YELP: The Sad Truth

Takeaway: Our short focuses on the TREND/TAIL duration, so we don't care much about 1Q14. But, the stronger the quarter, the more bearish we become


  1. Pressure to Build Through 2014: One of the major risks facing YELP in terms of both attrition and new client growth is the sharp rise in commodity costs, which has seen its sharpest sequential increase since 2011.  SMBs will be hit hardest, making adverting expenditures tougher to swallow.
  2. Today's Strength = Tomorrow's Weakness: YELP is losing virtually all its clients annually, meaning it must continually to sign more new clients in excess of what it starts the year with in order to drive growth.  That said, it's current client base will always be its future hurdle; the larger that is, the larger the hurdle, the lower it's future growth. Given a shrinking TAM, that's a scary prospect.  

Pressure to Build Through 2014

We're not seeing as much risk to 1Q14 Revenues; largely because what we've seen in terms of macro pressure didn't begin until mid February, which was after the company issued 2014 guidance (2/5/14).  That said, the backdrop has materially deteriorated since then, and will only get worse through 2014.


We previously pointed out the sensitivity of YELP's customer penetration levels to commodity prices in our YELP Short Best Ideas presentation.  Dating back to 1Q11, the y/y change in customer penetration levels is almost perfectly inversely correlated (-.93) with the change in commodity prices on a y/y basis.  


The point is that SMBs see a disproportionate impact from rising input costs given lower economies of scale.  In turn, advertising expenditures become increasingly discretionary when the SMB P/L is under pressure.


The CRB index has seen its sharpest sequential increase since 2011; most of that acceleration occurring after the company issued guidance.  More importantly, commodity comps ease throughout the year, so unless commodity costs decline materially, the y/y pressure will intensify.  


Put another way, as we move through the year, each SMB that is debating whether to renew its contact with YELP will be in a progressively worse situation than it was when it initially decided to advertise with YELP.


YELP: The Sad Truth - YELP   CRB vs. Ad Penetration 2

Today's Strength = Tomorrow's Weakness

YELP loses virtually all its clients annually, meaning it must continually sign more new clients in excess of what it starts the year with in order to drive growth.  That said, it's current client base will always be its future hurdle; the larger that is, the larger the hurdle, the lower it's future growth.  


The sad truth is that YELP's current year strength will become next year's weakness since it can't hold on to its customers, and it's addressable market is much smaller than many believe (see note below more detail).  In turn, the stronger YELP's 1Q14 revenues, the more bearish we become.  


YELP: The Sad Truth - YELP   Start vs. Lost Members 


We provide more detail on our short thesis in the note below, and far more detail in our YELP Short Best Ideas Slide Deck.  For a copy, or to discuss our thesis in more detail, let us know.


YELP: Death of a Business Model

04/04/14 10:05 AM EDT



Hesham Shaaban, CFA



Cartoon of the Day: Icebergs

Takeaway: Q1 GDP will likely have a 1% handle on it (down hard from the sequential peak of +4.1% in Q413). No worries, it was just the weather. Right?

Cartoon of the Day: Icebergs - GDP cartoon 04.28.2014


Takeaway: We’re Adding TGT to our Best Ideas list as a short. We’ll be hosting a call Wed. 4/30 at 11am ET to review our thesis. Call details below.

The crux of our argument? Wall Street's perception of Target's financial trajectory is more upbeat than Main Street. When the stock glossed over the company's weak 4Q earnings report, it was because Steinhafel (CEO) issued guidance that he hoped the company would grow into if the Company repaired its reputation after the data breach - not guidance that he knew TGT could meet or beat. We don't think that the Street is giving TGT credit for a) a miss this year, and b) another one in 2015.  The reality is that when a customer has a great experience in retail, they tell a friend. When a customer has a bad experience, they tell 20. Just ask JC Penney or Lululemon. Some of these 'fire your customer' events are worse than others, but there's one commonality - they take a very long time to recover.  

