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The Chimelong International Ocean Resort on Hengqin Island will open its doors tomorrow for a trial run.  Mainland media reported that Guangzhou Chimelong has completed some 80% of the park’s facilities, and that an aquarium, a whale exhibit and roller coaster rides would be open.  About 20 million visitors a year are expected to visit the park, generating more than RMB50 billion (MOP65.5 billion) for Hengqin annually, the company estimates.



Lawson CEO Takeshi Niinami and Suntory Executive Vice President Shingo Torii are among corporate and academic leaders forming a group to support a legalization bill introduced by lawmakers, said Hiroshi Mizohata, a former head of the Japan Tourism Agency, who will also be a member.  Niinami heads Japan’s second-biggest convenience store chain and Torii runs Japan's third-biggest brewer. 



Macau's migrant labour force increased to 137,838 workers last month, 1,952 more than in November.  Official data show more than 87,000 workers were from the mainland.  The hospitality industry was the biggest employer of migrant workers, employing about one-third of the total.  The government has set quotas that limit mainland domestic helpers to 200 people from Guangdong and 100 people from Fujian.


Takeaway: Current Investing Ideas: CCL, DRI, FDX, FXB, HCA, JPM, RH, TROW, WWW and ZQK


Below are Hedgeye analysts' latest updates on our high-conviction stock ideas as well as CEO Keith McCullough's refreshed levels for each stock. In addition, this week we have selected three institutional research notes we believe offer a valuable look into the state of the markets. 




Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers. 

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less


The latest comments from our Sector Heads on their high-conviction stock ideas.


CCL – We recently completed our early Wave cruise pricing survey.  The survey was bullish for Carnival on the margin with outperformance of the Carnival brand in the Caribbean. Europe pricing was mixed while Alaska was the glaring trouble spot.  Overall, we believe Wave is trending above CCL’s management expectations. With easy Triumph comparisons coming in mid-February, early strength in pricing bodes well for Carnival. 



DRI Good news for Darden shareholders this week. The heat increased on management with activist investor Starboard Value LP urging DRI to delay the spinoff of Red Lobster to find an alternative option to increase shareholder value. Restaurant Analyst Howard Penney couldn’t agree more with the Starboard letter saying it appears that the activists are close to agreeing on what we believe the new Darden should look like. 


DRI has the potential to become the true leader in the casual dining industry, but it needs an unbalanced (unbiased) force to make the changes necessary and unlock shareholder value. The Starboard letter represents one more step in the right direction.



FDX Shares of FedEx were weak as the broader market experienced increasing pressure this week.  There was little company specific news flow, other than some minor B to C customs issues in Russia and positive comments from DHL on European activity.  Market participants are likely focused on the deluge of earnings over coming weeks.



FXB – We received more positive economic data out of the UK this week, in line with our Q4 2013 and Q1 2014 macro themes of #EuroBulls and #GrowthDivergences, respectively, that forecast a bullish outlook for the British Pound.

  • The Unemployment Rate ticked down to 7.1% in NOV vs 7.4% in OCT and expectations of 7.3%.
  • BOE Minutes released showed a 9-0 decision to keep the benchmark rate unchanged and the asset purchase target unchanged.

UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which we expect should provide further strength to the equity market and currency. The decline in the unemployment rate represents the largest decline in almost 5 years! Additionally we’re seeing CPI also moderated, down 10bps to 2.0% in DEC Y/Y in the last reading – we expect this cut to boost business and consumer confidence and increase purchasing power and consumption.




We remain bullish on the British Pound versus the US Dollar (etf FXB), a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve). This was confirmed once again by the Minutes released today, which continues to stoke the Pound. The Bank said there was no need to raise rates even if the unemployment rate hits 7% in the near future.


The British Pound is holding its Bullish Formation, which we expect will continue to be supported by prudent monetary policy from the BOE and strengthening economic fundamentals.



HCA Healthcare Sector Head Tom Tobin has no update this week. 



JPM Financials Sector Head Josh Steiner added JPMorgan Chase & Co. to Investing Ideas this week. Click here for the full report issued Friday evening. 



