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DFRG: Timing is Critical

Takeaway: We're getting picky with timing here, but for good reason. We're looking to re-short this name into any sustained strength.

Brief Analysis: DFRG reported an unimpressive quarter, in our view, despite the fact that the market has responded positively.  We covered our short last week for this reason, as sentiment around restaurants has been improving due to strong industry sales data.  What really saved the day, however, was management's decision to maintain its full-year guidance and not provide guidance on 2015.  We don't think its unreasonable to expect DFRG to hit the numbers in 2014, but believe 2015 guidance on the 4Q14 earnings call will be a negative catalyst for the stock.  The street currently expects 2015 EPS growth of 19%, after delivering -7% growth in 2013 and what looks to be 3% growth in 2014.  Considering persistent cost of sales inflation, the ongoing struggle at Sullivan's and operational inefficiencies associated with the rollout of the Grille, we view this as highly unlikely.


Comps: DFRG delivered +3.7% system-wide comp growth in the quarter on a calendar basis.  Del Frisco's Double Eagle delivered +8.4% same-store sales growth driven by a +4.6% increase in customer counts and a +3.8% increase in average check.  Sullivan's delivered +0.6% same-store sales growth driven by a +7.3% increase in average check, offset by a -6.7% decline in customer counts.  Per usual, management did not disclose same-store sales data for the Grille.  Consolidated revenues of $61.949 million (+14.3% y/y growth) missed consensus estimates of $62.529 million by 93 bps.


Margins: DFRG suffered from margin deleverage in the quarter, primarily driven by two new Grille openings, the ongoing sales challenges in Phoenix, AZ and Palm Beach, FL, and persistent beef inflation.  Cost of sales surprised to the upside (+29 bps y/y) as restaurant level margins (-118 bps y/y) and operating margins (-218 bps y/y) fell short of consensus expectations.


DFRG: Timing is Critical - 22


Earnings: Adjusted EPS of $0.08 was in-line with expectations and notably stronger than last year's $0.02 loss.  Strength here was primarily driven by G&A leverage and the reduction of 165,496 shares of outstanding stock ($3.6 million in repurchases).


What We Liked:

  • System-wide same-store sales increased +3.7% on a calendar basis
  • Del Frisco's delivered its 19th consecutive quarter of comp growth (+8.4%)
  • Del Frisco's delivered an impressive +4.6% increase in customer counts
  • The natural hedge of the Grille should help mitigate food cost inflation as it becomes a larger part of the portfolio


What We Didn't Like:

  • Top-line miss
  • The reliance on share buybacks to hit bottom-line estimates
  • Persistent beef inflation with no end in sight
  • Restaurant level margin deleverage
  • Operating margin deleverage
  • Sullivan's rapid -6.7% decline in guest counts
  • Ongoing weakness at the two Grille's in Phoenix, AZ and Palm Beach, FL
  • 2013 class of Grille's continue to perform below the level of both 2011 and 2012 classes
  • Sullivan's continues to be a drag on the company
  • Grille continues to be an unproven growth concept
  • Management approved another $25 million in share repurchases over the next three years despite no FCF generation


Research Recap

DFRG: New Best Idea Short (06/12/14)

DFRG: A Castle-in-the-Air (07/02/14)

DFRG: Thoughts into the Print (07/21/14)

DFRG, EAT: Covering Our Shorts Given Strong Knapp Sales (10/09/14)


DFRG: Timing is Critical - 3



Call or email with questions.


Howard Penney

Managing Director


Fred Masotta




Takeaway: Our Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and proprietary quantitative market context.

CLICK HERE to view the document. In today’s edition, we highlight:


  1. Why we think you should remain as defensive as you can within the context of your investment mandate
  2. What would get us to back away from our bearish view(s)... as opposed to getting more conviction on the bearish side as we are doing today
  3. Drawing the line in the sand on small caps; we think that equity style factor remains a bubble that is in the process of blowing up


NOTE: Going from ~80% net long to ~60% net long does not qualify as "downside capitulation" in our playbook. Remembering who else is in the "pool" with you is definitely something to keep in mind as you attempt to risk manage the immediate-term volatility of the equity and credit markets. We have gone over the waterfall...


Best of luck out there,


Darius Dale

Associate: Macro Team

You Will Survive

This note was originally published at 8am on October 02, 2014 for Hedgeye subscribers.

“Did you think I’d lay down and die? Oh no, not I – I will survive.”

-Gloria Gaynor


I’m thinking some of the bond bears need some love this morning, so I thought I’d bring you some of that with Gloria Gaynor’s 1978 Grammy Award Winning disco love track, I Will Survive!


