DFRG, EAT: Covering Our Shorts Given Strong Knapp Sales

Takeaway: Removing short DFRG from Best Ideas, short EAT from Investment Ideas. Relegating both to the Short Bench.

DFRG, EAT: Covering Our Shorts Given Strong Knapp Sales - 1


Last night, Malcom Knapp released sales results for September, estimating that same-restaurant sales increased +1.7% and guest counts declined -1.0% year-over-year.  The results imply sequential improvements of 110 bps and 100 bps, respectively.


In addition, the underlying trends were strong on the margin, with two-year average same-restaurant sales accelerating 50 bps sequentially  to -0.1% and two-year average traffic accelerating 30 bps sequentially to -2.3%.


Following our recent note calling out the positive correlation between same-restaurant sales and PCE excluding food and energy, we were waiting for one incremental data point to support our view that sales were turning.  Knapp delivered that.


Given the improvement we are seeing in these numbers, we are making a tactical move and covering our two remaining shorts in the casual dining space - DFRG & EAT.


We added DFRG to our Best Ideas list as a short on 06/05/14 at $27.27 per share.  Since this time, FY14 EPS estimates have been revised down from $0.97 to $0.90 and the stock has acted accordingly (down ~28%).  While we continue to believe DFRG has structural problems, we are going to stay tactical with this name.  Improving industry sales could delay its demise for several quarters.  We continue to believe DFRG is not the growth vehicle the bulls believe it is and would look to short it again on any notable strength.


We recently added EAT to our Investment Ideas list as a short and believe we may have pulled the trigger a little too early here.  There is no doubt that EAT will benefit from the current sales environment and while we believe the company has issues going forward, we need to see sales turn before we dust off the full-blown bearish playbook.  This is another name that we anticipate revisiting on the short-side in the intermediate-term.


With that being said, we are relegating both of these names to our Short Bench and will be actively looking for opportunities to once again get active on the short side.


Call with questions.


Howard Penney

Managing Director


Fred Masotta



Takeaway: The labor market continues to improve and we continue to like unsecured consumer lenders like COF & DFS.

More Sub-300k Thoughts 

The labor market is chugging along with seasonally-adjusted initial jobless claims tracking well inside of the magic 300k line, which represents a frictional floor of sorts. We've shown in recent weeks that when claims breached 330k to the downside in the last two economic cycles, the market has continued its upward march for another 31 and 45 months. This go-around, we're currently at 8 months suggesting the market may not yet be done with its rally.


Conversely, the fact that we're sub-300k also represents a warning call of sorts as it has historically signified that we're in the proverbial 8th inning of the rally. Moreover, there's no guarantee that this cycle will play out similarly to the last two, especially considering the less-than-robust sample size (n = 2). As such, we'd be keeping Financials exposures on a relatively short leash from a big picture standpoint and we'll continue watching the labor data closely for any signs of negative inflection.


All that being said, so long as the good times keep rolling, we continue to like unsecured consumer lenders like Capital One (COF) and Discover (DFS) on the long side. Resurgent credit card loan growth dynamics coupled with stable credit quality metrics should combine to push estimates higher and potentially expand the multiple by a point or two.


The Data

Prior to revision, initial jobless claims were unchanged at 287k WoW, as the prior week's number was revised up by 1k to 288k.


The headline (unrevised) number shows claims were lower by 1k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -7.25k WoW to 287.75k.


The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -13.3% lower YoY, which is a sequential improvement versus the previous week's YoY change of -6.5%






















Yield Spreads

The 2-10 spread fell -1 basis points WoW to 187 bps. 3Q14TD, the 2-10 spread is averaging 187 bps, which is lower by -12 bps relative to 2Q14.






Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


Macro Notebook 10/9: UST 10YR | USD | Japan

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%

Retail Callouts (10/9): GPS, JCP, TGT, AMZN, DKS, EBAY, SHLD

Takeaway: GPS is not over bc Murphy is leaving, Murphy is leaving bc GPS is over. Even though JCP CEO role is a huge step-down, we can’t rule it out.



Thursday (10/9)

FDO - Earnings Call: 5:00pm




GPS - Gap Inc.’s Glenn Murphy to Pass Reins to Digital Leader Art Peck as Next Chief Executive Officer



  • "Gap Inc. announced that Art Peck, the president of its Growth, Innovation and Digital division, has been selected by the Board of Directors to succeed Glenn Murphy as the company’s next chief executive officer, effective February 1, 2015. Murphy and Peck have worked side-by-side for the better part of a decade as Gap Inc.  dramatically improved its financial performance while expanding globally."


