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New Best Idea: Long ZOES

Takeaway: We’re hosting a call on Wednesday, April 8 at 1:00pm EST. Dial-in details and associated materials to follow.

We are adding ZOES to the Hedgeye Best Ideas list as a long.

Standing Out From the Crowd

After coming down hard on NDLS, CHUY, PBPB, DFRG and SHAK over the past year, it’s probably apparent that we have a strong bias against “high growth” restaurant companies that have recently come public.  Rest assured this bias has not detracted from our research process.  In fact, this prior work in the small cap restaurant field has allowed us to identify a company that we believe is distinctly different from the rest – which, if you’re familiar with our work, can only be construed as a good thing. 


We like ZOES on the long side for many reasons, including its:

  • Superior brand positioning
  • Management philosophy and execution
  • Unit opening geographic profile
  • Early-stage average unit volumes and returns


There is little competition in the Mediterranean category which directly appeals to the health conscious millennial crowd and has the potential to become America’s next big cuisine.  Due in large part to a best-in-class management team and operating philosophy, we believe ZOES will be able to grow with minimal roadblocks.


Please join us on Wednesday as we walk through the intricacies of our call in a detailed Black Book.

New Best Idea: Long ZOES - 1

Retail Callouts (4/2): KSS, JCP, M, TGT, WMT, DKS, HIBB, FL

Takeaway: MCD raises wages, adding to lower tier wage pressure. DKS implications of Leonard Greene stake in Bass Pro.



WAGE PRESSURE Builds Further For Retail

MCD, KSS, JCP, M, TGT, WMT - McDonald's USA Announces New Employee Benefit Package Including Wage Increase and Paid Time Off at Company-Owned Restaurants



Takeaway: The largest restaurant group in the US and two of the three largest retailers are setting the tone on the employment front. Some may minimize this announcement because it only applies to 10% of MCD's, 14k US stores, and it's unlikely that Franchisees will follow suit, but we point to a) the 90,000 employees it will effect and b) the legislative risk associated with these pay moves by MCD, WMT, and TGT. Will we see a sweeping national reform of the Federal Minimum Wage? Who knows -- but, what is clear is that the likes of KSS, JCP, and M will have to compete with the employment leaders to attract and retain workforces. The reason why we haven’t seen it yet is because we’re now at a seasonal lull for retail. By July, retailers will start beefing up temporary workforce ranks for ‘Back to School’ and then they kick it up a notch again in October as they prepare for Holiday. With the exception of grocery retailers, they ALL follow that pattern. That’s precisely when we’ll see the biggest wage pressure. And it's not like these companies can optimize payroll hours to offset the additional cost without sacrificing the in-store 'experience'. KSS in particular at it's analyst day characterized its employee management as 'world-class' and said there wasn't much wiggle room.


To review our outlook for the year, see our note Retail - Our 2015 Quarterly Playbook  LINK: CLICK HERE


Additional data: According to Glassdoor, MCD pays its base level employees (crew members & cashiers) $8.31. That's just south of KSS territory, and below all of the big players in the retail industry. Here's a look at the average hourly wages by retailer.

Retail Callouts (4/2): KSS, JCP, M, TGT, WMT, DKS, HIBB, FL - 4 2 chart1



DKS Implications of Possible Leonard Greene Stake in Bass Pro



Takeaway: Bass Pro stores are absolutely massive, about and pump north of $60mm through an average store -- close to $300 bucks per foot (vs DKS at $207). Those numbers have tailed off over the past couple of years according to Euromonitor, but at 1.1x EV/Sales (LTM)  it doesn't seem like an egregious multiple for Leonard Green to stomach. With DKS trading at a discount it's likely we'll here some renewed talk in about the possibility of the company going private, though Stack has all but said he wouldn't sell. Here's how we are thinking about that talk…


Based on our LBO model (ping us is you want a copy), a DKS LBO at the current price -- and even 20% lower -- makes no financial sense. The IRR is negative in both instances.


To be clear, our model assumes…

  1. DKS tops out at 900 stores by 2018, below management's 1,100 goal
  2. 2% to 3% comp store sales growth as e-commerce offsets negative store traffic.
  3. Gross Margins fall by 50bp annually as e-commerce dilutes profitability, and aggregate sales growth is not strong enough for DKS to leverage occupancy costs.
  4. EBIT margins fall from 8% today to 6% in 2018.

Though the math on our model makes no sense, the reality is that a banker Dick's might hire to sell the company will use much more bulled-up assumptions. We've said it before and we'll say it again, if DKS could find a buyer with the stock at a $5-handle, it should hit the bit on that all day. Ed Stack built a good business in a tough space. But it's running out of growth and margin, and we think he knows it.  

Retail Callouts (4/2): KSS, JCP, M, TGT, WMT, DKS, HIBB, FL - 4 2 chart2C


LBO Model

Retail Callouts (4/2): KSS, JCP, M, TGT, WMT, DKS, HIBB, FL - 4 2 chart3





URBN - Comp sales QTD are mid single-digit positive



TGT - Target Canada to Close all Canadian Stores by April 12



LL - Formaldehyde Emission Standards for Composite Wood Products



APP - American Apparel to Lay Off 180 Employees



AMZN - We May Have Just Uncovered Amazon’s Vision for a New Kind of Retail Store



SQBG - Jessica Simpson Brand Bought by Sequential



McCullough: My Thoughts on Doug Kass’ Short Bonds Call


In this brief excerpt from today’s edition of The Macro Show (click here for full replay), Hedgeye CEO Keith McCullough discusses Doug Kass’ call (yet again) for rising interest rates. 