We think that TGT will be lucky to earn $3.75 this year, and $4.00 in 2015. The current 15x multiple is about as high as TGT has seen in 5-years - clearly the market is not factoring in a miss. We think that multiple compression alone on a weaker EPS number gets to a $48-50 stock, or $12-13 downside. If we're wrong, then we're looking at about $5 upside. That's about 2.5x to one, which we like on sleepy mega-cap shorts in Retail. 





  1. The biggest risks to current consensus expectations. 
  2. Target's visitation statistics (via one of our proprietary consumer surveys). 
  3. How key competitors are reacting to the opportunity to gain share from Target.  
  4. Target's value proposition compared to the rest of Retail, particularly Wal-Mart. 
  5. Has suffered the same customer attrition fate as Target stores?
  6. Which categories is Target winning? Where is it losing?
  7. Historical margin cycles for Target and other major retailers, and where we are in that cycle today.  


  • Toll Free Number:
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For more information contact .

Daily Trading Ranges

20 Proprietary Risk Ranges

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Slow and steady mid-scale segment, but new development beginning...


  • Franchise revenues +6% based on royalty fees +5%
  • RevPAR:  domestic +5.6% based on occupancy +200 bps and ADR +1.1%, expect greater demand for hotel rooms, strongest results were in pacific and mountain regions
  • Improved outlook for remainder of 2014
  • Increasing RevPAR guidance by 100 bps to 4.5% to 5.5%
  • 59 new franchise development contracts in Q1 2014, stronger due to availability of financing
  • Now expect franchise contracts will exceed 2013 levels
  • Reservations made via central res system increased 42.6%, up 320 bps YoY for Q1 2014
  • EBITDA from franchising activities +15% in Q1 as result of franchise revenues +6% and 500 bps margin, franchise SG&A less than expected (delay in timing of certain expenses)
  • Domestic royalty revenues +5.5%
  • Franchise system hotel count +2.4%, driven by Ascend and Quality Inn brands
  • Comfort Hotels - 97 hotels cancelled in 2013, repositioned 33 of 97 within other brands.
  • Aggressive new construction plan for Comfort Hotels in key markets.
  • Additional SG&A in new construction team for 2014 for Comfort and Cambria Brands
  • Costs: less than anticipated, resulting in franchise margins expanding from 55.1% to 60.2%
  • Skytouch $3.3m of expenses, but lower than expected
  • Sales:  sold 2 of 3 MainStay hotels, expect to sell remaining hotel in Q2
  • Outlook remainder 2014: 
    • 30.8% tax rate
    • No share repurchase
    • Revpar 5% for 2Q  4.5 to 5.5% for 2014
    • Unit growth 1%-2%
    • Royalty rate will decline by 3 bps for the full year
    • Full year EBITDA of $227-232 million from franchise activities
    • Outlook considering franchised, owned and Skytouch activities:
      • 2Q EPS $0.48
      • FY EPS $1.87-$1.93  
      • FY EBITDA $207-212m
  • Strong start, optimistic, trends better, consumer expectations rising, economy picking up momentum, improving development cycle.


