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CAKE: THIN BATTER

CAKE remains on the Hedgeye Best Ideas list as a SHORT.

 

Blame the Weather!


CAKE delivered disappointing 4Q results yesterday after the close, missing comp, traffic, revenue and EPS estimates by 90 bps, 100 bps,  191 bps and 256 bps, respectively.  Total comparable sales (+0.9%) and traffic (-1.0%) in the fourth quarter represent sequential slowdowns on a two-year average basis of 80 bps and 130 bps, respectively. 

 

Management blamed unfavorable weather for the poor comp performance in the quarter, estimating that it impacted comparable sales by approximately 70 bps.  This number strikes as us rather arbitrary and facile, particularly when considering this estimate excludes a positive impact from favorable weather on the West Coast and a positive impact from lapping Hurricane Sandy. 

 

Our skepticism, however, doesn't end here.  We also believe the estimate ignores any pent up demand as a result of unfavorable weather.  A couple of weeks ago, we heard CMG management speak directly to this point, noting that higher volume days typically followed periods of poor weather.  We didn't hear any of this on the CAKE call.  Management also denied any benefit from patio utilization, particularly on the West Coast, which benefitted from record dry and warm weather.  Back on the 2Q13 earnings call, management was quick to blame the inability to fully utilize patio space for the disappointing comp performance.  The point is, we have reason to believe the underlying trends are weaker than management is leading on.

 

Any way you slice it, these trends need to be reversed for CAKE to appease investors.  Traffic has now been declining for the past 5 quarters (both in favorable and unfavorable weather environments) and, unless fixed, will begin to manifest in margins.

 

CAKE: THIN BATTER - CAKE SSS

 

CAKE: THIN BATTER - CAKE traffic

 

 

Guiding Down 1Q14 Numbers


Management did its best to reign in 1Q14 expectations during the call by guiding to EPS of $0.48-$0.50 ($0.51 estimate) on 0-1% comp growth (+1.5% estimate).  An unfavorable calendar shift (Easter and spring break pushed into 2Q14) and poor weather are expected to negatively impact comps by 50 bps and 90 bps, respectively, in the first quarter.  The estimated negative impact from weather (storms in the Northeast, Southeast, and Midwest) factors in everything as of February 11th

 

Prior to the release, we surmised the street was too bullish on 4Q13 and 1Q14.  This has now been confirmed.  We believe the street will need to revise down 1Q14 estimates and, subsequently, FY14 estimates.

 

 

Maintaining Full Year Guidance?

 

Despite the negative recent trends and downward 1Q14 guidance, management reaffirmed FY14 EPS guidance of $2.29-$2.41 on comp growth of 1-2%.  Management cited a better than expected outlook for food cost inflation in 2014 (now 3-4%), largely due to a benefit from lower meat, some cheese, and grocery costs.  Dairy prices continue to rise and management noted there is not any less risk associated with the potential continuation of this trend.

 

We believe the bar for FY14 is set too high for CAKE and wouldn’t be surprised if management is forced to guide down full-year numbers after a disappointing 1Q14.  The street is currently looking for full-year EPS of $2.38 on comp growth of 1.8%, both of which are at the high end of management’s guidance.  We continue to believe a slow start to 2014, softening trends, and downward estimate revisions will lead to multiple contraction throughout the year.

 

CAKE: THIN BATTER - cake eps price

 

CAKE: THIN BATTER - cake ev ebitda

 

 

Call with any questions.

 

 

Howard Penney

Managing Director

 


Hurricane Janet

Takeaway: The British Pound remains our favorite major currency.

In case you're unable to read between the lines, Janet Yellen opened the door for “un-tapering” yesterday. No surprise there from the “Mother of All Doves.”

 

Ducks quack, doves print.

 

Hurricane Janet - jy

 

The slow-growth commodity inflation rip-trade loves Yellen. Utilities and Gold are leading the V-bottom S&P 500 parade as the US Dollar remains bearish TREND versus both the Euro and Yen now. 

 

Got Pounds? Because the Bank of England's Mark Carney is definitely not Janet Yellen.

 

Hurricane Janet - Hurricane Janet

 

The BOE doesn't have to do the whole lingo thing about “taper” or un-taper in the UK; they just need to talk about rates and currency higher, which perpetuates purchasing power, consumption growth, etc.

 

At $1.65 versus the USD, the British Pound remains our favorite major currency.

Join the Hedgeye Revolution.


$USD: Lower Deficit A Positive, But Not Really...

Takeaway: A lower deficit makes a better talking point than investible thesis for the $USD. We highlight the latest numbers & Trend improvement below

On immediate and intermediate term bases the dollar continues to anchor primarily on monetary policy speculation and relative global central banker interventionalism.  

 

The impacts of fiscal policy decisions (or the natural reversal in stabilization policies), however, are generally cumulative and build over longer durations.  

 

With the unconditioned House passage of the Debt Ceiling increase and the Treasury’s monthly budget statement for January, we’ve receive two (somewhat contrasting) updates to secular drivers of the dollar over the last day.

 

On the margin, an unconstrained, albeit temporary, ceiling on sovereign debt issuance is dollar bearish while the ongoing improvement in federal deficit spending stands as an obvious positive. 

 

Inclusive of January’s -$10.4B budget balance, fiscal 2014 remains on track to be the least profligate year since 2008.  We show the Monthly and Fiscal YTD totals over the last 10 years in the table below. 

 

Also, while federal spending/debt issuance has a seasonal component, spending in the first third of the year correlates strongly with full year deficit spending.  The regression implied full year deficit total for fiscal 2014 is $581B – inline with the latest CBO estimate of $518B. 

 

The deficit-to-GDP ratio is currently 3.4% on a trailing basis and if ~$500B is ballpark correct on 2014 deficit spending, we’d need to see nominal growth accelerate towards 5% to make a run at a 2-handle.   

 

While we’d apply little weight to the incremental debt ceiling or budget data to our nearer term view on the direction for the $USD, we thought it worthwhile to provide a quick highlight of the current numbers in the context of the broader, multi-year Trend.   

 

As it stands, the $USD remains in BEARISH FORMATION from a quantitative perspective and with the likelihood for incremental easing of policy with growth ebbing and inflation flowing, at the margin, we continue to think the risk is to the downside for the currency currently.  

 

$USD: Lower Deficit A Positive, But Not Really... - US Deficit Table

 

$USD: Lower Deficit A Positive, But Not Really... - Deficit to GDP

 

$USD: Lower Deficit A Positive, But Not Really... - DXY normal

 

 

Christian B. Drake

c

@HedgeyeUSA


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HOT 4Q 2013 YOUTUBE

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

 

 

TRANSIENT

  • Transient revenues have been growing at an 8% to 9% clip each quarter, powered by corporate and high-end leisure travel

GROUP

  • Group pace remains in the mid single-digits expect rate increases in the mid-to-high single-digits for the next year from corporate rate negotiations now underway.
  • Group revenue growth has been slower but steady at around 3% to 4%. Corporate groups generally smaller are the primary driver while larger groups, in particular, association and government business, have been slow to return.

NA

  • North America should continue to perform at or above our 5% to 6% worldwide company-operated REVPAR outlook range in the fourth quarter. There could be some impact from the recent government shutdown.
  • Assume that North American trends stay roughly where they are.

 

GOVERNMENT

  • See some decline in government demand in the quarter, thanks to the U.S. sequester, but government demand is less than 2% of our North American business. Were relieved that the impasse was resolved and it should not meaningfully affect the fourth quarter. Post D.C. debacle, see positive signs in both transient and group demand.

EUROPE

  • Europe is also showing very little new supply
  • Had a good summer in Spain and Italy with mid single-digit growth and double-digit growth across most of Eastern Europe. Central Europe has been a soft spot. Expect these trends to continue into Q4.

