BABA: Thoughts into the Print (F3Q15)

Takeaway: We're monitoring one key metric to time the short. At 16x 2015 revenues, we have no problem waiting for the turn.


  1. F3Q15 A MIXED BAG: Singles Day for BABA was considerable success in terms of GMV growth, but we don’t believe that strength held throughout the quarter, especially given lackluster China retail metrics.
  2. CONSENSUS NOT ASKING FOR MUCH, BUT WILL IT BE ENOUGH: Consensus estimates are calling for a notable deceleration in revenue growth to 47% from 54% in F2Q15.  We’re expecting a small top-line beat, but the question is by how much, and whether it will be enough to appease the street.
  3. WHAT WE’RE KEYING IN ON: Tmall GMV mix, which has been a secular growth driver, propelling commission revenue growth ahead of GMV growth, and masking secular pressures within its core marketing segment.  But once that sputters out, we’ll have our entry point on the short side.  At 16x 2015 revenues, we can wait for the turn, and still capture plenty of downside when it does.



The majority of BABA’s business model can be tied back to its GMV, which is the simplest way to gauge the strength of its business.  Below is a quick graphic on how we conceptualize BABA’s model and key secular drivers.


BABA: Thoughts into the Print (F3Q15) - BABA   GMV Model Impact


Regarding F3Q15, we all know Singles Day (November 11th) was a considerable success for BABA, with GMV up ~58% y/y; if that rate were to hold throughout the quarter, it would mark a considerable acceleration over the 49% it achieved in the prior quarter.  However, the big risk is the elevated percentage of Mobile GMV% (42.7%), which is concerning since mobile is a headwind to BABA’s core marketing segment (see link below).   If that elevated Mobile GMV % were to hold through F3Q15, it would market the largest y/y acceleration in BABA’s reported history.  


If we were to bet on one of either the GMV growth rate or the Mobile GMV % holding for the quarter, we would take the latter.  In the first chart below, we compare y/y growth rates of BABA’s GMV vs. selected China Retail metrics that we believe best aligns with BABA’s core e-commerce categories.  It’s a mixed bag at best, suggesting the strength from Singles Day was not likely representative of BABA’s GMV this quarter. 


BABA: Thoughts into the Print (F3Q15) - BABA  GMV vs. Retail 

BABA: Thoughts into the Print (F3Q15) - BABA   e com product share



Despite what is looking like a mixed bag of a quarter in terms of GMV, and the potential headwind from growing Mobile GMV mix, consensus estimates aren’t out of reason.  Expectations are fairly muted, calling for a notable deceleration in revenue growth to 47% from 54% in F2Q15. 


That said, we’re expecting a small top-line beat of RMB 27.8B vs. RMB 27.6B (or ~2% upside).  However, BABA has so many smaller moving parts, particularly within its non-core segments, that could potentially drive growth higher than we're expecting.  The bigger question is how big of a beat is the street expecting, especially following its F2Q15 (CY 3Q14) release when it beat top-line estimates by 5%.



Tmall GMV mix, which continues grow in proportion to total GMV, has been driving Commission revenue growth ahead of GMV growth (BABA collects commissions on Tmall transactions).  As long as this mix shift continues, it could continue to mask the secular weakness we're expecting for its core Marketing segment since both Marketing and Commissions are reported in a single line item (China Retail).


BABA: Thoughts into the Print (F3Q15) - BABA   GMV vs. Commissions


However, Tmall GMV mix shift appears to be losing steam; BABA hasn't delivered sequential improvement in its Tmall GMV % over the last two quarters. While we expect a seasonal uptick in F3Q15, we're keying in on the magnitude of that increase.  Because once Tmall GMV mix sputters out, commission growth will converge with GMV growth, and will no longer be able to compensate for the weakness we're seeing in its core marketing segment.  


BABA: Thoughts into the Print (F3Q15) - BABA   Tmall GMV   


As a reminder, our bearish thesis centers around the influx of a much weaker consumer pressuring BABA's model, particularly its core marketing segment (~60% of revenue), where we expect lower advertising ROI to pressure ad rates, which has already started (see link below for more detail).


BABA: Model Facing Secular Pressure

12/04/14 09:17 AM EST

[Click here]



Let us know if you have any questions, or would like to discuss in more detail.


Hesham Shaaban, CFA


Shorting the White Space Opportunity

We were struck by the blatant overuse of the phrase "white space" at this year's ICR XChange Conference. 


