Takeaway: Lululemon shares are tanking. Hedgeye's Brian McGough nailed it.
Got process? Brian McGough does.
Hedgeye’s Retail Guru-In-Chief held a jam-packed conference call this past Friday outlining his concerns and bearish thesis for Lululemon. Here’s one key chart among three or four dozen from his deck.
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Fast forward to this morning.
Lululemon is getting crushed down 18%. Cutting your forecast, lingering effects of an embarrassing recall and controversial comments by its founder will do that to you.
According to McGough, this is a top line issue for LULU. To be fair, it’s in line with what myriad retailers have said over the past week. On the flip side however, he says LULU has always been immune to any kind of Macro fluctuations.
The point here? The competitive landscape has gotten so fierce, and its sales productivity has gotten so high, that Lululemon needs to fundamentally change how it operates the business.
Finally, McGough mentions that the company is set to present tomorrow down in Orlando at ICR. But their new CEO won’t be there – at least that’s the plan.
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Before we get to the projections, we would like to point out one strange anomaly: the first 13 days of last year January produced exactly the same table revenue as the first 12 days as this year – HK$11,625 million. We’ve seen the Macau government use placeholders before so we would caution investors that this week’s numbers may not be reliable. Typically, placeholder weeks are followed by the volatility one would expect from a catch up month.
Assuming the numbers are real, average daily table revenues grew 1% above the comparable period last year and are up over 8% YTD. We are reducing our full month estimate from 22-28% YoY growth to 19-25% as a result of the softer week and expectation that virtually all of the incremental gaming revenue from the Chinese New Year celebration will occur in February. Our estimates for January and February growth remain above the Street consensus.
Anecdotally, we’re hearing that VIP volumes remain high, VIP hold may be a little low, and Mass traffic has slowed from week one to week two.
In terms of market shares, SJM is the big loser while LVS the winner this past week. Month to date, MGM has moderated but still remains above trend as does LVS and Galaxy.
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Takeaway: We expect this outperformance to continue, provided that the US Dollar doesn’t breakout versus the Euro.
Any idea what the Top-3 stock markets in the world are year-to-date?
They are all European. Greece, Portugal, and Austria. Incidentally, European Stocks handily beat US and Asian Stocks last week with Spain +5.0% and Austria +4.9% leading #GrowthDivergences.
We expect this outperformance to continue, provided that the US Dollar doesn’t breakout versus the Euro.
Take a look at our #GrowthDivergences Macro Theme for Q1. (Ping firstname.lastname@example.org for access.)
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BLMN continues to be on the Hedgeye Best Ideas list as a SHORT.
4Q ESTIMATES ARE TOO AGGRESSIVE
The likelihood that BLMN reports 5.7% revenue growth and 35% EPS growth in 4Q13 is slim. The company only reported 1.5% revenue growth and 25% EPS growth, after missing same-restaurant sales, in 3Q13. The current 4Q consensus EPS estimate for BLMN is $0.27. We see this number coming in closer to $0.24-$0.25, which will largely depend upon the company's ability to manage the labor line (manager bonuses) in order to mitigate the sales shortfall.
Additionally we see BLMN missing sales estimates by 2-3%. As it stands, the street is looking for 4Q same-restaurant sales of 2.1%. We believe this is too aggressive, evidenced by the chart below.
THE STREET’S BULL CASE
The current bull case for BLMN either goes something like this:
“We believe Bloomin’ Brands should be viewed as a unique and compelling casual dining portfolio, with strong brands across multiple categories. The portfolio combines the maturity and industry leadership of Outback U.S. along with the growth of Bonefish, Outback International and Carrabba’s. Looking to 2014, we expect comp outperformance to prevail, and cost savings to be large, supporting high-teens EPS growth. While casual dining remains challenged, we believe the relative strengths of the Bloomin’ portfolio make a compelling long-term investment.”
Or something like this:
“Bloomin’ has the internal same-store sales drivers and margin improvement/productivity initiatives to offset a tough casual dining environment and outperform its peers.”
WHY THE BULL CASE IS WRONG
First, there has NEVER been a successful, much less compelling company in the casual dining sector that consisted of a “casual dining portfolio, with strong brands across multiple categories.” It doesn’t matter whether you sell fish, chicken, or steak if people aren’t going out to eat. The best run restaurants focus on doing one thing right.
Second, the casual dining industry is in secular decline. According to Knapp Track data, after declining -2.6% in 2013, the industry reported its eight consecutive annual decline in same-restaurant traffic. A company with a portfolio of brands imbedded in an industry in a secular decline is at greater risk of missing the numbers than a company focused on doing one thing right. Another issue BLMN faces is the fact that the company is trying to grow capacity in the midst of a secular decline in traffic – a strategy that DRI has proven to be a huge mistake.
Third, where is the margin improvement? Since going public, the company has been telling the story of “improvement/productivity initiatives” which we believe has not materialized. On a TTM basis in 3Q13, restaurant level margins declined 36 bps as operating margins improved 58 bps.
Client Talking Points
The Yen is up another +0.8% this morning versus the US Dollar to +2.0% year-to-date. This is after being up +0.7% last week with the USD Index down -0.2%. Consensus is not as short Yen as it was, but the net short position (CTFC futures/options) of -130,749 contracts is still enormous.
The 10-year Treasury yield got smoked for a -14 basis point loss last week, and isn’t moving this morning either. Meanwhile, Gold can get interesting on the long side again if the 10-year yield starts making lower highs versus 2.99%. Gold is finally signaling a higher-low of $1195 support.
The Top-3 stock markets in the world year-to-date? They are all European (Greece, Portugal, and Austria). We expect that to continue provided that the US Dollar doesn’t breakout versus the Euro. Take a look at our #GrowthDivergencesMacro Theme for Q1. (Ping email@example.com for access.) Yes - we also remain long of Germany. Incidentally, the SPX risk range this morning is 1825-1850.
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Top Long Ideas
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.
We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.
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
TWEET OF THE DAY
Fun watching guys use macro indicators that went stale 1/2 a decade ago #BalticDry @KeithMcCullough
QUOTE OF THE DAY
"Your life does not get better by chance, it gets better by change."
STAT OF THE DAY
Got #GrowthDivergences? European Stocks beat US and Asian Stocks last week with Spain +5.0% and Austria +4.9% leading. Boom.
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