In this note, we look at a select group of stocks in the Restaurant space from both a fundamental and quantitative perspective.  As you will see, sometimes (though not often) our fundamental view does not align with the quantitative setup.





Fundamental Setup:  We have not written on AFCE in quite some time.  Over the years, AFCE has taken several strategic steps to strengthen its competitive position including investing behind developing a robust brand image.  The operating structure is one of the strongest in the industry and the stock has performed accordingly.  We believe AFCE will continue to trade at a premium multiple relative to its peers.


Quantitative Setup:  AFCE – bearish TREND (40.57 resistance); bullish TAIL (needs to hold 36.88 support)




Fundamental Setup:  Chipotle is one of the best managed restaurant companies in the space and we’re confident 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 4Q13 trends, we have little reason to believe this will not be the case.  We continue to expect 4Q13 to be another strong quarter.


Quantitative Setup:  CMG – looks like a good long – Bullish Formation w/ TREND support = 496




Fundamental Setup:  The fundamentals for DRI are the worst in the casual dining space (barring Ruby Tuesday).  As a result, the company will be forced to make some significant changes to the operating structure of the company.  We continue to see significant upside in the name under a new operating structure.


Quantitative Setup:  DRI – Bullish Formation – got through the event risk holding 51.39 TREND support




Fundamental Setup:  We like the KKD story.  It is a small cap growth company with a growing global footprint and the potential to double in size over the coming years.  It’s a volatile stock that will see large swings in sentiment given the company’s checkered history.  That being said, we believe it’s very likely KKD will wind up in the hands of a bigger company.  The company’s aggressive growth plans and strong balance sheet make it an attractive acquisition target for a foreign company.


Quantitative Setup:  KKD – 18.16 is long term TAIL support, I like it if that holds




Fundamental Setup:  Due to the successful new product momentum and the recent announcement of strategic operational initiatives, we believe the company is well positioned for 2014.  While there will likely be volatility around same-store sales trends, the new operating model will allow for continual improvement in the operating structure of the company.


Quantitative Setup:  WEN – best looking long on the entire list; TREND support = 8.24 needs to hold




Fundamental Setup:  YUM is our favorite long in the big cap QSR landscape and one of the best positioned stocks heading into 2014.  The main risk to our thesis continues to be persistent volatility in China, although we believe this is largely played out.  In our view, easy comparisons, new unit growth, and positive earnings momentum will lead to margin and multiple expansion over the next several quarters. 


Quantitative Setup:  YUM – back into a Bullish Formation w/ TRADE breakout line = 74.41





Fundamental Setup:  Admittedly, we may be biased against a business model that has proven multiple times that it simply does not work in the casual dining industry – but why wouldn’t we?  Bloomin’ Brands is another company that doesn’t make sense to us.  Contrary to what management teams like to tell you, the majority of multi-concept structures in the casual dining industry tend to create operational inefficiencies that only worsen over time.


Quantitative Setup:  BLMN – just broke TREND support of 24.28




Fundamental Setup:  MCD remains on the Hedgeye Best Ideas list as a short.  From a fundamental perspective, MCD is in secular decline.  At the end of 2013, senior management began to address some of the issues we’ve been harping on for the past year – but they didn’t go far enough to fix the business.


Quantitative Setup:  MCD – bullish TRADE (95.97 support); bearish TREND (97.29 resistance)




Fundamental Setup:  At the heart of it, Potbelly is a single daypart, low margin, low return sub shop with declining traffic and little competitive advantage over its most basic competitors.  Admittedly, these are not quite the qualities we’d expect to find in a company that is trading at a P/E of 73.8x and 19.1x EV/EBITDA on a NTM basis.  But, this is precisely what we have here.  To be clear, we believe Potbelly is a solid company with a strong management team, but it should not be trading at these levels.


Quantitative Setup:  PBPB – lower-highs and lower- lows; bearish TREND developing (needs more time)




Fundamental Setup:  We remain cautious on the casual dining segment and, despite strength in 2013, feel it is one of the weaker players in the space.  Being short RRGB in 2013 was our biggest mistake of the year.  Our short thesis was predicated on the company not delivering on improving traffic (which happened), but we misjudged the potential for a significant increase in average check.  We are encouraged by the quantitative breakdown.  We will look to get more active on the short side of this overpriced name.


