HEDGEYE INSIGHT: Quick Take on Nike's New SNKRS App | $NKE

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HEDGEYE INSIGHT: Quick Take on Nike's New SNKRS App  | $NKE - nk1


Takeaway: There is a lot going on with this new Nike SNKRS app. The takeaway right up front is that it makes buying shoes easier on a mobile device. That's obviously bad news for traditional retailers like Foot Locker (FL), Hibbett Sports (HIBB), Finish Line (FINL), etc. We haven't seen this type of technology before but it makes sense given Nike's push into the direct business.


A couple additional nuances worth mentioning…

  1. Everything purchased on the app ships for free. The free shipping threshold on sits at $75. As we were typing this it made sense to us because this is a sneaker-head app which will probably not feature any styles under the current hurdle rate, but it’s a solid piece that the marketing department can use. We think that Nike moving to free shipping across the board is a 12-18 month development.
  2. The app will curate specific styles that fit the consumers taste. That's cool, but we think the more important feature is the limited/new release notifications. Limited releases are a big driver for the likes of FL. Nike now has a way of communicating with its target consumers directly about these releases.

HEDGEYE INSIGHT: Quick Take on Nike's New SNKRS App  | $NKE - nke

CAKE: A Troubled Concept

Takeaway: Despite strong industry trends, restaurant stocks are not immune to looming cost pressures.

CAKE delivered one of the worst prints we’ve ever seen out of them, missing top line and bottom lines estimates by 177 bps and 2025 bps, respectively.  Comps also disappointed, coming in at +1.4% vs the +1.9% consensus estimate.  After reading the press release, and seeing the massive level of margin deterioration, we didn’t think it could get much worse – and then the earnings call started. 


CAKE: A Troubled Concept - chart1


CAKE: A Troubled Concept - chart2



Management’s commentary on food and labor inflation was critical on a couple of levels: 1) CAKE will be hard pressed to grow margins in 2015 and 2) this is awful news for the small and weak players in the industry. 


To the first point, CAKE’s food cost pressures in 2014 were widely recognized due to higher dairy and seafood prices.  But the degree to which this line de-levered over the course of the year was astounding.  Management conceded that it is considering supplementing its contracting with direct hedging, but to what extent this will help is unknown.  While many expected CAKE to be one of the largest beneficiaries of the retreat in dairy prices, beef and, to a lesser extent, chicken are expected to drive 2-3% commodity inflation in 2015.  They will have a very difficult time leveraging this line further without delivering a 2%+ comp, a feat they haven’t accomplished in over two years.


CAKE: A Troubled Concept - chart3


Labor inflation was a much less publicized issue throughout the year that the company mainly attributed to unusually high group medical claims.  This pressure, however, is expected to continue in 2015 and could be compounded by minimum wage increases in select states across the nation.  All in, management expects $10-12 million in wage inflation.  We wrote in a bearish Black Book last January that the margin story was over for CAKE and it certainly appears to be.  They haven’t driven labor leverage since 1Q13 and probably won’t anytime soon.


CAKE: A Troubled Concept - chart4


To the second point, and we’ll have more on this in a later post, the pressure CAKE is seeing is not limited to them.  If a well-established player in the casual dining industry is struggling to control these costs, what does that mean for smaller, rapidly expanding players in the industry?  They’re going to feel a bigger impact – and it’s not going to be pretty.  Minimum wages increasing and the restaurant job environment is improving.  It’s getting increasingly difficult and expensive to retain employees – an issue that, just today, Panera referred to as the “war for talent.”  In the coming days, we’ll unveil a list of companies that we believe will have a much more difficult time operating in this environment than consensus expects.  And, yes, we’d short all of them.



“Holiday 2013 was the first in which many traditional bricks and mortar retailers experienced in-store foot traffic give way to online shopping in a major way.”

-Howard Schultz, Chairman/President/CEO/Founder


Howard Schultz made this remark last year on his company’s 1Q14 earnings call – and we think it’s spot on.  If it’s not, CAKE’s traffic isn’t doing much to suggest so.  Traffic declined -1.2% in 4Q14, marking the ninth consecutive quarter of negative traffic.  Management insists it’s not related to the secular decline in mall traffic but, if that’s the case, they need to prove it.  The traffic and margin decline we’re seeing suggests this company is operating a broken model and, if it’s to be fixed, it will take significant time and investment.


CAKE: A Troubled Concept - chart5



CAKE guided FY15 EPS to a range of $2.08-2.20 on 1.5-2.5% comp growth, a far cry from the current $2.42 consensus estimate.  If they want to hit this range, they’ll need to deliver strong comp growth and, with limited drivers in place, we’re not sure how they do that.  Speaking to the lack of incremental leverage in the business model, management actually admitted that it needs to either develop or acquire a growth concept in order to deliver long-term EPS growth in the mid-teens.  And you probably already know how we feel about multi-concept operators.  This brand is in trouble and, if it weren’t down 10% today, we’d short it.  In fact, if it bounces meaningfully, we’d likely jump at the opportunity.


