RH Black Book: Real Estate Deep Dive

Takeaway: Join us for a call to debate the key issue today facing RH – real estate. Our deep dive will show why we think this story is far from over.

Please join us on Thursday, July 17th at 11:00 am ET for a call titled RH: Real Estate Deep Dive. We’ll be releasing our 2nd  Black Book on Restoration Hardware, specifically outlining the key issues that we think are critical to the investment thesis and the stock at this point in the company’s growth trajectory.  The reality is that some of the key factors to this story deserve greater scrutiny today than they did just $30 ago. 


We’ll hit on several topics, but the key focus on Thursday will be real estate. The crux of our commentary will focus on the likelihood of success in RH’s build-out of its large format Full Line Design Galleries. We’ll outline the biggest opportunities, potential risks, and whether or not the company is set up to execute on this opportunity. Ultimately, we’re going to flush out the real estate profile and potential store growth in the same way and using the same tools many retailers use to analyze their own store growth opportunity.



1) What does RH’s addressable market look like, and how will that evolve over the next 5 years?

2) How many markets in the US can support a Full Line Design Gallery at the sales productivity standards that RH is setting for its’ new stores?

  1. We’ll drill down on specific markets that have been announced, but will also analyze in great detail other markets that we think are likely candidates that the company has not yet announced.
  2. We’ll look quantitatively at the underlying economics of each FLDG market.
  3. We’ll break out ‘fill in’ markets versus new markets.
  4. The costs of the properties is evolving. How this is impacting RH’s ROIC?

3) A look at trends we’re seeing in anchor tenant space, and why we’re seeing more premium space available than most people might think.

4) Category expansion, and which categories present the biggest opportunities (and potential risks) at retail.

5) How much of a risk is a housing downturn to the RH story?


Participant Dialing Instructions

Toll Free Number:

Direct Dial Number:

Conference Code: 275779#

Materials: CLICK HERE

Retail Callouts (7/11): FL, LULU

Takeaway: FL - Lorna Jane may help fix womens/apparel issues at FL, but we're not overly excited



FL, LULU - Australia's Lorna Jane Attracts Some Big-Name Suitors



  • "Lorna Jane, an Australian maker and seller of women's workout clothing that is up for sale, has attracted buyer interest from Foot Locker Inc. and private-equity firms, according to people familiar with the matter."
  • "Manhattan-based Foot Locker and private-equity firms Advent International and Bain Capital are among potential buyers submitting first-round bids for Lorna Jane, some of the people said. Lorna Jane hired investment bankers Credit Suisse  to sell itself, the people said."


Takeaway: FL has a lot of cash to play with and Lorna Jane could help reinvigorate two of FL's biggest issues womens and apparel. If a deal were to go through, it's likely that Lorna Jane would function as a stand alone banner - we can't justify $90 yoga pants on Foot Locker shelves. Adding the brand's 169 stores into the fold would account for 5% unit growth to a base that has been shrinking organically for the last 8 years, and 3 percentage points of growth to the top line. But, it's hard for us to get overly excited about a brand that did under $1mil per store in 2013 (150 Stores, $138mm in sales) when LULU is pumping out $5mil plus through its box. Yes, the brand has limited awareness in the US and the Yoga market shows no signs of slowing so there is some runway for growth, but not enough for us to get overly excited about this potential deal.




EBAY, AMZN - ChannelAdvisor Reports June Comp Sales


Retail Callouts (7/11): FL, LULU - Chart1 7 11 2014


GPS - Gap Inc. Reports June Sales



  • "Gap Inc.’s comparable sales for June 2014 were down 2 percent versus a 7 percent increase last year. Comparable sales by global brand for June 2014 were as follows:
    • Gap Global: negative 7 percent versus positive 5 percent last year
    • Banana Republic Global: negative 7 percent versus negative 1 percent last year
    • Old Navy Global: positive 7 percent versus positive 13 percent last year"

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LEISURE LETTER (07/11/2014)



