December 9, 2014

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TODAY’S S&P 500 SET-UP – December 9, 2014

As we look at today's setup for the S&P 500, the range is 24 points or 0.45% downside to 2051 and 0.71% upside to 2075.                                             













  • YIELD CURVE: 1.63 from 1.63
  • VIX closed at 14.21 1 day percent change of 20.22%


MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Sm Business Optimism, Nov., est. 96.5 (pr 96.1)
  • 10am: JOLTs Job Openings, Oct. est. 4.795m (prior 4.735m)
  • 10am: Wholesale Inventories, Oct. y/y, est. 0.2% (pr 0.3%)
  • 10am: IBD/TIPP Economic Optimism, Dec., est. 47 (prior 46.4)
  • 11:30am: U.S. to sell $25b 1Y bills, 4W bills
  • 1pm: U.S. to sell $25b 3Y notes
  • 4:30pm: API weekly oil inventories



    • Senate Republicans hold closed-door discussion on whether to return to 60-vote threshold for advancing presidential nominees
    • 8am: Politico, Google, Tory Burch Foundation hold second annual “Women Rule Summit: Upping the Game,” w/ VP Joe Biden, Sens. Susan Collins, R-Maine, Cory Booker, D-N.J., House Minority Leader Nancy Pelosi, D-Calif.
    • 9:30am: Senate Finance Cmte hearing on whether Social Security adequately addresses challenges women face
    • 10am: Supreme Court may issue opinions
    • 10:30am: Senate Judiciary panel hearing on sexual assaults on college campuses
    • 11am: Senate Banking subcmte hearing on inequality, opportunity in housing market
    • 2pm: Sec. of State John Kerry testifies at Senate Foreign Relations Cmte hearing on use of military force against ISIL



  • Repsol Is Said to Revive Talks With Talisman Energy Over Possible Deal
  • SEC Said to Seek Standard & Poor’s Suspension of CMBS Rating
  • Fed ‘Considerable Time’ Rate Pledge Under Scrutiny Ahead of FOMC
  • Sumitomo Mitsui Said to Buy Citigroup Japan Retail Bank
  • Cubist Barred From Blocking Generic Cubicin Beyond 2016
  • JPMorgan Said Among Banks Telling Clients to Take Cash Elsewhere
  • China Spurs Bond Rout as Riskier Debt Removed From Repo Market
  • Big Banks Face U.S. Capital Rule Tougher Than Global Agreement
  • Deutsche Bank Sued by U.S. for Alleged Scheme to Evade Taxes
  • U.S. Spending Plan to be Unveiled Today as Funding Deadline Nears
  • CIA Torture Report Set for Senate Release
  • Valeant to Stop Acquisitions in Near Term: Reuters
  • Lone Star Said to Compete With Springleaf in Bid for Citigroup’s OneMain
  • Obama Proposes Expanding China Solar-Cell Levy to New Suppliers
  • Greek Government Bonds Drop as Presidency Vote Brought Forward



    • Analogic (ALOG) 4:15pm, $0.41
    • AutoZone (AZO) 7am, $7.16
    • Conn’s (CONN) 7am, $0.68
    • HD Supply (HDS) 6am, $0.53
    • Hudson’s Bay (HBC CN) 7am, C$0.06
    • John Wiley (JW/A) 8am, $0.84
    • Krispy Kreme Doughnuts (KKD) 4:05pm, $0.19
    • NCI Building Systems (NCS) 4:05pm, $0.17
    • Transcontinental (TCL/A CN) 8:05am, C$0.74
    • UTi Worldwide (UTIW) 8am, $0.05



  • Crude Rebounds From Five-Year Low Amid Shale-Oil Spending Curbs
  • Iron Ore Outlook Cut by JPMorgan as BHP, Rio Shares Extend Slump
  • Kuwait Sees Oil Stuck at $65 for Six Months Until OPEC Moves
  • Cheap Oil Also Means Cheap Copper, Corn and Sugar: Commodities
  • El Nino-Like Weather Seen by Morgan Stanley in South America
  • Gold Rises a Second Day as Lower Dollar and Equities Spur Demand
  • Iraq Follows Saudis Discounting Oil for Asia to 11-Year Low
  • Nickel Leads Industrial-Metals Declines on China Demand Concern
  • OPEC Early Meeting Seen More Likely by Analysts Amid Price Fall
  • Anglo American Cuts Capex, Sees 2016 Div. Funded From Cashflow
  • New York’s Snow Lovers to Get Stuck With Rain in Storm Pinwheel
  • Wheat Drops on Warmer Black Sea Weather, Slow U.S. Export Demand
  • Bullion Board Seen by Council as Way to Manage India Gold Demand
  • Putin Plan to Ship Gas to Europe Via Turkey Seen as Unrealistic
  • More Beef From Down Under Heading for U.S. Tables as Herd Drops


























The Hedgeye Macro Team



















Burn The Wagons

This note was originally published at 8am on November 25, 2014 for Hedgeye subscribers.