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

MCD: Still Lacking Direction

We hope there are better days ahead for MCD, but on the surface it looks like the company is still struggling to find its way.  We continue to believe MCD is a short.

Yesterday’s announcement about higher wages was largely a public relations stunt.  Unlike the other large retailers that have announced similar wage rate actions, the majority of McDonald’s workforce is not eligible for this wage increase – unless the franchisees decided to follow suit (highly unlikely).  To be clear, PR stunts and marketing gimmicks will not fix McDonald’s.  It’s time for the company to get serious about making changes that will improve the operations of the company.


Traditionally, increased inflation (higher menu prices) benefits MCD’s bottom line which means that, on the surface, this announcement could potentially benefit the new CEO.  If the franchisees are forced to raise wages, they’ll certainly raise menu prices, which will benefit MCD’s royalty stream.  Good news for MCD right?  Not so fast. 


This news, along with other recent announcements, solidifies our short case for three reasons:


1.  It appears the subject of raising wages was not on the agenda at the recent franchisee convention.  If this is, in fact, true it raises the question: why was the new CEO unwilling to openly talk about this with franchisees?  This goes against the founding principles of the company.  The McDonald’s system was built on Ray Kroc’s vision of franchisees working not for McDonald’s, but for themselves in conjunction with McDonald’s.  He constantly promoted the slogan: “In business for yourself, but not by yourself.”  This philosophy was based on the simple principle of the 3-legged stool:

  • Franchisees
  • Suppliers
  • Employees

Given that the stool is only as strong as the three legs that formed its foundation, if one leg is broken the whole system will fail.  Franchisees must be profitable and successful – the future of the company depends on  it.


2.  MCD is in no position to raise prices given the market place’s current brand perception.  MCD already has a price-value perception issue and this will only be exacerbated by higher prices.  The closer McDonald’s average check gets to the “better burger” category (without an improvement in quality), the more market share it will cede.


3.  The new CEO hasn’t proven that he is willing to make drastic changes.  While we’re in the early days of Steve Easterbrook’s tenure as CEO, it appears that he hasn’t yet taken charge of the company.  The continued test of Create-Your-Taste and the recent announcement that the company will be testing all-day breakfast in Southern California are clear signs that this company isn’t serious about turning around.

Keith's Macro Notebook 4/2: UST 10YR | Oil | Russia

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

The Top Three Things are part of The Macro Show, Hedgeye TV’s live and interactive pre-market show where we break down what’s happening in the markets and Global Macro. CLICK HERE to watch today's full 24-minute show.

LEISURE LETTER (04/02/2015)



OPAP - is extending an open invitation for the Expression of Interest (EoI) by interested parties regarding the concession of the right to install and operate 18.500 VLTs in Greece. The EoI process will run until 30 April 2015. The full EoI document plus other relevant information can be found at www.playopap.gr.


The EoI process will be followed with the issuance of an RFP in an open, international tender for the submittal of binding financial proposals by prospective concessionaires.  Participation in the EoI process will not be a prerequisite for participating in the tender process which will follow.

Takeaway: The 2nd round of Greece is an important growth opportunity for SGMS and GTECH and will be closely watched.


Genting Singapore - As stated in the March 9th and 11th Announcements, the share buy-backs referred to in the Announcements do not constitute the purchase, redemption or acquisition by the Company of its own shares under the Isle of Man Companies Act 2006 until the name of the Company has been registered in its Isle of Man register of members in respect of those shares. The Company wishes to inform that the name of the Company has been registered in its Isle of Man register of members in respect of 11,989,400 shares which are the subject of the share buy-backs referred to in the Announcements, and such shares have been cancelled on 1 April 2015.

Takeaway:  Those shares represented only 1% of outstanding shares.


Genting HK-  Genting Hong Kong is seeking shareholder approval for a new mandate to dispose of NCLH shares at the company's discretion. This gives it the flexibility to sell shares at appropriate occasions, without having to get approval for each transaction.


Genting HK's 2014 mandate for selling up to just under 56.82m NCLH shares is expiring on April 25 and, as expected, a new 12-month mandate has been proposed.  Under the 2014 mandate, Genting HK has sold 6.25m NCLH shares to date.


In a filing Tuesday, Genting HK said the future disposal may constitute a major transaction or a 'very substantial disposal.' 



LVS - Sands Bethlehem wants to expand its gaming floor with the addition of a multimillion dollar live dealer electronic table game stadium. Sands officials made an informational presentation for the Pennsylvania Gaming Control Board on Tuesday. Sands has yet to apply to the board to add the gaming stadium.

If approved, the 150 betting terminal, live dealer electronic gaming stadium would be the first in a Pennsylvania casino. It would feature four to eight live dealers.



AirBnB - starting today Airbnb will allow Americans to book accommodations in Cuba.  More than 1,000 properties are currently available across the island with 40% in Havana. Airbnb believes Cuba could become one of its largest markets in Latin America. 



RCL - