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Bubble Up: SP500 Levels, Refreshed

Takeaway: The all-time-bubble-high of 1878 SPX is in play and if/when we tag that, the SP500 can then mean revert lower 35 handles.



I’ve seen a lot in trying to trade markets for the last 16 years, but I haven’t yet seen something like this. For 3 months I feel like we’ve been watching the entire construct of consensus bang its head against the #OldWall, debating whether the US stock market is going to be -2/+2% YTD.


So let’s bubble this sucker right back up to the all-time-high into quarter-end and get on with it. From a #behavioral perspective, what we know is that consensus hedge funds will get net long up there (after tightening exposure on every selloff). Don’t be consensus.


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


  1. Immediate-term TRADE overbought = 1881
  2. Immediate-term TRADE support = 1844
  3. Intermediate-term TREND support = 1815


In other words, the all-time-bubble-high of 1878 SPX (on a closing basis) is in play and if/when we tag that, the SP500 can then mean revert (lower) for another 35 handles once consensus is leaning too long (again).


De-stress and keep moving out there. Fading Beta within a risk range is a good business.




Keith R. McCullough
Chief Executive Officer



Bubble Up: SP500 Levels, Refreshed - Slide2

RH: Duration Review Into The Print

Takeaway: There will be puts & takes on the 4Q print. But the multi-year catalyst calendar starts in April. Beware getting beared-up over 1Q guidance.

Conclusion: They’ll be puts and takes on the 4Q print. But the multi-year catalyst calendar starts in April. Beware getting beared-up over 1Q guidance. We stand by our positioning on RH that we presented in our last update conference call/deck in early February. Specifically, we laid out how we’re thinking about the name across multiple durations. See the links below to both the slide deck and audio presentation. Our general view by duration is as follows.


TAIL Duration (long-term): One of the most powerful growth algorithms in all of Consumer. The company should earn around $1.70 this year, and we think that over 5-years that number approaches $11. Common perception is that RH is building a bunch of palaces and hoping that people will show up to shop. We think about it the other way around…they are creating assortments of product across multiple categories in the home space, and are subsequently taking a massive piece of a category where they only have 2-3% share. Yes, bigger stores are a part of this, which is critical to support the kind of product extensions we’ll see from RH. Currently, the Legacy 9,000 sq ft stores only house 20% of the SKUs and run at about $750/sq ft. The 25,000 Design Galleries highlight closer to 50% of the product, and they average an ‘per foot productivity’ rate that is 2x the existing core. People often ask us about why RH has the right to expand into new categories of Home. People asked that same question about Ralph Lauren in the 1980s when he expanded beyond neckties and polo shirts. Our full modeling assumptions are in the Deck (link below), but the key is to measure the success by product and design creation and sourcing, not by simply building stores.


TREND Duration (next 3-4 quarters): The trends should accelerate dramatically over the course of this year for RH. First and foremost, the product line is being meaningfully changed for the Spring. With that will come an updated Sourcebook – which the company has not released in the better part of a year. At the same time, after a full year of not adding a single square foot of space, RH will be adding four new stores throughout this year. In April/May we’ll see the much anticipated opening of Greenwich, CT, the store in the Flatiron District in NYC, then in the Fall we’ll see Los Angeles and Atlanta. As noted above, the actual stores are not as important to us as the product that goes behind them. But this year, the calendar is lining up nicely with a product refresh in the Spring and then four large stores immediately following, That’s about 12% growth in square footage. That might not sound huge for a company that will be looking at a 30%+ growth rate in square footage within two years. But it matters to us given that it has not grown square footage since before 2008.


TRADE Duration (Immediate-term): The TRADE duration was a slam dunk when the stock was in the $50s. The reality is the Street got beared up because just about every retailer was missing numbers due to weather and whatever else is going on out there in the economy. But with RH, 47% of it’s sales are dot.com, which are weather proof, and the category in itself is not very ‘at-risk’ due to snow. Think about it…if you want to go shopping for clothes, you might pick up a pair of jeans. If it’s snowing, that purchase is probably dead. But if your kids need new bunk beds, are you going to bag the purchase just because it’s snowing? No. We have some useful stats on the topic in the Deck. We’re not very worried about the actual number that RH reports. The company has extremely good visibility with its top line. The same factor that the Street beats this company up so often for – the long lead times in its shipping window – also gives the company great visibility into its top line for an extended time period.


