Hedgeye CEO Keith McCullough is back from Europe and comes out guns blazing on this morning's conference call with his latest market thoughts.
Takeaway: Earnings miss, but strong revenue growth, traffic growth, and same-store sales acceleration push CMG higher.
We continue to believe that Chipotle is one of the best positioned growth companies in the restaurant industry. Revenues and same-store sales beat by 80 bps and 150 bps, respectively, which helps allay any concerns over the earnings miss. All told, the company reported a fairly strong 3Q in the midst of an unfavorable environment. While rising food costs are a point of contention, we believe management will be able to appropriately offset this headwind in the coming quarters with minimal price increases.
Chipotle, is one of the best managed restaurant companies in the space and we are confident that they will be able to mitigate any oncoming margin pressure. Last quarter, we wrote that CMG was well-positioned for the balance of the year and, after reviewing 3Q13 results, we have little reason to believe this will not be the case. For now, we expect 4Q to be another strong quarter.
What We Liked
- Revenues: $826.9m, beat consensus estimates by 80 bps, +18% y/y
- Same-store sales: +6.2%, beat consensus estimates by 150 bps, +70 bps sequentially
- Traffic was positive in what was a forgettable quarter for the restaurant industry
- CMG transactions accelerated sequentially during the year from 3% in 1Q13 to 4.5% 2Q13 to 6.2% in 3Q13 and positive trends will continue in 4Q
- $103m left on their share buyback program
- Targeting 180-195 new restaurant openings in 2014
- Opening sales volumes are very strong – $1.6-1.7m
- Plan to take 3-5% price in 2014, to offset any food inflation and the cost of removing GMOs from their menu; the timing of the price increase is unknown, although management hinted that it would be mid-2014
- They continue to have a strong operational focus, as throughput increased by 5 transactions during the peak day hour in the quarter
- It appears their unique marketing efforts, including the “Skillfully Made” campaign, are resonating with consumers
- Sofritas have been impressive and should bring in incremental customers – they account for over 4% of sales in the restaurants that carry it
- They continue to roll out the catering program, which has notable potential
- They are not rushing their international development and will not meaningfully accelerate growth until they have properly “built the brand”
- Likewise, they are not rushing the development of their Shop House brand, where early results have been encouraging
What We Didn’t Like
- EPS of $2.66, missed consensus by 433 bps, +17.2% y/y
- Food costs were 33.6%, +100 bps y/y
- Restaurant level operating margins were 26.8%, -60 bps y/y
- Operating margins were 16.6%, -20 bps y/y
- Same-store sales decelerated -130 bps sequentially on a two-year basis
- Guided to low single-digit same-store sales in 2014 – although this excludes any menu price increases
- Guided to food costs in the 33.5-34% range for the next several quarters, excluding the cost of removing GMOs and any potential price increase
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Takeaway: HBI shows MFB accretion guidance is low. UA takes a page out of NKE's playbook. KMart turns to Nicki Minaj to halt sales decline. HIBB M TOY
EVENTS TO WATCH
VFC - Earnings Call: Monday 10/21 8:30 am
HBI - US: Hanesbrands to axe half of Maidenform's workforce
- "...Hanesbrands will lay off nearly half of Maidenform Brands' 1,330 staff worldwide as part of its US$583m merger with the rival intimate apparel maker."
- "...Maidenform's New Jersey corporate operations will be consolidated into Hanesbrands' headquarters in Winston-Salem and its Manhattan offices by the end of 2014."
- "Most of the 300 positions at Maidenform's headquarters will be phased out over the next year, but Hanesbrands said many of the sales, design and merchandising personnel will remain with the company."
Takeaway: I guess we know why they bought MFB -- for the brands, and nothing else. This synchs with our view that this deal will be far more accretive than the company guided towards.
UA - Under Armour challenges techies to develop future products
- "The sportswear maker will begin hosting innovation challenges twice a year — instead of annually — for entrepreneurs outside Under Armour...to suggest ideas for new innovations the company can incorporate in future product designs. Under Armour began holding the contests annually three years ago, and the results of the first challenge will hit the market in 2014."
- "The company is searching for developers who can help build on the technology in Armour39, Under Armour’s fitness tracking device that debuted in March. Finalists will present their concepts before Under Armour executives at a Future Show in April 2014."
