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Takeaway: We liked the short at $63, and after digesting the puts and takes, we love it at $67.

After stepping back and picking apart our short thesis on KSS to see where we could be wrong, we’re sticking to our guns on this one. The reality is that we thought KSS was a great short at $63, and we think it’s even a better one at $67. Was the 3.7% comp better than we expected? Yes. Would we rather have been better positioned heading into today? Absolutely. But we’re sticking by our statement that the year KSS just preannounced is likely the last time the company will ever print EPS starting with a $4. We think that the Street’s 3-year earnings ramp to nearly $6/share ($5.76) is an absolute pipe dream. Over that same time period, we have earnings hitting $3 even (and $2.75 the year after). With a -48% earnings delta, we’re willing to take the beating on a sales comp.  If our numbers prove right, which we obviously think will be the case, then we’re probably looking at about an 11-12 multiple on $3 in earnings – or about $35.


We get the whole ‘it’s got good cash flow’ argument. But even at a price in the mid-$30s, the stock would be at a 12% free cash yield. Yes, that borders on cheap, but names like Dillard’s have traded as high as 20%+. Furthermore, we’ll worry about that when the stock is in the $40s.  With the stock at $67 today, that’s about $30 downside and maybe $5 upside if KSS pulls one out of the hat this coming year and earns $4.75 ($0.25 above the consensus). To be clear, KSS hasn’t traded at this multiple since March of 2007. It’s already trading at 15x the consensus numbers. To own KSS here you NEED to believe that the company is going to crush numbers. We don’t see how anyone could argue that with any fundamental analytical support.


KSS - All IN ON THE KSS SHORT - Kss 1 2 4


There are two big points we’d hit on…one short term, and the other long term.



As it relates to shorter term considerations, we think the comparison between Macy’s and Kohl’s is overblown – or at a minimum lacks context. True, the number of times that the perennially-hated KSS puts up better numbers that the perennially-loved Macy’s are few and far between. The quick and easy conclusion on the open that all the hype around new brands (Izod, Juicy), initiatives like Beauty, and the company’s new Yes2You Rewards program have turned this company around. Could they have helped on the margin? They probably did. But consider the following…

a) This is retail, and the best companies occasionally have a bad quarter, and the worst always have their moment in the sun.  Just because the numbers were higher by 2% does not mean that earnings are going up by a dollar next year.

b) One X factor this quarter is last year's January washout. KSS comps were -8%, assuming a 14% weight for the month. To be fair, we completely knew about this, and thought we modeled it appropriately. And Macy's had an even greater impact with -10% last Jan, and it put up a 2% owned comp for the quarter which implies a 1.5% comp for January. KSS is the rare standout. But modeling the holiday hangover this year for department stores is particularly tough.

c) People are only looking at Macy’s as a comp here. But consider similarly poor quality retailers like Belk and Bon-Ton (and even Old Navy – which is in KSS comp basket) comped negative all year, and then gave holiday updates that were 500-600bp higher.  When you look at KSS’ numbers relative to those companies, it is hardly a stand out at all.

KSS - All IN ON THE KSS SHORT - kss comp table

d) By our read, KSS had a killer January in its e-commerce business. This is in large part as it comped last year’s delivery issues, which benefitted it this year. The results mirror the comp differential with Macy’s well.
KSS - All IN ON THE KSS SHORT - kss 3 2 4



We think that KSS’ target market is far more tapped than most people think. We think KSS knows this, which is why it changed up its rewards program. But how we’re doing the math, it simply will not work over the long term – and perhaps the shorter term. It offers up meaningful risk on the SG&A line of the P&L.


Keep in mind that KSS is one of the last remaining retailers that links its rewards program to the loyalty program. Or at least it did. The company decoupled late last year. Everyone knows that, but few people talk of the risks. They should given that 57% of KSS sales flow through the card.

Last year – according to Capital One – it booked $805mm in income related to the KSS Card, and then rebated $405mm to KSS (a standard practice in such partnerships). Though this is not unusual, keep in mind that it served as a 9.5% counter-expense to SG&A.

Now with the new Yes2You rewards program, KSS decoupled that card from the rewards program. As such, a customer could shop in a KSS, get full rewards, and then use Amex, Discover, or whatever card, and get those rewards too. In effect, the customer can get similar rewards but double the benefits if they DON’T use the KSS card.  So…KSS might still get the sales, but then we’d see SG&A rise simply as the counter-cost begins to deflate.


We analyzed the number of customers that KSS would need to win in order to offset this risk.  The bottom line is that for every 5% of the 57% of sales that shifts to the new rewards program, the company has to find about 395,000 new customers to fill the void. In the table below, we built up to the customer count based on KSS’ average basket and visitation statistics. So if the credit card ratio decreases by 10% (very plausible), we need about 800k people in order to offset the $0.12 per share hit in EBIT from lost credit income.


