We Are Short US Growth

This note was originally published at 8am on February 12, 2014 for Hedgeye subscribers.

“We don’t see things as they are, we see them as we are.”

-Anais Nin


We are short the consumption growth components of the US stock market. And that means we were wrong yesterday. It’s ok to say it that way – we see the real-time score for what it is, not what we want it to be.


Ellen Langer uses the aforementioned quote in a #behavioral psych book I just finished called Counterclockwise. Her concept of “mindfulness” fits how I see things in macro (on the margin). “Noticing differences is the essence of mindfulness. Don’t imagine, however, that all this needs to be exhausting… mindfulness is actually energizing, not enervating.” (pg 52)


Being wrong for a few days is a little different than being wrong for a few months (or years). When I was younger and wrong, I’d get mad. Now that I am less young, being wrong energizes me – especially when I notice something that isn’t consensus.


Back to the Global Macro Grind


To be clear, I’m not the only one who has noticed that Janet Yellen is re-opening Pandora’s real-world inflation box with another Federal Reserve ideological “innovation” (the #untapering). Mr. Macro Market has been front-running her for 6 weeks:

  1. Dollar Down
  2. Rates Down
  3. Inflation Expectations Up

That, of course, is fantastic for slow-growth-yield-chasing asset prices like:

  1. Gold +7.1% YTD
  2. MSCI REIT Index +6.3% YTD
  3. Utilities (XLU) +3.5% YTD

Not to be confused with US #GrowthAccelerating asset prices like:

  1. Consumer Discretionary (XLY) -4.1% YTD
  2. Consumer Staples (XLP) -3.3% YTD
  3. Russell2000 -3.0% YTD

Alongside Boehner waiving the debt limit last night (without conditions!), what we have here is another Big Government policy investing-style shift towards #InflationAccelerating. This isn’t new. It’s what happened to the Dollar in both Q1 of 2008 and 2011. Inflation is a tax.


The inflationary concept that zero isn’t zero is what the Fed calls “policy innovation.” Happy #Darwin Day! #1806


In Q1 of 2008, Bernanke whispered to his boys that he was going to do the “shock and awe” thing and cut to zero; so, while demand was slowing, Oil prices ripped humanity a new one by the summer time ($150/barrel), perpetuating US #GrowthSlowing.


In Q1 of 2011, Bernanke continued to send sweet nothings down his communication pipes that zero really wasn’t zero – it was zero minus whatever # of QE’s he damn well wanted. The CRB Commodities Index, Gold, etc. ripped to all-time highs, US consumption growth slowed, and Utilities (XLU) closed the year +14.8%.


In Q1 of now, zero still really isn’t zero because you have to:

  1. Subtract 2 tapers from the 0 minus 3-4 QE’s
  2. Then add expectations of un-tapering to the 2 tapers…
  3. And add a minus taper to a real-rates # … and you get a dovish Dollar

Or something like that.


The Fed, of course, doesn’t see it this way. But no matter how they want to see their theoretical world, market expectations and prices see them the way the real-world is.


While I am sure this will all end well, can the US stock market continue higher? Obviously the answer to that is yes. But what parts of the market will lead? Will they be food/energy inflations, real-estate inflations, and/or some of those beauty MLPs?


I don’t know anything about nothing, but I am certain that everything that you eat, put in your car, and pay for from a housing perspective has nothing to do with inflation or your cost of living.


In other news, as both the British Pound and Euro gain strength versus Yellen’s Burning Buck, both the UK and German governments are taking up their GDP growth estimates for 2014 (British Pound remains our favorite currency vs USD).


How that #StrongCurrency correlation to growth thing works is cool. It’s too bad that un-elected and unaccountable US central planners aren’t paid to see the history of currency appreciation, real-purchasing power, and consumption growth for what it is.


Our immediate-term Macro Risk Ranges are now (all 12 macro ranges are in our Daily Trading Range product):


SPX 1730-1828

VIX 13.21-17.61

Pound 1.63-1.65

Brent 107.84-110.03

Nat Gas 4.57-5.34

Gold 1260-1291


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


We Are Short US Growth - Chart of the Day


We Are Short US Growth - Virtual Portfolio

KATE: Bill Leaves a Powerful Thesis Behind

Takeaway: McComb might be moving on, but this story remains a rarity in retail. We liked it at $4 and like it at $34. Price targets are way too low.

