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LEISURE LETTER (01/15/2015)



  • Jan 15:   LA Dec Revs
  • Jan 29:  PENN 4Q CC
  • Feb 2: Cod Manila Grand Opening


The David Group –  there is chatter that the David Group, a top-10 junket with 3-5% of total VIP rolls in Macau, is closing its VIP rooms. David Group has 2 VIP rooms at Wynn Macau, 1 at Galaxy, 1 at Sands China, 2 at MGM China and 1 at SJM (via 3rd party casino).


The junket operator had already closed VIP rooms in the Venetian Macao and City of Dreams last year.

Article HERE

Takeaway:  Should be a drag on VIP and we will see more junkets close up shop. However, it's market dictated and not really an incremental negative.  


SJM – Sociedade de Turismo e Diversões de Macau SA (STDM) says it will look into complaints by employees of the Palacio Lisboa restaurant in the Lisboa Hotel that they are overworked and underpaid.

Article HERE


CZR has declared voluntary Chapter 11. 

  • CZR's plan, which has received support from more than 80% of first-lien noteholders, is intended to significantly reduce long-term debt and annual interest payments, while providing for significant recoveries for creditors and ensuring no interruption of operations across the company's network of properties.
  • To implement the balance sheet deleveraging, CEOC and certain of its U.S. subsidiaries have voluntarily filed for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Illinois in Chicago. All Caesars Entertainment properties, including those owned by CEOC, are open for business and are continuing to operate in the ordinary course. All properties are continuing to host meetings and events and provide the facilities, amenities and experiences that guests expect.


 H – announced the sales of five select service hotels for a total gross sale price of ~$53m. The transactions closed in December 2014. As part of the sales, Hyatt entered into franchise agreements with the purchasers, with all hotels retaining their existing Hyatt Place branding. The purchasers intend to spend a total of approximately $6 million in additional capital expenditures at the hotels. 

Takeaway:  These worn-down upscale properties sold at a low average price per key of $84k. There are consistent with Hyatt's asset recycling strategy.


RCL – Azamara Club Cruises is planning one of the largest drydock upgrade programs since it has owned Azamara Quest and Azamara Journey.  While it's preliminary to share details, the vast majority of this 'significant' work will focus on passenger areas and accommodations, according to Azamara president and ceo Larry Pimentel, who called the projects 'an opportunity to ensure the ships stay in the up-market space. 'We're a destination-immersion product,' he added, 'but with this clientele it's incumbent to maintain the appropriate decor.'


Azamara Journey would begin its docking at the end of December and Azamara Quest in early January. Each project would stretch an estimated 3.5 to 4 weeks.

Article HERE

Takeaway:  Dry docks costs for Q1 are heading higher.


Higher labor costs – The opening of Studio City and of Galaxy Macau Phase II will require gaming labor to expand by 16,000 to 18,000 within this year, which represents an expansion of 28%-31%. As the currently unemployed population of Macau accounts for just 6,900, labor costs in the industry are expected to soar as operators fight to staff their new resorts.


However, and bearing in mind that Galaxy started a recruitment process to hire 8,000 workers this month, MPEL CEO Lawrence Ho admitted that he was “a bit worried” about how this could be achieved.


While immigration is the main key to solving the problem, there are two factors that will contribute to increasing labor costs for gaming operators: the competition of gaming operators for the most experienced and talented workers and the prohibition of hiring non-resident workers as croupiers. 

Article HERE

Takeaway:  Finding sufficient labor for the upcoming Cotai resorts are not new news but it is a risk that cannot be discounted this year. Despite negative revenue growth, there is little the concessionaires can do to offset wage inflation.  Volunteer, unpaid leaves of absences are one tool being employed.


Reno to NYC  Non-stop flights between Reno and New York City will be offered by JetBlue Airways starting on May 28. The route will make JetBlue the first carrier to offer daily nonstop service between New York City and Reno, which bills itself as the "Biggest Little City in the World."
Article HERE


Cyprus – According to Cyprus Commerce and Tourism Minister Yiorgos Lakkotrypis, 13 casino operators have expressed interest in running a casino.

Officials hope to pass casino legislation by end of January. There will be a competition process three weeks after the legislation is passed and to award the project to the successful bidder two months later.


Initial cost is projected at 500,000 euros (589,350 U.S. dollars) and the project includes at least 500 luxury rooms, at least 100 gaming tables and at least 1,000 gaming machines.