CHINA/SOUTHEAST

  • Assume that current trends will continue in China with REVPAR growth in the 2% range.
  • It's true that the Chinese economy still seems to be decelerating, but to put that into perspective, occupancy in China was up 3% points across the same-store footprint that was 35% larger than last year.
  • In the east and south where local economies are more diversified, growth has been better than in the north and west, which are more government dependent.
  • Expect continued strength in Southeast Asia and REVPAR growth for the region in the upper half of our global REVPAR outlook range

MIDDLE EAST/AFRICA

  • Do not expect the situation in Egypt or Syria to improve anytime soon, so this trend is likely to persist in the near term. Volatility is par for the course in some of these markets, with sharp recoveries once local conditions return to some normalcy.  Are bullish about long-term potential in sub-Saharan Africa, which has many of the fastest-growing economies in the world today.

LATIN AMERICA

  • Expect some pickup in REVPAR growth in Q4, mainly from Mexico.
  • Brazil, however, has been slowing.  Business in Brazil is further affected by major renovations currently underway. 
  • Argentina is finally growing REVPAR again.

RENOVATION

  • Nearing the end of our work at the St. Regis New York and the Westin Maui; plan to have the Sheraton Rio ready in time for next summer's World Cup. Overall, expect to begin tapering our renovation CapEX in 2014.

COSTS

  • Marketing and sales costs remain low 
  • Adjusted for these nonrecurring expenses, SG&A growth remained well under control at 2% to 3%.

SHARE BUYBACK/DIVIDEND

  • (10/31/2013)  Company’s share repurchase authorization has increased by an additional $250 million. As of October 30, 2013, the total amount available under the authorization is approximately $614 million.
  • Bought over $250 million in stock, and will soon pay an annual cash dividend of $1.35 per share.

MPEL 4Q YOUTUBE

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

 

 

COD MASS

  • "City of Dreams has led the way in the premium mass segment, as is clearly evident in the properties mass market table yield which remain well above those of our peers in Macau."

COD VIP PREMIUM DIRECT

  • "Our premium direct actually grew from last year about 15% to the third quarter, roughly about 20% in COD total rolling volume basis. In fact, on a sequential basis, we grew more than 20% from the third quarter, which is quite substantial, in terms of our premium in-house business."

MACAU STUDIO CITY

  • "On track to open in mid 2015."

COD TOWER FIVE 

  • "Preliminary works on Tower Five at City of Dreams which we expect to open sometime in late 2016, early 2017."

COD MANILA

  • "Opening is anticipated at be around the middle of next year."
  • "Under PAGCOR's revised gaming guidelines, City of Dreams Manila can now operate up to 365 gaming tables from 242 previously and over 1,680 of each gaming machine and electronic table games."

LABOR 

  • "When 2015 rolls around and Galaxy Phase II and Studio City opens up, we are confident that we will be able to get the required labor that will be necessary to operate the property."

VIP

  • "By the end of third quarter September and particularly in October, we see some subsequent improvement on that segment, meaning that from share is actually getting back and also the productivity of per table is improving in that segment."
  • "We look at the liquidity in the last few quarters particularly this year. We only see some improvement in some liquidity."

PAGCOR TAX ISSUES

  • "There is a solution in place that will really neutralize some of the tax issues. But I think they are working it through their government. But again, all four operators are unanimous and working together on this front. So they tell us that they hope to have a resolution sometime end of the year or sometime early next year. So it will be comfortably ahead of when we open our property."

COD COST STRUCTURE

  • "On a luck-adjusted basis, the margin at City of Dreams was up similar to the overall margin, up 200 basis points." "So we got the flow-through on that incremental mass market business as well as having a higher margin within the mass market business."
  • "There were nothing particularly special about our overhead this quarter or call outs. Our provision for bad debt was in line with our normal range."

LO Bulls—Volumes Miss But Outperforming the Industry

We remain bullish on LO over the medium term despite disappointing Q4 cigarette volume results (-1% vs the consensus’ estimate of +1.8%) and sequential slowing sales trends of its e-cig Blu business.  We however continue to expect LO’s profitability to be driven behind its category leadership in menthol and strong Newport brand loyalty, with continued outperformance on volume results versus the industry alongside competitive pricing.

