• run with the bulls

    get your first month

    of hedgeye free


PBPB: Closing Best Idea Short

We added Potbelly Corporation (PBPB) to our Best Ideas list on 11/19/2013 at $28.15/share.  Since this time, FY14 EPS estimates have been revised down from $0.39 to $0.19 and the share price has acted accordingly (down ~60%).  With this note we are removing short PBPB from our Best Ideas list.


PBPB still has issues that give us cause for concern, but we feel our short thesis is largely played out.  At 9.6x EV/EBITDA (NTM), the stock screens rather attractively relative to other restaurant companies and will begin rolling over some fairly easy comps following 3Q14.  We believe FY14 and FY15 EPS estimates of $0.19 and $0.25, respectively, are reasonable despite the fact that we are yet to see management deliver tangible same-store sales drivers.


Considering a more reasonable valuation, reset expectations, and high short interest (~34% of float), we believe the short setup is no longer favorable from a risk/reward perspective.   Our move to the sidelines, however, does not make us fans of the stock.  Declining same-store sales, traffic, margins and AUV's continue to be red flags.  Our biggest issue with the company, however, is its decision to relentlessly pursue a questionable growth strategy (12-15% unit growth in FY14) when the fundamentals suggest it shouldn't be growing at all.  The one scenario under which we'd expect to see notable downside from here is if management were to significantly slash projected new unit growth, and we've seen no signs of this happening.


We continue to believe 2016 EPS estimates of $0.60 are too aggressive, but that is much further out.  Staying short today at these levels is no longer compelling.


Research Recap:

PBPB: Staying Short (07/10/2014)

Investment Ideas: Shorts (04/16/2014)

PBPB Lays an Egg (02/19/2014)

PBPB: Not Worthy of the Multiple (11/19/2013)

Potbelly (PBPB): The Latest Restaurant IPO (09/19/2013)


PBPB: Closing Best Idea Short - 10 1 2014 10 26 35 AM


Howard Penney

Managing Director


Fred Masotta


3Q Demand Goes Out With A Whimper

Takeaway: Purchase activity in 3Q14 fell -6.2% QoQ with demand, as measured by the MBA, retreating to its lowest level since 2Q95

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume. 


*Note - to maintain cross-metric comparability, the purchase applications index shown in the table below represents the monthly average as opposed to the most recent weekly data point.


3Q Demand Goes Out With A Whimper - Compendium


Today's Focus: MBA Mortgage Applications & August Construction Spending


MBA Mortgage Applications

The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended September 26th. 

  • Mortgage Applications fell -0.2% as Purchase demand was flat sequentially and refi activity declined -0.29% despite the dip in rates. 
  • Purchase Applications:  Purchase volume was unchanged WoW as the index held below the 170-level for a 12th consecutive week.   Purchase Activity declined -6.2% QoQ as demand declined to its lowest level since 2q of 1995.   On a year-over-year basis, purchase applications improved to -10.9% from -15.9% prior as we lapped the last hard compare of the year.  From here, the YoY comps remain negative and get progressively easier through the balance of 2H.
  • Refinance activity declined -0.2% as rates on the 30Y FRM contract dropped -6bps to 4.33%.  On a year-over-year basis Refi volume worsened for a second week to -33.6% YoY despite increasingly easy compares.

3Q Demand Goes Out With A Whimper - Purchase   Refi YoY


3Q Demand Goes Out With A Whimper - Purchase Qtrly


3Q Demand Goes Out With A Whimper - Purchase LT w Summary stats


3Q Demand Goes Out With A Whimper - Composite LT w Summary stats




 Total Construction spending slowed -0.8% MoM in August with July revised down -60bps to +1.2%.   


The first estimate for private residential construction showed spending slowed -0.1% MoM while decelerating on both a 1Y and 2Y basis.   Expenditure growth slowed across each of Single-family, Multi-family and Home Improvement categories with the 4th consecutive month of (accelerating) negative growth in home improvement the most notable.      


On the nonresidential side, construction spending on commercial, office and manufacturing structures remained strong in August although each slowed modestly sequentially.  The nonresidential construction numbers extend the solid growth in private investment in structures reported in 2Q GDP and continue to accord with both the strong C&I/CRE loan growth figures in the Feds’ H8 data and the positive senior loan officer commentary. 


3Q Demand Goes Out With A Whimper - Construction Spending Table


3Q Demand Goes Out With A Whimper - Resi Construction   of GDP


3Q Demand Goes Out With A Whimper - NonResi Construction   of GDP



About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 



The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.



Joshua Steiner, CFA


Christian B. Drake


Join Tomorrow: Q4 2014 Macro Themes Conference Call at 1pm EDT

Join Tomorrow: Q4 2014 Macro Themes Conference Call at 1pm EDT  - vv. q4 themes pic


We will be hosting our highly-anticipated Quarterly Macro Themes conference call tomorrow, October 2nd at 1:00pm EDT. Led by CEO Keith McCullough, the presentation will detail the THREE MOST IMPORTANT MACRO TRENDS we have identified for the quarter and the associated investment implications.



  • #Quad4: Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.
  • #EuropeSlowing: Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth. 
  • #Bubbles: The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes.  The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.


  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 141367#
  • Materials: CLICK HERE (slides will download approximately one hour prior to the call)

Ping for more information.

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

Keith's Macro Notebook 10/1: Volume | Russell 2000 | UST 10YR

Retail Callouts (10/1): AdiBok, NKE, UA, Mobile Sales

Takeaway: Adidas is in denial. UA joins recent athlete endorsement incidents with Phelps arrest. AMZN and AAPL lead mobile.




AdiBok, NKE, UA - Adidas fights to draw top talent to headquarters in sleepy Bavarian town



  • "Adidas needs world-class designers, brand experts and technical whizz kids to improve its image against U.S. rival Nike, but persuading them to move to its headquarters in rural Germany is difficult. Adidas acknowledges it is hard to recruit at its headquarters near the Bavarian town of Herzogenaurach, particularly for design, marketing and digital roles, and admits it missed trends in the U.S. market, where Under Armour has just overtaken it as No. 2 behind Nike. Nike's better than expected earnings on Sept. 25 underscored its ascendancy."


Takeaway: Let's be clear about something, Adidas is not losing share because its headquarters is in a sleepy town. If anything we'd argue that its town is sleepy because the company is failing to drive the culture of the company. Nike is crushing it, and it's based in Beaverton, OR -- not exactly a cultural mecca. Yes, it's 20 min from Portland and a short drive to Seattle. But Adidas is a short drive from several major towns (as Adi CEO points out in this article), and it also has an office in Portland with 1,000 employees -- a good deal of them poached from Nike.   Our point here is that Adidas' problem goes far beyond where people hang their hat.  First it should look really close at its processes and ideals. Then it can worry about where the people that execute on them are physically located.


UA - Michael Phelps Arrested for DUI



  • "Michael Phelps was arrested for driving under the influence in Baltimore, Maryland"


Takeaway: We hate to call out something like this, but the fact of the matter is that with the string of bad behavior in professional sports over the past month, this event will garner special attention. Nike dropped both Adrian Peterson and Ray Rice after their 'incidents', though we'd be surprised to see UnderArmour take much action against Michael Phelps. He'll make a public apology, and say he'll never do it again -- just like when he caught his first DUI at 19 in 2004, and when he was caught smoking pot in 2009. He'll get a fourth chance.


Mobile Commerce Callouts


This ranking of the top mobile commerce players is interesting to us on many levels.  1) Amazon and Apple combined equal the next eight companies on the list in total sales volume. 2) Apple and Google Play make sense as having a high conversion rate (high traffic and low ticket), but Amazon's 7% is extremely impressive -- especially for a company with an $82 average ticket.  Average for the other retailers on the list is about 2%. 3) Sears is actually on the list of top 10, with an impressive 100% growth over last year. 4) Chinese mobile retailers have far superior ASPs than we have the US.


Retail Callouts (10/1): AdiBok, NKE, UA, Mobile Sales - 10 1 chart1

 Source: Internet Retailer







  • "With approval of the Supervisory Board, the Executive Board of adidas AG resolved today to return up to € 1.5 billion in total to adidas AG shareholders over the next three years, primarily in the form of share buybacks. In addition, adidas AG confirms its stated commitment to pay an annual dividend to shareholders in the range of 20% to 40% of net income attributable to shareholders."


HIBB - Jared Briskin Promoted to Chief Merchant at Hibbett



  • "Jared Briskin has been promoted to senior vice president and chief merchant of Hibbett Sports Inc., the Birmingham, Ala.-based sporting goods retailer."
  • "Briskin was most recently vice president and divisional merchandise manager of footwear and equipment and has been with the company for 16 years."


DLIA - Teen Retailer Delia's Seeks Buyer



  • "With a stalled turnaround effort and moves to recapitalize the company failing to reverse its fortunes, Delia’s Inc. is looking for a buyer."