  • What specific trends gave upbeat view - focused on employment trends as well as very low development starts = confidence for 2014 and next several years
  • Development financing - seeing constant improvement by local and regional lenders, CMBS coming back, leverage levels increasing from 50% to 65%/75%, even higher for stronger sponsors.  Core franchisee using local lender, while National franchisees use National lenders.
  • Any real inventory additions will be (at the earliest) late 2015 to early 2016
  • Construction timeline for average hotel -- 2 to 2.5 years, 9-12 months of actual construction, usually 12 months of zoning and entitlement process
  • Aggressive Comfort Hotel incentive plan will drive new development and room additions for Choice!
  • Conversion activity/trends -- up 1% to 2% but expect higher terminations
  • Cash increasing & how view dividend -- substantially all current cash is held off-shore, so off-shore cash not linked to dividend outlook.  Could use off-shore cash for acquisitions, development, or growth at Cambria brand.
  • View of leisure consumer vs. business consumer - leisure is very strong, getting stronger, and getting better for CHH.  
  • Easter shift impact to Q1 -- CHH not impacted by Easter shift because of Dec, Jan, & Feb results for franchisees.
  • Comfort Hotel brand revitalization -- new design, new protype, standards, bedding, breakfast, increase quality expectations, required performance incentive plans for franchisees, not Cambria-like, "Comfort Property Improvement Process" (CPIP). Goal to accomplish nationwide completion with 2-3 years.  Seeing $10 ADR improvement following CPIP, drop to bottom line.
  • Competitor reaction to CPIP - competitors moved early, expect to leapfrog Fairfield and Holiday Inn. 
  • Upper Mid-scale risk of oversupply -- not likely because supply is going to Upper and Upper Up Scale segments.
  • Details on CapEx total vs. Skytouch vs. development -- $15 million for systems, SkyTouch limited and usually expensed, Comfort Inn key money, Cambria mezz or JV money.  Framed $20-$40 million but could be higher.  Seeing opportunities in key urban markets, thus CapEx could be higher -- viz, Washington DC, NYC, White Plains, Phoenix, Chicago, etc.    
  • 30 Cambria Suites under construction by year end 2014.

59 Facts & Figures On Marijuana Legalization

Takeaway: We hope that speakers like Dr. Kilmer can help lay the groundwork for an emerging investment thesis.

Editor's Note: This research note was originally sent to subscribers on April 28, 2014 at 10:01 a.m. EST by Hedgeye Consumer Staples analyst Matt Hedrick. Follow Consumer Staples on Twitter @HedgeyeStaples.


59 Facts & Figures On Marijuana Legalization - m2


Last week we hosted a special call, Marijuana Legalization: The Debate Begins, featuring Dr. Beau Kilmer, co-director of RAND Corporation’s Drug Policy Research Center, to kick off a series of speakers on the topic. 


Dr. Kilmer co-authored the book Marijuana Legalization: What Everyone Needs To Know. Below we’ve summarized the first half of the book in which the authors provide a number of facts and figures on marijuana legalization. With increasingly more Americans supporting marijuana legalization – in fact a slight majority (54%) based on a recent Pew Research survey – we believe the data and studies provided in the book (while some are rough estimates and contested) offer a starting point for sizing up marijuana and the potential road to its legalization in the United States.


59 Facts & Figures On Marijuana Legalization - Pew marijuana chart

Chapter 1: What is Marijuana?

  • The marijuana plant contains concentrated amounts of mind-altering chemicals known as cannabinoids.
  • Marijuana (or cannabis) is neither a stimulant nor a depressant.
  • THC (delta-9-tetrahydrocannabinol) is the main psychoactive ingredient in marijuana, and can vary based on the wide genetic diversity of marijuana.
  • When marijuana is consumed as a joint, less than half of the THC is inhaled and absorbed by the lungs (the rest is burned up by the smoke).
  • THC enters the bloodstream and begins to reach the brain within seconds.
  • Ingesting marijuana orally (e.g. eating marijuana brownies) is less efficient, with smaller fraction entering the user’s bloodstream.
  • Marijuana can be detected in a user’s system well after the high, therefore complicating testing in determining usage.

59 Facts & Figures On Marijuana Legalization - marijuana plant


Chapter 2: Who Uses Marijuana?