Quantitative Setup:  RRGB – just broke its TREND (74.22), so this looks like the best new short on the list




Fundamental Setup:  Despite loving the long-term prospects of the company, we published a note yesterday heeding caution to investors in the short-term: “Our recent store visits in the Northeast suggest that the holiday season has not been as robust as anticipated.  If this is the case, we believe the trickle-down effect on slowing same-store sales are not yet fully reflected in the current share price.  With revenue growth decelerating, valuation close to a 3-year high and the likelihood that earnings will be revised down over the coming months, we see some short-term downside in the stock.“


Quantitative Setup:  SBUX – looks like a short developing; TRADE bearish w/ 79.41 resistance






Fundamental Setup:  BKW is another name we’ve been negative on that hasn’t worked.  Its 99% franchised business model and global growth opportunity has trumped the fundamentals of its U.S. business, which are lackluster at best.  We believe BKW’s strategy in the U.S. has led them to mimic MCD’s menu.  The problem is, this type of menu didn’t work out well for MCD, so why is this good news for BKW?  Shorting a raging bullish formation might not be the best strategy, but it sure is tempting.


Quantitative Setup:  BKW – raging bullish formation, so you’d need a catalyst – TREND support = 20.98




Fundamental Setup:  We’re not a fan of this name.  That being said, it has been a blockbuster stock for the past two years.  We can make a strong bearish case for the stock, but timing is crucial with this name.  We will be looking to get more active on BWLD in 2014.


Quantitative Setup:  BWLD – wouldn’t short this unless $134 TREND breaks




Fundamental Setup:  While management has verbally addressed many of the issues the company faces, it is still in the early stages of fixing these operations.  The street loves to love this company and its competitive position in the market place.  While our quantitative signal may disagree, PNRA remains on the Hedgeye Best Ideas list as a short for fundamental reasons.


Quantitative Setup:  PNRA – back to bullish TRADE and TREND w/ TREND support = $174ish




Feel free to call with questions.


Howard Penney

Managing Director





Adjusting hold to normal for both periods, December GGR would’ve grown a whopping 26% (off of a tough 20% compare) rather than the nominal 18% growth disclosed last week.  Of course, Mass led the way with 35% growth vs “only” 12% VIP revenue growth.  However, Rolling Chip volume actually grew over 23%.  The better than advertised December gives us more comfort in our January projection of 22-28% YoY growth.


Here are some Market and Operator takeaways from December:


Macau Market

  • Estimated VIP hold (adjusted for Direct VIP) was only 2.85% versus normal of 3.00% and 3.14% last year
  • The December comp of +20% was the most difficult since April
  • Even slot revenue participated, up 10% 


  • December was an outstanding month for the best positioned operator
  • LVS came within 60bps of share of overtaking SJM as top dog, driven in part to low hold
  • VIP hold (adjusted for Direct VIP) was higher at 3.3% vs 3.2% last year and normal of 2.8%
  • Mass share was slightly above trend but Rolling Chip share was well below trend due in part to the House playing lucky
  • GGR grew 31% YoY, 2nd only to Wynn
  • Mass growth of 57% led the market


  • WYNN is a growth story again! As we’ve discussed, Wynn Macau has made a more aggressive marketing/promotional push the last few months.
  • YoY growth led the market for the first time in years, despite lower than normal VIP hold
  • Mass growth of 30% was the property’s 2nd highest in 2 years
  • Encouragingly, Wynn’s Rolling Chip growth led the market
  • Mass and Rolling Chip share came in above recent trend


  • Share climbed above trend in December due to high hold – 50bps and 40bps above last year and normal, respectively
  • Mass share was higher than trend while Rolling Chip continues to trend lower – possible losing share to LVS and Wynn
  • GGR grew 25% YoY
  • RC was up only 2%
  • We think MPEL could be a market share loser in 2014


  • Hold fell well below last year but was close to normal
  • Mass revenue actually declined YoY – 1st time in 4 years -  no doubt as a result of Wynn’s aggressive Mass push
  • VIP volumes remain strong


  • Mass growth of “only” 28% was the lowest in 4 years
  • Rolling Chip volume growth remained strong
  • Market share was the 2nd lowest of 2013, due in part to low VIP hold 


  • VIP hold fell below last year's and normal, resulting in below trend market share
  • GGR grew only 8%, 2nd slowest behind MGM
  • On a YoY basis, SJM grew Mass 26% - the highest growth rate in nearly 2 years


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 80.52%
  • SHORT SIGNALS 78.67%






According to Secretary Tam, the government is considering a cap on electronic gaming in casinos and restricting the operations of slot machine parlours.  It is unclear if Mr Tam was referring to electronic table games with a live dealer, slot machines or both.  Tam said the government wanted to close all slot machine parlours outside casino premises.  A formal request to close slot parlours and the cap on “live” tables would be reviewed in tandem with the renewal of casino concessions next year and in 2016.  The cap on live tables may continue after 2022, Tam said.