RH – Weather continues to be a point of contention for investors with the retail sector this quarter. We addressed this point briefly last week and maintain our stance that Restoration Hardware, unlike many other retailers, won’t feel the effects of the recent cold spells in the Midwest and Northeast as badly as some of the other names in the consumer discretionary space for the following reasons.


1)      E-commerce – RH’s direct business accounts for 47% of company revenues. Consumers may use Brick and Mortar stores as a showroom before purchasing online, but weather induced traffic declines may displace sales by a day or two but will not eliminate them all together. Unlike traditional retailers – RH purchases are event driven, and there is very little correlation between traffic and sales unlike what you might see at Target or Bed Bath & Beyond.

2)      90% of all RH orders ship to consumers home – The current wait time for an RH order is 6 – 9 weeks. That means that essentially all meaningful (and by meaningful - we mean revenue driving categories like furniture) sales are booked for the quarter. Delivery may have been slowed due to adverse driving conditions – but those effects are marginal.

3)      Real estate distribution – 61% of RH stores are in the South/West regions of the United States, while 39% are in the Midwest, Northeast, and Canada. RH’s limited store base and geographic distribution sets it apart from other retailers who rely more heavily on the hard hit areas of the Midwest and Northeast. On the Ethan Allen Q214 conference call the company noted that weather was a factor in a quarter, but that stores in the South and West were the highest comping stores in the fleet. We expect the same to hold true for RH.


In conclusion, it would be irresponsible to ignore the fact that weather could be a drag on this quarter’s results. But, we believe that those effects are grossly overestimated by the rest of the street. 



TROW – We relay that our ongoing call of a retail investor allocation into equities and out of fixed income started as of mid-year 2013 and is continuing. As crystallised in the recent BlackRock fourth quarter earnings report, BLK's category asset flows showed the strongest growth in retail equities with weaker comparative trends in fixed income. We think that the retail story relayed by BlackRock is a trend that can continue into 2014 as mutual fund flow driven by retail investors is a performance chasing exercise with still better return prospects in equities over fixed income.


With this theme in mind, we continue to recommend T Rowe Price (TROW) on the long side with allocations of 82% of its assets-under-management in equities and 80% of the firm's AUM in retail.




WWW – Keds accounts for a negligible percentage of Wolverine Worldwide's annual revenue, but it is one of the company’s best known brands. Sales for Keds topped out at $450mm, but at the time of WWW’s acquisition of the PLG brands, annual sales totaled only $80mm. PLG focused its attention on its Payless business and the Sperry brand while Keds was largely ignored. Brand equity at Keds is strong, but the execution behind that powerful brand name left much to be desired.  The same was true for Converse, who prior to its acquisition by Nike in 2003, was a $200m brand. In FY13 revenue totaled nearly $1,500mm.  


After the acquisition, Wolverine looked to right the ship and rolled out 4 new initiatives in 2013: 1) an endorsement contract with Taylor Swift, 2) a design partnership with Kate Spade, 3) a  partnership and distribution agreement with ANF’s Hollister, and 4) Keds branded retail space in high traffic malls. The Taylor Swift partnership is entering the 2nd year of a 3 year contract, and we learned at the ICR conference that Kate Spade and Keds would be teaming up once again this year. As a result of these efforts, Keds sales grew at a ‘solid double digit rate’ this year, and we continue to believe that Keds will generate in excess of $400mm in revenue in 4 years. Granted, much of that will growth will come through international expansion, but the early read throughs in the US are promising. 



ZQK – When Quiksilver’s new CEO, Andy Mooney, was hired he laid out a detailed profit improvement plan that focused on cost reduction, brand consolidation, and revenue growth. One of the most polarizing cost reduction plans concerned the company’s marketing strategy – more specifically its history of shelling out generous amounts of cash to sponsor action sports athletes and events. Investors feared that this shift in strategy would tarnish the brands reputation as an authentic action sports brand and disconnect it from its roots.


We decided to ask consumers to get their opinion on ZQK’s brands so that we could gauge things like brand loyalty, authenticity, and purchase intent. Our results were jam packed with insight, and one of the most telling things we found was that athlete and event sponsorships really don’t matter despite what the consumer might say.