Cartoon of the Day: Beware the China Snail

Cartoon of the Day: Beware the China Snail  - China cartoon 02.12.2015

"Chinese GDP growth hit a 24-year low in 2014," Daryl Jones, Hedgeye Director of Research tweeted earlier today. "And you're worried about Greece?"

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This May Be the Biggest (and Most Overlooked) Market Risk Right Now

The biggest risk to the market right now isn’t fundamental – it’s technical. Not technical as in chart analysis (e.g. "The technicals look bad), but rather the structural nature of the U.S. equity market.

This May Be the Biggest (and Most Overlooked) Market Risk Right Now - 56

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Specifically, one of the least discussed risks to the U.S. equity market is the $2.6 trillion in assets under management (AUM) in the ETF industry, which is now more-or-less tied with the AUM of the entire hedge fund industry. The proliferation of passive investing has accelerated demonstrably in recent years amid the confluence of three key factors:


  1. The secular trend of underperformance among active managers
  2. A trend of minimal variance in returns at the sector and style factor levels
  3. A trend of subdued volatility at the index level

ETFs provide their investors – which are increasingly institutional – a cheap way to passively allocate to systematic risk. That’s great for investors, but in doing so, it severely disrupts market functionality (e.g. all-time lows volume and turnover) and distorts the price discovery mechanisms at the security level (e.g. tight, but spurious correlations in “risk on” or “risk off” episodes).


This May Be the Biggest (and Most Overlooked) Market Risk Right Now - Russell 3000 Turnover


When the market goes up, no one cares. But when investors panic – as previewed in early-to-mid October – the market goes down hard and fast because investors are likely de-risking their portfolios of entire factor exposures (e.g. “U.S. equity risk”), rather than of individual names.


In summary, the proliferation of passive exposure to market beta likely means the buying power of investors who are prepared to defend individual names/stories is getting dwarfed, at the margins, by the selling power of those that will just want out when the tide turns.


It took nearly 74 weeks for the U.S. equity market to trough during the last major downturn (10/9/07 – 3/9/09). If the October 2014 draw-down was any indication of the current dire state of market pricing dynamics, a similar decline is likely to have substantially more velocity absent outright central bank intervention.


“Velocity” * “Volatility” = “Mass Panic”, whereby “Mass Panic” heightens the risk that investors make decisions that lead to permanent or semi-permanent capital impairment.


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Takeaway: This week we consider a few different ways of evaluating the labor market's current state.

Below is the detailed breakdown of this morning's initial claims data from Joshua Steiner and the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact 


In psychology, cognitive dissonance is the mental stress or discomfort experienced by an individual who holds two or more contradictory beliefs, ideas, or values at the same time, or is confronted by new information that conflicts with existing beliefs, ideas, or values. - Wikipedia


The initial jobless claims data is beginning to give me some cognitive dissonance.  


CD 1) 50,000 Feet - Claims are simultaneously at their best and worst level. They're at their best in that they're trending around 300k, which is the historical average of the trough level of claims over the last seven economic cycles. See the first table below for details (courtesy of our Macro team's Christian Drake).


However, they're also at their worst, in that the nature of the trough is that .... it's the trough. It can't get any better. We illustrate this in the second chart below. We've tried to help investors frame up this risk/reward scenario by looking to history for guidance. Specifically, we've compiled data on how long markets have risen after claims have fallen to a specific level.


As the third chart below shows, the claims data has now been sub-330k for 10 months. Looking back historically at the last three cycles, rolling SA claims ran at sub-330k for 24, 45, and 31 months, respectively, before the corresponding market peaks in late 1991, March, 2000 and October, 2007.  








CD2) The Energy Paradox - We've written a fair amount recently about the deteriorating labor conditions for energy sector workers brought on by the collapse in crude oil prices since the Fall of last year. Last week's note on the subject can be found here: Concentrated Harm Meets Diffuse Benefit. This week's data shows a further decoupling in initial jobless claims for the US as a whole vs those states with higher energy exposures. We shows this in the two charts below, where we break the 8 energy-heavy states into a basket and index them vs the US since May last year.


However, as we pointed out in last week's note, oil and gas jobs make up just 0.6% of nonfarm employment in the US; if that were cut in half (along the lines of what's happened to the price of oil), it would have only modest repercussions on the labor force at the national level. That said, energy jobs tend to pay better than non-energy jobs, so that needs to be taken into account.






CD3) 50 Feet - This week's print wasn't good. Seasonally adjusted 1-week initial claims rose 25k to 304k, a large jump in absolute terms and a rise that was beyond what consensus expected. We're not aware of any distortions in the data for the most recent week. However, if we look at the rolling data (4-wk rolling averages) then we see a different story. 4-wk rolling SA claims dropped 3k to 290k vs the prior week. Meanwhile, 4-wk rolling NSA claims were lower on a YoY basis by 13.2% this week vs 9.9% in the previous week - the third consecutive week of accelerating improvement in that series.  


Our firm places a lot of emphasis on the importance of Rate of Change (RoC). Our overarching gestalt is that what happens on the margin matters most since it determines the next price. The challenge in that approach, however, is which data point to key off of, as the most recent week's number is clearly a miss while the rolling 4-wk average shows ongoing improvement.


