Key Takeaway

4Q sales and earnings fell well short of estimates, but the stock has been resilient as the street has found solace in a solid guide.  This, however, doesn’t mean the guidance was right – in our view, 2015 and 2016 estimates remain far too aggressive.  We’d short DFRG on this pop and continue to see downside to the $10-14 range.



EPS down $0.12 since 2012.   Is management’s growth strategy working?  You know where we stand on this, but let’s take a step back for a second and recognize the divergent trajectory between unit growth and earnings growth over the past two years.  DFRG’s earnings per share have decreased 15% from $0.94 in 2012 to $0.82 in 2014, while units have increased 35% from 34 in 2012 to 46 in 2014.  We understand the costs associated with aggressive unit expansion, the time it takes to reach normalization, etc., but to show such a significant level of earnings deterioration over this time on the back of 30% sales growth must tell you something’s wrong – DFRG doesn’t have a legitimate growth algorithm.  For a company that touts itself as a “one of the growth leaders in [the] industry,” this is a serious issue.




Management commentary proved the Grille is not ready to grow.  With restaurant level margins at the Grille down 200 bps y/y, management is scrambling to right the ship.  In other words, they should be taking their foot off the proverbial growth pedal, but they’re not.  Instead, in conjunction with this growth comes an effort to improve its training program, recipes, cooking methods, kitchen prep times and technology (speed up service, reduce labor costs).  While this can be viewed as a positive, on the margin, it’s important to understand why management is in this predicament in the first place.  What’s more bothersome than this, however, is that they have not identified the concept’s optimal target market and, as a result, are currently conducting market research to do so.  This is the same issue that is plaguing the underperforming NDLS.  You shouldn’t be growing an asset base by 38% if you don’t even know its target market.  It’s inevitable that a certain percentage of their new units will be underperformers and, ultimately, need to be relocated or closed.  Management better hope they’ve found all the answers in a short period of time – if not, they could be looking at another year of negative earnings growth.


2015 is set up to be another disappointing year.  Guidance was solid, and perhaps that’s why the stock has held up, but that doesn’t mean it’s right.  Considering the lower full-year EPS base of $0.82, management’s 2015 guidance of 15-18% EPS growth implies a range of $0.94-0.97 – a far cry from the $1.02 the street expected heading into the print.  And, at this point, $1.26 in EPS in 2016 is completely out of the question.  We have no doubt comp and cost of sales guidance is on the money, because the revenue growth is there and they have the benefit, or as they call it “natural hedge,” of the Grille working in their favor on the food cost line.  Our concern lies within the operating, marketing/advertising, and G&A which we believe will call for incremental investment over the course of the year.  The street expects other restaurant expenses to delever ~59 bps y/y to 47.31% of sales.  Given the current initiatives going on around the labor line, we have a hard time getting there.  We’re looking for closer to 5-10% EPS growth this year, but it could be much worse than that. 



Cartoon of the Day: Yellen's Testimony

Cartoon of the Day: Yellen's Testimony - Yellen cartoon 02.27.2015

Be "patient." Spring is just around the corner...

Macro Minute: The Truth About Today’s GDP Report


Hedgeye CEO Keith McCullough takes a quick dive inside today’s GDP report and what the latest release means for the long bond. 


here is the real gdp data 

Click to Enlarge

Macro Minute: The Truth About Today’s GDP Report  - Screen Shot 2015 02 27 at 12.33.03 PM

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Crickets From the “Economy Is Booming!” Crowd

Crickets From the “Economy Is Booming!” Crowd - tweet1


Year-over-year (that's how you measure growth) U.S. GDP is closer to 2% than 4-5%. This is the most basic information in America … and yet the Old Wall and its Media Apparatchiks obfuscate it.

Here's the data:

Click to enlarge.

Crickets From the “Economy Is Booming!” Crowd - whap


So, let’s get this straight:


They’re going to lie to us about the most basic economic number? Really?  Look, if your economic "sources" lie to you about this very basic fact, they'll spin just about anything. For the record, I don't associate with people who lie to me. And I certainly won’t pretend to respect them.


Don’t forget…there are a lot (and I mean a lot…) of "experts" out there who thought the US economy was growing 4-5%. And, sadly, you will hear nothing from them today. Zero accountability.




The reason why mainstream media is being de-rated is simple - you can't trust it anymore. Old Wall and its media failed you in 2000 and 2007.


This time is not different.


Keith's Macro Notebook 2/27: Japan | UST 10YR | USD


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

Retail Callouts (2/27): Dept Store Sigma, JCP, M, KSS, DDS, TGT, JWN

Takeaway: Entering year 7 of margin expansion cycle - inventories look healthy, but cost pressures accelerating. JCP takeaways.



Takeaway: Inventories look healthy coming out of 4Q. But, we think there is more margin headwinds facing this space than a clean balance sheet can solve for. The biggest factor on the gross margin line we're watching is shipping expense. KSS flat out said that a $25 free shipping threshold is unsustainable. TGT set the bar with a $25 minimum. And we think that has a ripple effect on the industry as retailers attempt to keep market share on the web.


Retail Callouts (2/27): Dept Store Sigma, JCP, M, KSS, DDS, TGT, JWN - 2 27 15 chart1

***JCP reduced by a factor of 4 and JWN reduced by a factor of 2


We've never gone more than 5 years without a meaningful correction in EBIT margins. We're now entering year 7 as 2 of the biggest players in the space are making big moves that we think are pretty telling. On the employment front - WMT shook up the employment paradigm, and M, considered the best in breed, goes into investing mode.

  Retail Callouts (2/27): Dept Store Sigma, JCP, M, KSS, DDS, TGT, JWN - 2 27 15 chart2


JCP - 4Q14 Earnings


 1. Mixed print, top line looked solid, but gross margins came in below expectations. The market is beating it up over that, but we’re more concerned about the comp. This is the 5th straight quarter where JCP has out comped KSS, and more importantly it lapped last year’s market share gains with another quarter of outperformance. Given what we’ve seen from a litany of retailers this holiday season on the comp line (BONT, BELK, DDS, JCP, ROST, etc.) and the fact that KSS had the most disastrous January last year – we think KSS’ big number is more a function of macro than it is the ‘Greatness Agenda’.

Retail Callouts (2/27): Dept Store Sigma, JCP, M, KSS, DDS, TGT, JWN - 2 27 15 chart3


2. Margins came in 60bps below consensus, but were still up 540 bps. Guidance on that front 50-100bps vs. consensus at 140bps. We’re 100% ok with that. A desperate JCP is much more bearish for a healthy KSS.


3. Brick and Mortar sales productivity was up 3% in 2014 at $100 even. That’s still $45 off pre-RonJon peaks. That’s not something we can get excited about. We think that JCP will step up to $115 over the next 4 years, but a) that's a really long time, and b) we’d need to see a runway to $130 to get more positive on this name. We’re not there.