Takeaway: Dollar Down, Rates Down = #StrongGold

Gold tested and confirmed its BEARISH to BULLISH TREND reversal, and we sent out the buy signal today in GLD (10:28 a.m. at $124.00) to our real-time alerts subscribers for a trade into the FOMC announcement tomorrow afternoon. We will continue to manage this exposure with a BULLISH intermediate-term TREND bias. Stay tuned for updates on this trade.


GLD Risk Management Levels:

  • BUY TRADE = $119.51
  • SELL TRADE = $127.34
  • BUY TREND (BULLISH) = $118.69



With the continued deterioration in U.S. economic data, we believe there is a probability Yellen’s language will be interpreted by the market as more dovish than her previous path as she attempts fight the pain of global deflation within the fed framework.  

One of the last Q4 data points, A durable goods orders print this morning, showed a large sequential deceleration of -3.4% in December. The number was slightly positive on a year-over-year basis, the general TREND since we moved into QUAD#4 reeks #deflation, which we fully expect to be a big talking point tomorrow.


BUYING GOLD INTO FOMC - chart2 durable goods


Yellen will anchor on 1) deflationary headwinds and 2) the recent deterioration in the labor market in tomorrow’s speech.

A more dovish policy path could be perpetuated with a GDP miss on Friday (which we model as more likely than not with a very difficult Q4 comp on a year-over-year basis). Under this scenario pressure on the dollar should bode well against a long gold position for a TRADE. Please reach out with any questions.


Ben Ryan



Retail Callouts (1/27): ICSC, Global ecommerce, FAST, GME, NKE

Takeaway: Apparel and Footwear global e-commerce snapshot. ICSC - current weather not helping against the easiest comp of the year.


Retail Callouts (1/27): ICSC, Global ecommerce, FAST, GME, NKE - 1 27 chart2





Takeaway: Nothing big to call out from this weeks data point. The 2.6% comp was a slight acceleration on the 2yr trend line - up 20bps. What struck us as we looked at the chart this morning was the upcoming week 5 comp, which was the first flat reading in the ICSC since Feb. 2010. As we sit here in CT in the midst of a state wide travel ban retailers must deal with mother nature once again. Not a great set-up for a blowout week.

 Retail Callouts (1/27): ICSC, Global ecommerce, FAST, GME, NKE - 1 27 chart1





E-Commerce Market Comparison 


Takeaway: We ran our own consumer survey in late December to gauge what the landscape looked like across 19 different subsectors of retail. We've presented just a fraction of the findings - focused primarily on the Athletic Space in our Athletic Black Book and Foot Locker Calls. We'll dig into the entire space in much more detail when we release our E-Commerce Black Book.


We thought this was an interesting look at the global apparel and footwear market.


  1. The first graphic shows the top 10 countries ranked by 2013 revenue totals. The growth numbers across the board are pretty remarkable. The US and Japan were the slowest growers, but were also the most mature markets in 2008.
  2. China has been on an absolute tear with a 5yr CAGR of 180%. The total sales number is now on par with the US from a base of zero and penetration is now higher than the US. That's an amazing combination of consumer adoption and systems integration.
  3. The 5 most penetrated markets are now: UK, China, US, France, and Germany. Graphic 2 shows the Global heat map.

Apparel & Footwear E-Commerce Sales

Retail Callouts (1/27): ICSC, Global ecommerce, FAST, GME, NKE - 1 27 chart4


Global Heat Map - Apparel and Footwear E-commerce penetration

Retail Callouts (1/27): ICSC, Global ecommerce, FAST, GME, NKE - 1 27 chart5

Source: Euromonitor




SHLD - Sears Canada Names Boire as CEO



FAST Retail - Uniqlo Enters Canadian Market



MAT - Mattel Names Christopher Sinclair as Chairman and Interim Chief Executive Officer



Sports Authority names former Pep Boys exec as chief marketing officer



GME - GameStop launches tax refund program



NKE - Nike signs major sports deal with Xavier




McCullough Phones It In to Maria: Why the Market’s Getting Spanked

As stocks get hit hard today, Hedgeye CEO Keith McCullough explains to Fox Business “Opening Bell” host Maria Bartiromo what’s behind the market volatility and selloff.

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Keith's Macro Notebook 1/27: #Deflation | UST 10YR | Earnings


Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.

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.

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