Takeaway: Little-to-no comp momentum, margin pressure, and accelerated expansion into new markets makes 20% EPS growth unlikely in ’15.

Key Takeaway

NDLS delivered a disappointing 4Q14 print and offered up a similarly disappointing outlook for 2015.  While we expected both, the fundamentals of the business are worse than we’d initially thought.  We reiterate our $14-16 fair value and anticipate another leg down in the stock.



No momentum heading into ’15.  NDLS reported system-wide SSS of +1.3%, well short of the consensus estimate of +1.8%.  As a result, revenues and EPS missed estimates by $1.5 million and $0.01, respectively.  The bigger disappointment, however, is the anemic 1.1% comp growth NDLS is seeing to-date in 1Q15 – consensus is expecting +3.9% for the quarter.  To put this number into context, Black Box reported January 2015 comp sales of +6.1%.  An emerging, fast casual growth concept should not be lagging its peers to this extent.  With little momentum so far in ’15, management guided to full-year EPS growth of 20% (below consensus at 27%) on the back of 2.5-4% comp growth.  These scaled back estimates are aggressive and will put a lot of pressure on the business to perform in 2H15.




Margin deterioration will be difficult to reverse.  NDLS is having a difficult time managing its P&L as it pursues its aggressive expansion agenda and, although they are scaling back new unit development slightly (from 16% to 12-13%) in ‘15, this will continue to be the case.  The truth is, this company needs to see mid-single digit comps to even think about driving margin expansion.  With pressure on the cost of sales (durum wheat) and labor lines (ACA, claims activity), in addition to increased marketing, ’15 could be another year of flat-to-down margins.




Expansion outside of the core will not be easy.  We’ve been through this before with CHUY.  Investors that expect these regional companies to rapidly, and successfully, expand outside their core markets are in for a rude awakening.  It doesn’t help that NDLS, in our view, is a rather narrow concept that largely unproven outside of the Midwest (little presence in New England, the Southeast, Pacific Coast, etc.).  Management appears to be finding this out the hard way and is struggling to drive brand awareness in these markets.  The current media strategy is such a disaster that they decided to suspend advertising in 1H15, with plans to accelerate it in 2H15.  New unit development this year will be skewed more toward new and developing markets than in ’14, with new units coming on in Oklahoma, California, upstate New York, Arizona, Florida, and Toronto, CA.  A rapid growth plan is never easy to execute, particularly when venturing into new markets.  We don’t see how NDLS will be able to deliver 20% EPS growth in 2015.

Real Conversations: How Firefly Founder Tom Markusic Is Changing the New Space Paradigm


In this edition of Real Conversations, Firefly Founder and CEO Tom Markusic talks with Hedgeye's Keith McCullough about the growing demand for efficient & inexpensive small satellite launches, his experiences working with entrepreneur Elon Musk, and why Firefly is poised to disrupt the new space landscape.

This Is the Biggest Risk in the Industrial Sector Right Now

This Is the Biggest Risk in the Industrial Sector Right Now - mm


In the industrials sector, significant debt financed capital investment has been directed toward feeding the commodity bubble – from iron ore, copper mines and rail networks, to oil well service and agriculture equipment. 


Losses on project financing and equipment backed lending may prove to be a big surprise later in 2015 and beyond, particularly at captive finance companies like Caterpillar Financial.


The cessation of credit available for commodity-related equipment sales and remarketing of used equipment may also lengthen and deepen the downturn.  We have estimated that approximately 10% of sector sales go to commodity-related capital equipment, with many highly visible companies facing much more significant exposure.


The bottom line here is the commodity correction should drive a prolonged blow back into several segments of Industrial equipment and finance.


This Is the Biggest Risk in the Industrial Sector Right Now - 779

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Initial Claims | Still Strong

Takeaway: This morning's labor market report was good, and the energy state complex got less bad in the most recent week.

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 


Last week's note (Initial Claims: Cognitive Dissonance & Mice) ran through both a high level and ground level overview of the labor market data. This week we'll keep it tight. After bouncing notably higher last week, claims retreated this week, dropping 21k to 283k. The four week moving average declined by a further 6k to 283k. The Y/Y rate of improvement in rolling NSA claims also accelerated. This week's numbers correspond to the sample period for the February jobs report and the M/M dynamic (4wk rolling) is lower by ~23k jobs vs the prior sampling period. 


On the energy side, job losses eased slightly as the gap between our energy state basket and the US as a whole tightened in the most recent data. The gap between the two closed by 4 pts to 26 from 30. 


Net net, the labor market data continues to hang in there, for now. 


Initial Claims | Still Strong - Claims18 normal  1


Initial Claims | Still Strong - Claims20 normal  1


The Data

Prior to revision, initial jobless claims fell 21k to 283k from 304k WoW, as the prior week's number was unrevised.  Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -6.5k WoW to 283.25k.


The 4-week rolling average of NSA claims, another way of evaluating the data, was -14.8% lower YoY, which is a sequential improvement versus the previous week's YoY change of -13.1%


Initial Claims | Still Strong - Claims2 normal


Initial Claims | Still Strong - Claims3 normal  1


Initial Claims | Still Strong - Claims6 normal



Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


Cartoon of the Day: Consequences

Cartoon of the Day: Consequences - Risk cartoon 02.19.2015

No, we do not believe this unprecedented global central banking experiment ends well.

Wal-Mart Earnings Read-through to Top Shorts (TGT, HIBB, KSS)

Takeaway: WMT's 4Q15 print read-through to top SHORT ideas - TGT, HIBB, KSS

The Wal-Mart US business posted its first positive traffic count since 3Q13 and it’s no surprise Comp number followed suit even against a 14 week quarter last year.


A few read-throughs from the WMT print to some of our top SHORT ideas:


1. TGT - The across-the-board wage hikes are not good for TGT. It will cost WMT about $0.20 in earnings or about $930mm pre-tax for the 500,000 US WMT store level employees. That equates to $1870 per employee. TGT will need to maintain the compensation spread. If we extrapolate the cost to TGTs ~300K store level employees we are looking at an additional $560mm in compensation expense (about 75bps of EBIT margin). That flows through to about $0.56 in EPS, about a 12.5% hit to the company's forecasted 2015 earnings number of $4.48. Chances are that TGT does not follow suit immediately, but will see if it can comp with a tighter wage gap to WMT. This is officially on the table for TGT.


2. HIBB - Historically the company's comp trends have mirrored the traffic and comp trends at its neighbor WMT. WMT US just posted its first positive traffic number in 9 quarters, and that coincides with HIBB comping against a -10% number last January. To us that set's HIBB up for a surprise to the upside on the revenue line. If we don't see it, it's a clear indication that this business is broken. For FY16 we're 10% below the street, that spread widens to -75% by year 5 of our model.


3. KSS – Everyone already knows that KSS recently reported positive store comps for the first time in 3 years. The question on most people’s minds is whether it is due to the company’s own initiatives, or a better macro climate. After seeing retailers like BonTon and Belk put up mid single digit comps after a horrendous stretch for 2+years and now seeing WMT’s comp tick up on the margin – it supports the case even more that KSS’ recent strength is not company specific. When people attribute macro tailwinds to company-specific ‘Greatness’, it gets us a lot more intrigued on the short side. KSS remains one of our favorites.

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