the period, only revealing that their hotel rooms have been fully booked. “We think there will be a substantial increase in players and people coming to Macau over that period. We are expecting growth year after year definitely."  

 

GENTING ARM MAKES PLANS FOR RESORTS WORLD MACAU Macau Business

Treasure Island Entertainment Complex Ltd, a company linked to Genting Hong Kong Ltd, has outlined plans to build a boutique hotel on reclaimed land opposite the Casino Lisboa.  Chairman Yany Kwan said the proposal did not cover gaming facilities, but an unnamed source said gaming may be included.  The development, in Praça de Ferreira do Amaral near Nam Van Lake, could include a low-rise boutique hotel with hundreds of rooms, shops, and facilities for entertainment, meetings and exhibitions.  The working name for the project is Resorts World Macau, using the same brand as Malaysia’s Genting Group uses for its casino-resorts.  Treasure Island said the 8,100-square-metre site was granted in 2008.


Mother of All Doves

Client Talking Points

US Dollar

The greenback was back down yesterday on the heels of a #GrowthSlowing ISM Services report in the USA. That piece of economic news increases market speculation that Janet Yellen will back off on Fed taper talk – she is the Mother of All Doves, don’t forget. The US Dollar Index fails @Hedgeye TAIL resistance of $81.12.

UST 10YR

The 10-Year Treasury yield holds yet another higher-low (and every line of support that matters in my model) at 2.96% ahead of the US employment report. There's no resistance to fresh highs of 3.05%. So yes, we’ll stay short Gold on that. $1185 support on that.

EUROPE

Simple math: If the Buck Burns, Euros win. It's hard for Keynesians to get this, but UK auto sales just hit their highest level since 2007 on a #StrongPound too. Why? A strong currency means strengthening confidence and higher European consumption growth. #EuroBulls.

Asset Allocation

CASH 30% US EQUITIES 16%
INTL EQUITIES 18% COMMODITIES 6%
FIXED INCOME 0% INTL CURRENCIES 30%

Top Long Ideas

Company Ticker Sector Duration
GHL

Hedgeye's detailed and constructive view on the improving fundamentals in the M&A market with a longer term perspective is a contrarian idea at odds with the rest of the Street which is overly focused on short-term results. From an intermediate term perspective, M&A is poised to break out in 2014. We are witnessing record amounts of cash on corporate balance sheets, continued low borrowing costs and the first positive fund raising round for Private Equity in four years. Moreover, a VIX in secular decline (this has historically benefited M&A), recent incrementally positive data points from leading M&A firms that dialogue has improved, and an improving deal tally from Greenhill & Company (GHL) themselves coming out of the summer all bode favorably for GHL.  So is a budding European economic recovery that would assist a global M&A market that has been range bound over the past three years. GHL stands out as a leading beneficiary of these developments.

FXB

Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged.  If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.

WWW

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.

Three for the Road

TWEET OF THE DAY

Yellen’s Senate confirmation vote (56-26) was the worst in Fed history – that’s progress @KeithMcCullough

QUOTE OF THE DAY

"Hell, there are no rules here - we're trying to accomplish something." - Thomas Edison

STAT OF THE DAY

Forget about Las Vegas. Macau has cemented its status as the undisputed heavyweight champion of the gambling industry. The Chinese territory reported gambling revenue of 360 billion patacas ($45 billion) for 2013, an increase of almost 20% over the previous year. If that sounds like a lot of cash, it is. Las Vegas will be lucky to make $6.5 billion, or 15% of Macau's total. (CNN)


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