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This Chart Illustrates One Reason Why Chipotle $CMG Is Crushing It

Takeaway: Hedgeye restaurants sector head Howard Penney still (really) likes CMG.

Got pricing power?  Chipotle does. 


This Chart Illustrates One Reason Why Chipotle $CMG Is Crushing It - chipotle


Traffic growth has more than doubled price growth over the past 5 years.

Organic Earnings Season

Summary Thoughts

  • “I would say that the competitive activity in this space has been very intense.” –John Foraker, Chief Executive Officer of BNNY
  • “Heavier competitive pressure and that pressure could be branded promotional pressure or some private label expansion.” –Greg Engles, Chief Executive Officer of WWAV
  • The battle in the mac & cheese category continues as both BNNY and WWAV say they are on track.
  • One of the more telling trends we are seeing of late is the shift in the grocery retail space.  As more natural-oriented retailers’ comps have slowed, the same-store sales for conventional grocers have improved.  Clearly, the bigger grocers are doing a better job focusing on natural and organic as a core initiative to try to draw customers into their stores.  In addition, fierce competition among natural chains is driving notable cannibalization.
  • The mix shift to traditional grocers is adding incremental growth, but it’s coming at lower incremental margins.
  • Europe is a bright spot.
  • Inflation pressure remains an issue – dairy, almonds, organic wheat, etc.
  • BDBD and BNNY are both calendar 2H14 margin recovery stories.
  • WWAV said organic growth will decelerate from 11% in 2Q14 to 8-9% in 2H14.


WWAV remains the strongest company in the organic space and is on our Investment Ideas list as a LONG.  We note, however, that organic growth will decelerate sequentially from 11% in 2Q14 to 8-9% in 2H14.


WWAV’s top-line increased 36% in 2Q14 as a result of double-digit organic net sales growth, which was over 11% in the quarter.  Excluding Earthbound (and joint venture-related investments), organic operating income grew more than 2.5x the organic top-line growth rate, with operating margins expanding by over 100 bps.


Sales were up 38% in North America, including up more than 8% on a purely organic basis.  Top-line results were driven by strong growth across all platforms, with plant-based beverages, coffee creamers and premium dairy all producing strong growth rates in 2Q14.  The most recent acquisition, Earthbound Farm, grew by double-digits again in 2Q.


Organic growth guidance: Top-line guidance also includes an organic growth rate that the company expects to be in the 8-9% range in 2H14, with Europe being accretive to overall growth.


Plant-based beverages: Plant-based beverages grew 17%, led by almond milk growth of over 40%.  Almond now represents almost 70% of the total plant-based beverage category.  Silk almond milk continues to be a key driver of this growth, as sales grew by 45% in 2Q14 off an already sizeable base.


WWAV is the plant-based market leader, with Silk holding a 56% share of the total category and holding the number one position in the almond, soy and coconut subcategories.


“All major national branded almond milk players saw share pressures.  We saw a step-up in both private label almond milk distribution expansions at a major retailer, plus we saw continued promotional pressure in the segment.”


WWAV continues to experience exceptional growth in Europe, with the plant-based segment reporting sales growth of 26% (18% on a constant currency basis) in 2Q, consistent with the strong growth it experienced in 1Q.


Horizon: “Our recently launched snacking line platform is performing very well, and as we expected, we experienced heavy competitive activity when we entered the mac & cheese category, but continue to be pleased with our results today.”


Management is confident about the potential of the brand: “The rollout of our new center store Horizon product continues to grow in-line with our expectations.  It will be some time before these brand extensions become material to our results, but we remain encouraged by the strong repeat usage we’re seeing and increased levels of distribution we’re achieving.”


Organic milk grew 8% in the quarter, ahead of expectations, and accelerated from 2H13 when growth was closer to 5-6%.


Organic packaged salads: The organic packaged salads category continues to grow rapidly, up 18% in 2Q14.  WWAV’s share of the total organic packaged salad category increased by 2 points to 24% in the quarter.  Earthbound Farm continues to maintain a leading 55% share in the branded organic packaged salads segment.


