$LNCO Hammered 30% Since Kaiser's Call: More Pain to Come?

Hedgeye Managing Director and Energy Sector Head Kevin Kaiser explained back in November why he remains the bear on shares of LINN Energy (LINE) and Linn Co (LNCO).



For the record, Kaiser added Linn Co as a best idea SHORT back on March 21, 2013. The stock has fallen -30% since then.  


Not bad considering the S&P 500 is up +20% during this time.

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PNRA remains on the Hedgeye Best Ideas list as a SHORT.


Following Panera’s Investor Day, we have upped our conviction in PNRA as a high quality short.  Since the end of January, the stock has largely traded off of overly optimistic expectations, rallying more than 12% in anticipation of the event.  However, after revealing a more sober financial outlook than most anticipated, the stock should sell off on reset expectations.


Panera announced a number of initiatives yesterday, many of which we liked.  These, ultimately, will lead to the culmination of a new to-go experience, a new eat-in experience, and a new catering business:

  • The new to-go experience will allow customers to order in the store or in advance on their mobile phones, leverage the MyPanera app (saved favorites, customization, rewards), and establish a specific time for pickup.
  • The new eat-in experience will incorporate fast line kiosks from which the customer can order and pay, before sitting down at a table and having their food served to them.
  • The new catering experience will run out of delivery hubs, which will enhance café capacity and focus and allow for both small and large order delivery.

It is Panera’s goal to thrive in a digital future and we believe they have an innovative, feasible plan in place to deliver on this.  With that being said, these initiatives require significant investment which likely means that 2014 and 2015 will be nothing more than investment years.  As management reiterated time and time again, they are positioning themselves to drive long-term success which means that there will be some near-term pain.


We remain bearish on Panera for the following reasons:

  1. No guidance – Management reiterated 2014 guidance but would not provide any guidance for 2015.  This lack of visibility is concerning, but understandable.  Management simply doesn’t know what to expect.  The majority of Panera 2.0 will not be rolled out until the end of 2015, meaning it will likely be another significant, margin compressing investment year.
  2. Conscious cannibalization – This is a phrase we never like to hear management teams use.  This, to us, is an indication of market maturity and while we understand the concept of growing units and overall sales, we never like to see this done at the expense of another store.  Growing at lower returns is always a red flag.
  3. Low returns – Among the P&L implications for Panera 2.0 are increased labor and training, higher credit card usage, fees related to IT, and depreciation, all of which will have a dampening effect on margins.  Management would not commit to higher margins post the rollout.

Considering the bulk of the investment will come in 2015, we believe it is unlikely Panera will be able to deliver the 18% earnings growth the street is expecting.  After a prolonged disconnect, we expect the stock to begin reflecting the fundamentals as the street comes back to reality. 






Recent Notes

12/19/13  Best Idea Update: Short PNRA

10/23/13  PNRA: The Pace Of Change?

10/21/13  PNRA: Stage 1 Denial

09/26/13  PNRA: No Quick-Fix Recipe

07/23/13  PNRA: Short Thesis Playing Out As Expected, Part II

04/24/13  PNRA: Short Thesis Playing Out As Expected

04/05/13  PNRA Hype Makes It Shortable

03/26/13  PNRA Happy Camper Facing QSR Wounded Bears

02/15/13  PNRA Mix Tapped Out?

01/30/13  PNRA Bread Not Quite Baked



Howard Penney

Managing Director


Fred Masotta



Retail Callouts (3/26): PVH, KSS, LULU, WWW, SHLD, APP

Takeaway: PVH -- masters of spin. KSS top merchant out. LULU warehouse sale. WWW/Keds gets French. SHLD 17 line, seriously? APP deal, stock off 30%.




  • HMB - Earnings Call: Thursday 3/27, 9:00am
  • LULU - Earnings Call: Thursday 3/27, 9:00am
  • RH - Earnings Call: Thursday 3/27, 5:00pm


  • FINL - Earnings Call: Friday 3/28, 8:30am




PVH - 4Q13 Earnings


Takeaway: Slight miss on the top line and a heavily adjusted beat on the bottom line = not a bad quarter for PVH. 1Q revenue guidance was in line with the streets expectations with the earnings number considerably below. $0.10 of that was due to a higher projected tax rate in 1Q14 vs. 1Q13. Inventories are unquestionably too high growing 46% on top of a 25% sales gain. For the record, no retailer should have a 19-page press release. The special charge reconciliation was painful.