Takeaway: Taking one right out of Nike's playbook -- again (as they should). Note that Nike held a major competition this summer for people to come up with new commercial product to elevate Nike's technological platform and marry with marketable product.
M - Macy’s strategy for Black Friday sales uncovered when ad leaked
- "Macy’s Inc. this week tried to titillate shoppers when it dangled a sample of what shoppers can expect when it opens stores at 8 p.m. for the first time ever on Thanksgiving day, but it seems its entire 49-page Black Friday deals ad now has been leaked, in perhaps the earliest ever such leak for a major retailer."
Takeaway: They make it sound like it was a leak…but sounds to me like it was intentional.
KER - Gucci Awarded $144.2M Against Online Counterfeiters
- "Gucci America Inc. on Wednesday was awarded $144.2 million in damages by a federal district court in Fort Lauderdale, Fla., against several organizations engaged in an online counterfeiting scheme."
- "The federal court also ordered the immediate surrender to Gucci of 155 domain names used in the counterfeiting operation."
Takeaway: The domain names are enforceable -- and therefore are history. But KER will never see a dime of the $144mm.
HIBB - Hibbett Sports Announces Transition Plan for Mickey Newsome
- "Hibbett Sports, Inc. announced that effective Feb. 2, 2014, Mickey Newsome will transition from his current position as executive chairman and employee of the company to non-executive chairman. The company also announced that Jeff Rosenthal, president and chief executive officer, has been appointed to the board of directors, effective immediately, thereby increasing the size of the board to ten members."
Takeaway: HIBB might be a tiny company, but Newsome is a major dominant force. Life without him will be a definite change for HIBB.
SHLD - Nicki Minaj Launches Fashion Line for Kmart
- "Minaj launched a new clothing line for Kmart and ShopYourWay.com. The Nicki Minaj Collection includes such items as color block skirts, bandage dresses, deconstructed jean jackets and galaxy print bomber jackets."
- "The new collection by Minaj...has items that range from $3.99 to $37.99."
Takeaway: Nicki is definitely an influencer, but does her fan base shop at K-Mart? This is a binary event for SHLD, but the upside potential is greater than the downside risk.
TOYS - No Joy in Toys 'R' Us Land
- "The problems have their roots in a $6.6 billion leveraged buyout in 2005 that piled on the debt and left it beholden to three investor groups—Bain Capital Partners LLC, KKR & Co. and Vornado Realty Trust —each with differing game plans."
- "The three had hoped to exit the investment with an IPO a few years ago, but they disagreed over exact timing, according to people familiar with the situation, and the window of opportunity has since closed because of the retailer's steady declines in profit."
- "Vornado in particular is ready to get out, according to people familiar with the matter. Vornado has written down the value of its holding by $118.5 million. But because the stake had appreciated before the write-downs a year or so ago, the investment is now worth $418 million, roughly what Vornado paid for it."
Takeaway: Interesting article showing the dynamics behind the ownership structure at TRU. Be careful who you partner up with when when buying something.
Bonmarché - Bonmarché prepares stock exchange flotation
- "Bonmarché, the fashion chain aimed at women over 50, is preparing to float on the London stock exchange in November…"
- "The retailer, best known for its plus-size ranges, announced on Friday that it plans to sell shares on the Alternative Investment Market next month…"
- "As well as re-fitting some of its 264 shops, the group is now scouting for new locations and plans to open stores in garden centres, as part of a tie-up with the Garden Centre Group."
- "Since Sun European Partners took over, the company has earned £9.1m on an income measure that counts earnings before interest, tax, depreciation and amortisation."
Takeaway: Does Bonmarché really deserve to be public?
New Research Uncovers Which Email Promotions Generate the Most Revenue for Online Retailers
- "...we have released new research today that identifies the types of promotional offers that work best – and when they should be sent – to generate maximum revenue for online retailers. The data was derived from an analysis of 100 million online transactions, 20 million user profiles and 100 email campaigns."
Japan’s August Clothing Imports Up 21.4%
- "Japan’s apparel imports for August were up in value by 21.4% over the same period last year, an increase to 280,732 million yen. "
- "By units Japanese apparel imports increased by 2.9% over the same period last year, hitting 371.059 tons, according to government data."