Conclusion: KATE remains one of our top ideas. We continue to believe that earnings power will rise from just $(0.15) in this (investment) year, to better than $3 per share over 3-5 years as the Kate Spade brand fills out its footprint, grows productivity, and takes up margins. We think that this story is unique in that it’s not just about a company that’s adding a bunch of stores, or a brand that found a niche and is growing it accordingly. This is brand that built a strategy around selling product across multiple categories (handbags, accessories and apparel, etc…), to multiple affluent consumers (Kate Spade, KS Saturday, and Jack Spade) in several channels of distribution (wholesale, retail,, and concessions) in several regions of the world. These characteristics might be expected from a multi-billion dollar company. But keep in mind that KATE is less than $800mm in sales. Never in 20 years have we seen a consumer brand be so broad in its reach and yet so concentrated in its focus. We’ve been fans of KATE/FNP/LIZ since it was at $4. We’re often asked when we’re going to get off the story. The simple answer is…not yet. Not until the financial model ceases to work for us. Based on everything we see, this will be a name to stick with for some time to come. Revenue streams that go from $800mm to $3bn are tough to find.



This was a solid quarter – though the market is already making that point clear.  We think it was a fitting curtain call for outgoing CEO Bill McComb. Let’s face it, the guy was arguably one of the least popular CEOs in retail 2-3 years ago. The Street couldn’t stand the guy. But the reality is that behind the scenes, he was doing all the heavy lifting that ultimately created so much value for some of the very people who criticized him. He sold Mexx – easily the worst Paul Charron (former CEO) acquisition we’ve seen – and there were many. He punted the stodgy department store Brands, got rid of Juicy, and finished off with a sale of Lucky. Maybe not the best economic terms for all of the deals, but he got it done. Period. And all while growing the crown jewel. Congrats Bill. We wish there were more like you.



All that said, we put back on our analyst hat and wonder what could go wrong now that McComb is gone. Regardless of our high opinion of the ‘new’ management team, we need to respect the reality that whenever there’s change in a complex organization, things can go wrong. We can’t point to any obvious stress points right now, however. The reality is that Craig Leavitt was being groomed to be the next CEO for the past 18 months. They kept it quiet, but it’s the truth. Any major business planning meetings (even for non Kate brands) – Craig was there. CEO-level customer calls – Bill and Craig. Organizational decisions – you guessed it…he was part of them.  On top of that, the fact that George Carerra – who has always been a very operational-focused CFO – was elevated to COO makes perfect sense. George will prove to be a big crutch for Craig in key areas where Craig quite frankly should not be focusing his time. The punchline is that this whole management transition started long before anyone thought it did, and we think that the company covered most of its bases.  



The reality is that there’s really no change to our thesis. This quarter gave us further ammo supporting our bull thesis. But there were a few things that stood out…

  1. We’re seeing an acceleration in store openings, and the quality is high. Out of Juicy’s 120 stores, about 30 will make their way into KATE’s fleet. They’re only converting the highest quality properties. The company has about 215 stores today, and will add about 90 in 2014 – that’s about 42% growth in units.
  2. In addition to the unit growth, we’re starting to see a far greater proportion of units come into the comp base. Only 60% of the current fleet is in the comp base today, or about 130 stores. We should see another 100 added by the end of 2015 – something that we think will be weighted toward 1H15.
  3. Let’s address the comp guidance of 10-13% for the year. The reality is that in his new role, Leavitt does not want to miss a comp – ever. We think that 10-13% is a slam dunk for a few reasons. First off, as noted in the point above, as we see more stores added to the comp base, it is a natural lift to y/y sales comps. More specifically, as the stores start to approach the ‘sweet spot’ of the comp curve of roughly 3-4 years, it provides an added lift – which bolsters our model in 2015 and 2016. Lastly, productivity at Kate was only $1265 this quarter, and while impressive, it’s still a far cry from the high teens and $2000+ rate being realized by US luxury competitors.
  4. Kate’s EBITDA margins were up for the first time this year, despite investment in Kate Spade Saturday. The company did its best to keep margin expectations grounded for 2014, and they probably succeeded in keeping them up no more than 100bp. Our numbers assume twice that rate.
  5. Adelington: The division isn’t really worthy of real estate in a research note, but there were a few notables that relate to other retailers. A) the QVC license is underperforming, which hurt revenue, B) The conclusion of the Dana Buchman/KSS partnership dinged the top line, but on the flip side C) Since the change in JCP’s promotional strategy, KATE has seen more positive trends in its Jewelry business.


