Hedgeye CEO Keith McCullough presents The Macro Show, where he breaks down what's happening in global macro this morning and takes viewer questions. Watch the replay from today's show right here.
Takeaway: These are the three areas of focus that we think will be new to most people in today's LULU Black Book presentation.
Other Relevant Names: NKE, UA, GPS, VFC, COLM, Puma, Adidas, Reebok
This evening we put the finishing touches on a 50+ page Black Book detailing some of the key issues surrounding Lululemon. While we’ll certainly outline our thoughts around near-term factors given the print in two days, we think that the most value-add from our presentation will come from our work into three areas we’ve never seen researched before for LULU; 1) Brand perception by country (33 brands), 2) Competitive positioning by activity (yoga, running, pilates, etc…), and 3) detailed analysis of LULU’s 80 real estate markets in the US.
Date/Time: Tuesday March 24/11:00am ET
Toll Free Number:
Conference Password: 13604247
Materials: CLICK HERE
1) Results of our consumer survey that allowed us to assess brand perception in the US, Canada, UK, Australia, and China by upper income athletic women (we’re surveying customers where LULU is growing)
2) Analysis of LULU’s US real estate portfolio, including…
RH Real Estate Example
Each Column Below Represents A RH Store – We Have That Detail for Lululemon
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Takeaway: We are adding the U.S. Dollar to Investing Ideas.
Editor's Note: Below is a brief note written earlier today by Hedgeye CEO Keith McCullough. Our macro team will provide a deeper update this weekend.
After a -2.4% down week, the US Dollar selling continues this morning, by another -0.8%. While there haven't been many pullbacks to signal buy on in the last 6 months, this appears to be one of them.
US Dollar Index (and UUP) are signaling immediate-term TRADE oversold within its bullish intermediate-term TREND.
Europe and Japan have worked hard to devalue their respective currencies. I expect both of them to so more of the same next.
We are removing DRI from our Investment Ideas list as a short.
We do, however, maintain that Darden’s stock is moving significantly higher ahead of a turnaround in the core Olive Garden business. In addition, there are valuation concerns following Friday’s “beat-and-raise” 3Q15 earnings release.
For the quarter, the company reported above consensus EPS of $0.15 (on slightly better same-store sales, lower costs, and higher margins) and guided to FY15 EPS of $2.45-2.48 versus the prior $2.25-2.30 range. Lastly, Darden issued an above consensus 4Q15 EPS target range of $0.91-0.94.
DRi shares are fully-valued, trading at a 2016 P/E of 23.2x – we still see fair value in the range of $55-58.
Management also guided to the following 4Q15 same-store sales targets:
In the short run, the next 6-12 months will be a crucial cost cutting opportunity for the new management team. As we suspected on the call, management held out a significant number of carrots to the investment community to highlight the changes that are being made within the company. It has formally announced the sale leaseback of its headquarters in Orlando and has begun to test the waters by selling some properties upon which its restaurants sit.
Management was very upbeat with how things are progressing on that front so far, noting that cap rates have been below 6%. More generally, management maintains that it wants to move to a more asset-light model if it makes business sense. Management provided little detail on the implications of the math on the income statement if they significantly reduced the number of properties they owned.
Operationally, management deliberately ran less price-point oriented promotions at Olive Garden in 3Q15 than a year ago, allowing for significantly improved profitability at Olive Garden. They also scaled back media spending to historical levels. These factors should continue to be in play for the next six months, during which it would be unwise to short the stock.
A simple reminder that Olive Garden is still struggling is that it continues to lose market share. Traffic has now declined for the past four years and continues to trail the industry by about 1%.
We think it’s premature to give credit to management for improved SSS trends at Olive Garden. Given the industry-wide noise created by weather and lower gas prices, it’s difficult to tell what the real trends look like at Olive Garden. To that point, the earnings call was focused on financial engineering with little mention of food or operational changes being made to improve the concept. Olive Garden needs a significant dose of innovation and improved assets before this chain be on a sustained path of positive traffic trends.
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