Coffee and creamers: The coffee creamers and beverages platform grew 5% in the quarter, as WWAV continues to experience a negative overlap within iced coffee as a result of enhanced competitive pressure in the back half of last year.  The premium dairy platform delivered top-line growth of 8% in 2Q14, despite an approximate 1% drag on asset sales.

BDBD: Strong Organic Growth and Declining Margins

We have a favorable view of BDBD and it remains on the Watch List as a potential LONG.

Total net sales increased 18.7% in 2Q14 as organic net sales increased 19.4%, well ahead of the company’s 13-18% guidance.  Organic growth in the natural segment, which includes EVOL, increased 34.8%.  The gluten-free brands, Udi’s and Glutino, reported strong net sales growth of 26.9%.


Gross margin was 35.7% in the second quarter, a decline of 610 basis points.  This decline was primarily related to the increase in egg white pricing, which negatively impacted gross margin by 210 bps, as well as a mix shift to lower gross margin natural brands.


The company made a number of changes in 2Q that should begin to payoff in 3Q.  We believe the combination of a price increase, formula changes, cost reductions and securing egg whites for the balance of the year will lead to a strong rebound in gross margins in 2H14.


The company also reaffirmed its guidance for the balance of FY14, which includes:

  1. Net sales to be in the range of $540 million to $550 million
  2. Organic net sales growth in the 13% to 18% range, with the Natural segment expected to come in at the high end of the range of 25% to 30%, and Balance to be flat to slightly positive.
  3. Adjusted EBITDA to be in the range of $89 million to $91 million, EBITDA to be in the range of $79 million to $81 million
  4. EPS to be in the range of $0.39 to $0.41 per share, based on 64.1 million shares outstanding.
  5. 3Q14 EPS of $0.10 to $0.12
  6. 4Q14 EPS of $0.18 to $0.20
  7. Gross margin to improve to 41% by year end from an average of 37% in 1H14

BNNY: Strong Organic Growth and Declining Margins

BNNY remains on the Hedgeye Best Ideas list as a short.


Consumer demand for Annie’s products remains very healthy, despite a more competitive environment.  In U.S. grocery, BNNY’s number of distribution points increased 10% year-over-year and its market share was up 100 bps despite seeing increased competition in the mac & cheese category.  Having said that, an increase in trade spending is negatively impacting gross margins.


Consumption increased in the high teens during the quarter, driven by very strong baseline performance in all sales channels and in most categories.  BNNY continues to benefit from driving mainline distribution in conventional grocery stores.  Consumption trends in the natural channel remain very strong, growing at approximately 9% in the quarter.


Organic wheat prices remain at historically high levels, up ~40%.


BNNY’s gross margins continue to be under pressure, due in large part to inflation and increased trade spending.  The company expects to realize a 4% price increase in 2HF15 to improve the margin structure of the company.  Gross margins should approach the mid-thirties during this period.


The company is guiding to strong earnings growth in 2HF15, as they benefit from mid-year pricing actions and productivity gains.  Guidance is for adjusted net sales growth of 18-20% and adjusted diluted EPS of $0.88-0.95; we remain skeptical that this will happen.


Howard Penney

Managing Director


Matt Hedrick



Fred Masotta


Monday Mashup: NDLS, RRGB On Tap

Investment Ideas

The table below lists our Investment Ideas as well as our Watch List -- a list of potential ideas that we are in the process of evaluating.  We intend to update this table regularly and will provide detail on any material changes.


Monday Mashup: NDLS, RRGB On Tap - chart1

Recent Notes

07/28/14 Monday Mashup: MCD, YUM and More

07/28/14 MCD: McLibel 2.0?

07/29/14 DRI: Light Gets In

07/31/14 YUM: Warning Shots Fired

08/04/14 Monday Mashup: Full Slate of Earnings

08/04/14 Invite: New Best Idea

Events This Week

Wednesday, August 13th

  • NDLS earnings call 4:30pm EST
  • FRSH earnings call 5:00pm EST

Thursday, August 14th

  • RRGB earnings call 10:00am EST

Chart of the Day

Got pricing power?  Chipotle does.  Traffic growth has more than doubled price growth over the past 5 years.