  • Globally, 125-200 million people use marijuana in the course of a year, or ~ 3-4% of the world’s population age 15-64, making cannabis by far the most widely used illicit substance.
  • The prevalence of marijuana use in the U.S. is about three times the global average.
  • In the U.S., 44% of 12th graders have tried the drug at least once, 6% are daily users.
  • Marijuana use is highest among 18-25 year olds, with first use around the same time of alcohol use, ~ age 16.
  • While marijuana did not achieve mass-market status in the U.S. until the mid-1960s, historically it is one of the oldest of the psychoactives.
  • Hemp cord dates back 10,000 years and the first recorded use of medical was in China around 2700 BC.
  • By the late 19th Century, marijuana was a common ingredient in many medicines and was widely available, however not consumed as an intoxicant until the early 1900s.
  • By 1931, 29 states had criminalized marijuana (such movies as Reefer Madness propagated strong anti-marijuana government propaganda).
  • Usage did not pick up until the 1960s. A 1967 Gallop poll of college students reported a 5% lifetime prevalence of use. In 1969 the same poll totaled 22%, and by 1971 51%.
  • President Nixon signed the Comprehensive Drug Abuse Prevention and Control Act of 1970, which along with the Controlled Substances Act (CSA), created a scheduling system that place psychoactive substance such as heroin, LSD, and marijuana as Schedule I drugs.
  • The Reagan administration in the 1980s increased anti-marijuana rhetoric with the “Just Say No” campaign and marijuana use dropped.
  • However in the 1990s usage bounced back, yet below the levels reached in 1979-80.
  • 40-50% of the people who have ever tried marijuana report a lifetime total of fewer than 12 day of use.
  • Regular users are in the minority, but they dominate market demand. 6 million Americans aged 12 and over use marijuana on a daily basis, according to National Survey on Drug Use and Health, in 2009.
  • There’s a clear trend since the 1960s of more potent marijuana offerings, and while marijuana use tended to be “upscale” demographically in the 1960s, the bulk of marijuana consumed today is smoked by people both poorer and less educated.
  • Estimates suggest the total market value of marijuana (medical and illicit) at $15 to $30 billion annually (versus estimates of $23 billion for corn and $17 billion for soybeans).

59 Facts & Figures On Marijuana Legalization - 630 marijuana joint


Chapter 3: How is Marijuana Produced and Distributed Today?

  • Today in the U.S. marijuana is mostly grown on a small scale, and can be grown outdoors or indoors, with or without soil; the cannabis plant is hardy.
  • Unlike cocaine and heroin, marijuana need not be extracted or refined; the dried plant material is the drug.
  • With reasonable confidence it is estimated that the majority of marijuana consumed in the U.S. is imported from Mexico (1/2 to 2/3rds); domestic production is the next largest source (1/5th to 2/5th), with smaller amounts imported from Canada, Jamaica, and a few other countries.
  • California dominates for outdoor plants (74% of the 9.8 million plants in 2009) and to a lesser extend indoor plants (41% of the 300,000 plants), followed by Washington (indoor and outdoor), Tennessee (outdoor), and Florida (indoor).[Note: we’d suspect that Colorado (indoor) growth may be entering this list if more current data was available].
  • Most marijuana entering the U.S. from Mexico is smuggled in by violent drug trafficking organizations.
  • The price of marijuana goes up markedly as it moves down the distribution chain from grower to user.
  • Commercial-grade marijuana produced in bulk in Mexico (4-6% THC) sells for about $35-$50/pound in Mexico and $200-500/pound just inside the U.S. border, increasing at a wholesale price of ~ $400/pound for every thousand miles away from the Mexican border, reaching $1,000 - $1,400/pound in the East and Northeast.
  • Marijuana is so expense primarily because production and distribution are illegal.

59 Facts & Figures On Marijuana Legalization - m1


Chapter 4: How Stringent Is Marijuana Enforcement in the U.S.?

  • In 2010 there were more that 1.6MM state and local arrests for drug violations.
  • Less than half of arrests were for marijuana offenses; 46% for possession and 6% for sale/manufacturing.
  • With an estimated 30MM Americans users of marijuana per year, only 2.5% of users got arrested.
  • Not all marijuana arrests lead to prosecution. Even if convicted, what happens depends on age, number of prior arrests, amount of marijuana possession, and the jurisdiction.
  • Alaska has the most lenient statutory sanctions for possession of small quantities: Possession of 1 ounce in private residence is not considered a criminal act and carries no penalty.
  • In California, Maine, Massachusetts, and Nebraska possession of up to one ounce is consider a civil infraction, or petty act, with no jail time, but fines may range from $100 to $600.
  • Reasonable estimates put total incarceration costs at $1.2B (about 40,000 inmates at $30k per year).
  • Seven states, referred to as the M7, account for about 90% of marijuana cultivated: California, Hawaii, Kentucky, Oregon, Tennessee, Washington, and West Virginia. 