As a metaphor, white space is both ubiquitous and ambiguous.  A restaurant company may have the “white space” opportunity to open hundreds of stores, but every concept wants A+ locations and no site comes without a well-funded competitor.  There’s also no guarantee that a particular concept will work in any given area.  In fact, consumers often fail to adopt and use the concept similarly across different geographies.  And then of course, there is the chance that the location is simply a poor site.


For all its ambiguity though, white space is an appropriate metaphor for opportunity.  Our issue with it is that it doesn’t guarantee success.  In fact, it tends to do quite the opposite.  Most companies aggressively attack the white space opportunity and invariably fall prey to meeting Wall Street expectations and, ultimately, destroying shareholder value.


We wonder if restaurant real estate selection models have been adjusted for the new shopping paradigm that Howard Schultz spoke about at the December analyst meeting.  To be frank, we doubt it.  It’s rare in this industry to find a concept that can fill-in its white space while simultaneously creating significant value, and generating robust returns, for shareholders.  This could be a coincidence but, after combing through three years of CMG earnings call transcripts, we didn’t find the phrase white space used once.


As we searched through public transcripts for the phrase “white space,” we were unsurprised to see many of our potential shorts often using the phrase.


Companies that have recently used the word white space in a public forum include: PBPB, BJRI, DFRG, NDLS, ZOES, BBRG, JACK, SONC, KONA, FRSH, CHUY, and DNKN.


Two of these names, JACK and SONC, are well-run companies that are benefitting from the demise of MCD


ZOES has been on the long bench for quite some time, but we’ve been unable to pull the trigger until we dig deeper into the unit growth story.  The performance of ZOES moving forward will be dependent on its new unit economics.


BJRI is a little different from the others, given the activist involvement in the name.  The cost cutting will only take it so far.  We suspect the ROIIC on its new units isn't so strong.


The remaining tickers in this screen are some of the best shorts in the restaurant industry.


Potential Shorts

Potbelly (PBPB)

“I believe our entry into these new markets coupled with the growth in our legacy markets, as well as a significant amount of white space that will remain untapped, sets us up to deliver our long-term financial goals, and more importantly, achieve our stated, at least 10% new unit growth, for a long period of time.”


Hedgeye: PBPB is up 16% over the past month and is currently trading at 57x FY15 EPS estimates.  The short interest is high at 25% of the float and only half the sell-side has a buy on the stock.  Same-store sales are estimated to grow 2.6% in 4Q14 and to accelerate to 3.8% in 1Q15.  We suspect these numbers will be difficult to achieve.



BJ’s Restaurants (BJRI)

“So, we remain very bullish around the opportunity to grow the concept from just a white space geographic expansion perspective. We're going to continue to be careful about doing that. We've been very disciplined historically around not doing a capital-cities approach and picking best spot.”


Hedgeye: After being up 60% over the past 12 months, BJRI is starting to sputter.  The street is expecting a rock star 4Q14 with EPS up 250% on a 1.1% same-store sales gain.  Trading at 38.8x FY15 EPS, there is a significant amount of good news baked into the story here.



Del Frisco’s Restaurant Group (DFRG)

“The market could support more than 170 restaurants across the country. This is in line with our internal projections. Having achieved less than 10% of that potential, we clearly have a lot of white space available for us to cover over the coming years and we will approach that opportunity in a disciplined manner by choosing only A+ sites.”


Hedgeye: This is one of the best shorts in the restaurant space.  The company has structural growth issues that will not be resolved in 2015.  Importantly, it will not come close to earnings $1.04 in FY15.  The stock is down 15% so far this year and could go significantly lower.  It looks cheap, trading at 19x FY15 estimates – but these estimates are far too aggressive.



Noodles & Company (NDLS)

“As such, we will remain diligently focused on restaurant operations and our teams, as well as earning the loyalty of our guests, while thoughtfully expanding the brand to capture the white space ahead of us. As we deliver on these expectations and generate our long-term earnings growth of 25% annually, we believe Noodles & Company remains one of the most compelling, high-growth restaurants.”


Hedgeye: At 52x FY14 estimates, NDLS is overvalued.  While it laps easy comparisons in 1H15, the business model is still a challenged one.  A concept that is positioned like NDLS claims to be should be posting significantly higher same-store sales.  The stock has rallied 19% over the past three months on the back of an improving industry environment.  The street has 3%+ same-store sales growth baked in for the first two quarters of 2015, after what looks to be a sluggish 4Q14.