KATE: Bill Leaves a Powerful Thesis Behind - 2 25 2014 1 57 13 PM

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




BLMN reported 4Q13 results mostly in-line with expectations before the open.  Total revenues of $1.051 billion and adjusted EPS of $0.27 slightly beat expectations by $3m and $0.01, respectively.  Total revenues increased 5.2% YoY, driven by revenues from new restaurants, an increase in comparable sales and the consolidation of one-month of sales generated by Brazil operations.  EPS growth was driven by marginally stronger restaurant level margins, due to higher AUVs and productivity savings, and lower corporate and compensation expenses.


Comparable store sales at BLMN’s two biggest brands fell short of street estimates.  System-wide, Outback and Carrabba’s comps missed expectations in 4Q13 by 10 bps, 50 bps and 50 bps, respectively.  Outback and Carrabba’s disappointed despite growing their lunch business by a large margin in 4Q.  At the end of the quarter, weekday lunch was being offered at approximately 35% of Outback locations and 40% of Carrabba’s locations.  This is up significantly from the third quarter, when only 26% of Outback locations and 28% of Carrabba’s locations offered weekday lunch.  With this degree of daypart expansion, these two concepts should be expected to grow traffic and outperform the industry.  Outback only managed to grow traffic 0.5% and management didn’t reveal traffic trends at the Carrabba’s brand.  Bonefish and Fleming’s comps beat expectations in 4Q13 by 80 bps and 70 bps, respectively. 


Although 4Q13 was a difficult quarter for many casual dining operators, BLMN managed to outperform the Black Box Index by 150 bps.  The 1.4% system-wide comp growth was driven by increases in price and traffic, partially offset by a lower mix due to lunch expansion.  This number also benefitted 40 bps from a calendar shift in the quarter.  Traffic grew by 0.3% in the quarter, consistent with what is to be expected of a company rolling out lunch across multiple brands.

Two-year sales trends remain weak across all four concepts.









Street estimates for FY14 proved too aggressive as management reigned in guidance and expectations across the board.


FY14 Financial Outlook

*Guidance indicates the low-end of management’s range

BLMN: BEAT & GUIDE DOWN - 2 25 2014 1 10 52 PM


BLMN: BEAT & GUIDE DOWN - blmn eeg



There were clearly some positives in the quarter, but there are also several signs that the underlying trends are not as strong as management is portraying.  That being said, we will revisit our short case and provide an updated outlook in the coming days.




Howard Penney

Managing Director


$DRI: Mr. Market (Still) Doesn't Like Darden's CEO

Takeaway: Darden management's "strategic plan" could do more harm than good.

Editor's note: What follows below is a brief distillation from Hedgeye Restaurants Analyst Howard Penney's institutional research note yesterday. If you are an individual investor and would like more information on how you can subscribe to Hedgeye click here. Institutional investors, please ping


$DRI: Mr. Market (Still) Doesn't Like Darden's CEO - lobster

  • We woke up to news today that activist investor Starboard may call a special meeting to halt Red Lobster's spinoff. 
  • As we wrote in our note, “Clarence’s Legacy, A Half-Baked Plan,” back when the plan was announced, Darden CEO Clarence Otis’ legacy will be defined by his unwillingness to make the changes necessary to create significant value for shareholders. 
  • The takeaway from stock action (and, in our opinion, sentiment since 12/20/13) is DRI rallies when there is movement toward replacing management and sells off when management publicly digs their heels in.
  • All told, the plan presented in December seems reactionary and hastily put together.  It fails to address declining traffic, margins and relevance as well as potential solutions to these issues.
  • After a series of conversations with industry insiders and some independent thinking, we’ve concluded that Darden’s strategic initiatives could actually end up destroying shareholder value.
  • Our plan creates four operating companies focused on: Italian, Seafood, Steak and Growth.  This would properly allow for intensive focus on guest targets and specific brand priorities in each respective category.

$DRI: Mr. Market (Still) Doesn't Like Darden's CEO - penney1


$DRI: Mr. Market (Still) Doesn't Like Darden's CEO - penn2

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