40.7% of the consumers we surveyed said that athlete and event sponsorships were critical to the Quiksilver brand image. We decided to dig a little deeper to judge if that was truly the case, and found that nearly 75% of the respondents were unsure of who Quik’s actually team members were (Quiksilver team members are displayed in blue). On top of that only 17% knew that Kelly Slater – the Michael Jordan of surfing – surfed for Quiksilver. The results speak for themselves on this one.



*  *  *  *  *  *  *


Click on the titles below to unlock the institutional research notes.


McDonalds's (MCD): Reiterating Short In 2014

Veteran Hedgeye Restaurants analyst Howard Penney still doesn't like what's going on at McDonald's. He has been bearish on MCD for quite some time now and continues to believe the company has issues in its underlying, core business.  While we believe management has realized they have problems, we have little faith that they have found the proper solutions. 



Argentine Default 2.0?

Argentina's options have not changed: default or burn the peso. Neither outcome is good for sentiment surrounding beleaguered Emerging Market assets. Analyst Darius Dale writes that "he feels bad writing so negatively about Argentina’s managerial woes. Typically when our firm publishes bearish research on companies, usually the worst thing that could happen is a bunch of overpaid corporate executives lose their jobs as a result of persistently poor operational performance. For countries, however, the ramifications of persistent mismanagement are considerably more far-reaching."



ICI Fund Flow Survey: Equity Flow Rebounds

Financials analyst Jonathan Casteleyn writes that Equity flows perked up strongly after a negative week to start 2014 with the biggest inflow in 10 weeks. This strong weekly inflow coupled with the slight outflow from last week has now moved the 2014 weekly average to a $3.9 billion average inflow for equities to start 2014, a follow through on 2013's positive trends where $3.0 billion per week on average flowed into stock funds. 







Stock Report: JPMorgan Chase & Co (JPM)

Stock Report: JPMorgan Chase & Co (JPM) - HE JPM table 1 24 14


JPMorgan shares are currently trading with the most implied upside to fair value in our fair value model for money-center, super-regional and regional bank stocks. By our estimates, JPM shares have upside of 33% based on our regression of EVA (economic value added) – which looks at the spread between return on capital and cost of capital – and the current multiple to tangible book value. Over time, we have found that sizeable discounts and premiums mean revert toward fair value giving JPMorgan an embedded tailwind in 2014.

From a catalyst standpoint, we expect JPMorgan to be quieter in 2014 than in 2H12-2013. This should be good news. Beginning in April 2012, when the “London Whale” fiasco first surfaced, and running through year-end 2013 it has been a rare day when JPMorgan or its CEO Jamie Dimon hasn’t been on page 1 in an unenviable light. This amounts not just to bad PR. JPMorgan recognized $11.1 billion in total litigation expense and existing reserve draw-down in 2013 – the highest annual amount in its history, and almost double the prior peak. For comparison, Bank of America (BAC) saw its peak litigation year in 2011, and went on to see its shares rise 108% in value over the following year and shares are now trading ~197% vs. year-end 2011.



INTERMEDIATE TERM (TREND) (the next 3 months or more)

In the intermediate term we expect the slow but steady improvement in the economy to continue to exert upward pressure on the long end of the yield curve. Widening yield spreads will fuel a modest acceleration in top-line growth for JPMorgan. Higher net interest income is pure margin as it requires no additional expense.

LONG-TERM (TAIL) (the next 3 years or less)

Our longer-term expectation is that JPMorgan will finally get past its “annus horribilis” (horrible year) of 2013 and begin to again move in the right direction. As the news flow and litigation expense of settlements begins to marginally decline, the discount to fair value will reflate. Moreover, the company, as of 4Q13, has finally achieved 9.5% Basel III “fully-loaded” capital, which is the amount required under the new regulatory framework. 

What this means is that finally the company can begin requesting permission from the Fed through the CCAR process to return larger amounts of internally-generated capital to shareholders through stepped up dividends and increased share buybacks. Over the coming 12-24 months this will add to the return potential already embedded in the company’s significant relative undervaluation.