“At first I was afraid… I was petrified.

Kept thinking I could never live without you by my side…

But then… I grew strong. And I learned how to get along”


‘Oh, as long as I know how to buy the Long Bond, I will get along… I know I will stay alive. And I’ll survive. I will survive! Hey, hey…’


You Will Survive - gg1


Back to the Global Macro Grind


Being born in the 1970s, I still get what living without all of the entitlements in the world means. Savings matter. So does saying thank you to the people who helped bring me along in my #blessed life.


One of the greatest gifts I’ve ever received was the time in which I entered this business. From my first trading internship at Williams Trading in the summer of 1998, to my first job @FirstBoston in 1999, I saw both the hedge fund business hockey stick and the Tech #Bubble manifest, then collapse.


For my 1st three years on the buy-side, the SP500 was down on the year (2000, 2001, 2002), so I learned how to A) not lose other people’s moneys first, then B) get really long when people hated stocks in 2003-2006. Oh, and then another #Bubble in 2007. Market crash. Epic recovery. Then this…


But what is this?


I’ll go through what I think this is on our flagship research call (Q4 Macro Themes) today at 1PM EST (ping Sales@Hedgeye.com for access). But to summarize it in hash tag terms, here it is:


  1. #Quad4 – where both US growth and inflation (in rate of change terms) are slowing, at the same time
  2. #EuropeSlowing – and why Draghi’s central planning drugs will be hard pressed to arrest it
  3. #Bubbles


Oh, yes. #Bubbles.


How does your portfolio survive an early cycle global recession as asset prices are deflating and #Bubbles are popping?


  1. Raise Cash  (mine is at 62% in my asset allocation model this morning)
  2. Be big on the long side of Long Term Treasuries (TLT, EDV, etc.)
  3. On pullbacks add to Munis, and maybe some Healthcare and Consumer Staples stocks


While this call may have sounded aggressive with the 10yr UST yield at 2.63% less than 3 weeks ago, it should have. While I don’t get paid like I used to (just putting the position on, in size), I still wake up at 4AM wanting to win, just like you do.


In Signal Terms (Real-Time Alerts), I issued 33 SELL signals (13 BUYS) in the month of September. Most of the sells were in US and European equities. Most of the buys were bonds. And I’d still buy more long-term bonds if there’s another opportunity!


When something big and contrarian like this is going your way, you don’t run for the exits during no-volume market head-fakes. You press it (or, as the great Stan Druckenmiller would say, “you spread your wings”).


That said, almost 100% of the questions I got in mid-September had to do with:


  1. Selling Bonds
  2. Buying Stocks


When the right questions should have been:


  1. How big do I make the Long Bond position on the recent pullback?
  2. How big do I get on the short side of the Russell 2000’s liquidity trap?


Markets don’t go from #bubble mode to buys on a -3.2% correction (that’s where we are for the SP500). However, on a -10.2% draw-down (Russell 2000’s drop from its all-time #Bubble high on July 7th 2014), levered long players start to freak out.


As they should.


What is the catalyst to reverse the Long Bond’s (TLT) total return of over +18% (vs Russell -7% YTD loss)? I don’t think there is one. If there is one catalyst we have been warning investors of all year long that matters most here, it’s the cycle.


That is it. The cycle, slowing.


And if one ISM slow-down print (yesterday’s was reported at 56.6 for SEP vs 59.0 for AUG) can smoke the 10yr Treasury Yield down to 2.39% in a day, what do you think the next bad jobs report and/or US GDP miss is going to do?


Personally, I don’t say buy FogDog.com or the FireEye on that. Stay with our Macro Playbooks, and you will survive this #bubble.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.36-2.53%

SPX 1927-1963

RUT 1067-1118

VIX 14.84-17.93

EUR/USD 1.26-1.28

WTI Oil 89.01-92.14


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


You Will Survive - UNITED STATES

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%

The World Changed

Client Talking Points


The Yen breaking out now on my immediate-term risk duration (vs. USD); breakout line = 107.79 and it’s important to realize how much Correlation Risk was embedded in macro markets during the biggest USD ramp since 1997; Nikkei does not like this USD reversal, down another -2.2% overnight to -8.2% year-to-date.


They tried bouncing the DAX and FTSE early this morning, but the rest of the European equity market faded to red in a hurry. Italy and Spain are down again; Greece and Portugal are both #crashing (again) at -23.5% and -21.6% year-to-date, respectively. Draghi’s drugs didn’t stop gravity #EuropeSlowing.


