The table below lists our Investment Ideas as well as our Watch List – a list of potential ideas that we are in the process of evaluating. We intend to update this table regularly and will provide detail on any material changes.
DFRG We’ve recently added Del Frisco’s Restaurant Group to our Best Ideas list as a short. We’re hosting a call on Thursday at 11am EST to run through our thesis and field questions.
PNRA We’ve removed Panera Bread Company from our Best Ideas list as a short.
CAKE We’ve removed The Cheesecake Factory from our Best Ideas list as a short.
06/02/14 Monday Mashup: PLKI, BNNY and More
06/03/14 KKD: Concerns Are Overdone
06/05/14 New Best Idea: Short DFRG
06/06/14 Employment Data Mixed
06/09/14 CAKE: Closing Best Idea Short
06/09/14 PNRA: Closing Best Idea Short
Events This Week
06/09/14 MCD May 2014 Sales and Revenue Release
06/10/14 William Blair Growth Stock Conference: SONC
06/10/14 Piper Jaffray Consumer Conference: CAKE, RUTH, IRG, NDLS, BAGL, FRGI, ZOES
06/11/14 William Blair Growth Stock Conference: BNNY, CMG, SBUX, PBPB
06/11/14 Piper Jaffray Consumer Conference: BBRG, SONC, PLKI, DFRG, DEN
06/12/14 DFRG Hedgeye Best Idea Short Conference Call
06/12/14 William Blair Growth Stock Conference: ZOES, FRSH
06/12/14 TAST Annual General Meeting
Chart of the Day
Del Frisco’s Restaurant Group (DFRG) We continue to believe this stock is disconnected from the fundamentals and have recently added it to our Best Ideas list as a short.
Recent News Flow
Monday, June 2nd
- DENN celebrated 25 years in Puerto Rico and announced plans for its 13th local restaurant that is set to open in Aguadilla in early 2015.
- DRI Starboard delivered a letter to Darden condemning the Board and withdrawing their request for a Special Meeting. Starboard remains committed to replacing a majority of the Board.
Tuesday, June 3rd
- DIN In a move expected to bring 250 jobs to the Guam economy, IHOP signed an agreement with Pacific Pancakes, LLC, to open three restaurants on the Island by 2018.
- WEN announced the hiring of Liliana Esposito to Chief Communications Officer. Esposito previously served as VP, Corporate Communications and Public Affairs, at Dean Foods.
Wednesday, June 4th
- RT Longbow Research reiterated its buy rating with a $10 PT, citing improving same-store sales driven by improved menu offerings and store designs.
- WEN introduced a new LTO – the Strawberry Fields Chicken Salad. According to the company, the new salad “serves up hand-sliced California strawberries, savory Applewood Smoked bacon, crumbled blue cheese and freshly slice red onion in every forkful.” The salad has a suggested price of $4.49 and $6.49 for the half-size and full-size, respectively.
- DNKN announced it surpassed one million DD Perks Reward Program members after launching nationwide earlier this year.
Thursday, June 5th
- PNRA announced 100% franchise commitment to Panera 2.0. The full 2.0 system is expected to be rolled out to approximately 100 cafes by year end. Panera also announced a new three-year, $600M share repurchase program.
- CAKE announced the opening of its newest restaurant in Lenox Square Atlanta. The restaurant is approximately 8,700 square feet in size and accommodates 215 guests.
Friday, June 6th
- DFRG Buckingham Research initiated coverage of Del Frisco’s with a buy rating and $35 PT.
US Macro Consumption
The XLY (+1.9%) outperformed the SPX (+1.3%) last week, as both casual dining and quick service stocks outperformed the narrower XLY index.
