Takeaway: We reiterate our Best Idea shorts: BLMN, CAKE, MCD, PBPB, PNRA.

Last night, Malcolm Knapp released sales results for January, estimating that same-restaurant sales and guest counts declined -2.6% and -4.4%, respectively, versus January 2013.  On a two-year average basis, same-restaurant sales and guest counts declined -1.6% and -3.3%, respectively.

January did, however, mark a period of sequential improvement.  The results imply a sequential acceleration of 350 bps and 340 bps for same-restaurant sales and guest counts, respectively. On a two-year average basis, the results imply a sequential acceleration of 225 bps and 235 bps for same-restaurant sales and guest counts, respectively.


Knapp noted that all four weeks in January had both negative same-restaurant sales and guest count results.  While January benefitted from gift card redemption, weather was a widespread and fluctuating issue.  Parts of the East Coast and Midwest were hit particularly hard during the month.


We will release more data when Black Box Intelligence reports, including any revisions to company specific 1Q14 same-restaurant sales estimates in January.



Howard Penney

Managing Director



We haven’t officially revisited our BWLD short thesis in over a year.  During that time, we stayed away from the long side because we don’t think the company has the unit economics to survive in the long run.  After last night’s earnings release, we have a few incremental data points to support an emerging secular bear case for BWLD.

We will spend more time pressing our short case over the upcoming weeks, but we wanted to post four critical charts to get the discussion going.

  1. New Unit Sales Performance
  2. ROIIC
  3. CFFO/Net Income
  4. Valuation



While same-store sales trends (+5.2%) were better than expected, the company missed overall revenues by 2% due to lower-than-expected new unit productivity.  This is the first time since 1Q10 that the growth in average weekly sales was below the growth in same-store sales.  This is a critical leading indicator for future trends.  While we see some underlying issues, we do acknowledge the company is currently benefitting from a few tailwinds.  These include mid-single digit comp growth, lower labor costs, and lower wing costs.  The bottom line is that there is limited visibility toward the future growth of the core BWLD concept.  This factor is reaffirmed by management’s desire to aggressively expand into the fast casual space.






BWLD has always been a very low return business and now that new unit performance is slowing, the blue line will likely head lower from here.  We expect the red line to begin to mirror this trend.






CFFO/Net Income is a key metric for any growth company, as it is another measure of the efficiency of capital being deployed.  Simply, it indicates the proportion of earnings that are yielding cash.  A higher ratio relative to the industry can indicate more conservative accounting, signaling a sustainable level of income.  Any ratio that is close to flat or negative is generally a red flag for us.  BWLD is heading in the wrong direction.






BWLD is still a great example of the current bubble in casual dining.  On a good day, BWLD should trade at 8x EV/EBITDA – but the market suggests the company is worth 11.2x EV/EBITDA.  Assuming the multiple corrects three turns over the coming months, there could be as much as 30% downside from current levels.




Feel free to call with questions.


Howard Penney

Managing Director

RL: Hurry Up and Wait

Takeaway: RL came a long way to ease our 2Q concerns. But quality was lacking -- tax, sg&a, and Chaps math matters. Not expensive, but no catalysts.

Conclusion: Three months ago, we definitely did not like RL’s quarter. Sales were sluggish, margins were weak, inventories high, and management was in a clear and questionable transition. Fast forward to today’s results, and most of those issues have been addressed. Don’t get us wrong, there was more we disliked than we liked in the 3Q results, but given the horrific operating environment, the company redeemed itself today – even if the market does not agree. To be clear, we still would not buy the stock here. Near-term catalysts are simply nonexistent, and we have to wait another 15 months for double digit EPS growth. The stock has grown into its multiple – so we’re only looking at about 16-17x forward earnings today, which isn’t egregious. But unlike three months ago, there are so many other outstanding businesses with rock solid fundamentals that are simply at fire-sale prices.  If the stock is still sitting here in another 9-12 months, we’ll likely be more constructive. But here and now – it’s got no go-juice.