- "Japan’s apparel imports have increased by both value and volume for five consecutive months…"
Takeaway: The biggest import number we've ever seen out of Japan. Ever is a long time.
E-Commerce Trends in China: By the Numbers
- " E-commerce sales in Mainland China may be growing, but the actual order submission rate is still just 10 percent and apparel as a segment represents only 9 percent of online sales."
- "Apparel and accessories represent 80 percent of sales in China through Borderfree’s shopping service. The service allows consumers to buy at an international brand’s site, but with the Borderfree interface that automatically does currency conversions and is in the language of the country where the consumer is located…"
- "Shirts and tops rank first, followed by dresses, shoes, outerwear, pants and handbags in top categories for sales year-to-date, but when calculated by units sold, more shirts and tops were sold than any other category, followed by dresses, pants, shoes, outerwear and then handbags."
- "The top brands sold online occupy the luxury space, such as Gucci, Michael Kors, Tory Burch, Giorgio Armani, Kate Spade, Marc Jacobs, Prada and Stella McCartney."
- "By demographic, 63 percent of shoppers are male, with the average age range for those who did the most shopping online between 18 and 30 and an income range of between 1,000 and 3,000 yuan a month, or $163.16 to $489.48 at current exchange."
One that doesn’t appreciate high growth, high cash flow, and a newfound propensity to distribute cash to shareholders.
LVS posted a great quarter. We’re very happy with the Macau fundamentals, the stability in Singapore, and potential expansion of gaming in Asia. Within that favorable industry construct, LVS is nailing it operationally. The LVS properties yielded up their Mass tables impressively which contributed to higher margins (see the charts in the Quarterly Review section below). And they’re not done yet. Table yields have a long way to go and with the company’s extensive room base, cross marketing initiatives, and premium Mass push, LVS is likely to continue share growth in the rapidly growing Macau market. On the margin and from a stock perspective, we’re probably most excited about LVS’s broadening appeal, growth and dividend investors alike.
LVS announced yet another dividend hike – this time a 42% increase, pulling the yield up to nearly 3% and $300 million in stock buybacks during the quarter. Meanwhile, leverage remains too low around 1x. With over $3.6 million in free cash flow next year, LVS could up its yield to a whopping 6% without levering up. And that cash flow will continue to grow with the opening of The Parisian in late 2015 and continued same-store EBITDA growth. We have no feel for whether LVS will pay out a special dividend – they could easily do it – but we would prefer continued buybacks and regular dividend hikes.
Valuation is the main push back but with LVS’s combination of growth and cash flow, should we really be concerned with an EV/EBITDA multiple of 13.x (excludes debt associated with Parisian)? Certainly not, especially when considering that a good portion of LVS’s profits are not taxed (approximately 55%), a benefit that isn’t captured by EV/EBITDA. Future high ROI projects in Macau (The Parisian), potential developments in Japan and South Korea are also not captured. LVS should continue to garner more widespread investor appeal with its emerging cash distribution focus (dividend investors welcome) along with the existing growth investors. We would argue that valuation concerns are of little relevance.
Per usual, we don’t want to recap the entire quarter. As can be seen in the chart below, LVS beat us quite handily.
Our focus is on table yields, specifically at Sands Cotai Central and Four Seasons. These are clearly the two properties with the most upside. Operationally, LVS is pushing the underpenetrated (for them) Premium Mass segment. Both Sands Cotai (who will have more mass tables coming in Q2 2014) and Four Seasons made significant progress as can be seen in the following table yield chart.
Table yields should continue to move higher for LVS and drive market share gains in the coming months (probably through year end 2014).
This note was originally published at 8am on October 04, 2013 for Hedgeye subscribers.
“Life is a series of collisions with the future; it is not the sum of what we have been, but what we yearn to be.”
-Jose Ortega y Gasset
Yesterday we (Keith and I) held a conference call with former Speaker of the House Newt Gingrich. We invited him to join us for a call because, frankly, he and former President Bill Clinton were the last two politicians to shut down the Federal Government, so he better than anyone understands the strategy of what is currently occurring in Washington, D.C. Even though he is an admitted conservative Republican, the call was both insightful and objective.
