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This Person Is the Single Biggest Risk to the Bears

Takeaway: Keep your head up out there. You don't want the Fed to smash your face in.

By Keith McCullough


Earlier this morning, a listener on my firm's morning macro call asked me an important question.


What is the biggest threat to the bear case right now?

Economic growth slowing?


Emerging market contagion?


Janet “Mother of All Doves” Yellen reverting the Fed back to full blown dove?


This Person Is the Single Biggest Risk to the Bears  - yell2


Stop right there. From my market perch, the greatest threat to the bear case right now is Janet Yellen. In other words, Janet Yellen being Janet Yellen.


Here’s how this risk might hypothetically play out: our new, all-knowing, omnipotent Fed Head recognizes a day late and a dollar short that growth is slowing. She says to herself, “We’ve got to stop this tapering!” She picks up her phone, calls the Fed’s mouthpiece Jon Hilsenrath over at the Wall Street Journal, and shows him her cards.


You know what happens next. Someone gets an early whiff of the leak. Voila! “Suddenly” the S&P 500 is up 5 percent. Just like our Founding Fathers envisioned in 1776.


That there is the key risk to being bearish right now.


The other risks? They are “known knowns.” I’m not worried.


Emerging market contagion? Are people seriously still debating that? We’ve been bearish on emerging markets for over a year now. That’s nothing new and certainly not something I’m losing any sleep over at night. Look, emerging markets have been a total disaster. Just to get anywhere near back to breakeven, emerging market bulls are probably going to have to fast forward to the year 2020.


Incidentally, the “Tail” line (a duration of 3 years or less in our model) of support on the S&P 500 is 1,683. That’s the key line to keep in mind. The “Tail” is really important because it’s binary. (I can get you a lot lower than that if I were to use fundamentals.)


What I mean by that is that when you break the “tail,” there’s basically no support whatsoever down 300-400 points below. It’s really not something you want to mess with. The corollary is like walking up to some dog you don’t know and pulling on its tail. Now, you can go ahead and roll the bones on that. Have at it. Maybe the dog will even lick you. But there’s also an outside chance it’ll turn around and bite your arm off.


As far as the “Trend” (a duration of 3 months or more) is concerned, it has the best back test in our model. The math works really well here. When trends reverse from bullish to bearish (or the other way around), that’s when we make our best calls, because it’s typically where consensus gets caught offside’s. I really like to lean when the trend breaks one way or another.


Right now, the trend is breaking the wrong way, and gold is breaking the right way. That’s why we’re doing literally the opposite of what we were doing a year ago. If you were on our morning macro call a year ago, you would have heard me saying short gold and buy U.S. stocks.


A lot of people are still scratching their heads over this pullback. Why?  The writing was on the wall. The Financials (XLF) -2.5% snapping our TREND last week was a huge signal. It was one reason why we were advising caution, getting short, and telling people to look out below. (For the record, if my S&P 500 line wasn't broken, I'd be buying the damn-bubble like I did numerous times recently. But it is. And bubbles pop.)

At any rate, the biggest bear risk right now is clearly “Mother Dove.” She’s the most important wild card that I would be worried about right now.


Central Planners remain the greatest market and economic risk out there.


This Person Is the Single Biggest Risk to the Bears  - boom1

HAIN – Gross Margin Headwinds Sting?

HAIN reported its fiscal Q2 2014 earnings after the close yesterday. The report was mixed:  while the company achieved double digit sales growth in the quarter, the trend is slowing, and CEO Irwin Simon noted commodity headwinds in the remainder of the year. While we remain bullish on HAIN’s portfolio – which meets customer demand of organic and natural products – we think this richly valued stock is heading lower based on our quantitative setup and profitability concerns in an environment of #InflationAccelerating.


The stock took a leg down after the print and has traded down as much as -10% intraday today.


HAIN – Gross Margin Headwinds Sting? - a. hain ch


As you can see from the chart below, sales of $535M in the quarter (an increase of 17.5% Y/Y) took a leg down in the quarter. The Q&A was filled with the management team explaining away what was a weaker quarter based on price and inventory shifts, particularly in the U.S. and U.K. that negatively impacted results. 


Gross margins fell in the quarter (26.8% vs 28.7% in the year-ago quarter) and we think investors are concerned with rising commodity prices in 2014, in line with our macro team’s Q1 theme of #InflationAccelerating.  Starting with a base of higher costs to produce organic and natural products, its two largest commodities in almond and dairy have already seen significant price gains.  The company expects its basket of commodities to inflate by +3.2% this year – we think a big threat to the company is its inability to expediently take pricing, especially in a macro environment that see the consumer still challenged in the U.S. and Europe.   


We’re bullish on the company’s recently completed acquisition of Tilda (a rice company) and its integration in the Middle East and Asia, in particular. The company boosted its full-year earnings and revenue outlook, now expecting per-share profit of $3.07 to $3.15 and a top line of $2.12 billion to $2.15 billion. In November, the company said it expected $2.95 to $3.05 and $2.03 billion to $2.05 billion, respectively.


HAIN – Gross Margin Headwinds Sting? - z.price diverg


Call with questions,


Matt Hedrick


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 dot.com 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

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        

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