MGM Macau’s Executive Director of Business Development – Casino Market, Michael Jensen said, “We expect that the market-wide growth of VIPs would probably be between 10-15%, and growth in the mass market may be between 25-30%, from a market perspective.”  Jensen said that they have been progressively increasing the minimum bets across the mass floor, and will continue to raise the amount in 2014. “The main reason for that is, particularly, the lack of supply or the lack of tables available for the mass market”.   As for the revenue during the Chinese New Year period, Jensen refused to predict the percentage growth for the period, only revealing that their hotel rooms have been fully booked. “We think there will be a substantial increase in players and people coming to Macau over that period. We are expecting growth year after year definitely."  



Treasure Island Entertainment Complex Ltd, a company linked to Genting Hong Kong Ltd, has outlined plans to build a boutique hotel on reclaimed land opposite the Casino Lisboa.  Chairman Yany Kwan said the proposal did not cover gaming facilities, but an unnamed source said gaming may be included.  The development, in Praça de Ferreira do Amaral near Nam Van Lake, could include a low-rise boutique hotel with hundreds of rooms, shops, and facilities for entertainment, meetings and exhibitions.  The working name for the project is Resorts World Macau, using the same brand as Malaysia’s Genting Group uses for its casino-resorts.  Treasure Island said the 8,100-square-metre site was granted in 2008.

Mother of All Doves

Client Talking Points

US Dollar

The greenback was back down yesterday on the heels of a #GrowthSlowing ISM Services report in the USA. That piece of economic news increases market speculation that Janet Yellen will back off on Fed taper talk – she is the Mother of All Doves, don’t forget. The US Dollar Index fails @Hedgeye TAIL resistance of $81.12.


The 10-Year Treasury yield holds yet another higher-low (and every line of support that matters in my model) at 2.96% ahead of the US employment report. There's no resistance to fresh highs of 3.05%. So yes, we’ll stay short Gold on that. $1185 support on that.


Simple math: If the Buck Burns, Euros win. It's hard for Keynesians to get this, but UK auto sales just hit their highest level since 2007 on a #StrongPound too. Why? A strong currency means strengthening confidence and higher European consumption growth. #EuroBulls.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hedgeye's detailed and constructive view on the improving fundamentals in the M&A market with a longer term perspective is a contrarian idea at odds with the rest of the Street which is overly focused on short-term results. From an intermediate term perspective, M&A is poised to break out in 2014. We are witnessing record amounts of cash on corporate balance sheets, continued low borrowing costs and the first positive fund raising round for Private Equity in four years. Moreover, a VIX in secular decline (this has historically benefited M&A), recent incrementally positive data points from leading M&A firms that dialogue has improved, and an improving deal tally from Greenhill & Company (GHL) themselves coming out of the summer all bode favorably for GHL.  So is a budding European economic recovery that would assist a global M&A market that has been range bound over the past three years. GHL stands out as a leading beneficiary of these developments.


Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged.  If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

Three for the Road


Yellen’s Senate confirmation vote (56-26) was the worst in Fed history – that’s progress @KeithMcCullough


"Hell, there are no rules here - we're trying to accomplish something." - Thomas Edison


Forget about Las Vegas. Macau has cemented its status as the undisputed heavyweight champion of the gambling industry. The Chinese territory reported gambling revenue of 360 billion patacas ($45 billion) for 2013, an increase of almost 20% over the previous year. If that sounds like a lot of cash, it is. Las Vegas will be lucky to make $6.5 billion, or 15% of Macau's total. (CNN)

What's New Today in Retail (1/7)

Takeaway: Abysmal ICSC reading…but marking meteoric rise of UA takes winter torch from NKE? Shrewd move by Li&Fung. SHLD PVH OXM MW UNIQLO



LULU: Consumers Challenge Our Bearish View - Friday 1/10 1:00pm EST


We reversed course and turned bearish on LULU in November for several reasons - such as concern over increased competitive pressure, waning relative value proposition, lack of focus inside the company, and the financial cost (and margin implication) for focus to return. But the purpose of this Black Book is not to tout our bear case, but rather to step back, open up our thought process, and challenge our thesis. We'll present our key issues to consumers in an unbiased non-leading way, and then we'll see how LULU customers chime in. We don't know what the results will be yet, but based on the results we expect to either a) back off of our bearish view, or b) gain conviction that the business is likely to get worse before it gets better. We're equally open to either option. The data will speak for itself.