Monday Mashup: NDLS, RRGB On Tap - chart2

Recent News Flow

Monday, August 4th

  • DPZ upgraded to buy at Miller Tabak with an $81 PT.
  • JACK announced Sharon John will join the company's board of directors.  John has over 25 years of retail marketing, branding and executive management experience in both the public and private sectors.
  • MCD noted that China, Japan and certain other markets have been severely impacted following food safety issues.
  • PNRA CFO Roger Matthews resigned.  William Moreton, Panera's current Executive Vice Chairman, will serve as Interim CFO until a successor is found.
  • PLKI announced the resignation of the company's U.S. President, Ralph Bower.

Tuesday, August 5th

  • CAKE announced its newest restaurant opening in Trumbull, CT at the Westfield Trumbull Mall.

Wednesday, August 6th

  • FRGI announced it will consolidate all of its food distribution with Performance Food Group.
  • THI declared a $0.32 dividend payable to shareholders of record as of August 18th, 2014.
  • BOBE released an investor presentation to provide their take on a series of "misleading" statements made by Sandell Asset Management.
  • JACK debuted three new breakfast items, featuring two new breakfast burritos and croissant donuts.

Thursday, August 7th

  • THI was upgraded to outperform at BMO Capital.
  • SONC announced a quarterly cash dividend of $0.09 as well as a $105 million share repurchase program for FY15.

Friday, August 8th

  • DRI Activist Starboard Value increased its stake in Darden from 8.0% to 8.8%.
  • CMG was downgraded to neutral at Longbow Research.

Sector Performance

The XLY (+1.1%) outperformed the SPX (+0.3%).  On average, casual dining stocks (-0.1%) underperformed and quick service stocks (+1.6%) outperformed the XLY Index.


Monday Mashup: NDLS, RRGB On Tap - chart3

Monday Mashup: NDLS, RRGB On Tap - chart4

XLY Quantitative Setup

From a quantitative perspective, the sector turned bearish on an intermediate-term TREND duration.


Monday Mashup: NDLS, RRGB On Tap - chart5

Casual Dining Restaurants

Monday Mashup: NDLS, RRGB On Tap - chart6

Monday Mashup: NDLS, RRGB On Tap - chart7

Quick Service Restaurants

Monday Mashup: NDLS, RRGB On Tap - chart8

Monday Mashup: NDLS, RRGB On Tap - chart9


Howard Penney

Managing Director


Fred Masotta


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Retail Callouts (8/11): RL, NKE, ADI, PUMA, WMT

Takeaway: Hedgeye Retail Ideas List. Alibaba cleans up counterfeits-interesting dot.com oppty for brands in China. Puma doubling down on soccer.



Retail Callouts (8/11): RL, NKE, ADI, PUMA, WMT - Chart1 8 11 2014




Tuesday (8/5)

  • KATE - Earnings Call: 10:00am
  • FOSL - Earnings Call: 4:30pm


Wednesday (8/6)

  • M - Earnings Call: 10:30am


Thursday (8/7)

  • WMT - Earnings Call: 7:00am
  • KSS - Earnings Call: 8:30am
  • JCP - Earnings Call: 4:30pm
  • JWN - Earnings Call 4:45pm




RL, NKE, ADI - Alibaba Cleans Up 'Gray Market' for Some Prestigious Brands



  • "Chinese e-commerce company Alibaba Group Holding Ltd. is rolling out a powerful new incentive to attract luxury brands: removing some listings from its online shopping sites."
  • "Like many premium brands, Burberry PLC had been fretting about a flood of discount Burberry products—some of them fakes—on Alibaba's two big marketplaces, which accounted for 80% of China's estimated $300 billion in online shopping last year. Burberry hadn't authorized any of those vendors to sell its goods."
  • "Alibaba would do its best to get those products off its sites if Burberry opened its own shop on Alibaba's online mall, Burberry was told, according to people familiar with the talks. Burberry opened a store on Alibaba's Tmall in April."


Retail Callouts (8/11): RL, NKE, ADI, PUMA, WMT - chart2 8 11


Takeaway: As a brand you can’t argue with Alibaba's reach. It dominates the Chinese online marketplace, but for many counterfeit and brand integrity concerns were a non-starter. Then BRBY opened a banner on T-Mall in April and in a span of two months the number of 3rd party outlets offering Burberry branded products fell from 56 to just 1 - essentially eliminating the counterfeit threat in the process. Whatever you want to call it, forced coercion or cooperation it's clear that the platform offers some compelling advantages for brands who choose to partner with Alibaba. NKE, Adi, and GPS have already taken the leap, and we think it's an interesting opportunity for many more (particularly RL).