If what’s going on from a #Quad4 deflation perspective in Oil and related energy stocks (XLE -11.1% for OCT) isn’t telling you the world changed, it should. These draw-downs are both nasty and pervasive. Chasing a Russell #bubble bounce when it is in freefall is as risky as it gets during a macro phase transition like this – stay hedged!

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.


We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).


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


VIDEO | I Talk Market Mess With @MariaBartiromo @FoxBusiness http://app.hedgeye.com/media/1313-video-keith-talks-market-turbulence-with-maria



The way I see it, if you want the rainbow, you gotta put up with the rain.

-Dolly Parton


The UST 10YR Yield at 2.06% has crashed, down -32% year-to-date.


Let them eat debt.”

-Dan Alpert


That’s how my friend Dan Alpert starts chapter 4 of a non-perma-bull book I have been reviewing as of late – The Age of Oversupply. It’s a play on Marie Antoinette telling those who were plundered by central planners in France to eat cake.


Ironically enough, it was on this day in 1793 that Marie was guillotined at the epicenter of the French Revolution. The People will only put up with negative real incomes and the all-time highs in cost of living for so long…


Right in the middle of our new bear cave (Hedgeye Headquarters in Stamford, CT), we have an office I painted pink (with fluffy white couches) that we call the Marie Antoinette Room. There’s a guillotine painted in black on the wall.


"Ebeta" - EL chart 2


Back to the Global Macro Grind


Yep, we do things a little differently over here. And thank God for that. If anyone who works for me bought the “bounce” in the Russell #Bubble (into yesterday’s close), we’d be having a little chat in the pink room today.


Newsflash: the world changed yesterday.


And I can’t for the life of me understand why money managers who haven’t been positioned for it for the last, say 3-6 weeks, wouldn’t respect that. There has never been a % move like that in the Treasury market (in that compressed window of time), ever. I call that part of the phase transition of market risk, The Waterfall.


The Waterfall isn’t ebola (or whatever bulls want to blame next). It’s levered-long hedge fund beta.


And until I get at least a dozen shorter-term hedge funds calling/emailing me (at the same time) and telling me we’re going to crash, we’re probably going lower.


“We”, in market terms – dammit I hate that word. This market isn’t we. That would include me, Mucker, as having some ownership in being long the US equity market. To be clear, I am long the Treasury Bond market – Long Bond style!


Back to the #behavioral point on fund manager positioning and sentiment…


Understand that this entire way down (-11.2% for the Russell 2000, -32% for the 10yr bond yield, -7.4% for the SP500), I have generally been asked about where “we bounce.”


The reason for that is pretty simple. In the Chart of The Day (exhibit 45 in our Q4 Macro Themes deck) you can see Hedge Fund Correlation to SP500 and Average Relative Performance (using a 60 month trailing correlation).


Punch-line: forget ebola – correlation to Ebeta for the levered-long beta chasing trade = +0.90-0.95


When the US equity market goes down, for real… that’s more dangerous than almost any data point you can give me other than the following 3-factor #Bubble chart (exhibit 52 in our Q4 Macro Themes deck) – Spread Risk:


  1. All-time low in credit spreads
  2. All-time low in cross-asset class volatility
  3. All-time high in debt outstanding


No, I didn’t need a one-on-one meeting with my favorite stock picker to come up with that… I am pretty sure that the CFO of the only company I hit the buy button on as of late in Real-Time Alerts (HCA) wouldn’t know what to do with it anyway.


Q: Who does?


A: No one


How could anyone tell you, with a straight face that, even though, they “don’t do macro”, they just know that buying the damn dip is going to work, in spite of coming off the all-time lows in volatility and highs in, well, everything?


To review why our call on rates really matters to cross asset class expectations (risk):


  1. Long-term rates shock consensus to the downside
  2. Yield Spread (leading indicator for US #GrowthSlowing) crashes -34% (10yr minus 2yr yield)
  3. Small caps, bank stocks, and anything illiquid credit junk gets slammed


In the non-it’s-different-this-time playbook, this is what is called an early-cycle slowdown. And from the all-time highs in debt outstanding, I don’t think piling on more of what hasn’t worked (Qe4) is going to make this better.


I am not trying to scare you, or be “not nice” about this. I like to be right as much as you do. “So”, I say, let whoever bought yesterday’s intraday bounce in the Russell #Bubble eat beta.


Tomorrow at 1PM EST I’ll be hosting a Hedgeye Flash Call#Bubble Or Bottom”, updating our Q4 Macro Themes. Ping if you’d like to participate.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.01-2.22%


RUT 1038-1080

VIX 19.55-27.99

USD 84.76-85.79

Gold 1

Best of luck out there today,



"Ebeta" - Chart of the Day

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.