Stock Report: JPMorgan Chase & Co (JPM) - HE JPM chart 1 24 14

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.


Takeaway: We had the honor of penning the Early Look this morning and used the opportunity to highlight the complacency of DRI's current CEO.

“If we lack emotional intelligence, whenever stress rises the human brain switches to autopilot and has an inherent tendency to do more of the same, only harder.  This, more often than not, is precisely the wrong approach in today’s world.” 

- Robert K. Cooper PhD


Robert Cooper is a neuroscientist and strategic advisor to CEOs and many Fortune 500 companies.  Taking on the work that Dr. Cooper requires is certainly not easy.  According to Cooper, your brain is organized to reflect everything you know in your life.  Or, in other words, your brain is a record and an artifact of your past. 


Consistent with this line of thought, Cooper poses the following question: Does your environment control your thinking or does your thinking control your environment?


To help you ponder, we ask the following questions:

  • What does your daily routine look like? 
  • Did you wake up today and hop out of bed on the same side? 
  • Did you shut your alarm off with the same hand? 
  • Did you go to the bathroom like you always do? 
  • Did you shower and follow the same grooming routine? 
  • Did you dress the way your coworkers expect you to dress? 
  • Did you follow the same breakfast routine and do you get angry when the morning commute to work is just slightly off the normal pace?

I’m sure many of you will find that you often revert back to a routine in life you are comfortable with or, in Layman’s terms, the same-old, same-old life.  This is considered living life inside your box and it is much more prevalent among us and our colleagues than we’d like to acknowledge.


Admittedly, this may be too much philosophical thinking for a Friday morning.  But, the metaphor of switching to autopilot during rising levels of stress could be the norm for a CEO whose company you have invested hundreds of millions of dollars in and whose stock is underperforming.  Isn’t this a scary thought?  What if this routine keeps him/her in survival mode and prevents him/her from making the right decisions for the company he/she is running?


Back to the Global Macro Grind


I often refer to this decision making process in the restaurant space as the “6 Stages of Grief.”  This is a cycle that some companies tend to go through before they can see life outside the box.  As I see it, today’s activist investors provide a version of neurological therapy for this grief.


Unfortunately, the news of an activist investor can actually provoke a series of decisions based on past experiences that might be inconsistent with what is appropriate for today’s environment.  When an activist investor arrives on the scene, it’s only natural that “as stress rises, the human brain switches to autopilot and has an inherent tendency to do more of the same, only harder.”


Whether it’s a letter from Dan Loeb saying you’re an idiot or a letter that says “we look forward to maintaining an open dialogue and working with you to ensure that value is created for all shareholders,” either one could put management on the defensive and get them to react in ways that could potentially destroy shareholder value.


Sadly, this is precisely the path of destruction that the CEO of Darden Restaurants is headed down.  


As I said earlier this week, the challenge for the Board members of Darden (or any Board) is to recognize the appropriate time to step up, break out of their box, and implement meaningful change.  It is their challenge, their job, and their responsibility not to be more of the same. 


When a Board works closely with a CEO for a number of years, the best interest of shareholders’ can become fuzzy.  As an outsider, it appears that this is the case with the current Board and Chairman/CEO Clarence Otis.  The operational performance of DRI has stagnated and it is, without question, time for a significant change.


As Keith said in yesterday’s Early Look, we are short a significant number of restaurant names.  On yesterday’s earnings call, the CEO of Starbucks, Howard Schultz, went out of his way to emphasize the decline in bricks and mortar retailing.  Starbucks was wisely in a position to win in this environment.  Mr. Schultz is a great example of a CEO, at least in my space, that is willing to take on the difficult task of recognizing when and where he can strengthen his company.


To be honest, I welcome the commentary about bricks and mortar retailing as it relates to my short call on CAKE.  My original thesis was shorter term, but his comments could make our bearish call on CAKE more secular in nature.  In the short run, however, we believe the price spikes in the dairy complex are unaccounted for and suggest that EPS estimates are too aggressive for the company in 2014.