XLY Quantitative Setup
Casual Dining Restaurants
Quick Service Restaurants
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Tickers: LVS, MGM, 1928, 0880, 1680, CCL
- Tues June 10: HLT lock-up expiration
- Tues June 10-Thurs June 12: Bally Systems User Conference Mohegan Sun
- Thurs June 12: Blackstone Investor Day 8:00 am
LVS & 1928.HK – The Macau government has ordered Sands China and its contractor to suspend the construction works for Parisian Macao as well as review and improve safety standards as a result of falling scaffolding which injured a worker on Saturday. The government did not indicate when construction would resume.
Takeaway: Not expected to delay the opening.
MGM – This week the Massachusetts Gaming Commission will hold a series of final vetting meetings in Springfield and Boston leading up to Friday's Commission vote for the awarding of the Western Region casino license. MGM wants to build a $800 million, casino-294-room hotel-convention center resort in Springfield.
Takeaway: MGM has repeatedly requested permission to delay paying the initial deposits ($200 million) until at least early July when the MA Supreme Judicial Court decides on whether to allow a voter referendum in November.
Macau Legend 1680.HK– confirmed the first of three new hotels in the Macau Fisherman’s Wharf theme park will open in 3Q 2014 - earlier than the 4Q 2014 opening. Also, construction on the second hotel Legend Palace casino-hotel is ahead of the original schedule and should be ready in 2Q 2015 vs 3Q 2015. The two new casinos are still subject to the approval of Macau’s Gaming Inspection and Coordination Bureau. They are expected to accommodate 350 new gaming tables, if approved by the gaming regulator. Macau Legend intends to allocate 20% to 40% of the new gaming tables to VIP rooms in the new hotels.
Takeaway: Good to see construction progress better than forecasted for a change.
SJM 0880.HK – CEO Ambrose So indicated the Lisboa Palace project currently under construction in Cotai may go over budget due to higher salary and material costs. During the Company's shareholder meeting the chief executive of SJM also conceded that the project could be delayed. The project was originally budgeted at HK$25 billion (25.7 billion patacas) but its first budget has already been increased to HK$30 billion (31 billion patacas).
Takeaway: Definitely not the first to raise capex projection for a Cotai project.
CCL - Insider 1994 B. Shares LP Ma (Micky Arison's irrevocable trust) sold 521,077 shares of stock on Wednesday, June 4th at an average price of $40.11 and now owns 97,252,408 shares. The shares were sold pursuant to a Rule 10b5-1(c) sales plan dated February 28, 2014.
NCLH - Andy Stuart, EVP global sales and passenger services, netted $2.37m from the sale of 70,000 NCLH shares at a weighted average price of $33.93. According to a filing, Stuart still holds 225,126 shares.
Nevada May Consider Videogaming – The Nevada Gaming Commission commission wants the State of Nevada to change its laws so that the commission itself would be allowed to decide on its own ways to expand the gaming market, and at a legislative study committee vetted the subject of allowing skill-based games in casinos
Takeaway: This would be a positive for casino gaming as skill-based games appeal to Generation X, Y and Millennials. Baby Boomers appear to be the last of the traditional slot players so a change is necessary. We've only been talking about this for 4 years.
China Visitation to Hong Kong – during the Tuen Ng (Dragon Boat) Festival holiday period that lasted from May 31 to June 2, Hong Kong, whose tourist arrival base is bigger than Macau’s, recently recorded a rare 1.6% YoY drop in mainland visitor arrivals at about over 387,700 during the 3-day Labour Day holiday starting on May 1, a fall beyond the expectations of the local tourism sector.
Takeaway: A concerning negative headline for visitation.
Macau Infrastructure – (Macau Daily Times) The Marine and Water Bureau Director Wong Soi Man claimed that the sea passenger transportation industry is waiting to review the impact of the Hong Kong-Zhuhai-Macau Bridge. As a result, her department has gone two years without receiving any application for new routes between Hong Kong and Macau. “Everybody is waiting to see how the opening of the Hong Kong-Zhuhai-Macau Bridge in 2016/17 will influence the sea passenger transport."
Takeaway: Interesting to us as we've heard anecdotal stories about peak hours ferry sold out for hours which would imply the need and demand for immediate additional ferry service.