  • July 14: AC June revenues
  • July 15-17: Pre-RCL earnings Hedgeye Cruise pricing survey
  • July 16:  LVS 2Q call (430pm)
  • July 23:  TRIP 2Q call (430pm)
  • July 24:  
    • WYN 2Q call (830am)
    • PNK 2Q call (9am)
    • LHO 2Q call (930am)
    • PENN 2Q call (10am)
    • HOT 2Q call (1030am)
  • July 25:
    • PEB 2Q call (9am)


PNK expects its 2Q Consolidated Adjusted EBITDA and Income (loss) from Continuing Operations to include unusual expense items that aggregate to a range of $8-10 million.  The unusual expense items relate to the rollout out of the Company's my choice player loyalty program at its Ameristar branded properties, Colorado lobbying expenses, and severance expense.

Takeaway:  PNK had mentioned on its Q1 conf call that it expects a $5m charge only related to the loyalty program integration at its ASCA properties.  At some point, analysts will have to start including these regularly occurring "non-recurring" expenses in EBITDA.  No wonder margins continue look better. 


ISLE – after the close, the Company announced a strategic realignment including the departure of Dale Black, who served as CFO since 2007, replaced by Eric Hausler, who currently serves as Chief Strategic Officer, a role that will be eliminated going forward. Executive Chairman Jim Perry will step down and Robert Goldstein, currently the Vice Chairman of the board, has been named (non-executive) Chairman of the board. ISLE expects these actions to reduce annual corporate expense by approximately $2.5m exclusive of severance costs.

Takeaway:  If the company were about to be acquired, one would think C-Level management would stick around for the vesting and higher take-out value on their equity interests. This also signals the need for ISLE to reduce expenses further.


PENN & GLPI – District Judge Eliza Ovrom on Thursday extended her stay of an Iowa Racing and Gaming Commission order to close the casino until she rules on Argosy's appeal.  Previously, Judge Ovrom granted the casino a 10-day stay, which allowed it to stay open past the July 1 deadline until Thursday. At the conclusion of a hearing Thursday morning, Ovrom said she hoped to issue a ruling early next week.

Takeaway: Positive for PENN as this is not included in guidance


LVS – CEO Sheldon Adelson has continued his anti-online gambling crusade by hiring former GOP congressman Connie Mack of Mack Strategies to lobby against Internet gambling legislation. Mack will go to bat for Adelson and his Coalition to Stop Internet Gambling and will be tasked with lobbying in support of the Restoration of America’s Wire Act, the federal bill introduced by Sen. Lindsey Graham (R-S.C.) and Rep. Jason Chaffetz (R-Utah) over three months ago. Mack joins a lobbying lineup that includes Steptoe & Johnson, Capitol Counsel, The Keelen Group and the Lincoln Policy Group.

Takeaway: Mr. Adelson's battle against online gaming continues.


BYI (SHFL) – Macau’s Court of Second Instance dismissed an appeal from SHFL Entertainment (Asia) Ltd, which sought an injunction against Paradise Entertainment Ltd and its subsidiaries’ assertions of monopolistic rights over “multi-gaming” in the Macau market. The injunction sought to prevent Paradise Entertainment and its subsidiaries from claiming monopoly rights over multi-game electronic table game products in Macau and to restrain them from any unfair competition.


WYNN & 1128:HK (GGRAsia)The head of Macau's Commission Against Corruption confirmed the agency is "analyzing some details" about land granted to Wynn Macau for its Cotai project after U.S.-based International Union of Operating Engineers called on the Macau authorities to investigate how Tien Chiao Entertainment and Investment Co Ltd secured rights to Cotai land before it was granted to Wynn Macau. While WYNN says it hasn't been contacted by authorities, and it doesn't anticipate any delay to the Cotai project, which is scheduled to open in H1/16.  

Takeaway:  More scrutiny behind a complicated Cotai deal but Wynn is apparently not a part of the investigation.


Chinese Money Laundering (Xinhua) China's central bank is looking into allegations by a state broadcaster that Bank of China, the country's fourth largest lender, has been laundering money offshore for clients. 

Takeaway: Could money laundering by Chinese big banks be the next area of Chinese Central Government crackdown?