59 Facts & Figures On Marijuana Legalization - large JNS.MarijuanaRaid3


Chapter 5: What Are The Risks Of Using Marijuana?

  • There is no clear evidence on what type of person is the most typical user.
  • Epidemiological study by James Anthony and colleagues found that 9% of those that had used marijuana wound up being clinically dependent on marijuana at some point in their lives, males are at a much greater risk than females. Comparable rate for alcohol = 15%; cocaine = 16%.
  • Heavy marijuana users can experience withdrawals, but physical discomfort generally pales in comparison to that experience by those with serious addictions to alcohol or heroin.
  • Robin Room and colleagues found that marijuana posed less addictive risk than tobacco, alcohol, cocaine, stimulants, or heroin.
  • In 2009 marijuana accounted for more than 350,000 drug treatment admissions in the U.S.
  • The Center for Disease Control’s WONDER database reports only 26 deaths between 1997 and 2007 due to the use of cannabinoids.
  • Marijuana smoke contains carcinogens.  What is not clear is whether exposure is great enough to cause cancer.
  • Marijuana users generally inhale more deeply than cigarette smokers, but consumer far less marijuana than regular cigarette smokers consume tobacco.
  • Kids who use marijuana, particularly those who start marijuana use at a young age, are statistically more likely to go on to use other drugs than their peers who do not use marijuana.
  • Being stoned impairs driving performance, but driving stoned isn’t as dangerous as driving drunk, however determining toxicity is a challenged because marijuana can stay in the system for a number of days.
  • The two major research projects that follow expectant mothers and their children after birth both found an association between prenatal marijuana exposure and poorer cognitive development, attention and executive functioning.

59 Facts & Figures On Marijuana Legalization - marijuana and alcohol


Chapter 6: What Is Known About The Nonmedical Benefits Of Using Marijuana?

  • Astoundingly little, claim the authors.
  • Serious scholarship in the U.S. is hamstrung by administrative rules. Only one facility is allowed to grow cannabis for use in research, and that supplier is only allowed to provide it to the government.
  • Scientists can’t get legal supplies of research material without applying for a grant from the National Institute on Drug Abuse; that agency has not proven especially responsive to requests from researchers interested in studying either the benefits or harms of marijuana.
  • So while heroin, cocaine, methamphetamine, or LSD are available to researchers, marijuana remains an exception.

59 Facts & Figures On Marijuana Legalization - marijuana leaf joint 140423


Chapter 7: What Are The Medicinal Benefits Of Using Marijuana?

  • It depends on who you ask.
  • U.S. Federal government unwaveringly argues that marijuana has no medicinal value, the states’ positions are mixed.
  • Polls conduction In 2010 by ABC News/Washington Post and Pew showed that 8 in 10 respondents supported medicinal marijuana.
  • Proponents point to marijuana as having therapeutic value in treating a range of symptoms; among the most common are appetite loss, nausea, chronic pain, anxiety, sleeping disorders, muscle spasms, and intraocular pressure.
  • The Federal government has placed marijuana in Schedule I, the category of substances with no accepted medicinal use.

We will not be making any investment recommendations on any marijuana stocks at this time, but we hope that speakers like Dr. Kilmer can help elucidate such topics as policy and legal frameworks, economics of marijuana, and social implications around marijuana legalization and help lay the groundwork for an emerging investment thesis.

Subscribe to Hedgeye.


Consensus estimates, management guidance and commentary, and questions for management in preparation for the earnings release/call tomorrow.