“We should burn what wagons we have, on order that our cattle not be our generals.”



According to ancient Greek #history, that’s what an emerging Athenian leader, Xenophon, told his men they should do as they marched against their Persian King. “Moreover, let us also abandon other superfluous baggage, except what we have for war or for food.” (Xenophon: The Anabasis of Cyrus, pg 108)


Yep. That’s the stuff I am reading these days. If you want to call it my confirmation bias in being bearish against central planning overlords (i.e. that this will not end well), I’m cool with that.


Buying the Long Bond (TLT) is as close as I am going to get to war with US and global growth bulls. And I probably won’t stop riding this bearish growth view, until the US elects to burn the yield chasing wagons – letting rates rise.

Burn The Wagons - growth cartoon 10.08.2014


Back to the Global Macro Grind


In case you didn’t know that one of the only ways out of this centrally planned Liquidity Trap (Total US Equity Market Volume was -29% versus its YTD avg yesterday) is to stop doing what didn’t work, now you know. Or at least the bond market does…


BREAKING (updated growth “survey” from Hedgeye): US 10yr Treasury Yield is ticking down to a fresh November low of 2.29% this morning and the Yield Spread (10yr minus 2yr yield) has compressed towards its 2014 YTD lows of 176 basis points this morning.


These are clean cut #GrowthSlowing signals. But you already know that.


What you also know is that at this stage of the central planning war, equity markets going up really has nothing to do with real-growth anyway. It has everything to do with Japan, Europe, USA, China, etc. trying to resuscitate drowning inflation expectations.


On that real-time score, as you can see in today’s Chart of The Day (US TIPS, 5 year Breakevens), so far… no good.


While the 2 day China rate cut “pop” in everything inflation expectations that’s been dropping was fun to watch, it didn’t change #Quad4 Deflation expectations. Both global growth and inflation expectations are still slowing, at the same time.


Other than one of the Fed’s preferred ways to monitor #deflation expectations (Breakevens), here’s what else I’m looking at:


1. US Dollar Index vs both Burning Yens and Euros = +10% YTD

2. CRB Commodities Index -0.7% yesterday to -4.6% YTD

3. WTI Oil flattish this morning at $76.01, down -17% YTD

4. Copper flat this morning at $3.01/lb, down -10% YTD

5. Russian Stocks (RTSI) -1.2% this morning to -23.3% YTD

6. Energy Stocks (XLE) down (again) -0.8% yesterday to -0.8% YTD


Then, of course, you can look at some late-cycle stuff like US wage Inflation… where 2/3 of the country has seen real wages deflate since the Fed undertook their unprecedented Policy To Inflate (see Federal Reserve’s own papers on the matter for details).


Or you can just find a “survey” that tells you something that has been the complete opposite of the wage deflation and no-capex cycle data. And say that the “market is up” on something like that.


But when you say “market” don’t forget that my preferred risk adjusted market to be long in 2014 (Long Term Treasuries) has had a much higher absolute return on much lower realized volatility than US small/mid cap stocks have.


Even if the July to October +160% ramp in the VIX is forgotten (for now), that doesn’t mean that the non-linear and interconnected economic risks associated with #Deflation Expectations Rising cease to exist.


What also exists as of this week is non-survey computed options positioning in Global Macro (non-commercial CFTC futures and options consensus positioning):


1. SP500 (Index + Emini) has moved to its biggest net LONG position since late SEP at +29,110 contracts

2. Long Bond (10yr Treasury) hit its biggest net SHORT position of 2014 at -128,032 contracts

3. Oil still has a net LONG position of +276,213 contracts, only down -12,971 week-over-week


“So”, what does that tell us?


1. After shorting the OCT lows, hedge funds have covered their shorts and are chasing the bull run in SPY (again)

2. Consensus Macro continues to think the risk in interest rates is to the upside (we reiterate downside!)

3. Perpetual expectations for another central plan (OPEC) remain for a non $65 oil price


Since Consensus Macro is not my expectations general, I say you burn the groupthink wagons and do the exact opposite of where those options are positioned: BUY Long Bond (TLT, EDV, etc.), and SHORT SP500 (SPY), Oil, and its related stocks and bonds.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.28-2.34%

SPX 2018-2072

RUT 1154-1190

EUR/USD 1.23-1.25

Yen 117.03-119.16

WTI Oil 73.04-77.51


Best of luck out there today,



Keith R. McCullough

Chief Executive Officer


Burn The Wagons - 11.25.14 EL Chart

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RH - The Binary Quarter

Takeaway: We think that RH will come out on the positive side of what we think is a binary set-up into the print.

Conclusion: This is a binary set-up for RH and the market knows it. The company needs to put up a significant reacceleration in its top line. With 31% of the stock held short, there are plenty of people betting it won't. But we think the unit growth, category expansion, comp, and margin opportunities are coming together for RH, and will be apparent this quarter. RH remains our favorite name in Retail. 



We feel good about the RH earnings event on Wednesday after the close. Revenue should accelerate meaningfully as RH has finally hit the inflection point (after 7+ years) where square footage starts to enhance as opposed to shrink the top-line algorithm.  We’re also seeing great strength in the brand’s online momentum, and should see a catch up from revenue that was delayed by problems with the sourcebook in 2Q. All-in, we’re looking for 24% growth, which is over 1,000bp better than the (unacceptable) 13.5% we saw in 2Q.  The Street is straddling guidance at about 20-21%.  On the EPS line, we’re at $0.52, which compares to the Street at $0.47 ($0.46-$0.48 guidance).


While the EPS beat should be nice, we think that there’s a binary nature to this quarter. Why? RH has never missed EPS, and it’s not going to start now. But it missed 2 of the last three quarters on the top line by an average of 4%. Even though the trendline growth rate (2-yr) remains well above 20%, the fact is that we’re arguing that RH will add $700mm in revenue next year alone (31% growth) and another $2.4bn over the following 3-years. We’re the first to call out that while the company undergoes its real estate build-out, there will be ongoing volatility in its’ top line on a quarter to quarter basis – that should last another 2-3 years. But weakness in 2Q needs to manifest itself in the 3Q revenue line. To be clear, we think that will happen. But if it doesn’t – timing or not – it will be very tough to argue a big multiple for RH over the near-term. 


Details of Our Thesis. The way we see it, we think that RH will ramp from $2.50 in EPS this year to $11 in 2018. It’s an ambitious model, but completely achievable. The biggest barrier to getting there is RH itself. We think a few factors remain misunderstood – 1) The degree to which the high-end home furnishings market can be consolidated – not unlike what Ralph Lauren did to high-end apparel in the 1980s. 2) Our view that there are over 20 markets that could sustain a 50,000+ foot Design Gallery at a productivity rate of $1,200/foot. 3) The impact that occupancy leverage will have on Gross Margins, ultimately pushing GM% to 40%.  Our key modeling assumptions are in the table below. 


RH - The Binary Quarter - rh 1


With Growth Comes The Multiple. If our model is right, then the company will be growing EPS at a CAGR of over 40% for the next four years. What kind of multiple is fair for a high-end category leader with a low-cost advantage that’s growing EPS at over 40%? We hate to just make-up multiples. But there are businesses growing at lower rates that carry a much higher multiple.  UnderArmour grows at 25-30%, and yet it trades at near 70x earnings. Perhaps UA is grossly overvalued, and perhaps the market likes that someone came first and paved the way (Nike) showing what UA could look like when it grows up. With RH, people will have to use their imagination. But using 40x 2015 and 2016, we get to $150 and $230, respectively.



Why Revenue Should Accelerate In 3Q

Here’s a few supporting points for why we think revenue will accelerate.