Here are some key takeaways from the quarter…

  1. Beat, Kind Of: Yes, RL beat the quarter  -- which is a feat in itself for any company in this tape -- by $0.06 per share.  That’s the good news. We’d note, however, that that’s only about a 2% beat. Still better than the alternative, but this isn’t like what we’ve seen out of some other high-quality consumer companies. On the downside, a lower tax rate accounted for anywhere between $0.05-$0.10 of the $0.06 upside, and lower SG&A spend helped by another $0.02-$0.03 relative to our expectations. Earnings tailwind from SG&A and taxes is never something we look at with a company’s results and get overly excited about. We want sales and gross margin.
  2. Sales: The top line looked really good this quarter. Can’t take anything away from RL there. To excel on the top line in a climate when consumers generally are not buying anything is a testament to the geographic and category portfolio. Sales were up 9.1% (11% in constant currency) -- an acceleration from the 2.8% level we saw in 2Q. Solid acceleration…
  3. …But: We at least need to acknowledge the shift in the Chaps business from a license to consolidated wholesale operation. The impact on profitability should not be meaningful at first, but the impact on revenue should be considered. It’s impossible given the information at hand to determine the precise math, but the way we see it, it’s possible that 100% of the revenue growth associated with the Wholesale business is derived from simply switching over Chaps from Licensing to Owned. Here’s our math – Licensing revenue was down about $6mm. That included strength in the core licensing business, which tells us that reallocated Chaps revenue was probably a number in the high single digits. Let’s say $8mm. Now we need to apply a royalty rate to gross it up to a wholesale equivalent. Normally, we’d use something around 7-8%. Let’s be conservative and use 5%. That equates to about $160mm wholesale equivalent, which is the rough amount Wholesale should have been up due to Chaps alone. But wholesale was only up by about $110mm.  One could make the case that the business was down excluding Chaps. You can poke holes in our assumptions and royalty rates, but directionally, this is something to consider when applauding the growth rate of the wholesale business.  To be clear, this reclassification of licenses has been a core part of the Ralph story for a long time, and it has worked brilliantly. They’ll probably crush it with this Chaps business as well. But we simply want to make people aware of the underlying real organic growth.
  4. This is stating the obvious, as the stock gave up its 7% pre-market gain (and then some) nearly immediately after the CFO noted profitability trends – but margins are expected to be down in fiscal 2015 (March). This is largely due to global expansion of the POLO brand, higher quality/cost of goods, ecommerce investment to support growth in US, Europe, Asia (Korea, Japan), SAP implementation in Europe Let’s assume that the company can leverage Chaps and its new business initiatives and grow the top line 10% -- at best we’ve got a mid-high single digit growth rate until the 2016 fiscal year. That’s a long time to wait for profitable growth.
  5. Management surprised us on the upside. Last quarter’s call was almost painful to listen to -- it sounded grossly inconsistent with a company of Ralph Lauren’s caliber. There was no question the company was going through transition in its executive ranks, and the conference call all but confirmed that premise. But today, the group was focused around one brand message, and all were clear and concise. We know, this seems like kind of a fluff point to comment on, but with a company like RL where the people up top are such a driving force behind the product, brand, culture and company we think it matters. Most notable, we were running for the hills after last quarter. Today, this risk is far diminished after this quarter.
  6. Other Notables

a. Europe - Europe up HSD in C$ YY- Northern Europe is growing and southern Europe is stabilized

                                          i. Opportunities - Polo - Flagship in NY (Fall '14), Flagship in London ('15) - Regent St

                                         ii. Actively looking for property in US, Europe, Asia

                                        iii. Women's Polo (Fall '14)

                                       iv. Men's tailored line (Fall '14)


b. China - will begin to actively open stores beginning in FY '15

                                          i. Hong Kong Ralph flagship next fall

c. E-commerce - grew at a high teens rate

                                          i. 10% of revenue in US retail

                                         ii. Still investing in Europe which will most likely turn profitable in this Year

                                        iii. Asia (Japan and Korea) just getting started with that investment


7. SIGMA Analysis Looking Rough

Inventories still not looking good relative to sales. On top of that, the company swung into positive margin territory. While that's better than the alternative, usually when a company has positive margins and a negative inventory spread it proves to be bearish for the stock. That's not our opinion, it's a proven fact based on a few thousand tickers over time. In general, after being in the quadrant where margins are down and inventories are unfavorable, the move the market wants to see is improved inventories, even if it is at the expense of margin. That's almost always a positive stock move. 