  • EBITDA:  $582 million
  • Revenues: $2.566 billion
  • EPS: $0.08


  • Outlook for LV REVPAR beyond Q1
  • Explain the under performance of slots over the past few years. Do you see a recovery in LV slot volumes for the rest of the year?
  • Will there be any slot machine upgrades to try to stem a secular decline from an aging demographic?
  • MGM China:  Any new initiatives on the VIP/Mass front at MGM Macau to drive same store growth beyond just overall market growth? Competitive environment?
  • Credit outlook for VIP players and thoughts on VIP future given China issues
  • What's the latest on Japan?  How much is the Company willing to invest for a Tokyo Integrated Resort?  What sort of partnership arrangements would MGM consider?
  • Thoughts on potential new owner of Cosmopolitan.  Would you be interested?
  • Quantitative performance of co-marketing deals with regional operators.
  • What is the next step in Springfield and when does the company expect to break ground?
  • Update on New Jersey Re-licensing and what is the next event?  When does MGM expect to receive the $100+ million cash distribution from the Trust?  What is the use of proceeds?
  • Does MGM Resorts International (MGM) or MGM China (2282) have any intent at repurchasing shares in 2282?




  • 1Q REVPAR expected to be up ~10% YoY
  • Feel good about the remainder of the year.
  • Most of the REVPAR growth will come from rate.
  • Still feel comfortable with the pace of bookings in the remaining three quarters of the year. And there's still some more work to do, say, in the fourth quarter in and around the holiday period. Overall, feel very confident in ability to meet or exceed the prior-year levels.

Slot business:

  • Slot business here in Las Vegas is actually up when the market has been actually down.
  • Overall slot numbers are down because of the regional properties

Strip development:

  • Strip frontage at New York-New York and Monte Carlo will be completed in the first half of this year.  New park will be completed in 2016.  Remodel of THEhotel into the Delano will begin in April and expected to be completed by September.

MGM Cotai:

  • Increased project cost from $2.6 b to $2.9b
    • There has been some market increases, so there has been escalation in labor and some materials as well.
  • Will open in early 2016

MGM National Harbor:

  • Groundbreak in the summer and opening in 2016


  • Remain very excited about the opportunity for a downtown revitalization project in Springfield.  Await a decision and awarding of that license this year.

Convention market:

  • Strong convention market in Las Vegas in 2014 with improving corporate business.
  • Expect 1Q convention mix to be ~22%, near peak levels for any 1Q prior
  • FY 2014:  expect convention mix to increase to 15.5-16%, which is beginning to approach prior peak levels.
  • The quality of the convention mix is continuing to improve with industries and corporates coming back into the fold, not only is it a better customer this year, but will pick up higher banquet spending, catering spending and restaurant, food and beverage spending throughout.
  • Room attrition's coming in lower now
  • Convention pace for 2015, 2016, 2017, all look above where they were prior year for the previous years.

Strip flowthrough:

  • Flow through was a bit better than expectations due to strong collection efforts which have been consistent throughout the year, continued refinements to our M life program, and a change to the employee vacation policy and accrual.  As a result, Strip flow through was approximately 70% in 4Q, above 50% to 60% target.

Operating costs:

  • It'll be relatively in check in 2014.


  • Added a few more tenants and look forward to bring on a few more in current calendar year

Mandarin Oriental:

  •  In 2014, sales are up to a strong start with 18 units closed in January alone.


  • Pretty good shape in terms of overall receivables and reserves against that receivable.  Don't expect a creep up.

Use of MGM China dividend:

  • Will use in this interim period to pay down debt and anticipate to do that throughout 2014.  More reinvestment opporunities in 2015/2016.
  • MGM China semiannual dividend policy of 35% of profit

Luxury vs Core

  • Luxury properties continue to see a pretty good customer and continue to hope to see them improve their spending.
  • Core properties, when that convention base isn't there, they continue to be challenged on consumer spend.  But when it is in here, they're able to get a higher quality customer in their hotel. The correlation between the ADR and spend is definitely there.

Borgata trust

  • Would look to sometime here in the first half be back and front of the New Jersey Casino Commission and the DGE on that opportunity.
  • Trust balance: $102m

2014 non-operating guidance:

  • Capex at wholly owned domestic resorts:  $350m
  • JV LV arena: $75m on MGM's share of investment
  • National Harbor: $170m on development costs
  • MGM Macau: $70m
  • MGM Cotai: $500m

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