  1. Square Footage Turns Decidedly Positive. We’re looking for 3.5% growth in square footage this quarter. That might seem like it falls into the ‘who cares’ category. But this is a company that has largely been shrinking its store base since before the last recession. This quarter it turns positive, and should be up roughly 30% by the end of next year. Note that the Atlanta Design Gallery that opened on November 20 falls into 4Q, and should account for about a 6% pop in consolidated square footage.
  2. RH Online Presence Has Strong Momentum. There are several tools that we use to track the online momentum for consumer brands, including RH. The chart below shows the spread in ‘reach’ versus last year. The percentages are irrelevant – as they show the percent of all internet users that visited What we care about is the direction of the line. Up is good, and RH has been increasingly up.
    RH - The Binary Quarter - rh 2
  3. Deferred Revenue Buildup. Every quarter, RH books deferred revenue, which represents product that has been ordered but is not yet delivered (RH gets paid when the consumer takes final delivery). There’s an exceptionally strong relationship between deferred revenue, and the upcoming quarter’s realized revenue. That is, except for 2Q. That’s when revenue stalled due to timing associated with a Friends and Family promotion, as well as what we think are miscues in its Sourcebook (ie 3,300 pages at once was a mistake). The deferred revenue alone synchs with our 24% revenue growth forecast.
    RH - The Binary Quarter - rh 3
  4. Inventory Supports Revenue Growth. One of the only times that deferred revenue will not accurately accrue to the upcoming quarter would be when there is not enough inventory on hand to fulfill orders. Then RH has a problem. That is absolutely not the case this time around, as RH ended 2Q with inventories up 35% -- and ready to ship to fulfill 3Q deliveries.


Some More Detailed Modeling Considerations

Square Footage:

  • RH added one new store during the quarter on Melrose Ave. in Los Angeles. That equates to 10% growth in selling sq. ft. year-over-year and the addition of 9K sq. sequentially as the new 23,000 sq. ft. Design Gallery replaced the now idle 13,800 sq. ft. Beverly Boulevard location.
  • With the opening of the first 2nd Generation Design Gallery in Atlanta during the opening weeks of 4Q, square footage growth is now done for the year.
  • For the year the square footage growth algorithm looks like this: Design Gallery square footage +77%, Legacy Store square footage -6%, total selling square footage growth +9%, and total average selling sq. ft. growth +8%. *Note we model NYC store as a Full Line Design Gallery.
  • Initial guidance for 2015 implies 4 to 6 openings and 30%-40% sq. ft. growth. Those will be heavily weighted towards the back half of next year.


Retail Comp:

  • This may be the hardest line on the entire P&L to model as the store additions/subtractions and remodels make for a lot of moving pieces. For the quarter we are at 18%.
  • Additional details
    • Boston and Indy entered the comp base during June of this year. This will be the first full quarter where those two properties show up in the consolidated comp number.
    • New York was removed from the comp base after the 17,000 sq. ft. remodel during the 2nd quarter. This is the most productive store in the entire fleet.
    • The 13,800 sq. ft. store on Beverly Boulevard exited the comp base once Melrose opened at the tail end of the quarter. This store was operating in excess of $2,000/sq. ft.

DTC comp:

  • On the last call, management indicated that DTC growth would outpace Retail growth until the real estate transformation catches up to fit the expanded product assortment. For the quarter we’re at 25% growth in the DTC channel. Up 700bps sequentially on the 1yr trend line and 1000bps on the 2yr.
  • Visitation statistics were solid for the quarter. Up over 65% in every month during the quarter and 77% for the quarter in aggregate (+48% on the 2yr). The company was comping against a visitation suppressed 3Q13 when the company eliminated the fall source book. That coupled with the late shipment of the Source Book this year and prospecting efforts are the main drivers of the growth.
    RH - The Binary Quarter - rh 4
    RH - The Binary Quarter - rh 5
    RH - The Binary Quarter - rh 6


Combined Brand Comp:

  • Putting the two pieces together, 25% DTC growth and 18% Retail comp, equates to a 22% combined brand comp for the quarter.



  • Guidance of $475-$485 implies 20%-23% growth. An acceleration of 1000bps sequentially on both the 1 and 2yr trend line.
  • The Source Book timing issue caused books to arrive in homes about a month later on average compared to last year. Some of those sales were lost forever especially in seasonal categories like outdoor. But, given the company’s extended shipping window and strong traffic trends in the DTC channel we believe there was a healthy backlog headed into 3Q.
  • Stores in Greenwich and New York were open for the entirety of the quarter. And, there was very little interruption caused by the shift from Beverly Boulevard to Melrose Ave. in Los Angeles with the late October opening.


Gross Margin:

  • We’re modeling 100bps of Gross Margin expansion in the quarter. Here’s a quick look at the headwinds and tailwinds for the quarter…
  • Headwinds
    • Promotions: Margins were up 230bps in 2Q. Part of that was due to reduced promotional selling during the company’s Friends & Family event in July. Some of that may have been pushed into the early October Friends & Family sale. Which we should note was the exact same timing as last year.
    • Dead rent: The company started to feel a drag from new properties scheduled to open in ’15  in the quarter. That will be more pronounced in 4Q due to the back-half weighting in the opening schedule next fiscal year and the companies 6-12 month buildout schedule. But, it’s something that we are aware of.