Retail Callouts (3/26): PVH, KSS, LULU, WWW, SHLD, APP - chart1 3 26


KSS - Kohl's Chief Merchant to Exit



  • "Donald Brennan, chief merchandising officer of Kohl’s Corp., will leave the company on April 1. Brennan, who has been with since 2001, has been Kohl’s chief merchant since 2007 and earlier served as general merchandise manager of men’s and children’s and executive vice president of merchandising planning and allocation."


Takeaway: Resignation looks a lot more like termination when you consider the compensation package Brennan left with. It's clear that KSS is going in a different direction with a bigger emphasis on national brands. This move definitely supports that -- at least from where we sit. As an aside, we have never seen a chief merchant exit during a time of product success at a retailer.


LULU - 10 Things to Know About Lululemon's Warehouse Sale



  • "As previously reported, Lululemon has selected Minneapolis, Minnesota as the next city to host its warehouse sale. It's a straight shot from the Mall of America and is going down this weekend, March 28 through March 30."
  • "There is a 25 total item limit per guest (per visit). Athleticwear hoarders and eBay resellers be warned."


Retail Callouts (3/26): PVH, KSS, LULU, WWW, SHLD, APP - chart2 3 26


Takeaway: We've talked about the need for LULU to develop a discounting strategy as it grows to over $3bil in revenue by 2018. For now this is a good strategy as it allows the brand to liquidate inventory reserves and keep its full price floor set clean of discounted merchandise. But this approach -- or something like it -- will need to be scaled tremendously if the brand wants to grow up.


WWW - Buzz: Gandys, Keds & FitFlop



  • "For spring ’14, French retailer Comptoir des Cotonniers is unveiling a special collaboration with Keds in-store and on its e-commerce site. The classic cotton canvas plimsoll will be offered in two colorways: sand and flag-blue feathered print with coordinating laces. A limited-edition version of the blue print also will be included, featuring black laces and sole. The sneakers will retail for $100 starting in mid-April."


Retail Callouts (3/26): PVH, KSS, LULU, WWW, SHLD, APP - chart3 3 26


Takeaway: Keds is building on its partnership with Kate, Taylor Swift, and Hollister. More importantly, this partnership is with a retailer outside the US. Prior to the WWW acquisition Keds was a $80mm brand (after shrinking from $500mm in the 1990s) with virtually no sales outside the US.  Now the brand has WWW's logistics network behind it and some key partnerships with international brands that will help it gain exposure.




SHLD - Sears to Launch Seventeen Line



  • "The Hearst partnering with Sears to create a full line of clothing, shoes and accessories. The collection will be sold in 500-square-foot Seventeen-branded shops-in-shop in Sears’ 10 flagships and 500 additional Sears doors. The shops will feature Seventeen signage, interactive elements, charging stations and image pieces."


APP - American Apparel to Sell Stock to Head Off Cash Crunch



  • "American Apparel Inc., facing another cash crunch, plans to sell $30.5 million of stock to pour more money into its attempted turnaround and meet looming debt payments."
  • "The funds will cover interest due next month on its senior secured notes...The underwriters also have a 30-day option to buy as much as $4.58 million in additional shares. The company’s market value was $83.4 million at yesterday’s close."

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FedEx Weathers Brutal Winter | $FDX

Takeaway: The latest report looks relatively uninteresting. There's nothing wrong with that.

Editor's Note: This research note was originally published March 19, 2014 by Hedgeye’s Industrials Sector Head Jay Van Sciver. For more information on Hedgeye please click here.


FedEx Weathers Brutal Winter | $FDX - fedex courier services snow small 83175


Excluding the impact of weather, FedEx (FDX) reported a solid quarter on several key metrics.  This was the toughest winter in which FDX has “ever” operated, according to CEO Fred Smith, who probably knows.


But are the profit improvement plan benefits accelerating? 