Zoe’s Kitchen (ZOES)

“I want to summarize the significant long term opportunities to grow our business and enhance our brand. First, we have significant white space development opportunity with an estimated long term total restaurant potentially in the United States in excess of 1,600 locations.”


Hedgeye: We are digging deeper into ZOES.  We like the concept and want to believe it has a strong growth story, but we're not there yet.



Bravo Brio Restaurant Group (BBRG)

“So when we look at the U.S. map, we see ourselves have substantial amount of white space to grow, and we look at that as a huge opportunity.”


Hedgeye: This stock is a short, except it just might get bought.  We have no clue why this is a publicly traded company.



Chuy’s Holdings (CHUY)

“With 56 Chuy's restaurants as of today, we continue to have a tremendous amount of white space development ahead of us.”


Hedgeye: Chuy’s is an unproven concept outside of the state of Texas.  The 16% run-up this month is helping it shape up as a good short once again.



Dunkin’ Brands (DNKN)

“It's a great story with a brand with 60 years of brand heritage and significant white space in the U.S. for many years to come. So today 7,800 restaurants with an opportunity to grow to about 17,000 over the long term.”


Hedgeye: The importance of the unit growth story here has risen as Dunkin’s comps have slowed.  The probability the company misses on its 2015 unit opening guidance is strong.

LEISURE LETTER (01/27/2015)




  •  Jan 28:  LVS 4Q CC
    • , Passcode: 61558874
  • Jan 29:  
    • PENN 4Q CC
    • RCL 4Q CC
  • Feb 2: Cod Manila Grand Opening
  • Feb 3:  GLPI 4Q CC

headline story

MAR - 

  • Signed definitive agreements to acquire the Delta Hotels and Resorts® brand and management and franchise business from Delta Hotels Limited Partnership, a subsidiary of British Columbia Investment Management Corporation (bcIMC) for C$168 million (approximately $135 million).  
  • Delta brand:  38 hotels; 10,000 rooms in more than 30 cities across Canada
    • bcIMC-affiliated entities own 13 Delta hotels (and one under development) and will sign new 30-year management agreements with Marriott for these properties.  Third parties own the other 25 Delta hotels; 15 are managed by Delta and 10 are franchised.  In total, five managed hotels (approximately 1,100 rooms) are under development.

  • When completed, the transaction will increase Marriott's distribution in Canada to more than 120 hotels and 27,000 rooms, making Marriott the largest full service hotel company in Canada.
  • At stabilization, after realizing certain operating synergies, Marriott expects the purchase price to be approximately 10x annualized EBITDA 
  • Expect transaction to close 2Q 2015 
  • MAR does not expect the transaction will have a material impact on its 2015 results, excluding one-time transaction and integration costs.

Takeaway: This is a micro deal considering Delta would generate only $14m in EBITDA after synergies while MAR is expected to earn >$1.6bn in EBITDA in 2015.


Grand Korea Leisure - is seeking to operate casinos on cruise ships. The company has already engaged a consulting firm to study the economic feasibility of the project. 

Article HERE


MAR - will be introducing Moxy Hotels to the US via 8 projects slated for major metropolitan locations, including New York City (Chelsea, Mid-town and Lower Manhattan), San Francisco, Seattle, New Orleans and Chicago.

Takeaway:  Bringing the boutique, fun and hip to the big cities


H - introduced Hyatt Centric, a new, full service lifestyle brand designed for business and leisure travelers. The launch marks the sixth brand Hyatt has introduced since 2006.  More than 15 Hyatt Centric locations, comprised of open and previously announced hotels, will debut this summer in the heart of some of the world’s most popular cities, including New York, Paris, Atlanta, Chicago and Miami. 

Takeaway:  A lifestyle brand? What an original idea...


HST- announced that its European joint ventures' recently acquired 394-room Grand Hotel Esplanade Hotel in Berlin was converted to a Sheraton franchise in December 2014.  EVENT Hotel Group will continue to operate the hotel under a franchise agreement.

Takeaway: The European JV, in which HST holds a 33.4% interest, had already acquired a 90% ownership interest in the Grand Hotel Esplanade in October. At the time, the hotel was acquired for a gross purchase price of €81.0 million.


LHO - LaSalle Hotel acquires the Westin Market Street for $350M. Hotel was renamed Park Central San Francisco.  Michael D. Barnello, President and CEO of LHO, said, “The San Francisco lodging market remains very strong, with demand at peak levels and limited supply growth on the horizon, and we are excited about increasing our presence in San Francisco for the second time within 10 months – marking our seventh hotel in the city. Approximately 17% of our EBITDA is now generated in San Francisco.”