Restaurant Sales, Traffic Dip in November

Black Box Sales, Traffic dip in november

Despite the industry registering its fifth consecutive quarter of same-store sales growth, Black Box results for November were relatively disappointing.  This disappointment comes after a very strong October, during which same-store sales and same-restaurant traffic increased sequentially on both an absolute and two-year basis.


Restaurant same-store sales increased +1.5%, while same-restaurant traffic decreased -1.1%, during the month.  These numbers were down 130 bps and 150 bps, respectively, on an absolute sequential basis and down 70 bps and 50 bps, respectively, on a two-year sequential basis.


Restaurant Sales, Traffic Dip in November - 1


Black Box estimates 4Q14 same-store sales to fall within the +1.5-2.0% range, which would imply December comps of +0.3-1.8%.  Given the easy lap, this appears to be a fairly conservative estimate. 


The widening gap between sales and traffic suggests an increase in average check during the month, which could be the result of: higher prices, less promotions, or a shift in sales mix. 


Importantly, November’s drop in traffic is consistent with the recent dip in consumer sentiment (Conference Board Consumer Confidence Index).  Black Box noted that the NY/NJ region has been the worst performing for the past six months, while CA has been the best performing region for the past two.


Restaurant Sales, Traffic Dip in November - 2


Restaurant Sales, Traffic Dip in November - 3


employment growth slowing

This is the fifth consecutive month employment growth has been positive on a year-over-year basis across our five primary age cohorts.  While one can argue we saw strength across the board, we saw a marked sequential slowdown in growth rates across all but one age cohort – suggesting the momentum in the jobs market may be fizzling.


November Employment Growth Data:

  • 20-24 YOA +1.48% YoY; -143 bps sequentially
  • 25-34 YOA +2.64% YoY; -59.6 bps sequentially
  • 35-44 YOA +1.12% YoY; -25.6 bps sequentially
  • 45-54 YOA +0.39% YoY; -65.4 bps sequentially
  • 55-64 YOA +3.78% YoY; +24.1 bps sequentially


Restaurant Sales, Traffic Dip in November - 44


While widespread employment growth is positive for all restaurants, November’s release screened stronger for casual diners as the 55-64 YOA cohort showed unusual strength.  All told, casual dining is an industry we are quite cautious on as a whole.  However, we continue to favor BLMN and BOBE on the long-side as special situation plays in the space.


The release was undoubtedly a negative, on the margin, for quick service and fast casual restaurants, highlighted by a sequential decline in employment growth rates in the 20-24, 25-34, and 35-44 YOA cohorts.  We continue to favor select, mostly nimble, operators in the space including JACK, YUM, CMG, KKD, PLKI, and WEN.


Howard Penney

Managing Director


Fred Masotta


SBUX: Will the Big Bet Pay Off?

We remain bearish on SBUX over the intermediate-term, as the new growth algorithm has risks and a few “big bets” that may or may not pay off for the company as expected.  In the meantime, slowing traffic trends continue to suggest there are a few cracks in the current algorithm that will need to be addressed in FY15. 

Last week Starbucks Chairman, President and Chief Executive Officer, Howard Schultz, and other company executives detailed the company’s five-year strategic growth plan.  That plan included a goal of generating nearly $30 billion in revenues by 2019.  Importantly, what they failed to mention is what type of earnings the company expects to generate with that level of revenues.


As mentioned earlier, Starbucks outlined its new growth algorithm over the next five years.  It’s significantly different from how the company delivered growth to shareholders over the past five years.  Over this time, the company has grown, on average, annual revenues and earnings of 8% and 26%, respectively.  Now, the company is talking about annual revenue and earnings growth of 12-13% and 15-20%, respectively.  Importantly, this will come as annual unit growth is expected to accelerate from 6% to 8%.


The risks, and overall returns, associated with a unit growth story are distinctly different from those associated with a margin recovery story.  Our bearish bias heading into last quarter’s print was predicated on globally decelerating traffic trends.  There was no evidence presented during the analyst meeting that suggested this deceleration wouldn’t continue throughout 1H15.  Management is essentially guaranteeing a successful holiday season in the short-term, while looking to mobile payments, pickup and delivery, and food to drive incremental transactions over the long-term.  Needless to say, we have our reservations about how food will perform and believe it’s important to note that the technology piece of this algorithm is still in the test phase.  Even if technology proves to a successful driver for the business, it will not have a notable impact on the business until 4Q15; only 16% of in-store transactions currently use the SBUX app for payment.


