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

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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



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. 

investing ideas

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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



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


Macro Stars

“Stars can’t shine without darkness.”



It is indeed the contrast that draws one’s eye towards something that is different.


Every once in a while in Independent Research we earn an opportunity to see that light develop before consensus does. God willing, the search for macro stars is what has my two feet on the floor each morning of every risk management day.


While it would be convenient to skip over the #deflation part of an epic central planning experiment, unfortunately that’s not the way the cycle from day to night works. There will be darkness before America’s free market economy can shine again.

Macro Stars - 445


Back to the Global Macro Grind


Don’t forget that I had the lowest grade in my freshman creative writing course @Yale. “So”, I’m still working on it (thanks for bearing with me over the years!). I’d love to go back to New Haven and slap some hash-tags on my English Lit prof’s desk.


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
  2. OIL – 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 I made in our Macro Themes Deck for Q1, reiterating it this am
  3. FINANCIALS – yesterday’s drop in JPM was its biggest since 2011. Volume was huge. Remember 2011? Financials worst perf #divergence vs Utilities, ever. XLF already -5% for the YTD 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)


“So” how are you feeling about some of our #Quad1 US equity long ideas now? After seeing the US stock market drop in 10 of the last 12 trading days, I’m thinking some of those look a tad early!


What’s really cranking for us are these #Quad4 Deflation ideas (Long #TLT!). And that makes complete sense to me, because:


  1. In Q1, globally #Quad4 doesn’t bounce to #Quad1 anywhere but in the USA
  2. USA is still coming to grips with the #Quad4 slowdown that happened in DEC and Q4 of 2014


Slowing? Yeah, that “everything is awesome” LEGO gas station thesis that everyone and their brother in long-only USA equity land ended up being almost as fictional as the movie. At -0.9% month-over-month, that was a big US Retail Sales miss.


It wasn’t recessionary, and that wasn’t our call anyway. It was simply A) slower in rate of change terms (both sequentially and on a 2yr comp basis) and, more importantly, B) way worse than the Old Wall was prepped for.


Go back and read their tweets. My boy Lavorgna was tweeting in sync with Bloomberg/CNBC’s new editorial JV macro team that the US economy was “booming” and that it was a “closed economy, unaffected by the global slowdown.”


Then they got Swissy’d.


Don’t you hate when that happens? When an un-elected Swiss dude wakes up in the morning and whacks his country’s stock market for a 7% down day and takes out Zervos’ spoooz at the knees?


Yes, I am going to call these people out by name this time. Oh, right – I did last time too. And, no, it’s not “mean” or unprofessional. It’s what someone with a spine needs to do, or our profession will never be held to account and evolve.


Due to the countless conflicts of interest associated with the aforementioned brokers, banks, and advertisers, the consensus complacency about risk remains the greatest risk to your country, children, and their future stars.


Our immediate-term Global Macro Risk Ranges are now (I’ll give you all 12 Big Macs in our Daily Trading Ranges report from this morning – in brackets is our intermediate-term TREND views):


UST 10yr Yield 1.78-1.97% (bearish)

SPX 1 (bearish)

SMI (Swiss Index) 8 (bearish)

FTSE 6 (bearish)

VIX 19.27-22.51 (bullish)
USD 91.48-93.11 (bullish)
EUR/USD 1.16-1.19 (bearish)

Yen 116.43-119.12 (bearish)
Oil (WTI) 44.43-48.97 (bearish)
Natural Gas 2.74-3.31 (bearish)

Gold 1 (neutral)

Copper 2.45-2.71 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Macro Stars - 01.15.15 chart

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.