The big question is around comp guidance for the first quarter. The company already noted that the first quarter would be its weakest comp of the year – due to the timing of the product refresh and catalog drop. The Street knows that. The consensus is printed at 11%, and we think that the whisper is for something in the high-single digits. Could guidance for 1Q be in the single digits? Yes – with no product refresh, a 41% compare vs last year, and the strong possibility that some 1Q purchases were pushed into 2Q,the upcoming quarter will be the weakest of the year – as management already indicated. What we can say is that with the tremendous delta in our estimates versus the Street over our modeling horizon – and with how good the TAIL and TREND calls are lining up, we’re not going to get too bent out of shape figuring out if people are going to freak out over guidance that was already largely given.





RH: Duration Review Into The Print - rh model

$LNCO Hammered 30% Since Kaiser's Call: More Pain to Come?

Hedgeye Managing Director and Energy Sector Head Kevin Kaiser explained back in November why he remains the bear on shares of LINN Energy (LINE) and Linn Co (LNCO).



For the record, Kaiser added Linn Co as a best idea SHORT back on March 21, 2013. The stock has fallen -30% since then.  


Not bad considering the S&P 500 is up +20% during this time.

Connect to Hedgeye.


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


Following Panera’s Investor Day, we have upped our conviction in PNRA as a high quality short.  Since the end of January, the stock has largely traded off of overly optimistic expectations, rallying more than 12% in anticipation of the event.  However, after revealing a more sober financial outlook than most anticipated, the stock should sell off on reset expectations.


Panera announced a number of initiatives yesterday, many of which we liked.  These, ultimately, will lead to the culmination of a new to-go experience, a new eat-in experience, and a new catering business:

  • The new to-go experience will allow customers to order in the store or in advance on their mobile phones, leverage the MyPanera app (saved favorites, customization, rewards), and establish a specific time for pickup.
  • The new eat-in experience will incorporate fast line kiosks from which the customer can order and pay, before sitting down at a table and having their food served to them.
  • The new catering experience will run out of delivery hubs, which will enhance café capacity and focus and allow for both small and large order delivery.

It is Panera’s goal to thrive in a digital future and we believe they have an innovative, feasible plan in place to deliver on this.  With that being said, these initiatives require significant investment which likely means that 2014 and 2015 will be nothing more than investment years.  As management reiterated time and time again, they are positioning themselves to drive long-term success which means that there will be some near-term pain.


We remain bearish on Panera for the following reasons:

  1. No guidance – Management reiterated 2014 guidance but would not provide any guidance for 2015.  This lack of visibility is concerning, but understandable.  Management simply doesn’t know what to expect.  The majority of Panera 2.0 will not be rolled out until the end of 2015, meaning it will likely be another significant, margin compressing investment year.
  2. Conscious cannibalization – This is a phrase we never like to hear management teams use.  This, to us, is an indication of market maturity and while we understand the concept of growing units and overall sales, we never like to see this done at the expense of another store.  Growing at lower returns is always a red flag.
  3. Low returns – Among the P&L implications for Panera 2.0 are increased labor and training, higher credit card usage, fees related to IT, and depreciation, all of which will have a dampening effect on margins.  Management would not commit to higher margins post the rollout.

Considering the bulk of the investment will come in 2015, we believe it is unlikely Panera will be able to deliver the 18% earnings growth the street is expecting.  After a prolonged disconnect, we expect the stock to begin reflecting the fundamentals as the street comes back to reality. 






Recent Notes

12/19/13  Best Idea Update: Short PNRA

10/23/13  PNRA: The Pace Of Change?

10/21/13  PNRA: Stage 1 Denial

09/26/13  PNRA: No Quick-Fix Recipe

07/23/13  PNRA: Short Thesis Playing Out As Expected, Part II

04/24/13  PNRA: Short Thesis Playing Out As Expected

04/05/13  PNRA Hype Makes It Shortable

03/26/13  PNRA Happy Camper Facing QSR Wounded Bears

02/15/13  PNRA Mix Tapped Out?