Takeaway:  Another transaction in a strong tier 1 market.  Average price per key was $513,950


NCLH - Regent Seven Seas Cruises reports that its new flagship, Seven Seas Explorer, has posted both single-day and first week record bookings since the ship went on sale to the line's loyalty members. Here's the latest on the new ship.

Article HERE

Takeaway:  Strong initial demand for Regent's new ship


CCL - will sign a MOU with China Merchants Group (CMG) for 2 potential JVs. 1) explore a potential partnership to form a Chinese cruise line for the domestic market, using new ships designed and built in China. The joint venture might also acquire existing vessels. 2) Develop ports and destinations in China and Northern Asia. CMG is already developing Prince Bay Cruise Terminal in Shenzhen.

Takeaway:  Carnival continuing to explore opportunities in China and build relationships there.

industry news

Gaming workforce The number of people in Macau working for the gaming industry reached an all-time high during 4Q 2014.  There were 87,000 people employed by the sector during the October-December 2014 period, said the Statistics and Census Service. The figure was up by 7% QoQ.  

Article HERE 

Takeaway: This number will be much higher after Galaxy Phase 2 and MSC opens later in 2015

Hotel transactions

  • Dubai Based Select Group Acquires the 211-key Radisson Blu Hotel Birmingham in the UK 

Article HERE

  • Arden Group Acquires Florida's 323-key Intercontinental Hotel Tampa Westshore; $7 Million Renovation Planned 

Article HERE

  • DelMonte Hotel Group Sells Four of its Fairfield Inn Hotels 

Article HERE


Caribbean capacity - According to the 2015-2016 Cruise Industry News Annual Report, Caribbean market capacity will level off for the 2015 calendar year, slightly dipping due to ship movements. After a record breaking 9.1 million passenger performance in 2014, up from 8 million passengers in 2013, the Caribbean cruise market will come down to an estimated 8.75 million for the 2015 season. The main driver of the slight decrease has been a few ship movements, including sending the Allure of the Seas to Europe. In addition, some operators are offering longer cruises and a few vessels were moved to Asia and Australia, thus offsetting capacity spikes from new tonnage.

Article HERE

Takeaway:  Lower capacity in the Caribbean is a known; will pricing grow?


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.

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Late-Cycle Macro Factors Matter

Client Talking Points


Sorry for sounding like a broken record on this, but not really – because #deflation remains grossly misunderstood. CRB Index hit another new low yesterday at 216 (-6% year-to-date, -31% last 6 months) with Nickel chasing Copper lower -3.4% as Chinese Industrial profits of -8% year-over-year are as bad as their marked up stock market has been good. 


UST 10YR gets the global #GrowthSlowing + #Deflation theme; they tried to bounce rates intraday yesterday, but that only lasted a few hours and the UST 10YR is right back down at 1.81% this morning with no immediate-term support to 1.75%, then 1.52% after that – don’t forget that Q414 GDP report is pending on Friday and should slow vs. Q3.


The mainstream/sell-side is about anything but this right now – worst start to an EPS season in 6 years. Only 33% of companies are registering sequential acceleration in sales growth thus far, only 40% registering sequential margin expansion, and just half registering sequential acceleration in earnings growth.



WATCH and INTERACT with CEO Keith McCullough and Hedgeye's analysts as they discuss the stock market, economy and more all in real-time. They will answer your questions live via email, phone, Twitter and chat throughout the entire trading day. 


Special appearances by market experts, including best-selling "Currency Wars" author James Rickards, money manager Michael Holland, Jones Trading chief market strategist Michael O'Rourke and many more. CLICK HERE to sign up.

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


Oil continues to suck wind at $45.21 WTI (-15% YTD - started 2015 at $53.27)



The revolution is not an apple that falls when it is ripe. You have to make it fall.

-Che Guevara


Craft brewers on average use 4.17 times as much barley as brews from U.S. beer giants InBev and MillerCoors, according to the USDA. Non-craft beer brewers use an average of 16.5 pounds of barley per barrel, while craft beer producers use a whopping 68.7 pounds per barrel.

