Takeaway: YUM! Brands was added to Investing Ideas on Monday, February 9th 2015.
In a Q&A session today, Restaurants Sector Head Howard Penney discusses why we are giving YUM! Brands nearly a $100/share valuation with Director of Research Daryl Jones.
Penney touches on YUM's latest earnings release, the significant upside he sees in the stock, and why he believes management needs to be nudged into running an asset-light model in China.
Hedgeye Director of Research Daryl Jones shares the top three things in Keith's macro notebook this morning.
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Takeaway: One of the few quarters for any Macau operator that we aren’t below the Street.
Please see our detailed note:
Takeaway: We've already highlighted BABA's secular risks. Now that we saw the turn in its last major growth driver, it all bubbles to the top.
- GMV GROWTH TO SLOW PRECIPITOUSLY: China's upper class drives the bulk of BABA's GMV. There is no other plausible explanation after comparing BABA's reported metrics to China consumer demographic data. That means the next wave of user growth will come from a much weaker consumer, leading to declining GMV/Active Buyer, and slowing GMV growth.
- MODEL FACING SECULAR PRESSURE: Slowing GMV growth naturally bodes poorly for commissions. But the bigger issue is Marketing Revenues (~60% of total), which are facing secular pricing pressure as a weaker consumer pressures ad conversions and ROI. We were already seeing this in BABA’s financials, but the street just took notice this last print, because...
- TMALL CAN'T SAVE THE DAY: The one thing that was keeping us on the sidelines was the migration of GMV moving over to BABA's Tmall platform (where BABA collects commissions). That sputtered out in F3Q15, leading to a sharp slowdown in Commission revenue growth, which exposed the weakness in its Market segment (both reported in its China Retail segment). Tmall Mix shift can't be trusted a secular growth driver moving forward, so we don't need to worry about getting run over by it longer term.
- HEFTY PRICE, WORSE DILUTION: BABA is trading at ~13.7x P/S for 2015, at least 1 full turn ahead of its large cap comps (FB, LNKD, TWTR) despite having the lowest consensus growth expectations of the group. What's more concerning is the amount of new float set to hit the market, with the potential risk from its pending lock-up expiration in March, and the spin-off of YHOO's BABA stake in 4Q15 (the latter will double BABA's current float).
SUPPORTING data and ANALYSIS
We have outlined our bearish thesis in a series of notes, which will provide supporting detail behind our analysis. Below, we highlighted three notes corresponding to the first three Key Points above.
BABA: What the Street is Missing
11/26/14 08:03 AM EST
BABA: Model Facing Secular Pressure
12/04/14 09:17 AM EST
BABA: Hammer and Nail (F3Q15)
01/29/15 11:09 AM EST
Let us know if you have any questions, or would like to discuss in more detail.
Hesham Shaaban, CFA
Takeaway: UA & FL leveraging Steph Curry into NBA All-Star Weekend. PIR - No read through to RH. AMZN slowing on ChannelAdvisor comps.
EVENTS TO WATCH
UA/FL - UnderArmour and Foot Locker Go Viral
UA and FL are promoting a series of short videos centered around its basketball footwear business, and more specifically, Stephen Curry -- arguably the brand's most marketable asset in the sport. The segments pit Curry against a series of opponents in a 3-point competition. As amazed as we are with the talent of 9-year old Jaden Newman, we're a bit surprised UA would put her up against Curry. But truth be told, her killer performance supports what UA stands for -- that the little guy (or gal, in this instance) has the right to compete, and win.
The notable thing from our perspective is that this is extremely cheap advertising for UA, but more important is that they are partnering with Foot Locker. That said, Foot Locker is not prominently positioned in the ads. And furthermore, when you go to the FL dot.com site, you have to click five times to get past all the Nike's to get to UA shoes. Maybe that changes on Friday when UA releases the latest Curry shoe in advance of the All Star Game -- but then again, Nike will probably release 30 shoes on that same day.
One other point we'd note is that any shoe that launches at Foot Locker will ALSO be available at underarmour.com and at UA stores. It looks like FL is buying the right to get the exclusive vs Finish Line, etc...
This is definitely notable in that co-op credits have been trending lower for FL -- that is, the ad expense that have been funded by the footwear brands. This campaign supports our view that vendor support will continue to dwindle, which will pressure the P&L. That's probably the 10th reason out of ten why we are bearish on FL...but it's another small development in the short thesis.
PIR - FY 2014 Guided Down, CFO Leaving
Takeaway: The stock was up 22% since the company reported earnings on 12/18 and 15% since the company posted Holiday comps 190bps ahead of the street. And then…the market closed and the bottom fell out after the company guided the top end of the EPS range down 22%. This appears to be completely self inflicted and there is a body count to prove it.
More importantly as it relates to RH (our favorite idea) --
- We never liked PIR as a comp, but given the small cadre of names in this industry that trade on the capital markets it's something we have to live with. It's a completely different customer group and the decorative/furniture split is 60/40. It's the inverse at RH.
- This isn't endemic to the industry. Simply the case of a management team misunderstanding the business model. We don't expect that the market will beat RH up over this, but if they do it's a name we still like a lot up here. The company is on track to grow revenue by 30% and EPS by 50% in 2015.
AMZN, EBAY - 2year Slowdown for AMZN, Acceleration for EBAY
Takeaway: Amazon sales in January were +27%, but against an easy comp the 2 year continued the downward trend from the August peak. These comp numbers are composed of a large sample of 3rd party AMZN and EBAY sellers. One thing we can't ignore is AMZN's decision to incorporate items sold by 3rd party sellers into its free shipping minimums. Our guess is that the company is looking at the same chart we are.
CHS - Private Equity Firm in Advanced Talks to Buy Chico’s FAS
DKS - DICK'S Sporting Goods And The U.S. Olympic Committee Announce Partnership
RAD - Rite Aid to Acquire Leading Independent Pharmacy Benefit Manager EnvisionRx for $2 Billion
HD - The Home Depot Preps for Spring with 80,000 New Hires (Same Number as Last Year)
Closeout Retailer Ollie's Selects Banks for IPO
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