Moving on to a broader concept, the biggest risk to the consumer and restaurant space in 2014 is our MACRO theme of #InflationAccelerating.  The CRB Index, milk, cheese, natural gas, cattle, hogs and coffee are all up more than the S&P 500, as gold continues to signal higher lows.  With the Bloomberg Consumer Confidence Index flat week over week at -31, sluggish Per Capita Disposable Income, and a stagnant job market, it could be challenging for most companies to take price in order to offset inflation.


The irony of all this is that one of the few names I like on the long side is Darden Restaurants.  The CEO’s tendency is to do more of the same, only harder.  While I’m typically not a proponent of this line of action, it has indeed created a significant opportunity for a lot of money to be made.


It has also provided me with the material for a scathing attack on what has arguably been the largest case of value destruction in Casual Dining history.  For the record, if you’re reading this Mr. Loeb, I have everything you could possibly need to write your best letter yet.


Function in disaster, finish in style.


Howard Penney

Managing Director


LIFE INSIDE THE BOX - 1 24 2014 7 46 43 AM


Not #BTDB Today: SP500 Levels, Refreshed

Takeaway: I’m not buying-the-damn-bubble #BTDB today. Maybe tomorrow. Maybe not.

This note was originally published January 23, 2014 at 11:45 in Macro



The 3 main issues for the US stock market in our model are as follows:

  1. US consumption #GrowthSlowing (rate of change vs Q313’s sequential top)
  2. US stocks are down YTD (consensus chases performance)
  3. SPY just broke one of my immediate-term TRADE lines of momentum support (1837)

So, I’m not buying-the-damn-bubble #BTDB today. Maybe tomorrow. Maybe not.


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

  1. Immediate-term TRADE resistance = 1848
  2. Immediate-term TRADE support = 1821
  3. Intermediate-term TREND support = 1779

In other words, for the 1st time in months the SP500 is signaling A) lower-highs vs the all-time closing high and B) a very immediate-term TRADE momentum line breakdown with C) fundamentals (#GrowthSlowing) hanging out in the background.


Sure, there are plenty of reasons to buyem. Flows in particular are tantalizing. But a stock market that goes down on Down Dollar and Down Rates (today), is a stock market that is worried about something I haven’t had to worry about for a year now = #GrowthSlowing.


Keep moving out there,



Keith R. McCullough
Chief Executive Officer


Not #BTDB Today: SP500 Levels, Refreshed - km1


What's New Today in Retail (1/24)

Takeaway: SBUX’ Schultz echoes our view that we just saw watershed moment for dot.com. RL redeems itself. China takes aim at WMT. HD deal. JWN, Neiman



Last night Howard Schultz echoed our recent comments that this past holiday would prove to be a watershed moment for e-commerce:

"Holiday 2013 was the first in which many traditional bricks and mortar retailers experienced in-store foot traffic give way to online shopping in a major way. Customers researched, compared prices and then bought the brand and items they wanted online, frequently using a mobile device to do so. This was also the first holiday in which consumers embraced the convenience and flexibility afforded by physical and digital gift cards with a passion. Instead of gifting a particular item, many consumers instead chose to give the gift of choice."


From Our Note on January 9th: Takeaway: With all the companies putting up disappointing sales, we wanted to throw out a factor that we think is critical. Yes, weather was terrible as the month closed out (and got worse in January). But one thing we'll keep in mind is our view that this holiday will go down as a watershed year for the shift from bricks and mortar to dot.com. The chart below shows that over the past 10 years there has been a steady increase in e-commerce's share of total spending, but we think that when this quarter's numbers are reported, it will show the greatest increase in the slope in the history of the internet. Our belief is that shopping is behavioral, and an increase in dot.com will only feed upon itself and continue to gain share in 2014. 


What's New Today in Retail (1/24) - chart5 1 9




RL - First look: Team USA Olympic opening ceremony uniforms



"Team USA's opening ceremony uniforms for the Sochi Olympics are a patchwork of American iconography — of oversized stars and stripes and multicolored rings and names and numbers."

"They're also a patchwork of American craftsmanship — of wool carted from Oregon, spun in Pennsylvania and North Carolina, and knit in California."