KSS - All IN ON THE KSS SHORT - kss 4 2 4


800k customers might not sound like a big deal for a company as big as KSS, but consider the share it currently has of it’s target market. We calculate it two ways, and the results are very similar (scary).

1) Household Share: There are 79,000 households within a 15 minute driving distance of the average KSS store. The company has about 58,800 customers in each market. That tells us that the company has 74% share of relevant households.

2) Customer Share: The core demo for KSS is a 30-60 year old woman, and secondly is a 61-80 year old woman. When we look at this core, we get to a total market size of 73.2mm consumers (assuming that 75% of women in the age group are potential KSS customers, and 5% of males are prospects).  Today KSS has about 64.3mm customers. In other words, it has about 88% share according to this metric.


So with extremely high consumer share penetration, KSS will largely be attracting new customers from either a) a less desirable age demo, b) a greater driving distance, or c) they’ll be looking to attract more men. We don’t want to bank on any of those. It’s no wonder that KSS has store productivity that is ahead of Macy’s. It’s not going to get much higher.  


KSS - All IN ON THE KSS SHORT - kss 5 2 4

KSS - All IN ON THE KSS SHORT - kss 6 2 4

Our Favorite Sector (on the Short Side) When the Market’s Ripping

Editor's note: This is a brief excerpt from Hedgeye research earlier this morning. Click here to learn more our options for individuals.

*  *  *  *  *  *  *

On big U.S. equity beta chases in 2015, our favorite sector to lie out on the short side when we’re at the top-end of the risk range remains the Financials (XLF).




Mainly because we think long-term rates continue to make lower-lows. Incidentally, if we get a bad jobs print this Friday, we can get you UST 10YR Yield of 1.61%, in a hurry.


Our Favorite Sector (on the Short Side) When the Market’s Ripping - br8

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CMG: Look Past the Near Term Noise

CMG remains on the Investment Ideas list as a long.


It’s unlikely for a restaurant stock to trade down after reporting same-store sales growth of +16.1% and a $0.05 (or 136 bps) bottom line beat – but that’s precisely what we have here.  With a lofty valuation (41.5x NTM P/E; 21.41x NTM EV/EBITDA) and sky high expectations, Chipotle needed to deliver an impeccable quarter to appease the market.


Alas, in the market's eyes, margin pressure and some cautious commentary regarding 2015 same-store sales and cost of sales trends trumped the best in class comp and traffic growth.  Cost of sales inflation, primarily due to beef, dairy, and avocado, pressured margins in the quarter and the guide for 2015 was well above consensus estimates (35% vs 34.3% est.) as beef and avocado prices are expected to remain elevated while dairy normalizes. 


Management dismissed the notion that cost of sales is an issue as they tend to take a more holistic view of their operating model – as long as restaurant level margins are improving, they are pleased.  As an aside, restaurant level margins improved 101 bps in 4Q14 even as cost of sales increased 108 bps.  We firmly believe Chipotle should be praised rather than condemned for investing in its food, a phenomenon that the majority of its competitors are reluctant to do.


CMG: Look Past the Near Term Noise - 1

Source: Company Filings, Consensus Metrix


In our view, there were far more positives in the quarter than negatives and the street is overlooking the strategic investments the company made this year to further improve operating performance moving forward.


Comp growth was driven by 6.3% price, 2.0% mix, and 7.8% traffic.  In addition, throughput picked up again, as CMG increased its peak hour lunch and dinner transactions by three and five, respectively.  Its restaurants are now operating at AUVs close of ~$2.5 million, a number which management intends to improve through stronger operating efficiency.  To that point, the company has decreased its field leadership ratio from 15 a few years ago to 8 today and has created its own Restaurateur diagnostic tool that helps these leaders identify weaknesses in each of the restaurants they supervise.  With these two investments (people, diagnostic and plan tool) in place, 2015 should be a year of continued growth and development in each of Chipotle’s restaurants – better food, better throughput, better experience.


Considering CMG’s bullet proof balance sheet (nearly $1 billion in cash) and improving incremental returns (even at ~1,800 restaurants), it’d be foolish to bet against this stock.  It is the best positioned growth company in our space.



While we understand the market’s initial reaction to the report, we believe it is important to look past the short-term noise and volatility that sometimes plagues this stock around earnings releases.  What’s most important to us is that Chipotle’s brand positioning and relevance has never been stronger.  This is not only evidenced by the company’s same-store sales growth, traffic growth, and all time high AUVs, but also by the ever evolving preferences of American eaters.  Chairman and Co-CEO, Steve Ells, shed light on this early on in the call:


“For example, our vision is really resonating with teens, millennials, and Generation X. According to industry research, Chipotle is one of the most popular restaurant chains among teens and has been growing in popularity among this demographic. This report from 2014 ranks Chipotle as the third most popular brand among teens, up from number eight in 2013. Gen X consumers were 33% more likely than average to choose Chipotle, with millennials Chipotle was even more popular. With customers in this group 75% more likely than average to choose Chipotle over other restaurants.