Revel Employees Vote for Union – Revel had been Atlantic City's only non-union casino since its 2012 opening. However, Revel employees voted late Friday night to join Local 54 of the Unite-HERE union. About 80% of the workers who cast ballots voted to join the union.
Takeaway: A negative overhang to the potential sale of Revel.
Fire Damages Anthem of the Seas (Cruise Critic UK) – RCL's Anthem of the Seas has suffered €50,000 (approx $68,000) of damage after fire broke out on June 5 at the shipyard where it is being constructed.
Takeaway: Could be a slight delay to April 2015 launch
Hedgeye remains negative on consumer spending and believes in more inflation. Following a great call on rising housing prices, the Hedgeye
Macro/Financials team is turning decidedly less positive.
Takeaway: We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.
Takeaway: Updated Hedgeye Retail Ideas list. WMT curious shopper data disclosure. FOSL - Tory Burch watch line to debut in Fall
HEDGEYE RETAIL IDEAS LIST
*Deleted RL and WSM from Short Bench and added both to Long Bench.
EVENTS TO WATCH
- FRAN - Earnings Call: 8:30am
- ULTA - Earnings Call: 5:00pm
- RH - Earnings Call: 5:00pm
- LULU - Earnings Call: 9:00am
WMT - Shopper Data Stats
Takeaway: This is one of the strangest tweets we've ever seen from a company. We're not sure how WMT thinks customers will react to it touting how much information it has on their shopping behavior. From where we sit, it makes a lot more sense for WMT to simply pipe down and use the information to optimize the pricing part of equation around the type of product it has in its stores. It's presumably doing that already -- which we'd arguably makes this a bearish statement by the company. It has 30 petabytes of shopping information, and still can't comp. McMillon shouldn't have signed his name to this tweet.
FDO - Carl Icahn discloses 9.4% stake in Family Dollar
- "Carl Icahn reported a 9.4% stake in Family Dollar Stores Inc., calling the stock undervalued and saying he plans to agitate for changes."
- "Icahn said he plans to seek discussions with the retailer’s management to discuss 'strategies to enhance shareholder value,' potentially including the 'exploration of strategic alternatives.' The billionaire investor made the statement in a filing Friday with the Securities and Exchange Commission."
- "Icahn said he and his affiliates 'may also determine to seek shareholder board representation if appropriate.'"
Takeaway: Interesting move here. From where we sit, FDO clearly has a sub-par real estate portfolio when compared to it's arch-rival, Dollar General. After shifting incrementally to consumables to drive traffic, now it's resorting to less desirable items like tobacco. We've looked at FDO so many times, and never did we ever walk away thinking that it is a long -- except in a situation where you want a levered bet on the low-end US consumer (something we have not wanted in a while). The point here is that FDO strikes us as one of those companies where an activist can't be the catalyst for meaningful change inside the company. If anything, it'd be that Icahn looks to get this company sold.
FOSL, JWN - Tory Burch Extends Brand Into Watches
- "Tory Burch has teamed with Fossil Group to launch her first watch collection, due out in October.
- Burch and Fossil first inked the deal in February 2013, and over the past 15 months have worked together to shape the debut collection. The final selection features nine models done in multiple colorways, and will be unveiled to press on Wednesday."
- "The... collection ranges in price from $350 to $695. The price point places Burch higher than watches by Kors (which retail from $140 to $550) and Marc by Marc Jacobs (priced from $150 to $350)."
- "The initial collection will be available exclusively at Nordstrom, as well as at Tory Burch stores and on toryburch.com."
Takeaway: Logical next category for Tory Burch following in the footsteps of KORS and KATE who have looked to watches, jewelry, and accessories to support the next leg of growth. Not a direct competitor to the two aforementioned names given Burch's much higher price points, but definitely competition on the fringe. FOSL keeps winning these licenses given its high-quality, low-cost status in the industry, which has helped offset the secular slowdown in the watch category.