CHART OF THE DAY: Late-Cycle #Earnings Slowdown

CHART OF THE DAY: Late-Cycle #Earnings Slowdown - chart


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


With US Earnings Season underway, here are some early highlights (with ~20% of SPX constituents having reported – see Chart of The Day for color coded rate of change breakdown):


  1. From an operating momentum perspective this is about as ugly as it’s been in recent memory
  2. Only 33% of companies are registering sequential acceleration in sales growth thus far
  3. Only 40% registering sequential margin expansion, and 50% seeing sequential acceleration in EPS growth

Late-Cycle Slowdown

“Each thing is of like form from everlasting and comes round again in its cycle.”

-Marcus Aurelius


Until you’ve survived a few cycles in this business, you haven’t really lived. Cycles come in many styles and durations. Sometimes they’re cyclical. Sometimes they’re secular. Most of the time, you can front-run them – in rate of change terms.


Yes, the ole rate of change. As in the thing that helps you analyze time/speed – accelerations vs. decelerations. No, it’s not what most traditionally-trained-linear-economists use. That’s why what you read here every morning is different.


What is not different this time is that there will be an economic cycle. While central planners will try their damndest to “smooth” and “stabilize” it… in the end, the gravitational force of the cycle will prevail.

Late-Cycle Slowdown - cycle arrows small 

Back to the Global Macro Grind

It’s a lot easier to make bold statements like that about the economic cycle when:


A)     The cycle is already slowing

B)      The Bond Market is already pricing it in


“So”, while our call on global #GrowthSlowing + #Deflation isn’t yet consensus on the sell side, the buy-siders (and self directed individuals) who are set up for it are the ones who are getting paid.


To review the #process of measuring markets and economies in rate of change terms, I always try to contextualize the rate of change in indicators as either EARLY-cycle, or LATE.


For the purpose of this morning’s discussion, I’ll focus on a USA trifecta of LATE-cycle macro factors slowing. Oh, and by the way, they started slowing in the following order (not all at once):


  1. INFLATION (classic late-cycle) has undergone a full phase transition to #deflation in the last 6-8 months
  2. JOBS (as late-cycle as late-cycle gets) peaked in the back half of 2014, and Jobless Claims are breaking out now
  3. EARNINGS (yes, they are cyclical) peaked, in rate of change terms, when pricing and FX impact did (2014)


That last one (EARNINGS) is going to drive the people who are pitching “SP500 isn’t expensive” (if you use peak sales growth and margins to derive SPX earnings) right batty. The rate of change slowing in cyclical data generally does.


With US Earnings Season underway, here are some early highlights (with ~20% of SPX constituents having reported – see Chart of The Day for color coded rate of change breakdown):


  1. From an operating momentum perspective this is about as ugly as it’s been in recent memory
  2. Only 33% of companies are registering sequential acceleration in sales growth thus far
  3. Only 40% registering sequential margin expansion, and 50% seeing sequential acceleration in EPS growth


Now if all you do is look at absolutes vs. Old Wall “expectations”, I lost you at rate of change. But, since most of you reading this pay for it, I’m highly confident that you get it. Calculus was a 12th grade pre-req to the Early Look.


For your stock picking friends who don’t do macro math and don’t get rate of change, ask them the following questions:


  1. If a company’s growth rate is about to slow, will the stock go up or down until the slow-down is priced in?
  2. What if a company’s margins are about to compress from an all-time peak?


Seriously. It’s not rocket science. You just have to doggedly track the second derivatives and #grind.


You also have to do the required #history reading to respect that #Deflation hasn’t been a sustained reality for nearly a decade now. If you expand your analytical horizons to past cycles, you’ll find ones like the 1 #Deflation (i.e. the ugly kind) and the more beautiful ones like 1 (even though America had to go through the ugly to get there).


Delaying the ugly (btw, Dalio coined the “ugly vs the beautiful deleveraging”, not me) via some cochamamy central plan only postpones the inevitable. Draghi and Yellen know that. They’ve been trying to delay the mismatch between falling demand and inflated prices with the illusion of growth (Policies to Inflate via currency devaluation), for what, 6 years?


Thankfully, not everyone shares our view of holding both large cash and long-dated Treasury positions (see Asset Allocation Model) so that we can buy the riskier things we like when they really deflate. Our current strategy doesn’t hold us hostage to an inevitable late-cycle slowdown, and makes us a nice, low-volatility absolute return, while we wait…


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.75-1.84%


VIX 14.64-23.04

Oil (WTI) 44.03-46.85

Gold 1

Copper 2.48-2.58


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Late-Cycle Slowdown - chart


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