Boot Barn Files for IPO



  • "The Irvine, Calif.-based retailer has filed with the Securities and Exchange Commission for an initial public offering."
  • "While no terms were given for the offering, the move could potentially raise up to $86.25 million. The company plans to list on the New York Stock Exchange under the symbol BOOT."


SHOO - Madden Acquires Mexico Business



  • "Steve Madden is buying up its Mexico-based licensee."
  • "Executives expect that the $15 million acquisition of SM Mexico, which distributes and markets Steve Madden product in wholesale and retail stores, will boost efforts to grow the brand's presence throughout the Mexican market."


SPLS - Staples launches nationwide tour to boost employee productivity



  • "Staples has kicked off a nationwide tour called "Refresh. Recharge. Refuel." The tour aims to encourage office workers across the country to take a break from the daily grind by visiting a large-scale, popup break room stocked with free snacks, coffee and other beverages."


SPLS - Staples closes 15 stores in Canada



  • "Staples Canada has closed 15 of its 331 stores in this country as the office supplies retailer feels the brunt of more business shifting online."
  • "The closings are part of a broader move by U.S. parent Staples Inc. to shut as much as 12 per cent of roughly 1,800 North American stores and downsize others as it struggles to improve its bottom line in a fast-changing market."

LEISURE LETTER (10/01/2014)

Tickers: MPEL, PEB, RHP, CCL


  • Oct 1 - Oct 2: G2E Las Vegas
  • Wednesday: Oct 1
    • National Day of the People's Republic of China
    • DB Leveraged Finance: PENN, BYD, SGMS, MTN
    • TAG Fall Consumer Conf: LVS, WYN
  • Oct 8: HT Investor Day


MPEL – Casino resort City of Dreams, in Macau, announced on Tuesday a partnership with XCOR Space Expeditions that will see three customers sent to space. “The Space Legend” campaign will kick off in November. City of Dreams will draw one winner every month for three consecutive months. “Participating guests will become one of the first 12 XCOR astronauts in Asia and also one of the first 100 XCOR astronauts in the world,” XCOR Asia chief executive Alex Tang said in a statement.

Takeaway: Boldly going to the next frontier.


PEB – amended and supplemented its Trust Certificate, classifying and designating an additional 1,200,000 of the Company’s authorized preferred shares of beneficial interest, $0.01 par value per share, as 6.50% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest as the Company entered into an underwriting agreement with Wells Fargo Securities, LLC relating to the issuance and sale of 1,000,000 Series C Preferred Shares at a price of $24.50 per share. The closing of the offering occurred on September 30, 2014. Upon completion of the offering, there were 5,000,000 Series C Preferred Shares outstanding. The 1,000,000 Series C Preferred Shares issued and sold pursuant to the Underwriting Agreement have been registered on the Company’s shelf registration statement on Form S-3 which became effective upon filing with the Securities and Exchange Commission on March 4, 2014.

Takeaway: PEB rounding out its capital stack with modestly priced preferred securities.


RHP – expect a press release from RHP today addressing the maturity of the convertible notes.

Takeaway: We expect positive earnings revisions as analysts adjust downward their fully diluted share count.


CCL (Travel Weekly) Holland America Line said it was forced to cancel a seven-day Canada/New England cruise on the Veendam to make emergency repairs on a propeller. The cruise had been scheduled to depart Quebec on Sept. 28. Booked guests will receive a full refund of their cruise fare and all shore excursions booked through Holland America Line, plus a credit toward a future cruise equal to 100% of the fare paid.


CCL (Courier Mail) In the latest debacle for Princess Cruises Sea Prince, close to 2,000 passengers in Sydney were told their New Zealand cruise had been cancelled due to technical issues. Over the past two months, The Sea Princess was plagued with several norovirus outbreaks as well as mechanical issues which resulted in passengers “go-slow” transit, meaning the ship could only travel at half-speed, resulting in several missed ports during a cruise to the north of Australia. 

Takeaway: Lots of small cancelled sailing in aggregate may undermine the recent positive financial and earnings results. Hedgeye remains concerned with European pricing risk.