AEO - American Eagle to open UK stores
- "The fashion chain is in talks to open a store at Westfield’s Stratford City shopping centre, as well as at its west London centre and Bluewater in Kent."
- "The company has filed documents at Companies House to create a UK subsidiary called American Eagle Outfitters UK Limited, paving the way for it to open stores."
- "A total of 31 international retailers opened stores in London for the first time last year, including US fashion retailer J Crew and luxury brand Tom Ford. This means that 57pc of international brands – almost three in five – have a presence in London."
CWTR - Sycamore Acquires Coldwater Creek IP Assets
- "Private equity firm Sycamore Partners has acquired the intellectual property assets of bankrupt women’s specialty retailer Coldwater Creek."
- "The purchase, which included customer lists, was through a Sycamore affiliate, CWC Direct LLC, last month at a bankruptcy court auction in Delaware. A Delaware bankruptcy court has already approved the acquisition."
- "A source familiar with Sycamore’s plans said the financial firm intends to reestablish the business in the future. The entity would operate as a separate company under Sycamore’s growing portfolio that now includes Talbots, Hot Topic and the former Jones Group brands."
The table below lists our current investment ideas as well as a list of potential ideas we are in the process of evaluating (watch list). We intend to update this table regularly and will provide detail on any material changes.
Consumer Staples rose +0.4% week-over-week versus the broader market (S&P500) up +1.3%. XLP is up 5.2% year-to-date versus the SPX at 5.5%.
EVENTS THIS WEEK
6/10/14 HAIN Piper Jaffray Consumer Conference 10:35am EST
6/10/14 REV Annual General Meeting TBD
6/11/14 BNNY William Blair Growth Stock Conference 9am EST
6/11/14 SMG William Blair Growth Stock Conference 3:40pm EST
6/12/14 JAH Annual General Meeting TBD
XLP remains bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up.
The Hedgeye U.S. Consumption Model has shown steady improvement over the past month, with 5 of the 12 U.S. Economic Indicators flashing green.
Despite the bullish quantitative set-up for the sector, we continue to believe that the group is facing numerous headwinds, including:
- U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating, and Q2 2014 theme of #ConsumerSlowing
- The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
- The sector is loaded with a premium valuation (P/E of 19.9x)
- Less sector Yield Chasing as Fed continues its tapering program
- The high frequency Bloomberg weekly U.S. Consumer Comfort Index (recently rescaled for cosmetic and not component reasons) has not seen any real improvement over the past 6 months, but rose to 35.1 versus 33.3 in the prior week
TOP 5 WEEK-OVER-WEEK DIVERGENT PERFORMANCES
Positive Divergence: HSH 10.6%; NWL 5.9%; SAFM 4.3%; NUS 4.0%; SJM 3.0%
Negative Divergence: BNNY -14.1%; RDEN -8.7%; TSN -5.5%; LO -3.9%; FLO -1.7%
In the charts below we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we can offer one. As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).
BUD – big cap-slow-growth-low-beta, this Bud is for you! #confirmed bullish intermediate-term TREND with $106.94 support
DEO - #confirmed bearish to bullish TREND reversal still holding its head above $125.51 TREND support here too
KO – bullish intermediate-term TREND intact with TREND support of $39.97
PEP – breakout to higher-highs is always a thing of beauty – if only there was some volume behind this move; TREND support = $84.17
GIS – since February 2014 this name has looked as good as any on this list; TREND support = $52.91
MDLZ – signaling some exhaustion (overbought) to the upside, bullish TREND with $35.88 support, this remains
KMB – one of the top names on this list for the last 6 months – no change on that front; TREND support = $108.16
PG – worst looking name on the list; bearish TREND breakdown on an absolute basis ($80.73 TREND resistance)
MO – big-cap-slow-growth-low-beta, yep. Bullish intermediate-term TREND support of $38.94 intact
PM – same as the MO mo in all the aforementioned slow-growth #YieldChasing Style Factors; bullish TREND support = $84.71
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