What's New Today in Retail (1/24) - chart1 1 24


Takeaway: No surprise that RL is making a big deal about these uniforms being 'a patchwork of American craftmanship'. It's still reeling from the PR headache of putting uniforms on athletes in 2012 that were made in China. You may or may not like the uniforms below, but there's no mistaking what country they represent.


HD - The Home Depot Acquires Blinds.com



"The Home Depot...today announced that it has acquired Blinds.com.  Based in Houston, Blinds.com is the #1 online window coverings retailer in the world.  The acquisition closed today, and terms of the deal were not disclosed."


Takeaway: This makes sense for The Depot, as it's been trying to build out more on the home furnishings side as opposed to the home renovation side.  But we're surprised to see HD deploy capital in online blinds. There are a lot of categories that lend themselves perfectly to the online marketplace. But we don't think blinds is one of them. We're not saying it's a bad deal. But for a company that so rarely acquires other businesses, we're just a little surprised about this one.


NM - Neiman Marcus Says 1.1 Million Cards Affected by Data Breach



  • "Neiman Marcus Group Ltd., the luxury retailer, said about 1.1 million credit cards may have been compromised in a data breach that occurred last year."


Takeaway: At least it's not 40 million.  Our sense is that the average Neiman customer is still shopping there come hell or high water -- even with a data breach. On the other hand, Target customers will much more easily shift to other alternatives -- because there are alternatives. Not quite the case with Neiman.


WMT - Wal-Mart Assures Product Safety in China



  • "Wal-Mart Stores Inc. has responded to a critical report on Chinese state-run television this week, assuring that it does not cut corners in safety checking or approving products for sale at its 400-plus stores in China."
  • "The company released a detailed statement on Friday in response to a story that appeared on state broadcaster CCTV Thursday evening accusing Wal-Mart of circumventing China’s retail product permit procedures for profit. The report said Wal-Mart had violated proper procedures in instances of more than 600 products that went to its shelves."


Takeaway: Wal-Mart is doing everything in can here. But the reality is that when a Chinese State-run TV station sets its sights on you, even the best PR response is probably not enough.


JWN - Sarah Jessica Parker Teams With Nordstrom



  • "To promote her new shoe line, SJP, Sarah Jessica Parker is teaming up with Nordstrom for a series of pop-up shops at select stores nationwide. The multicity tour kicks off Feb. 28, coinciding with the line’s official launch date."
  • "Through March 2, Parker will be on hand at Nordstrom’s Treasure & Bond location in SoHo to sell shoes, greet fans and sign the product. Following her New York stint, Parker will be making personal appearances from March 5 to 9 at Nordstrom locations in Seattle, Los Angeles, Chicago, Miami and Dallas, respectively."


Takeaway: Sex and the City has been off the air for a decade now…we must have missed the memo that Sarah Jessica Parker is still relevant.


Patagonia - Patagonia Names Rose Marcario CEO



  • "Patagonia on Thursday appointed Rose Marcario, chief executive officer of Patagonia Works, the parent company of Patagonia, Inc., to the dual post of president and ceo of Patagonia. Prior to serving as the ceo of Patagonia Works, Marcario served as Patagonia’s chief operating officer and chief financial officer. Casey Sheahan will step down as ceo of Patagonia, Inc., effective Feb. 7, in order to spend more time with his family in Colorado."


LS&CO - Craig Nomura to Head Retail at Levi's



  • "Craig Nomura has been appointed president of global retail at Levi Strauss & Co., effective Feb. 3."
  • "Nomura, most recently senior vice president of global development at Williams-Sonoma Inc., will also serve as executive vice president of the San Francisco-based jeans and sportswear firm and report to Chip Bergh, president and chief executive officer."
  • "He succeeds Joelle Maher, who left Levi’s in June to join Gymboree Corp. as chief operating officer."




SAP to develop single vertical solution for fashion sector



  • "SAP AG announces plans to collaborate with key customers to better meet the challenges faced by apparel, footwear and accessory companies. Working with adidas, Luxottica and Tommy Hilfiger, SAP envisions bringing a new fashion solution to the marketplace that will better enable fashion brands to manufacture their products and sell them to retailers and consumers using one single, vertical solution."






Early Look

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