There are a number of adjustments that are needed to make the year-over-year comparison and it would be a mistake to read too much into a single troubled quarter, but FY3Q 14 looks pretty good for a challenged quarter (Express margin up about 50-70 bps on our adjustments). Not exactly acceleration, but this was not the quarter to expect it. 


As usual, we will want to see the 10-Q, particularly on what looks like weaker cash generation.  On balance, the report looks relatively uninteresting (nothing wrong with that) and we do not see anything so far that meaningfully impacts our longer-term thesis. 

Key Points

FedEx Express Margins: To make a decent year-over-year comparison on the operations at FedEx Express, one needs to make a number of adjustments. One extra operating day, with one-third to one-half of costs not varying, is a year-on-year benefit. Weather was a $70 million headwind, according to management.


We estimate that fuel surcharge timing was a slight headwind year-over-year (while a significant absolute negative in both periods) and the postal service contract was also a negative YoY, partly offset by lower pension. Business realignment charges impacted both periods, but were larger in the year ago quarter. Adjusting for those items, we get a rough 50-70 basis point improvement. That seems good enough to maintain expectations for the eventual success of the profit improvement program. Of course, the profit improvement plan goal is to deliver closer to ~5x that gain by FY16, with that progress coming more slowly.


FedEx Ground: Excluding the estimated impact of weather, FedEx Ground showed a solid margin of ~17.1%, in line with guidance.  Some may have expected the late Thanksgiving holiday to push a greater improvement in FY2Q 14, but the result is probably good enough even with the Ground operating day add in. Next year, a late Thanksgiving will also compress the e-commerce shopping season and we expect both FDX and UPS will be better prepared for high peak volumes. 


Outlook and Buyback: When asked about 2015 estimates, management highlighted the share repurchase program. The repurchase does get FDX a good part of the way to meeting consensus, when combined with the current profit improvement plan momentum. We should receive better insight into 2015 with the June release.


Given the unusual operating environment and adjustments, it is hard to extrapolate FY3Q 14 results too far. That said, it looks okay and we do not expect a particularly interesting reaction to the report. FedEx Express remains reasonably on track with respect to its profit goals in a challenging operating environment.

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Takeaway: Headwinds are industry and company specific, in our opinion.

IGT confirms what a lot of people already knew - guidance was way too high. 




  • NA GGR environment:  declines are broad-based and greater than anticipated
  • Continued fragmentation in the industry, primarily in North America
  • Continued structural challenges in international marketplaces
  • Had assumed in previous 2014 guidance that Argentina restrictions would not get worse; but in fact, restrictions had been tightened recently. Only a fraction of the 2,200 units will be shipped to Argentina.
  • Cost-cuts:  Will be focused on senior executives
  • Wheel of Fortune agreement with Sony:  to protect highest performer in company history; categorized as acquisition of intellectual capital ($185MM payment)
  • Powerbucks:  provides differentiation in megaJackpot area
  • Doubledown:  will grow 20% in 2014
  • IGT Systems business also doing well
  • Expect Greece/US replacement cycle to resume at some point

Q & A

  • Consumers feeling pressure
  • Gaming ops:  more sensitivity to operating environment than its competitors
  • Feels better about March
  • Cost cuts are permanent
  • Product sales disproportionately impacted by international challenges
  • No additional repurchases in 1Q
  • FCF:  bascially proportionally impacted by top-line
  • Lower guidance:  MLP pressure and NA GGR weakness.  Product sales division is more affected than gaming ops.
  • 1st priority: investment in business e.g. Wheel of Fortune/Sony
  • 2nd priority:  share buybacks/dividends
  • View shares as favorably priced 
  • DoubleDown:  largely R&D - so protected from cost cuts
  • Visibility has not changed
  • Positioned for 2015/2016 growth
  • FX headwind:  euro/argentina/australia; will take a devaluation on Argentina
  • FQ2:  simliar trends seen through the lowered guidance for the full year
  • 2014 severance charges:  $8-9MM (excluded from guidance range of $1.00-$1.10)
  • More consolidation could happen in the industry
  • Avatar product doing very well - top end of yield #s

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