When dealing with something as large as the US labor market, we're not going to make an inflection call based on a single week's worth of data, especially not based on a data series as routinely volatile as the weekly jobless claims. That said, anytime a high frequency data series signals potential trouble, our caution flags go up and we place added significance on the next data as we look to see whether the beginning of a new trend is taking hold. For now the trend remains positive, but we've got the caution flag up with this morning's claims number.






CD4) Convergence & Mice - One of the challenges of watching RoC is that you have to have proper context for what you're observing.  In Science, mice are often used for experimentation. We'll use them for our purposes as well.


Consider the following thought experiment (again, h/t Christian). Let's say that I have 10 mice in my house in 2012, 5 mice in my house in 2013, no mice in my house in 2014 and no mice in my house in 2015. Here's how RoC looks on that: 2013: 50% improvement, 2014: 100% improvement, 2015: 0% improvement.


No mice is the obvious objective here, the analog is maximum potential employment. RoC would have you believe that 2013 was good (50%) , 2014 was better (100%) and 2015 was bad (0%), but obviously 2014 represented the achievement of the goal (no more mice) so no change to 2015 was as good as could be hoped for since you can't have negative mice in your house.


Claims reach their frictional lower bound around 300k. As a reminder, 300k is the trough average over the last seven economic cycles. As we are now at that trough we should expect that as we begin to lap the 300k level the YoY rate of change will converge towards zero, just as no mice YoY equals 0% RoC improvement. This isn't a bad thing. This simply means we've reached the trough in claims. At this point, the important exercise becomes watching for signs of new mice (a rise in claims). 


The Data 

Prior to revision, initial jobless claims rose 26k to 304k from 278k WoW, as the prior week's number was revised up by 1k to 279k.


The headline (unrevised) number shows claims were higher by 25k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -3.25k WoW to 289.75k.


The 4-week rolling average of NSA claims, another way of evaluating the data, was -13.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -9.9%








Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT



Takeaway: Another good quarter by a regional gamer and estimates going higher for the first time in years


  • Revenues up ~11% in January, with positive trends that continuing into February
  • Pleased with financial performance in 4Q
  • Seeing improvement in consumer confidence
  • Based on Jan/Feb numbers, consumer seems to have wind behind its back across all geographical areas
  • Sees improving spend per visit and visitation
  • Q4 tables game volumes grew 10% at ASCA properties. Expect them to grow in 2015.
  • Have seen solid improvement in REVPAR at East Chicago (+10%) and St. Charles (+7%).  15% increase in hotel cash revenues in Q4.
  • myChoice program: 9% increase in play and 6% spend per visit
  • Market share:
    • Grew 60bps and expanded EBITDA margins
    • River City - record market share
    • St. Charles: highest since 2010
    • East Chicago- highest since 2008
  • L'Auberge Lake Charles: Q4 and 2014 record EBITDA and performance.
    • December: revenues lower but volumes increased
    • January:  both revenues and volume both increased
  • Belterra Park:  seeing larger % of play from VIP players; have launched expanded advertising campaign in the next 30 days
  • 1st time in 10 years, SS revenue growth
  • Q4 SS EBITDA $152m increased $11.6m (excluding integration costs and Lake Charles costs)
  • Belterra Park posted positive EBITDA in January
  • Lake Charles retention program costs:  halfway through program.  Expect $1m per quarter in Q1 and Q2 2015.
  • Boomtown New Orleans hotel:  have improved results
  • Will make final payment for Belterra Park license in 2Q 2015
  • So far in 2015, have repaid $25m in debt
  • Will issue equity to de-lever.  $1bn prelim estimate lowered to $700m and potentially less.  Reduction due to strong operating performance broad base which has a multiplier effect on leverage and cash flow and other company refinements
    • Not have added risk to profile of company through this change.
    • The issuance of up to 20% of REIT could be large portion of the $700m
  • REIT spin-off: (issue shares up to 20% of REIT pre-spin without tax consequences), straight equity, equity-linked securities options
    • Submitted Private letter ruling to IRS in December.  
    • Expect REIT in 2016

Q & A

  • 1Q so far, revenues continue to build
  • Lake Charles:  
    • Golden Nugget attracting a different and new customer 
    • Optimistic on market expansion
    • Seeing myChoice customers grow as well
    • L'Auberge hotel doing well
    • Not changed marketing strategy
  • Lower G&A:  expect 2015 to be south of $80m (mid 70s or so)
  • How much has PNK spent on REIT transaction? $1m in quarter. $2-3m overall.
  • REIT:  Need approval from IRS and gaming regulators. Will be diversified REIT.
  • New Orleans smoking ban: sees upside from that
    • Some discussion of smoking ban in other Louisiana markets but see no progress there
  • Table game initiative:  still early 
    • National casino advertising 
    • Expansion of table games
  • East Chicago: putting in a restaurant called Stadium (will be there in April).  And doing some gaming changes as well.  Construction starting on Cline Avenue Bridge is a positive
  • Maintenance capex:  close to $80m run rate but $100m in 2015
  • Term Loan B outstanding:  $782m ; should see it go lower as you go forward