But the chosen operator can establish four other premises outside the casino with a maximum of 50 gaming machines each but no other casino gambling. The operation will be controlled by a 7-member Gaming and Casino Supervision Authority which will be tasked overseeing all casino activities and with making sure that it will be kept away from organized crime.

Article HERE

 Takeaway:  A small expansion opportunity for the Macau operators and slot suppliers. 


Singapore macro

Home sales –  According to URA, developers sold 230 units of new homes in December, down 45.6% from the 423 units sold in November 2014. This was the lowest monthly sales figure since January 2009, when just 108 units were sold.   Property sales are typically slower towards the festive year-end period.  Home sales in Singapore have weakened considerably since the Government rolled out a series of cooling measures and loan curbs in recent years.

       Article HERE


Retail sales – Retail sales gained 6.5% YoY in November due to strong auto sales. Ex motor vehicles, retail sales fell 0.4% YoY and 0.9% MoM in November 2014.  However, Watches/Jewelry segment rose 4.2% MoM and 3.9% YoY.

Article HERE

Takeaway: Mixed macro signals for Singapore but the trend is tilting worse.


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015. 

TGT – Canada Quick Thoughts

Takeaway: Closing Canada from a position of strength. Good move. But if former mgmt. could be so off on this call, what else could be buried here?

Target just announced that it is exiting Canada. Some conclusions…

  1. The market had been expecting this. It’s part of what drove the stock up from $60 to $75 over three months. Nonetheless, it’s clearly good news for TGT.
  2. We outlined in our Black Book in May 2014 why Target would likely never earn money in Canada – counter to the company’s goal for earning $0.80 per share from Canada by Jan 2017. In this release, TGT said it’s clear that Canada would not be profitable until at least 2021. How a company could miss a profitability forecast by 4+-years is simply astounding.
  3. This decision was an easy one for new management. But if the old guard could have been so incompetent, how can we possibly believe that the decision to exit Canada is the last problem Cornell will uncover? Fixing Steinhafel’s mistakes could get expensive.
  4. The timing of this decision makes sense, as new CEO Brian Cornell has been in his seat for 5 months, and TGT is guiding to a 3% comp for the fourth quarter, which is about 50bps better than consensus. He’s making this move from a position of strength, which makes all the sense in the world to us.
  5. But let’s not forget the reason why TGT entered into Canada in the first place. First it exhausted the ‘Tar-Jay’ brand allure by turning 65% of the stores into P-Fresh (glorified supermarkets), converting 20% of its sales to its Red Card, and shifting the mix disproportionately away from Apparel, Home and Hardlines in favor of Food and Household Essentials (see below). In effect, TGT began to look a lot more like Wal-Mart.  With a strategically flawed Store and Brand transformation putting TGT up against four different competitive sets – 1) WMT, 2) Department Stores, 3) Dollar Stores, and 4) Supermarkets – not to mention Amazon growing stronger by the day, TGT’s answer was to go to Canada to find growth. Now that it found out the hard way that it was wrong, it does not mean that the factors that caused it to go North of the border have abated.  In fact, if we really are at the tail end of a retail margin cycle, which we think will become evident in 2015, then a dominant positioning in its core market is as important as ever.


Though we were right on the fundamentals with this one, that clearly did not matter – and most importantly we were definitely wrong on the stock.  Rather than rush to cover today, we’re going to a) wait to hear what the company says on the conference call, and b) see where expectations shake out. The reality is that TGT is trading at 16x-17x 2015 EPS (assuming 2-3% comp). Aside from the fact that this is a peak multiple for TGT. It seems high to us for a levered company that has its weakest competitive positioning in a decade, and is likely to grow earnings at a sub-5% rate for the next three years. This name should hardly run away from us on the upside.


TGT – Canada Quick Thoughts - 1 15 TGT chart1   42 2

TGT – Canada Quick Thoughts - 1 15 TGT chart2  43 2

TGT – Canada Quick Thoughts - 1 15 TGT chart3   44 3

TGT – Canada Quick Thoughts - 1 15 TGT chart4   45 4

EVENT: P Best Idea SHORT call (TODAY)

Takeaway: Join us for our call TODAY at 1pm EST outlining our Best Idea Short thesis on P. Dialing Instructions below.

We will be hosting a call today outlining our Best Idea Short thesis on Pandora Media (P).  P’s user retention issues and waning TAM create a precarious setup into 2015.  Further, Webcaster IV can derail P's entire business model in 2016.


Join us for our call TODAY at 1:00pm EST.