 

What we Like:


In Q4 cigarette sales (excluding excise) were up +3.6% or +1.4% (including excise) with pricing partially offsetting volume declines.  In the quarter, LO’s -1% volume performance compared to the industry’s decline of -6.2% and on the year was up +0.5% vs -4% for the industry, outperformance that we expect to continue in 2014 as the industry braces for volume declines in the -3% to -4% range.

 

In the quarter Newport increased its domestic retail market share of 0.8 share points to 12.7%, and grew its domestic retail share of the menthol market to 39.9%, an increase of 1.6 share points compared to the fourth quarter of 2012. Newport’s market share gains continue to be strengthened by Newport menthol in its core geographies. Full-year for Newport volume was up +0.6%

 

What We Didn’t Like:


Slowing e-cigs trends remain a concern (more below) however we expect Blu to maintain its category leadership and offset losses with the strength of Newport menthol. 

 

Our Levels:


From a quantitative standpoint LO broke its intermediate term TREND line of $48.68 today. We’d be long term TAIL buyers of the stock closer to its support line of $45.09, or around 4% to 5% lower than its current price. While we see slightly more challenging Q1 gross margin and operating profit comparisons in Q1, Q2 moderates and both Q1 and Q2 have much easier sales comps. We'll look to its presentation next week at CAGNY (2/18 at 5:30pm EST) to get a better sense of its FY outlook. 

 

LO Bulls—Volumes Miss But Outperforming the Industry - vvv. lo

 

 

Update on E-Cigs:


Blu’s Q4 operating income was a net loss of -9MM on sales results that disappointed at $54MM versus $63MM last quarter and market share that dipped to 48% from 49% in Q3. CEO Murray Kessler chalked up the results as somewhat expected given the inventory build associated with adding 30K new stores (now at a peak of 130k stores nationally) selling at a lower price to encourage trialing and adoption of its new rechargeable unit.

 

Below is E-cig Q&A commentary from Kessler:

  • Outlook 2013 vs 2014: LO had a leading 47% market share of total e-cig industry sales of $1 billion (including internet sales) in 2013. Kessler says he’s bullish that the increase of competition (MO and RAI rolling out offerings in test markets late last year) will “lift all boats” in 2014. He remains committed to sell Blu at a break-even (or loss) over the next few years to win share and band loyalty to support what he says is the greatest harm reduction offering ever presented to smokers. He sees the continued expansion of new rechargeable kits flowing against dollar revenues in Q1 as well, and that e-cigs had about 1% negative impact on cigarette volume in 2013, which could rise slightly in 2014.
  • On Purchase Behavior: He’s encouraged by incidence of repeat purchasing which he expects to grow as earlier e-cig versions were not as good as what’s on the market now and the strategy remains growing the higher margin rechargeable business (razor/razorblade model). Blu’s cartridges account for 30% of sales.
  • On slight slowdown of e-cig category and what is driving it: says slowdown is the nature of a new category and lots of distribution building. He also said that things like vape shops and internet sales are creating a lot of sales that are not being measured/counted.
  • On indoor bans: Kessler sees the bans (most recently in NYC and Chicago) as draconian, however not impacting results as the measures don’t take effect until the April/mid-year time frame. He is unclear how the FDA will act, but said you’re starting to get knee-jerk reactions from the state and municipal level as regulation from the FDA is taking longer than previously expected. 
  • On deeming regulation: Kessler is unclear on the timing of regulation and says if you tax it like traditional tobacco, prevent marketing, and ban indoor use people will go back to traditional tobacco, which is completely backwards thinking in terms of public health.
  • On SKYCIG and international expansion: optimizing portfolio and rolling out in the UK before expanding to other European markets. Will be transitioning SKYCIG brand to Blu and wants to make Blu a global brand. Having purchased SKYCIG it is optimistic it can accelerate its international roll-out by mid-year, versus a much longer runway of 1-2 years had it decide to go at distribution alone without the SKYCIG acquisition.  

Matt Hedrick


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