01/30/13  PNRA Bread Not Quite Baked



Howard Penney

Managing Director


Fred Masotta



Retail Callouts (3/26): PVH, KSS, LULU, WWW, SHLD, APP

Takeaway: PVH -- masters of spin. KSS top merchant out. LULU warehouse sale. WWW/Keds gets French. SHLD 17 line, seriously? APP deal, stock off 30%.




  • HMB - Earnings Call: Thursday 3/27, 9:00am
  • LULU - Earnings Call: Thursday 3/27, 9:00am
  • RH - Earnings Call: Thursday 3/27, 5:00pm


  • FINL - Earnings Call: Friday 3/28, 8:30am




PVH - 4Q13 Earnings


Takeaway: Slight miss on the top line and a heavily adjusted beat on the bottom line = not a bad quarter for PVH. 1Q revenue guidance was in line with the streets expectations with the earnings number considerably below. $0.10 of that was due to a higher projected tax rate in 1Q14 vs. 1Q13. Inventories are unquestionably too high growing 46% on top of a 25% sales gain. For the record, no retailer should have a 19-page press release. The special charge reconciliation was painful.


Retail Callouts (3/26): PVH, KSS, LULU, WWW, SHLD, APP - chart1 3 26


KSS - Kohl's Chief Merchant to Exit



  • "Donald Brennan, chief merchandising officer of Kohl’s Corp., will leave the company on April 1. Brennan, who has been with the...store since 2001, has been Kohl’s chief merchant since 2007 and earlier served as general merchandise manager of men’s and children’s and executive vice president of merchandising planning and allocation."


Takeaway: Resignation looks a lot more like termination when you consider the compensation package Brennan left with. It's clear that KSS is going in a different direction with a bigger emphasis on national brands. This move definitely supports that -- at least from where we sit. As an aside, we have never seen a chief merchant exit during a time of product success at a retailer.


LULU - 10 Things to Know About Lululemon's Warehouse Sale



  • "As previously reported, Lululemon has selected Minneapolis, Minnesota as the next city to host its warehouse sale. It's a straight shot from the Mall of America and is going down this weekend, March 28 through March 30."
  • "There is a 25 total item limit per guest (per visit). Athleticwear hoarders and eBay resellers be warned."


Retail Callouts (3/26): PVH, KSS, LULU, WWW, SHLD, APP - chart2 3 26


Takeaway: We've talked about the need for LULU to develop a discounting strategy as it grows to over $3bil in revenue by 2018. For now this is a good strategy as it allows the brand to liquidate inventory reserves and keep its full price floor set clean of discounted merchandise. But this approach -- or something like it -- will need to be scaled tremendously if the brand wants to grow up.


WWW - Buzz: Gandys, Keds & FitFlop



  • "For spring ’14, French retailer Comptoir des Cotonniers is unveiling a special collaboration with Keds in-store and on its e-commerce site. The classic cotton canvas plimsoll will be offered in two colorways: sand and flag-blue feathered print with coordinating laces. A limited-edition version of the blue print also will be included, featuring black laces and sole. The sneakers will retail for $100 starting in mid-April."


Retail Callouts (3/26): PVH, KSS, LULU, WWW, SHLD, APP - chart3 3 26


Takeaway: Keds is building on its partnership with Kate, Taylor Swift, and Hollister. More importantly, this partnership is with a retailer outside the US. Prior to the WWW acquisition Keds was a $80mm brand (after shrinking from $500mm in the 1990s) with virtually no sales outside the US.  Now the brand has WWW's logistics network behind it and some key partnerships with international brands that will help it gain exposure.




SHLD - Sears to Launch Seventeen Line



  • "The Hearst publication...is partnering with Sears to create a full line of clothing, shoes and accessories. The collection will be sold in 500-square-foot Seventeen-branded shops-in-shop in Sears’ 10 flagships and 500 additional Sears doors. The shops will feature Seventeen signage, interactive elements, charging stations and image pieces."


APP - American Apparel to Sell Stock to Head Off Cash Crunch



  • "American Apparel Inc., facing another cash crunch, plans to sell $30.5 million of stock to pour more money into its attempted turnaround and meet looming debt payments."
  • "The funds will cover interest due next month on its senior secured notes...The underwriters also have a 30-day option to buy as much as $4.58 million in additional shares. The company’s market value was $83.4 million at yesterday’s close."

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