RL: Hurry Up and Wait - RL SIGMA

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REPLAY: U.S. Economy Update Call: What Is Priced In?

This morning Keith McCullough and the Hedgeye Macro team hosted a flash call updating their view on the U.S. economy, discussing what is priced into assets after the recent sell-off and how to be positioned for the continued manifestation of  #InflationAccelerating and #GrowthDivergences


The presentation and replay information can be accessed via the links below:






  • #GrowthDivergences:  Since our 1Q14 Macro Investment Themes call on 1/9/14, the incremental fundamental data has continued to reflect a deceleration in the slope of domestic growth.  We survey the latest income, housing, manufacturing and consumption data and the implications for equity and asset class positioning. 
  • #InflationAccelerating:  Long inflation expectations and #GrowthSlowing has been the positioning playbook YTD with the CRB commodities index accelerating, Utilities and Healthcare leading sector performance and low short interest, low beta, and large cap style factors driving relative equity out-performance. We discuss whether to remain long this trend.  


- Hedgeye Macro        


In preparation for PENN FQ4 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • On a same store sales basis, where the gaming industry in terms of our view looks no different than what you're seeing from a retail sales perspective. It's sluggish and it's troubling.


  • We do have two cannibalization events next year. One is the opening of the Horseshoe Casino in Baltimore that will cannibalize our Charles Town facility. And then we have a few of the race tracks that are opening in Ohio will cannibalize predominantly the Lawrenceburg facility. But to a smaller extent, they'll take some of the growth out of the Columbus facility also, one of those being our facility opened in Dayton.
  • The cannibalization should largely be over after next year. I think we only have one other known event, which is probably a 2016 event, best case.


  • We've been going through a rebranding process. We'll be about $670 million of total purchase price into this facility after the rebranding is done. The facility will be completed just before Christmas, so it will be open for the all-important New Year's week late this year.
  • We are putting about $60 million into it. About $35 million of that is on the construction side, and the rest of it is in systems to replace the slot system, replace the general ledger. I think they've got about $7 million of it went to IT. The rest of it went to slot machines to bring the floor up to speed. We usually run on about a 7, 7.5 year cycle in floor replacement, and it was behind that, so we kind of wanted to get it into our spectrum of comfortable.


  • Total project cost of these is a little bit over $500 million, Penn is responsible for about basically $320 million. A portion of that will be paid in 2014, with the remainder paid in some payments over the next nine years to the State of Ohio. There's a license fee, which is $50 million per facility. $25 million of that is due in 2014, $25 million is due a year after that. And then there's relocation fees of $75 million per facility. $15 million is paid at open, and then about just under $20 million paid per year for the nine years after that.


  • The Zia Park Hotel is going to open late in 2014


  • Started construction on Hollywood Casino Jamul, projected to open in late 2015, is expected to include a three-story gaming and entertainment facility of approximately 200,000 square feet, featuring over 1,700 slot machines, 50 live table games including poker, multiple restaurants, bars and lounges and an enclosed below grade parking structure with over 1,900 spaces.
  • It's a 30% of net income management contract.

[podcast] Keith's Macro Notebook 2/5: JAPAN RUSSIA COMMODITIES

Takeaway: Hedgeye CEO Keith McCullough reviews the Top-3 things in his macro notebook this morning.

">Click here to listen

[podcast] Keith's Macro Notebook 2/5: JAPAN RUSSIA COMMODITIES - h78