  • Users to Decline in 2015: P’s waning TAM isn’t large enough to compensate for its heightened attrition issues.
  • Tug of War: P will need to continue increasing ad load to drive much of its revenue growth, which will exacerbate its attrition issues.
  • Lofty Consensus Revenue: P would require a considerable acceleration in ARPU growth to hit 2015 estimates.  If P falls short in 2015, 2016 would be unattainable.
  • Webcaster IV = Powder Keg: Anything short of the best case scenario won't be good enough.  P may have to curb hours/exit certain markets in 2016, curbing its long-term prospects



Toll-Free Number:

Toll Number:

Conference ID/Password: 13598859

Materials: CLICK HERE (link will go live an hour before the call)



Hesham Shaaban, CFA



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Select Long/Short Updates

Select Long/Short Updates - 1


Long List

KKD – Prior to ICR, Krispy Kreme came out and reaffirmed FY15 EPS guidance of $0.69-0.74 and tempered expectations for FY15 EPS with guidance of $0.79-0.85.  They also announced that TXRH CFO Price Cooper resigned to become the CFO at KKD.  Cooper will succeed Douglas Muir, who has served as CFO of Krispy Kreme since 2007 and announced retirement plans last year.


The KKD story is powerful and one that we believe is being underappreciated by the street as it continues to invest for the future by focusing on 1) accelerating global growth 2) leveraging technology 3) enhancing the core menu and 4) maximizing brand awareness.  Management has developed a flexible store model that will allow them to grow units at a double-digit rate for the foreseeable future.  FY16 plans call for 11-13% unit growth (10-20 net new domestic units; 95-110 net new international units) and 10-18% EPS growth. 


KKD is attractive to us for many reasons including its asset-light model, strong financial profile, compelling unit economics, strong FCF generation, impressive returns on incremental invested capital, feasible growth strategy, and established international presence.


Long Bench

ZOES – Differentiated, young concept that has identified its ‘niche’ in the fast casual category.  Out of the most recent IPOs, this is the one we like the best as it is truly a unique concept that largely appeals to educated, affluent women and their families.  Despite only having 132 locations in 15 states, ZOES has specifically identified 1,600 locations where the concept could work domestically and has three types of restaurant models to choose from (end-cap; free-standing; in-line).  We like ZOES for its management, unique concept, attractive unit economics, impressive comps, and growth potential but are currently hesitant to add it to the Long List due to its rich valuation.


PLKI – Popeyes came out before ICR and pre-announced 4Q global comps of +9.8%, well above consensus estimates, and indicated full-year adjusted EPS would fall in-line with the street at $1.64-1.65 – good for 15% growth. 


As many of you know, Popeyes was one of our favorite stocks throughout 2014.  CEO Cheryl Bachelder has done an outstanding job since assuming her position in late 2007 and has positioned the company for tremendous domestic and international growth moving forward (double U.S. footprint; untapped international opportunity).  PLKI’s commitment to its franchisees is not only admirable, but also paying dividends. 


We recently pulled PLKI from our Long List given the current valuation, but are ready and willing to add it back given a notable pullback.  The fact of the matter is, this is one of the best run companies in our space and investors have ample visibility into the company and its operations given its asset-light model, diversified revenue steam and stable cash flows. 


JACK – JACK was another one of our favorites on the long side in 2014 that we recently moved down to the Long Bench due to the recent run it has benefitted from.  We first turned bullish on JACK in early 2012, given the potential inherent in the Qdoba brand.  Since then, CEO Lenny Comma has a tremendous job running the company while Qdoba President Tim Casey has successfully reignited comp growth at the brand.  Management put to rest any speculation that Qdoba will soon be spun off, due to the fact that the street is (finally) properly recognizing the concept for the growth vehicle that it is. 


We still like JACK and believe they’ve identified feasible opportunities to drive margins moving forward (shared services model), but are hesitant to champion the stock at current levels.  The stock very well could find itself back up on our Long List at some point, but we’d likely need to see a notable correction first.


Short Bench

DFRG – Del Frisco’s found itself on our Short List in mid-2014 as we found street estimates to be far too aggressive and refused to credit the Grille as being a viable growth concept.  To be frank, we we’re waiting for easy comparisons to pass before re-shorting this one, but may have tried getting a little too cute in regards to timing.  The stock has been hit hard the past couple of days after revealing soft margins in the Class of 2012 and 2013 Grille restaurants, reaffirming our view that this concept is not ready to grow 38% next year.