We believe that our popularity among these younger consumers is tied to our vision and the growing interest in issues related to food and how it is raised. Our own research shows that these issues are clearly becoming more relevant and important when customers choose where they will dine. Based on our ongoing tracking research, 87% of fast casual diners say they prefer to eat foods that are grown locally, up from 70% in 2011. 86% believe ingredients raised or grown in a more responsible way taste better. That’s up from 76% in 2011. 73% feels important to buy organic for certain food items, up from 61% in 2011 and 69% try to eat meat that has been raised responsibly and that’s up 53% in 2011.”


If there’s a better positioned publicly traded restaurant than Chipotle, we’d like to know about it.  


CMG: Look Past the Near Term Noise - 2


CMG: Look Past the Near Term Noise - 3

Keith's Macro Notebook 2/4: USD | Commodities | Financials


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

LEISURE LETTER (02/04/2015)




  • Feb 10: 
    • IGT extraordinary shareholder meeting vote
    • HOT 4Q CC 10:30am
      • (1866) ; pw: 67514695
  • Feb 12: 
    • MPEL 4Q CC 8:30am
      • (1866) ; pw: MPEL
    • PNK 4Q CC 10:00am
      • ; pw: 68847867
    • BYD 4Q CC 5:00pm
      • ; pw: 5378350
  • Feb 17: MGM 4Q CC 11:00am
    • ; pw: 8870181
  • Feb 18: 
    • HYATT 4Q CC 11:30am
      • ; PW: 62845475
    • MAR 4Q release 5pm
  • Feb 19:
    • HST 4Q CC 9:00am
  • Feb 25: Prestige analyst day (9:00am-12pm)



    CCL - Carnival Vista will homeport in Miami. The move is part of an extended deal between Carnival Corp. and PortMiami that would require Carnival to sail Vista out of Miami for at least 24 months in the three years after the ship launches next year. The 3,954-passenger Carnival Vista will launch May 1, 2016. After a season of 18 sailings in Europe, the ship will embark on a 13-night transatlantic crossing October 21, 2016, arriving in New York City on November 3. 

    Article HERE

    Takeaway: As expected.

    HOT - Bahrain-based International Investment Bank (IIB) has announced that its mixed-use real estate development in Sarajevo has signed a memorandum of understanding (MOU) with Starwood Hotels and Resorts concerning the project's second tower, which would house a luxury five-star hotel. Sarajevo City Centre (SCC), which is based in Sarajevo, the capital of Bosnia and Herzegovina, is a partnership between IIB and Saudi-based business group Al Shiddi Group.

    Article HERE







    Jimei – The company says it is expanding its gambling junket business in Macau. Jimei told the Hong Kong Stock Exchange that it had an agreement with New International Club Ltd to participate indirectly in the gaming promotion business in the city. New International Club is in negotiations with casino operator Wynn Macau Ltd about managing several VIP gaming rooms. The agreement will give Jimei all New International Club’s share of the revenue from these rooms in exchange for taking all the risk.

    Article HERE

    Takeaway: More VIP rooms coming for WYNN? 


    North America

    Alaska– The Alaska market may have found its perfect supply and demand scenario, as market capacity will remain flat year-over-year from 2014 to 2015 according to the 2015-2016 Cruise Industry News Annual Report. The market accounted for 900,000 passengers in 2014, and 2015 numbers remain the same, although still somewhat below a peak of 1 million passengers in 2008, before the infamous Alaska head tax drove 20 percent of the beds elsewhere.

    Article HERE


    New York - Again, NYC set a record for visitors, drawing 56.4 million of them in 2014. The total was a 3.9% increase over the 54.3 million visitors in 2013, which had been the all-time high for the city. The number of international visitors grew 7%, to 12.2 million. Domestic visitors totaled 44.2 million, a 3% increase. Also a city record: 32.4 million hotel room nights sold. The average daily rate was $295 and average hotel occupancy was 89% — both highs in the U.S. for 2014, said the city’s tourism organization, NYC & Company.

    Article HERE

    Takeaway: NYC was a hot spot for lodging in 2014 but Fx will be a hurdle in 2015?





    China PBOC announces system-wide reserve ratio cut by 50bp to 19.50%.  

    • Cut reserve ratio by additional 400 bps for agricultural development bank.
    • PBoC said it will continue to implement prudent monetary policy.
    • Maintain an appropriate degree of credit and social financing.

    Takeaway:  Largely expected by the market. Nevertheless, this is a positive for the VIP segment, on a 9-11 month lag.


    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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