Takeaway: This is so bad for Gap, on many levels. The reality is that Murphy is too good for the Gap -- at least the Gap that he helped create. Since he joined the company in 2007 (at the age of 45!), he engineered a 15% EPS growth CAGR on a top line that only grew about 1%. GPS was never a top line growth story, and Murphy knew that. But he freed up 500bps in operating margin, and subsequently fed accelerated share repo, which drove earnings and the stock. But we've sensed for the better part of a year that Murphy took the company has far as he could operationally, and now is at a point where he has to worry about things like fashion (clearly not where he wants to be). We won't say that Gap is in trouble without him, but that Gap is likely in trouble, which is why he is leaving. The speculation, of course, is where he will go. It's uncanny that JCP's Mike Ullman reiterated yesterday that a CEO transition is on the front burner, and then just 8 hours later Murphy announces that he's leaving GPS. We think that JCP is a big step down for him, but if the money is right, we can't rule it out. If, by the grace of the retail Gods (and a big check), JCP were to get Murphy, it would be an absolutely huge hire.



Negative Datapoint for AMZN, Positive for EBAY -- ChannelAdvisor Comp Sales


Takeaway: ChannelAdvisor works with a host of 3rd party sellers who use the AMZN and EBAY marketplaces and uses the sales results from its clientele to back into these monthly comp numbers. In September, AMZN had its first sequential deceleration of 2014.  At the same time EBAY saw its first acceleration since March, reversing the large divergence seen between the two during 2014.  EBAY marketplaces, which is 52% ($8.3B) of current EBAY revenue at 82% gross margins, will become its own company with the PayPal spinoff expected next year.


Retail Callouts (10/9): GPS, JCP, TGT, AMZN, DKS, EBAY, SHLD - 10 9 chart1


Golf:  Amazon golf comps slowed but with a solid 39% gain.  Inventory remains high in the space, apparently, as Amazon golf sales are a good proxy for excess inventory in the channel. Still not good for DKS .


Retail Callouts (10/9): GPS, JCP, TGT, AMZN, DKS, EBAY, SHLD - 10 9 chart2



TGT - Target’s new CEO makes Canadian turnaround his priority



  • "The new chief executive officer of Target Corp. is taking a hands-on approach to fixing the company’s problems in Canada, making regular trips to check stores here as he heads into the all-important holiday season."
  • "Brian Cornell said in an interview on Wednesday he will travel to Canada from Target’s head office in Minneapolis on a 'regular' basis to oversee the turnaround efforts."
  • "He has 'put on pause' the company’s earlier plan to appoint a non-executive chairperson with domestic experience to oversee the troubled Canadian operations."


Takeaway: What does it say about Canada, when a new CEO 8-weeks into the job has put a part of the business that accounts for about 7% of total company square footage and 2.5% of revs at the top of the priority of list? Sure it's disproportionally dilutive to earnings, taking down numbers by about 20%, and we have a hard time seeing how it ever turns a profit. But, there is a lot that needs to be fixed in the core US business that needs the CEO's attention. Like un-boxing itself from the competitive set its developed over the past 5 years as it made its move into groceries, pushed the RedCard, and lost its cache in apparel and home. Now it finds itself right in the middle of five unique competitors - 1) WalMart, 2) Department Stores, 3) Dollar Stores, 4) Supermarkets, and 5) Amazon. If there is one thing we take away from this article it's that Cornell has a lot of wood to chop on the HR front. That means that he's spent the past two months meeting the organization, and either he thinks changes need to be made, or gaps need to be filled. It's probably both.




SHLD - Sears stock down again on reports of halted vendor shipments



  • "Sears Canada stock plunged by eight per cent and U.S. parent Sears Holding Corp. was down by 15 per cent after reports that a vendor had stopped shipments to U.S. stores."
  • "Bloomberg News said Wednesday that a Sears vendor was halting shipments because it couldn’t obtain insurance to ensure it would be paid for its products."