Macau Smoking Ban Pronouncement – We understand the DICJ called an urgent meeting with the six concessionaires with representatives from the Health Bureau.  The DICJ issued a clarification that tables that are currently designated as “mass” tables can not be amended to be included as VIP/Premium/High Limit and shall maintain this designation and remain as non-smoking once the regulations are in force. Effectively all mass gaming areas as of Oct 6th will be non-smoking areas. This includes all tables within currently designated Premium and High Limit areas. Tables designated as VIP (Junket) tables within designated VIP (Junket) areas remain unaffected and smoking will be allowed.  The definition of a “mass” table as opposed to a “VIP” table is via the classification from the DICJ whereby the annual operating premium payable to the Govt. associated with a “mass" table is HKD $150K with a “VIP” table attracting an annual premium of HKD $300K. All the current partition works and barriers regardless of height are now, based on the revised interpretation, obsolete.  The only areas that smoking will be allowed on the mass floors is within the dedicated smoking rooms.

Takeaway:  More restrictive than previously thought and a negative for the Macau stocks.


Macau Smoking Ban Part 2 – Only 12 of Macau’s casinos and slot-machine parlors have already completed the construction of smoking lounges on their mass floors, Health Bureau director Lei Chin Ion said on Wednesday. The Health Bureau on Tuesday said that by then only 28 gaming venues had submitted final requests to establish smoking lounges.  Macau has 35 casinos in operation and five slot-machine parlors, according to data from the city’s Gaming Inspection and Coordination Bureau. Casinos will have to go 100 percent smoke-free in their mass floors after October 6 if their smoking lounges have not been inspected and approved by then. The full ban would remain until the smoking lounges are approved and operational.

Takeaway: Failure to comply with the smoking ban rules may create incremental disruptions in gaming play and downside to financial results.


Japan Gaming Legislation (Bloomberg) A Japanese lawmaker backing the legislation to enable the legalization of casinos said he expects it to win lower-house approval next month and that the gambling resorts would be in major cities and charge locals an entry fee. “We want to finish up in the lower house in the first half of October and send it on to the upper house,” Koichi Hagiuda, secretary-general of a lawmaker’s group promoting the casino bill and an aide to Prime Minister Shinzo Abe, said in an interview.  The parliament’s autumn session runs from September 29 to November 30.  Should the bill to legalize casinos pass, further legislation setting rules for operating gambling resorts would have to be approved before building would start. This could be presented in the next session of parliament, starting in January, Hagiuda said.

Takeaway: Like all things Japan, its the process...so let's pass the enabling legislation. 


Macau Ferry Fares to Increase (Macau Daily Times) The Marine and Water Bureau (DSAMA) announced that it has approved requests from two local ferry service providers to increase their ferry fares for Macau–Hong Kong economy class journeys by 2.6 to 3.4% which equals MOP5. The economy class fare of the Hong Kong International Airport–Macau service will also rise between 3.3 and 6% which equals MOP8. The new fares will come into force on October 8. TurboJet and Cotai Water Jet asked to increase their fares between 7.5% and 8.3% in March this year.


Outbound Macau Visitation (Macau Business Daily) Macau residents are traveling more and often. Since January, around one million locals vacationed abroad, a 7% increase year-over-year. South Korea is the hot new destination for locals, with Macau tourists growth of 10.2% year-over-year. By comparison and in sharp contrast to a 54.6% drop in outbound travel to Thailand and a 29.2% drop in travel to Malaysia during the same period, official figures released yesterday by the Statistics and Census Service. Mainland China remained the most popular destination, accounting for 72% of the total residents traveling outbound

Takeaway: Despite protests about unfair wages, we suspect casino workers are traveling and spending more.


Revel Update – The bankruptcy auction enters a third day today but with a contingency.  According to local media reports which quoted Glenn Straub's attorney Stuart Moskovitz, rival bidder Brookfield Asset Management, which owns the Hard Rock casino in Las Vegas and Atlantis Paradise Island in the Bahamas, had increased its offer from $98 million to more than $110 million, but Brookfield made its bid contingent on it being accepted by 6 a.m. today.

Takeaway: Brookfield Asset Management, a late entry to the bidding process but already licensed in Nevada.

Singapore Housing –- The flash estimate of the 3rd quarter 2014 Resale Price Index (RPI) for public housing is 192.5, falling 1.6% over the prior quarter, the Housing and Development Board while the flash estimate of the private housing price index fell 1.3 points to 208, resulting in a 0.6% decline over the previous quarter, the Urban Redevelopment Authority

Takeaway: A headwind for the Singapore mass gaming segments at Genting Singapore's Resorts World Singapore and Las Vegas Sands' Marina Bay Sands.


China Macro – September manufacturing PMI 51.1 vs 51.0 consensus and 51.1 in August.


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.

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.