At the beginning of the meeting, Howard Schultz presented the following question: “What does it take to build a great, enduring company?”  To be clear, we believe Starbucks is a great company (we’ve written very favorably on the name since 2009) that will endure for generations.  There was never a question in our mind that this continues to be the case.


Our current thesis on SBUX, however, has little to do with the aforementioned.  Instead, it has essentially everything to do with the risks associated with driving incremental transactions and the timing of when these risks will impact the P&L.  As we’ve seen in the past, not everything this company touches turns to gold and expanding the business beyond its core operations has had significant implications in the past.


To put our thoughts about the new unit growth algorithm and the risks associated with it into perspective, the following quote from Howard Schultz says it all:


“We have to maintain the entrepreneurial DNA of the company.  We have to have the constant curiosity to see around corners and see what others don’t see, and we have to have the courage and conviction to make big bets.”

As we see it, the “biggest bet” the company is making is on its food strategy and its potential impact on the lunch daypart.  SBUX is investing a substantial amount of time and effort into building food sales, without the benefit of having equipment that allows them to produce the food fresh.  Food is the biggest risk to the DNA of the company because, in our view, it will never be on-par with the quality of beverages consumers have come to expect from Starbucks.  Lastly, it’s difficult to imagine that other QSRs and fast casual restaurants will simply let SBUX take incremental market share from them.


Within the first three minutes of his speech, Schultz hit on the one question on everybody’s mind: “What will the company do to drive incremental traffic?” 


He set the tone early when he said, “As a merchant, we have to consistently recognize that one of our obligations and responsibilities in this new world is that we have to drive incremental traffic.”


What’s become clear to us is that the street has given management a “pass” after delivering disappointing 4Q14 results, opting instead to wager that the current holiday promotions, most notably “Starbucks for Life,” will drive accelerated traffic in 1Q15.


The most disingenuous slide of the day consisted of a chart of Starbucks stock price from November 2008 ($7 per share) to December 2014 ($80 per share).  The implication here was to imagine what could be accomplished in five or six years, but it’d be unreasonable to expect a similar return moving forward.  The analyst day showed the significant level of sophistication inherent in the SBUX business model, particularly when compared to other companies in the quick-service space.  To be fair, however, we could’ve made the same observation in July of 2007, right before the stock plummeted from $40 to $7 per share.


There was a great deal of emphasis on the Starbucks Reserve Roastery and Tasting Room during the conference.  The new building, which represents a new premium brand within the SBUX family, has been in the making for over two years and offers a retail experience that does not exist anywhere in the global QSR market today.  Starbucks Reserve gives consumers access to rare micro-lot coffee that will be roasted in the new facility.  The company plans to open new Starbucks Reserve stores, which will be about the same size as an average Starbucks store.  The goal of these new stores is to bring to life a super-premium experience for coffee consumers, although management did not touch upon the size of the opportunity.


The following is a summary of comments from key Starbucks executives and our quick take on what each said:

Matt Ryan - Global Chief Strategy Officer

Matt laid out seven key strategies for growth:

  1. Be the Employer of Choice – invest in partners capable of delivering a superior customer experience.
  2. Lead in Coffee – continue to build our leadership position around coffee agronomy, sourcing, roasting, brewing, and serving handcrafted beverages.
  3. Grow the Store Portfolio – increase the scale of the Starbucks store footprint with disciplined expansion (different formats, licensing opportunities, international expansion).
  4. Create New Occasions to Visit Stores – grow store usage across dayparts with new product offers; in addition to breakfast, create new food offerings for lunch, afternoon refreshment and snacks, and evenings.
  5. CPG Brand Growth – focus on the Starbucks brand to unlock profitable growth rarely seen in consumer packaged goods internationally.
  6. Build Teavana – create a second major business in tea; the global tea market is about a $109 billion dollar industry (emphasis on tea bars, relevant tea product and formats, Teavana in Starbucks, and Teavana in the grocery aisle).
  7. Extend Digital Engagement – drive convenience and brand engagement through mobile commerce platforms; this includes expanding the number of customers participating in My Starbucks Rewards and launching Mobile Order, Pay, and Delivery (1/8 Americans received a Starbucks gift card for Christmas last year).