M - Bloomingdale's goes high-tech at new store in Palo Alto, California



  • "Bloomingdale’s goes high-tech with the opening of its store in Stanford Shopping Center, Palo Alto, California, on Oct. 10. In a nod to the digitally-savvy locale, the three-level, 125,000-sq.-ft. store features a wide array of high-tech innovations to make shopping easier. Among the offerings: state-of-the-art smart fitting rooms, a buy online, pick-up in-store feature and the launch of same-day-delivery where shoppers located within a 15-mile radius from the store can buy select merchandise on and have the product delivered within a five-hour window. And all sales associates are outfitted with mobile checkout devices."


H&M's & Other Stories Opens in New York



  • "H&M’s new format, '& Other Stories,' is starting a new chapter."
  • "The chain on Friday will open its first store in the U.S., in SoHo, as well as a U.S. e-commerce site."
  • "The 6,400-square-foot store is at 575 Broadway. It has two entrances: on Broadway, which attracts a mixed audience, including tourists, and on Mercer Street, which is filled with designer and luxury brands."

LEISURE LETTER (10/09/2014)



  • October 9: Todd Jordan in Macau
  • October 16: Hedgeye cruise pricing survey (mid-October)


880:HK SJM  (Macau Business) When Jai Alai Palace will reopen is uncertain because work on renovating the establishment remains suspended while it awaits government permission to proceed. The government ordered the suspension of the work in March while the Land, Public Works and Transport Bureau considers an application for permission to modify the building.

Takeaway:  The approval process for Macau projects have been very slow.


LVS (Inquirer)– a Marina Bay Sands food court, 1983, was closed temporarily for thorough cleaning, after a photograph of cockroaches patronizing one of its stalls went viral online. Marina Bay Sands issued a statement to say that they were “aware of a pest incident” that occurred at 1983 – A Taste of Nanyang on October 6. The food court, which is run by Koufu, is located at the South Promenade of The Shoppes. “We immediately took action and worked with the tenant to conduct checks and investigate the incident,” said the statement.

Takeaway: An unfortunate and unwelcomed guest, but we've seen much worse Singapore locals hawker / food centers. 


3918:HK NagaCorp – New startup airline, Bassaka Air, was granted its aircraft operation certificate (AOC) by the State Secretariat of Civil Aviation. Representatives from Bassaka Air, which has partnered with the state-owned China International Travel Services (CITS) and will lease its two Airbus A320 aircraft from casino firm NagaCorp to ferry in Chinese tourists, said the first flight is yet to be confirmed.  Bassaka AIr's CEO Joseph Strekker  denied the casino operator had any financial interest in BA, however confirmed the aircraft were leased from NagaCorp.

Takeaway: While technically unrelated businesses, the airline was clearly established to support tourism to NagaWorld. 


PENN & GLPI – Sioux City and its residents bid bon voyage to the former Argosy riverboat casino when it departed Sioux City down the Missouri River. The three-deck boat is bound for Wood River, Ill., where its new owner operates a large shipyard and salvage operation. 

Takeaway: The final headline in this matter will be the ruling and resolution of the current litigation over the license. 


PEB – entered into an agreement to acquire an upscale, full-service hotel
and adjacent commercial real estate and land parcel in the Boston, Massachusetts region for $261.0 million from an unaffiliated third party. The
Company expects to fund the purchase price with available cash and borrowings on its senior unsecured credit facility. The closing is expected to
occur before the end of 2014,

Takeaway: PEB filling a noticeable hole in its Northeast footprint.


NCLH – received antitrust clearance from FTC regarding purchase of Prestige Cruises.


Japanese Gaming Expansion (Yomiuri Shimbun) The integrated resort enabling legislation was revised to exclude Japanese nationals from gaming participation. As a result, only foreign nationals will be initially allowed to gamble at casinos.


This policy was agreed Tuesday at a meeting of senior members of the league dedicated to promoting international tourism.  The league, chaired by Hiroyuki Hosoda, executive acting secretary general of the Liberal Democratic Party, will make an official decision at a general meeting next Thursday. The league plans to add a clause in the bill that Japanese nationals would be allowed to gamble at casinos through the enactment of another law.

Takeaway: Besides this major change, the enabling legislation also includes the following stipulations "integrated resorts will be limited to central government-designated areas based on applications from local governments" AND "central, relevant local governments can collect levies from firms that open and operate casinos, and entrance fees from users".