KER, Puma - Puma CEO confirms consideration for entry at BVB



  • "Puma CEO Bjørn Gulden has confirmed in an interview with business week for the first time that the sporting goods manufacturer is considering a shareholding in the listed Bundesliga club Borussia Dortmund."
  • "Here, the Puma CEO expects that BVB will continue to sell more jerseys outside of Germany abroad through its expansion of marketing."


Takeaway: Some of the article admittedly may be lost in (Google) translation - it's in German after all. Despite spending 3 months living in the country, I never got past learning how to order a beer. What we could glean from the interview with Puma's CEO, Bjorn Gulden, is that the other brand from Herzogenaurach plans to double down its core sports business, i.e. Soccer. The global soccer marketplace has evolved into a two horse race between Nike and Adi with UA nipping at their heels. We understand why the sport is such a particular point of emphasis following the World Cup, but Puma's timing couldn’t be worse. Following Adi's 70mm pound per year deal with ManU, it's clear for Puma that a renewed emphasis on Futbol won't be cheap.




WMT - Chinese Regulators Investigate Wal-Mart Store



  • "Chinese regulators are investigating a Wal-Mart store in the southern city of Shenzhen for food safety violations, the official Xinhua news service reported, based on videos it said were taken by a Wal-Mart employee at one branch."
  • "The U.S. retail giant told Reuters that it had launched its own investigation in response to the video and found no evidence to support its claims, nor had multiple visits by authorities uncovered any wrongdoing."


WSM, RH - Williams-Sonoma and Pottery Barn to Exit Toronto's 100 Bloor Street West



  • "Early next year, Williams-Sonoma and Pottery Barn will exit Toronto's 100 Bloor Street West. As a result, about 37,000 square feet of new retail space will become available in the heart of Canada's 'Mink Mile'. 100 Bloor's landlord substantially raised its rents, according to sources."
  • "Williams-Sonoma, Pottery Barn, and Pottery Barn Kids have occupied spaces at 100 Bloor Street West since 2001."


GPS - Would You Tweet for These Flip-Flops? Old Navy, Nike, Westin Hotels dole out freebies for social chatter



  • "Old Navy on Sunday wrapped up its second rollout of Twitter-enabled vending machines in Japan that dispense free flip-flops in exchange for sending a tweet from a kiosk. Earlier this summer, the retailer used 28 machines in New York, Los Angeles and San Francisco leading up to a summer sale."


AMZN - Amazon Halts Some Disney Movie Preorders



  • "Amazon.com Inc. has halted preorders for some DVDs and Blu-ray discs from media giant Walt Disney Co., including popular titles such as "Captain America: The Winter Soldier," in an apparent contract dispute."
  • "The online retailer is restricting customers' ability to preorder physical copies of the films, promising to notify them when they become available. It is a tactic Amazon has used several times this year, including with Time Warner Inc.'s Warner Bros. studio, before reaching a resolution earlier this year, as well as a continuing spat with Hachette Book Group."


LEISURE LETTER (08/11/2014)



  • Aug 11:
    • HPT 2Q 1pm:
    • CZR 2Q 430pm: 844.231-441, pw: 55917191
    • STN 2Q 430pm
    • HTHT 2Q 9pm: , pw 7103 4558
  •  Aug 12:
    • HMIN 2Q 9pm: , pw HOME INNS
  • Aug 14:
    • GENTING SINGAPORE 2Q earnings
    • Revel Auction Proceedings


IGT – GTECH S.p.A. announced the U.S. antitrust authorities have granted early termination of the required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 relating to GTECH’s pending acquisition of International Game Technology (IGT), thereby satisfying one of the conditions required to finalize the transaction.  The transaction, which has been approved by the boards of directors of both companies, is currently expected to be completed in the first or Q2 of 2015.

TAKEAWAY:  A faster than expected clearance of a significant hurdle.