Hedgeye: The company laid out an ambitious goal of 82% revenue growth over the next five years to nearly $30 billion, stemming from more than 30,000 stores globally.  This implies 8% annual unit growth and mid-single digit same-store sales growth.  This represents a different business model than the last five years, when revenues and EPS grew approximately 68% and 233%, respectively, and unit count grew ~6% annually.  The new strategy will be more difficult to execute, making margin growth difficult to come by if same-store sales slow.  We suspect years one and two will be well-executed, while years three and five will be more difficult to manage as management pushes the unit growth rate to levels unseen in a very long-time.



Adam Brotman - Chief Digital Officer

  • “Mobile order and pay, launched in Portland, is the latest edition to what is already the most powerful mobile ecosystem of any retailer in the world.”

By the numbers:

  • Starbucks has 47 million transactions each week in its 12,000 US stores
  • 8 million active My Starbucks Rewards members
  • 12 million customers actively use Starbucks mobile apps
  • “Delivery is one of our most requested ideas. We are exploring several different options to make this a reality. Delivery will launch in select markets in late 2015.”

Hedgeye: The SBUX bulls are making their own “big bet” that technology will save the day for the company.



Arthur Rubinfeld - Chief Creative Officer

  • “Starbucks is the gold standard because of its retail site selection, global reach and local relevance with 18 design studios around the world.”
  • "We are the leading retail, real estate, design and construction management company in the world."
  • “Starbucks honors its heritage, with the original store in Pike Place Market, it evolves with locally-relevant design, and embraces its future – the Starbucks Reserve Roastery and Tasting Room.”
  • Starbucks has design studios in Seattle, San Francisco, Los Angeles, Dallas, Chicago, New York, Coral Gables, Vancouver, Toronto, Montreal, Mexico City, Sao Paulo, London, Amsterdam, Moscow, Shanghai, Tokyo and Hong Kong.
  • "No two Starbucks stores being built today are alike because of our in-house design studios focusing on locally-relevant design."
  • “The company continues to develop new store formats.”

Hedgeye: SBUX is light years ahead of the competition in keeping its store consumer friendly.



Troy Alstead - Chief Operating Officer

  • “Starbucks partners are the driving force behind our culture.”
  • “We measure what drives perception of our brand and the single most important thing, is the connection made between partners and customers.”
  • “Starbucks has a deep history of elevated partner investments and innovation. This includes: healthcare for partners; Bean Stock; beverage, food and merchandise benefits; Starbucks College Achievement Plan.”  
  • “Starbucks currently has 21,000 stores and expects to have 30,000 stores by the end of 2019. The company has ‘significant store growth opportunity’ around the world.”
  • “World-class operations are driving global growth including: best in class store operations; expanding channels of distribution; supply chain excellence and efficiency; industry leader in digital with ongoing investments in tech capabilities; deep global leadership bench.”

Hedgeye: It appears as though Troy is clearly being groomed to be the next CEO of Starbucks.



Cliff Burrows - President, U.S., Americas, and Teavana

  • Americas region (Canada, U.S., South America) contributes 73% to global revenues with 54 million transactions every week, through more than 14,000 stores in 16 countries. 
  • U.S. stores account for 65% of global revenue. 
  • More opportunities lie ahead with food. Starbucks has completed the rollout of La Boulange to more than 11,000 stores ahead of schedule. The biggest opportunity with food is in the breakfast sandwich category.
  • “Americas is strongly positioned for continued growth. Over the next five years we plan to open over 3,500 net new stores, increase revenue by $7 Billion and almost double our operating income.”

Hedgeye: There is nothing new regarding these comments.  Food and technology are the incremental growth drivers of the division.  New units are important, but this isn’t the story here.



Kris Engskov - President, EMEA

  • EMEA (Europe, Middle East, Africa) is positioned for future, profitable growth, currently with 6.4 million+ transactions every week through 2,100 stores in 37 countries. The region has 23,000 Starbucks partners. 
  • Starbucks expects to double its EMEA store count over the next 5 years. Key drivers will be: improving store economics; new formats and channels; new strategic partnerships. 
  • “Drive-Thru and roadside stores remain our biggest growth opportunity.”
  • "Licensing in grocery stores is emerging as a major, new growth opportunity."
  • “50 percent of the world’s coffee is consumed in the EMEA region.” 

Hedgeye: EMEA may represent a significant growth opportunity for the company, but it is too small right now to make a difference in the overall performance of the company.