UnionPay Crackdown Continues in Macau (LUSA) The value of transactions using unregistered China UnionPay Co Ltd terminals in Macau amounted to MOP300 million (US$37.6 million) in the first eight months of 2014. Lusa quotes the city’s Judiciary Police as saying they have identified 51 suspects (39 from mainland China and 12 from Macau) involved in what they describe as illegal transactions. They have investigated 40 cases since the beginning of the year, with 34 of the cases sent to the territory’s Public Prosecutions Office. Jewellery and watch shops inside the precincts of the city’s casinos were banned from applying for new UnionPay swipe terminals since July 1. The existing swipe card devices operated by such shops have not been removed but the Macau government has not excluded that possibility.

Takeaway: Despite the crackdown, it appears the use of illegal devices continues.


Biloxi Margaritaville Casino – A U.S. bankruptcy judge has given MVB Holding until midnight Oct. 27 to vacate the former Margaritaville Casino building and turn the keys over to the property owners. Mississippi Gaming Commission regulations say the building can’t reopen as a casino unless it has a 300-room hotel, an upscale restaurant and an amenity that would make it unique and draw new people to the market.

Takeaway: The redevelopment plan remains unclear given the hotel mandate. 


EBOLA Screening to Begin – The government plans to begin taking the temperatures of travelers from West Africa arriving at five U.S. airports as part of a stepped-up response to the Ebola epidemic. The additional layer of screening would begin at New York Kennedy and the international airports in Newark, Washington Dulles, Chicago and Atlanta. He said the new steps would include taking temperatures and would begin Saturday at JFK. The new measures also will include more screening questions for passengers arriving from the countries worst hit by the outbreak -- Liberia, Sierra Leone and Guinea.

Takeaway: A good first step, but more precautions are warranted.


Business Travel Trends – According to the Global Business Travel Association, during the second quarter of this year, U.S.-originated business travel added up to $72.8 billion, a 7.1% year-over-year increase. Although, notably, there was a 0.1% decline in the actual number of trips. However, more business people are traveling. The report found that travel volume is expected to rise only 2.3% for the year, but spending will grow by 7% year-over-year due to the higher prices for hotel rooms, airfare and food. International outbound business travel is also expected to rise in volume by 5.6% for the year 2014, followed by a 6.5% increase in 2015 despite slowing growth in Europe, China and Latin America, according to the report.

Takeaway: Positive trends for the lodging industry.


Virgin Hotels – Virgin Hotels announced the opening of its first hotel in Chicago, scheduled to open on January 15, 2015, with “chambers” starting at a US$209 rate. The hotel with 250 guestrooms, 40 one-bedroom suites and two "rock star" suites will also have a large gym on the top floor of the building as well as a spa that will open in the spring. The company also launched its new web-site

Takeaway: All inclusive entertainment, fee unlimited-highspeed internet -- we look forward to putting our heads onto a pillow and trying the custom-designed hybrid bed and other creature comforts.




German Recession Fears Increase – German exports plunged 5.8% in August by their largest amount since the height of the financial crisis and leading institutes slashed forecasts for growth, fueling debate on whether Berlin is doing enough to prop up the domestic and European economies. This was the latest sign that Europe's largest economy is faltering amid broader euro zone weakness and crises abroad which have battered confidence and delayed German firms' investment plans.


Hedgeye remains negative on consumer spending and believes in muted inflation, a Quad Four set-up.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is 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.

Decidedly Dovish

Client Talking Points


Epic decline for the UST 10Yr (-71 basis points year-to-date, -23%) as long-term yields effectively crash vs. consensus expectations of rates rising. Most bond proxies in equity land (Utilities) ripped on the dovish Fed move yesterday; don’t confuse that with growth.


Massive correlation risk in the market as of Friday (when Gold was pinned sub $1180 and EUR/USD was $1.25) reversed, fast – this back and forth Currency War between the Japanese, Europeans, and Americans is very much on – and consensus is way too long of U.S. Dollars given a dovish Fed.


Prime Minister Shinzō Abe does not like Dovish Dollar because he gets up Yen (down Nikkei) on that; Nikkei down another -0.66% overnight to -3.5% year-to-date – it will be interesting to see if the Japanese react to ECB and Fed devaluation moves in the coming months.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.


Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.


Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road


FX: Currency War #on as Fed takes its turn (Euro up)



Success is not forever and failure isn’t fatal.

-Don Shula


Over the last 34 years, on our way to becoming the biggest debtor nation in history, the U.S. has borrowed some $10.4T, with an average annual deficit-to-GDP ratio of ~3.2%.

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