Management predictably touted the company’s portfolio of brands, suggesting it allows them flexibility in what they need to do to grow – you likely know where we stand on that.  It’s become clear to us that 1) Sullivan’s can’t grow 2) the Grille isn’t ready to grow (and may never be a viable growth vehicle) and 3) the Double Eagle Steakhouse can only grow at a rate of one restaurant per year.  With the street looking for 19% and 27% earnings growth in 2015 and 2016, respectively, this is a name that could find itself back up on our Short List in the near future.


CHUY – Akin to Del Frisco’s, Chuy’s spent some time on our Short List last year and could find itself back on it in 2015 after delivering, in our view, an underwhelming presentation at ICR.  For starters, Chuy’s dialed back its expansion plans by one unit to 10-11.  Second, and more importantly, Chuy’s scaled back expectations for new unit economics, as it decreased AUV and cash-on-cash return targets for its restaurants (down from $4.2mm and 40%, respectively, to $3.75mm and 30%).


We don’t deny that Chuy’s isn’t an overwhelmingly successful concept in its core market (Texas).  We do, however, question the company’s ability to generate similar returns outside of this market.  Chuy’s classes of 2012-2014 stores in immature markets have been ~50% less profitable than those in its mature market, but management insists this is a short-term phenomenon and will be corrected by its backfilling strategy.


Chuy’s development strategy, in which it is targeting long-term annual restaurant growth of 20%, calls for 1) the identification and pursuit of development in major markets and 2) “backfilling” smaller existing markets to build brand awareness.  If you are long this stock, you are essentially betting that this expansion plan into new markets will go smoothly and that immature markets will mature well.  That’s not a bet we’re willing to make and if the stock runs, we’ll be looking to re-short it.


NDLS – Very close to adding this name to our Short List.  While it’s an intriguing, proven concept with an experienced management team, its first full-year as a publicly traded company was one to forget and, quite frankly, that’s exactly what the street has done – but we haven’t.  Management’s 2014 guidance was woefully off-target and this year’s guidance is similarly unsettling.  In 2015, Noodle’s expects to deliver:

  • 12-14% unit growth
  • 2.5-4% same-store sales
  • ~25% earnings growth (consensus at 27%)

To be clear, the chances of this happening are slim.  Yes, industry sales are currently strong, but we’d be foolish to expect this trend to continue throughout all of 2015.  And, if our memory serves us correctly, the company is coming off a year in which it delivered 0% earnings growth.  For the street to assume the company will grow earnings 27% and 30% in 2015 and 2016, respectively, is mind-boggling.  We don’t see NDLS hitting its numbers this year, which suggests the stock is even more expensive than investors think.  Trading at 56x an inflated forward earnings number, management has no room for error.


HABT – The Habit Burger Grille is a better burger concept with an impressive history of same-store sales, unit, revenue, and adjusted EBITDA growth.  We like the operations-focused management team and believe the company has a strong enough infrastructure to support its growth.  All-in-all, it’s an impressive concept.  But, it’s a small concept and it plans on growing rapidly (over 20%+) for the foreseeable future.


Aside from an egregious valuation, what concerns us most about HABT is the declining returns on invested capital it expects to realize during its expansion.  While existing units are generating average unit volumes of $1.7 million and 40% cash-on-cash returns, management expects new units to generate average unit volumes of $1.5 million and 30% cash-on-cash returns  – and there’s no guarantee these numbers don’t move lower as Habit begins to saturate markets.  It’s a viable concept that’s in the early innings of an aggressive expansion plan; one that typically doesn’t come without a fair amount of hiccups.  When you’re stock is trading at 257.26x forward earnings, you can’t have those.


CBRL – We actually think management is doing a good job running this company and did a good job articulating the Cracker Barrel story at ICR this week.  CFO Larry Hyatt outlined the company’s properly aligned strategic priorities: 1) extend the reach of the Cracker Barrel brand to drive traffic and sales 2) optimize average guest check through the implementation of geographic pricing tiers 3) apply technology and process enhancements to drive operating margins and 4) further grow the store base with the opening of 6-7 Cracker Barrel stores. 


Cracker Barrel has rightfully been the direct beneficiary of the recent decline in gasoline prices (86% of its stores are off of highways), but we fear the stock may have gotten a bit ahead of itself.  Family dining chains, in general, have done quite well lately as they generate comps momentum, but it’s unclear how long this will last.  It’s not easy for us to poke holes in the Cracker Barrel story right now and 2015 EPS growth of 9% looks achievable.  However, we can’t justify paying 21x forward earnings for a chain that is growing ~1% per year and has historically traded closer to 14x.  It’s on our Short Bench until we identify a catalyst, one way or the other.