John Culver – President, CAP

  • “We are at a transformative moment in our growth within the China and Asia-Pacific region. Two years ago at this conference, I said that the CAP region represents the single largest and fastest retail growth opportunity for the company. As true as that statement was two years ago, that statement is even more true today as we look at the opportunity in front of us.”
  • “If a picture is worth 1,000 words, this shows us our brand across the region has never been stronger, the customer experience we deliver has never been more relevant, and our partners who wear the green apron have never been more passionate.” 
  • In CAP region - there are 80,000 partners in 4,600 stores in 15 countries with 12 million transactions ever week.
  • “Going forward, our ambition is clear. As we look ahead five years, Starbucks will double the number of stores we have across the region and approach 10,000 locations.”

Closer look at key markets within CAP:

  • Japan:  In September, Starbucks announced it will take full ownership of the company’s second largest market in the world.  Starbucks currently serves 4 million customers every week and has 1.3 million My Starbucks Rewards members. 
  • India: Starbucks fastest growing new market (just celebrated its 2nd anniversary) with 61 stores across six cities.
  • Korea: Starbucks opened in Korea 15 years ago and the country is the third largest market in the region with 700 stores.  The company opened its first drive thru two years ago and over the next year half of the new stores they open in Korea will be drive-thrus.  
  • Thailand: Last month Starbucks opened its 200th store.  Thailand is home to Starbucks first community store outside the U.S. 
  • “Over the next five years we are committed to doubling the number of stores across the region.”

Hedgeye: CAP is also seeing a significant slowdown in traffic trends.  Therefore, CAP has the potential to become a sore for investors in FY15.



Belinda Wong - President, China

  • China is the fastest growing market for Starbucks.
  • The company has been in China for 16 years with 25,000 partners working in 1,400 stores in 84 cities, with 3 million transactions every week. 
  • “We opened on average 1 store per day last year. This year we have a high ambition. We will open one store every 18 hours, and I’m proud to announce we will open our 1,500th store by the end of this month.”
  • Starbucks China has 6,000 certified coffee masters. “Our passionate partners are why we are successful in China.”
  • “We are humbled by how Chinese consumers have accepted and embraced the Starbucks experience. We are proud to lead the specialty coffee experience in China.”
  • “Starbucks will continue to “grow with great discipline."
  • “The investment made through a Starbucks design studio in China is giving the company an edge in driving innovations.”
  • “Company will more than double its store count to have 3,400 stores in mainland China by 2019.”

Hedgeye: Considering other U.S. brands such as MCD and KFC are losing favor with Chinese consumers, there is the potential it spills over to SBUX.



Michael Conway - President, Global Development

  • Think of Channel Development as “connecting people around the world to Starbucks wherever they live, work and play.”
  • Our reach today is significant, with products distributed in 39 countries including the U.S. There are more than 1 million places outside a Starbucks retail store where a customer can find Starbucks products.

This includes:

  • 1,300 colleges and universities.
  • 30,000 offices.
  • 120,000 grocery and convenience stores.
  • More than 12 million travelers each week encounter Starbucks in their hotel rooms, on cruise ships or on Delta and Alaska flights around the world.
  • “We hold the leadership position in the premium and single cup categories. Roughly half of sales in these two categories come from just three brands.  As a testament to our brand relevance, Starbucks was the only established brand to gain share last year in Premium Single Cup.”
  • "The fastest growing segment in the coffee category is K-Cups and Starbucks once again grew faster than the category in 2014 at more than 34 percent. Since we launched K-Cup packs in 2011, we have shipped 2.3 billion K-Cups and are projected to ship over 1 Billion in 2015, led by our newest innovation - iced coffee K-cups. "

Hedgeye: The least exciting part of the SBUX story.



Scott Maw - Chief Financial Officer

  • “Highlights of Starbucks strong financial performance over the past four years: Starbucks doubled cash returns and doubled dividend payout through strong financial discipline.”
  • “We will maintain our core focus: best in class revenue growth; capital investment efficiency; total return to shareholders.”
  • "We've never missed our guidance due to coffee prices." 
  • “Starbucks is uniquely positioned to deliver significant shareholder value.”

Hedgeye: We like Scott and he certainly has a great handle on the numbers.  The one lingering uncertainty we walked away with was whether or not he controls the punch bowl when it comes to making incremental investments.  One thing, however, was clear: Scott’s job will be significantly more difficult than the one Troy had.


Howard Penney

Managing Director


Fred Masotta


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