After a successful run, we are removing HCA Holdings (HCA) from Investing Ideas.
HCA is up 72% since Hedgeye healthcare sector head Tom Tobin added it to our high-conviction list back on 6/13/13. The S&P 500 is up 18% during the same period.
Takeaway: We are removing HCA from our high-conviction stock idea list.
The headline U.S. jobs number surpassed expectations in September, as nonfarm payrolls advanced 248,000 (vs 215,000 estimate) and the unemployment rate dropped 20 bps to 5.9%. This is the first time in over six years since we've seen the unemployment rate below 6%. Although the labor force participation rate ticked down 10 bps to 62.7% and wage growth remains anemic, it is indisputable that more jobs in America is a positive for restaurants. We've seen this reflected in both July and August restaurant sales numbers, which have shown sequential upticks, and are eagerly awaiting September's release.
This is the second straight month employment growth has increased year-over-year across our five primary age cohorts. While we saw strength across the board, we do have several notable callouts:
While widespread employment growth is positive for all restaurants, September's employment release is particularly positive for casual diners as both the 45-54 and 55-64 YOA cohorts are showing their strongest levels of growth in the last two years. With that being said, we continue to favor BLMN and BOBE on the long side as a play on potential value enhancing initiatives and are turning cautious on our shorts (DFRG, EAT) heading into earnings season.
The release was also a positive for quick-service and fast casual restaurants, as weak growth in the 20-24 YOA cohort is more than offset by another very strong month of growth in the 25-34 YOA cohort. We continue to favor operators with strong margin drivers in place (CMG, JACK, WEN) and those with strong unit level economics and well-calculated expansion plans (KKD, PLKI).
September Employment Growth Data:
Employment growth at full-service restaurants, limited-service restaurants and leisure & hospitality continues to grow, despite seeing a steady deceleration since the highs of mid-2013 likely due to cost pressures these companies are facing on both the food and wage front.
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Takeaway: RH's New Financing program + growth in In-House Interior Design gives us greater confidence in our long-term revenue model.
Last night RH announced a long-term financing program that we think is positive news for its top line. The company already offers a credit card, but that carries a much higher interest rate (24.99%) and is a shorter-term financing bridge for consumers. With the new RH program, consumers can finance purchases at 5.99% for a duration ranging from 24 months to 7-years.
There's no question for us that this is a positive for RH's top line. In our latest RH consumer survey, we asked 1,000 consumers how important it is for a furniture store to offer store credit -- on small, medium and large purchases. Interestingly, it is 'Very Important' to only 13.6% of consumers for 'Small Purchases' and only '18.8% for 'Medium Purchases'. But once we get into the 'Large Purchase' classification, it is 'Very Important' for 41.7% of customers. Even 33.4% of the $100k+ demographic said that it Very Important to their purchasing decision.
An interesting note is the screen shot below that 'advertises' consumers to meet with RH designers. This is the first time we EVER saw this advertised by the company. Approximately 40% of RH's business comes from designers, but they are largely third party designers. These are people that are hired by a customer and shop dozens of stores, where they pick and choose assortments that work -- maybe including RH, maybe not.
But now RH not only has a massive product assortment (i.e. 3,300 pages), but a stepped-up in-house Interior Design team AND a superior long-term financing program. Add all that up and you get a stealth revenue driver that will build meaningfully. We're not taking up our estimates (which are already high on the street by a country mile) but these factors give us more confidence that the company will get there.
Takeaway: Adding KATE to Best Ideas list as a long. LULU finally goes mobile. Hong Kong lux market at risk.
QUIZ OF THE DAY
Yesterday's Question: What does this date, 10/2, signify in Nike’s history?
Answer: 10/2 is the day (10/2/96) that Lance Armstrong learned that he had cancer, and marked the day that 'changed his life forever'. Nike subsequently created the Livestrong Brand -- which was initially largely comprised of those yellow wrist bands. But Nike, who can capitalize on a commercial trend better than anyone, subsequently turned this into a $200-$300mm business across apparel, footwear and equipment -- and the company made a marketing splash every year on October 2. Needless to say, that business is now a big goose egg. Perhaps the peak was when Dick's Sporting Goods missed a quarter for having excess inventory of Livestrong treadmills.
KATE - Best Idea Long
We are adding KATE Long to the Best Ideas List - CLICK HERE for full note
LULU - LULU introduces new iOS App
Takeaway: LULU released it's first iPhone app last night where customers can actually shop. They've dabbled in the mobile space 2 times in the past, but each was unrelated to the actual merchandise sold in its stores. Dot.com sales represent nearly 20% of sales at LULU to date, and it's been able to grow that segment exponentially without this extra piece of technology which is standard across nearly every other brand and retailer in the marketplace. If anything, this is an opportunity for LULU to cater to a segment of the population moving away from stores and desktops.
Not-So-Golden Week Looms for Hong Kong Retailers
Takeaway: Despite the seriousness of the situation, we're hard pressed to think that any US companies are going to miss the quarter because of the situation in Hong Kong. But Chinese tourists accounted for 75% of the Hong Kong's 54mm tourist visits last year. That will be materially crimped this year. In all likelihood, a vast majority of the Chinese tourists will spend that money elsewhere. If they want a Kors bag, they're going to get a Kors bag.
RSH - RadioShack Said to Reach $590 Million Refinancing Agreement
WTSL - The Wet Seal, Inc. Announces Departure of Chief Financial Officer
Warren Buffett admits Tesco investment ‘a huge mistake’
Sur La Table CEO names former Bath & Body Works chief as new CEO
AMZN - Amazon Warehouse Workers Want to Be Paid for Waiting in Line
HD - Home Depot extends e-commerce capabilities westward
UA - Under Armour to build new DC in Nashville suburb
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