MGM / MGM China – (Macau Daily Times) the Company reportedly received the license approval for the full MGM Cotai building plan and now expects the new property to open mid-2016 – albeit potentially in phases.  

TAKEAWAY:  Licensing approval, but does the Company hold the construction permit to erect steel and build the superstructure above ground?


880:HK – late on Friday, Forefront of Macau Gaming announced the labor organization would protest and picket against SJM, its latest target. Previously, Forefront of Macau Gaming targeted labor actions against both Sands China and Galaxy.

TAKEAWAY:  Forefront of Macau Gaming is simply moving from operator to operator demanding higher pay for casino floor workers – despite the operators voluntarily increasing worker compensation.


BYI – launched a new 50 line, 5 line video slot game titled “Aloha Island”.  The slot title features tropical island symbols such as parrots, pearls, boat and more while also playing gentle island music.  The game allows for bets from $0.01 up to $100.

TAKEAWAY:  Another new game but for an industry facing strong demographic headwinds.


MPEL - The Taipei District Prosecutors Office charged the Taipei branch of MPEL with deliberate violation of foreign exchange controls and failure to maintain financial oversight when the Company transferred more than $NT5.4 billion ($194 million) between its Taiwan office and City of Dreams and Altira casinos located in Macau.

TAKEAWAY:  Could be an overhang on the stock.


WYNN – is coming under scrutiny for a $200,000 donation last winter to the Republican Governors Association, an organization that is now supporting Charlie Baker’s run for Massachusetts governor.  Massachusetts gambling law prohibits applicants for casino licenses from donating, directly or indirectly, money or in-kind contributions to “any group, political party, committee, or association organized in support” of a Massachusetts candidate. The association is a major funder of a television ad that is currently airing in the Boston market supporting Baker’s candidacy.

TAKEAWAY: Thus far there is no evidence of any wrongdoing by WYNN.


MGM – (Bloomberg) – Renew NJ license

According to CFO Dan D'Arrigo, MGM expects to renew its NJ gaming license soon.  MGM will keep 50% ownership of Borgata.  MGM’s license renewal will be considered by New Jersey regulators next month.

TAKEAWAY: A definite positive, but expected.


Melco International Development MelcoLot, controlled by Melco International Development Ltd, said on August 6, it was informed by Spanish authorities that BCN Integrated Resorts 2’s bid had passed to the second phase of the tender process, “which consists of preparation and assessment of detailed development proposals and granting of authorisations for the installation and exploitation of casinos”.  It is expected that BCN World will include casinos, hotels, convention centres, leisure centres and residential areas. Each casino licensee would have to invest a minimum of EUR300 million (US$403 million) in BCN World.

TAKEAWAY:  An interesting opportunity that has received little interest from the investment community. Gaming tax rate needs to be low.


RCL (Cruise Critic) – Celebrity Cancels 2015 Round-Japan Sailings Due to Charter  

Two 2015 sailings to Japan on Celebrity Millennium have been canceled and another changed, due to a private charter.  The charter affects passengers who booked on the 14-night Japan cruises for September 27, 2015 and October 11, 2015.  The September 11, 2015 sailing is also affected and will end in Shanghai instead of Tokyo.

TAKEAWAY:  The complications with sailings in Japan continues. 


RCL – delayed the float out of Quantum of the Seas until Tuesday, August 12, 2014 at 4 p.m. local time.  According to RCL, the delay was the result of the poor weather forecast at the Meyer Werft dockyard.

TAKEAWAY:  Minor delay


New Jersey gaming (NJ.com) – Christie vetos sports betting bill 

Christie's office announced that he nixed a bill (S2250) that would have allowed New Jersey to circumvent the 1992 federal law that bans sports betting in most states, after New Jersey’s challenges to the law in court failed.  The bill would have repealed the state’s ban on sports betting and made it legal in casinos and at racetracks.

TAKEAWAY:  Atlantic City needs help badly and Christie shot down an opportunity.


Maryland Live – On Saturday at 11 p.m., Maryland Live opened a $1 Double Gold million slot machine which requires gamblers to bet $500 per spin for a chance to win the $1 million jackpot.

TAKEAWAY: Maryland Live attempting to generate big media coverage prior to the opening of the Horseshoe casino in two weeks. 


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.

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