A key point that Gingrich raised is that a government shutdown is not as abnormal as it is being hyped and, in fact, may be a safeguard practice intended by the founding fathers. Certainly, government employees will be furloughed and people’s lives will be interrupted, but as the former Speaker pointed out, this has happened many times in U.S. history. In fact, it happened 12 times while Tip O’Neill was Speaker of the House. Overall, there have been 18 government shutdowns in U.S. history, including the current one.
Not surprisingly, most government shutdowns have been very short lived. In fact, the longest shutdown was 21 days in 1995 – 1996. The shortest government shutdown lasted only one day. In the Chart of the Day, we look at the length of every government shutdown over time. As the chart shows, the average government shutdown lasted 6.5 days.
Naturally, when we pressed Gingrich on how long he thought this shutdown would last, being the astute student of history he is, he answered 3 days to 3 weeks (which is what history shows). His view is that neither side has anything to gain by making this protracted. His caveat, though, was that there are currently no negotiations occurring as President Obama is unwilling to cede anything at all on the Affordable Care Act. According to Gingrich, while he and Clinton would go at each other in the press, and certainly had their differences, they would grind out solutions at the negotiating table.
The current set of actors are both polarized and talking matters personally, which is much different than the mid-1990s. There has never been much cross talk or cooperation between Boehner-Pelosi or McConnell-Reid, and it is seemingly only getting worse in this time of “crisis.” This unwillingness to negotiate and compromise is only exacerbated by the fact that neither President Obama, nor Speaker Boehner, have any concerns of getting reelected, so they are willing to expend personal approval for what they perceive as their party’s fundamental beliefs.
On the last point, disapproval is definitely mounting. As it relates to the President, his most recent approval polls are as follows:
- Gallup – Approve 44, Disapprove 50 -> Disprove +6;
- Rasmussen – Approve 47, Disapprove 51 -> Disapprove +4; and
- The Economist – Approve 43, Disapprove 53 -> Disapprove +10.
Not great numbers for Obama to be sure, but the approval numbers for Congress are even worse. According to the most recent Economist poll, a full 74% of Americans disprove of the job Congress is doing. Clearly, our elected officials are on a collision course with the next midterm election in which the polls turn to votes. If any of them yearn to be re-elected, they have a lot of work to do over the next year to gain back America’s trust.
Coming back to the government shutdown, if the politicians in Washington have any acumen, they will resolve their differences over the next few weeks before the fear mongering on the debt ceiling begins to accelerate. The stock market has been weak due to the dysfunction in Washington, but if amateur hour continues as the debt ceiling looms, risk assets are likely to be sold even more aggressively.
The White House is actually starting to use the debt ceiling as a bargaining chip and the Treasury Department released a report yesterday that outlined the potential macroeconomic effects of debt ceiling brinkmanship. According to a preview released by the Treasury Department:
“The report states that a default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, and U.S. interest rates could skyrocket, potentially resulting in a financial crisis and recession that could echo the events of 2008 or worse. By looking at the disruptions to financial markets that ensued in 2011, the report examines a variety of economic indicators – including consumer and small business confidence, stock price volatility, credit risk spreads, and mortgage spreads – through which a similar episode might harm the economic expansion.“
In as much as the economy doesn’t need brinkmanship over a debt ceiling, it also doesn’t need fear mongering from the Secretary of Treasury . . . but I digress. Ironically enough, the fiscal outlook of the U.S. has actually been improving, so in theory the rating agencies should be upgrading their outlook on U.S. debt and not considering downgrades due to partisanship in the nation’s capital.
Next week, we will be releasing our quarterly themes and this focus on the dysfunction in Washington will be front and center as we update our views on the U.S. economy and outlook for the U.S. dollar. An emerging conclusion is that Europe is starting to get relatively more interesting, which is supported quantitatively by the recent move in the Euro.
As you head into the weekend, we’ll leave you with a quote from Gingrich:
“What is the primary purpose of political leader? To build a majority. If voters care about parking lots, then talk about parking lots.”
Sadly, none of our leaders, whether it be in Congress, the White House, Treasury Department, or Federal Reserve, know much about building a majority as of a late.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.59-2.65%
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
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