PLAY – The re-emergence of Dave & Buster’s brings back memories of the old, “big box” company that failed miserably as a public company.  Will things be different this time around?  Our inclination is to be very skeptical of the company’s growth trajectory, but there’s no denying that they are putting up compelling numbers.  The PLAY model generates $10.3mm in AUVs per unit, with approximately 50% of its revenues from its restaurant and 50% of its revenues from its entertainment offerings ($5mm “Eat and Drink” revenue; $5.3mm “Play and Watch” revenue).


On the surface, PLAY’s valuation looks reasonable – trading at 10.7x EV/EBITDA.  However, we have issues with this valuation metric considering it uses an inflated EBITDA number (the company has come up with its own definition of EBITDA) that adds back pre-opening costs, which we view as a real cost of doing business – particularly for a growth concept.  Although the set-up for the first quarter looks fine, we’ll be keeping a very close eye on this one in 2015. 

Central Market Planners Perpetuating The Next Crisis

Client Talking Points


There’s CTRL+Print, then there’s panic – and this is rightly A) freaking people out and B) equating to a massive margin call on levered FX trades – Swiss cut by 50 basis points (to negative -0.75%!) and cut the wire loose on their exchange rate? (Richemont -11.2%, Swatch -8.5%, UBS -7.2%, Adecco -7.9%, Credit Suiss -8.2%, Julius Baer -7.5%, ABB -7.4%) #nice. 


Follow the #Deflation Dominos – Yens, Euros, Francs panic/burn --> Up Dollar --> Crashing Oil --> Spreads blow out in High Yield Energy --> Energy States lose moneys and jobs --> Financials and Industrials follow (late-cycle rolls) --> Fed doesn’t hike … this was the call we made in our Macro Themes Deck for Q1, reiterating it this morning.


Yesterday’s drop in JPM was its biggest since 2011. Volume was huge. Remember 2011? Financials worst performance #divergence vs. Utilities, ever. XLF already -5% for the year-to-date and the Regional Banks are in the midst of a 10% draw-down since that no-volume all-time SPX high on December 29th (2090).

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1.  Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.


As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT). We believe the TLT has plenty of room to run. We strongly believe the dynamics in the currency market are likely contribute to a “reflexive deflationary spiral” whereby continued global macro asset price deflation and reported disinflation both contribute to rising investor demand for long-term Treasuries, at the margins.


Hologic (HOLX) is a name our Healthcare Sector Head Tom Tobin has been closing monitoring for awhile. In what Tom calls his 3D TOMO Tracker Update (Institutional Research product) of U.S. facilities currently offering 3D Tomosynthesis, month-to-date December placements signaled a break-out quarter after a sharp acceleration in October and slight correction to a still very high rate in November. We believe we are seeing a sustained acceleration in placements that will likely drive upside to Breast Health throughout FY2015. Tom’s estimates are materially ahead of the Street, but importantly this upward trend in Breast Health should lead not only to earnings upside, but also multiple expansion and a significant move in the stock price.

Three for the Road


VIDEO: My Uber-Bull Case For Gold $GLD https://app.hedgeye.com/insights/41742-mccullough-this-is-the-uber-bull-case-for-gold



I ride the storm - cheering wildly. I gather strength from the storm.

-Jonathan Lockwood Huie



The average American consumer will pay nearly $280,000 in interest over their lifetime, this figure varies dramatically from state to state based on credit scores and mortgage size.

CHART OF THE DAY: Central Planning, Swiss Style!

CHART OF THE DAY: Central Planning, Swiss Style! - 01.15.15 chart

Editor's note: This is a brief excerpt from today's Morning Newsletter by Hedgeye CEO Keith McCullough.

*  *  *  *  *  *  *

While I probably don’t deserve a Ph.D. (or a perma bull II vote) for this, I’ve always said that un-elected central market planners would perpetuate the next crisis. That’s #on this morning – follow the interconnected risk:


  1. SWISS – there’s CTRL+Print, then there’s panic – and this is rightly A) freaking people out and B) equating to a massive margin call on levered FX trades – Swiss cut by 50bps (to neg -0.75%!) and cut the wire loose on their exchange rate? (Richemont -11.2%, Swatch -8.5%, UBS -7.2%, Adecco -7.9%, Credit Suiss -8.2%, Julius Baer -7.5%, ABB -7.4%) #nice


investing ideas

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