Margaritaville Tulsa (Tulsa World)  Construction on the Muscogee’s $355 million Margaritaville casino is running behind schedule, and is now on track to open sometime in 2016 rather than mid-2015.

Takeaway:  Even fewer new slots for 2015


Gaming in California's Wine County – A group of Native Americans, the Mishewal Wappo Tribe of Alexander Valley, filed a federal lawsuit in 2009 asking for recognition of their tribal status. The group's 350 members, most of whom live in Sonoma County today, say they are descendants of the Wappo people, who once inhabited parts of Sonoma, Lake County and much of Napa Valley, and that they were unfairly stripped of tribal status. Tribal leaders insist they simply want recognition. But winemakers worry such status would allow the tribe to petition for lands and eventually build a casino in Napa County. If the tribe wins, it would become a sovereign nation, and any lands they were granted by the federal government or that they purchased would be exempt from local land-use and zoning restrictions. Motions to dismiss the Wappo's claim have been denied. Last July a federal judge affirmed a ruling that Napa and Sonoma counties had no standing to fight recognition of the tribe, escalating widespread apprehension that a casino could find a home in Napa’s agricultural region

Takeaway: Nearly 3 million people visited Napa Valley in 2012 and visitors spent an average of $714 per day, including $260 on lodging, $148 on restaurants and $107 on wine purchased at wineries. Lodging guests typically stayed in the valley for 2.9 days on average. 


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

Dial-In and Materials: 3Q 2014 Macro Themes Call

Dial-In and Materials: 3Q 2014 Macro Themes Call - HE MT 3Q14


We will be hosting our highly-anticipated Quarterly Macro Themes conference call today at 11:00am EDT. Led by CEO Keith McCullough, the presentation will detail the THREE MOST IMPORTANT MACRO TRENDS we have identified for the quarter and related investment opportunities. 



  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 171487#
  • Materials: CLICK HERE (Slides will be available approximately one hour prior to the start of the call)



  • #Q3Slowing:  Against a backdrop of harder growth and easier inflation compares in 3Q14, the conflation of rising inflation, static nominal wage growth, and an ongoing deceleration in housing should drive a sequential deceleration in domestic economic growth. Growth sentiment, meanwhile, has been improving with 3Q GDP estimates rising as consensus again back-end shifts misguided 1H estimates. We expect that optimism to be marked to [a more dour] reality as we progress through 3Q.  
  • #DollarDevaluation: Given that the Fed's 2H14 and full-year growth forecasts are still too optimistic, the outlook for an easier Fed and future dollar devaluation looks probable. The negative correlations between the dollar and commodity prices should tighten further as the Fed surprises consensus by getting more dovish. 
  • #VolatilityAsymmetry: Across global financial markets, measures of volatility are at historically-depressed levels. While low levels of volatility aren't necessarily a timely harbinger of financial market calamity in and of themselves, other signals - such as the economic cycle rolling over and pervasive complacency among investors and corporations - would seem to suggest we are well into the latter innings of this bull market.


Ping for more information.


Client Talking Points


Risk happens slowly, then all at once - front month VIX went from its long-term asymmetry point (buy it at 10!) to immediate-term TRADE overbought yesterday after crashing (to the upside) on a +24% four-day move. Risk range for VIX is now 10.32-12.67, so use that as a beta backboard.  


Russell 2000 is both below our TREND resistance line of 1173 and DOWN for 2014 YTD (bull market). Its risk range is now 1155-1173; above 1173 bullish; below it bearish – with a lot of emotion in between.


We learn a lot more from the bounce than the breakdowns – and this morning’s European Equity bounce is rather pathetic; DAX and FTSE only +0.2-0.3% and are now both trading below TRADE and TREND lines; Portugal is +2% but would need to be up another 1,000 points on the PSI 20 to recapture TREND support.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road


GOLD: not giving it back to the bears this morning - and I like that = +11.1% YTD

@Keith McCullough


“A man may die, nations may rise and fall, but an idea lives on. Ideas have endurance without death.”

- John F. Kennedy


The Japanese Nikkei has been down every day this week and is down -6.1% year-to-date.

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