TCS - Earnings Call: Tuesday 1/7 4:30 pm




ICSC - Chain Store Sales Index


Takeaway: This reading is simply bad. Numbers are still growing, which is good, but the growth rate isn't even in the same ball park as what we saw over the past two years. Our sense -- which unfortunately we cannot yet quantify -- is that this shows a dramatic shift to online shopping both pre and post holiday. Yes, we've been shopping online for years. But we think that online as a percent of total went parabolic this year. When we look at the 2013 holiday season in retrospect, it will be known as the point in time where bricks & mortar really started to take it on the chin. What this also goes to show is that so many 'sales monitoring' data sources that the Street has relied upon for years are losing relevance -- fast.


What's New Today in Retail (1/7) - chart3 1 7




JOSB, MW - Jos. A. Bank Urges Shareholders to Take no Action With Respect to Men's Wearhouse Tender Offer or Director Nominees



  • "The Board of Directors of Jos. A. Bank Clothiers, Inc. today confirmed that The Men's Wearhouse, Inc. has commenced an unsolicited tender offer to acquire all outstanding common shares of the Company at a price of $57.50 per share."
  • "The Board said that, consistent with its fiduciary duties, it will carefully review all aspects of the Men's Wearhouse offer in consultation with its financial and legal advisors and make a recommendation to shareholders, which will be outlined in a Statement on Schedule 14D-9 filed with the Securities and Exchange Commission on or before January 17, 2014."
  • "The Company's stockholders are advised to take no action on the tender offer until the Company's Board of Directors has announced its recommendation to stockholders."


Takeaway: So JOSB says it will uphold its fiduciary duties and fully evaluate the MW offer on its own merits. Does anyone want to bet that they come out against it after that fiduciary evaluation?


UA - UA has big presence at US Short Track Speed Skating Olympic Trials


What's New Today in Retail (1/7) - chart1 1 6


Takeaway: Short track speed skating has emerged as on of the most exciting events of the winter Olympics -- thanks in large part to Apolo Anton Ohno, who was a Nike poster-boy.  But there's a changing of the guard. Whether you look at the men's or women's competitors, UnderArmour's logo completely dominated in the Olympic Trials this past weekend. The only catch is that UA seems to have put its logo on the wrong side -- when the athletes are constantly making left turns on such a compressed track, the TV has a better shot at capturing the logo when its on the right side. But it made up for it by super-sizing the logo, which rivals the massive polo ponies Ralph Lauren uses at the US Open.

PVH - PVH CORP. Announces License Agreement with Axis Golf Pty. Limited for IZOD Brand



  • "PVH Corp. announced that it had entered into a license agreement with Axis Golf Pty. Limited under which Axis Golf will market and distribute men’s sportswear, golf apparel and related accessories under the IZOD brand in Australia, New Zealand, Fiji, and other South Pacific islands. The initial term of the license agreement runs through December 2018."
  • "IZOD products will be sold at Golf World and Golf Mart, two golf retail store chains owned by an affiliate of Axis Golf and into selected golf retail, sports retail, department stores and IZOD stores to be operated by Axis Golf. The license permits Axis Golf to manufacture, market and distribute IZOD dress shirts, neckwear, and underwear, in addition to the categories mentioned above, and distribute belts, headwear, watches, umbrellas and flip flops purchased from other licensees of IZOD across the region."


Takeaway: On one hand, we have to hand it to PVH -- these guys are striking new license deals across its portfolio at the speed of light. But on the flip side, the scope of this deal seems extremely broad. The 5-year deal basically allows the licensee to design, manufacture and sell Izod products across categories. We hope that PVH is maintaining the right to veto any product designs that it thinks are inconsistent with the brand. In fairness, the contract includes minimum sales hurdles on which royalties are generated. If Axis misses minimums due to poor product planning, then the royalty rate goes up, before ultimately going back to PVH if it doesn't perform. 


