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Bad News for Bricks & Mortar

Takeaway: We think that online shopping as a percent of total went parabolic this year.

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 when bricks & mortar really started to take it on the chin.


Bad News for Bricks & Mortar - bri


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.


(Editor's Note: This is a complimentary research excerpt from Retail Sector Head Brian McGough.)

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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 80.45%
  • SHORT SIGNALS 78.37%

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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