9983 - Fast Retailing Dec sales rise 4.1%



  • "Fast Retailing announces December 2013 sales report. December 2013 same-store sales increased by1.1% year on year while sales at our own stores increased by 3.7%. Total sales including online sales increased by 4.1%."


Takeaway: These numbers don't seem impressive at face value. But keep in mind that we're talking about a Japanese company here. Any positive comp is good news. Granted, we suspect that most of the comp was driven by its International operations -- most notably US and Western Europe. But we'll take what we can get on this one. For those unfamiliar with the name, its primary concept is UNIQLO -- the same brand that sponsors Novak Djokovic.  Here's some useless trivia for you… The company started off with the name Unique Clothing Warehouse. But they shortened it to UniClo. But when they registered the subsidiary in Hong Kong, there was a clerical error that substituted the 'C' with a 'Q'. The embraced the mistake and never changed back. 


SHLD - Sears And Kmart Shoppers Can Now Score Rewards Points By Getting Fit



  • "Starting Friday, members of Sears’ loyalty program can earn points toward purchases at Sears and Kmart by logging into the Hoffman Estates-based retailer’s fitness site,, and tracking their physical activity."
  • "The Points for Progress program works with fitness apps and devices — the device must be a Fitbit or BodyMedia brand, both sold by Sears — and with Netpulse-enabled fitness equipment at more than 500 gyms in the U.S. and Canada."


Takeaway: We're fans of any initiative that is designed to boost fitness/activity levels -- even for Sears. But we question whether the average Sears customer will actually care -- especially when a significant purchase is required to earn points. Nonetheless, the company will likely get a tax credit, which is good because it needs every dollar it can get.


OXM - Tommy Bahama Dives Deep Into Footwear



  • "Tommy Bahama...just relaunched its footwear collection to include everything from flip-flops and boat shoes to espadrilles." 
  • "For spring ’14, women’s footwear features ocean-inspired elements, such as flip-flops with beaded starfish uppers, boat-shoe inspired espadrilles and cork-bottom platform slides. On the men’s side, offerings include barefoot driving mocs, canvas slip-ons and fisherman sandals."
  • "Currently, men’s accounts for 60 percent of the footwear mix and retails from $58 to $198. Women’s product is priced from $28 to $148."


Takeaway: The irony that Tommy Bahama makes a splash about warm-weather footwear on one of the coldest days on record.


494 - Li & Fung Sets Up Factory And Worker Safety Unit



  • "Li & Fung Ltd. has created a new business unit to focus on factory and worker safety."
  • "The new unit, called Vendor Support Services, is part of the firm's new three year business plan that will be disclosed more fully when the company reports full-year results in March."
  • "The new unit will be led by group chairman Dr. William K. Fung. It will incorporate the firm's existing range of support services to factories."
  • "'As the leading sourcing company in the world, we feel our responsibility is to play an even bigger role in bringing about and speeding up systematic positive change in the industry,' Fung said."


Takeaway: The guy is right. This is the right thing from a workplace safety perspective -- that's obvious. But it also raises the bar for virtually everyone else in the industry, many of whom can't financially afford to keep up. Ironically, by driving forward a workplace safety agenda, Li & Fung could shake out some marginal capacity in this business.


Loehmann's - Loehmann's IP Assets Sold



  • "According to bankruptcy court records docketed on Monday, Esopus Creek Value Series Fund LP is the successful bidder for the Loehmann’s intellectual property assets and customer lists. Madison Capital Holdings won the bidding for the 39 store leases and a joint venture among SB Capital Group, Tiger Capital Group and A&G Realty Partners has acquired the inventory that will be liquidated, furniture and fixtures, accounts receivable and cash in a court-approved auction held on Friday and Saturday. The auction results are still subject to Manhattan bankruptcy court approval this afternoon."


Takeaway: So few retailers that go bankrupt actually go away. But make no mistake, Loehmann's is history. Unlike what we've seen with consumer electronics retailers like Circuit City that go under and many locations are reborn as similar shops -- like PC Richard -- we think it's pretty safe to assume that the lion's share of this capacity will leave the apparel industry for quite some time.




More Than $250M Lost During Cambodia Strikes



  • "The Cambodian apparel industry suffered estimated losses of more than $250 million in sales and investment during the nearly two-week nationwide strikes staged by its workforce to protest for higher wages."

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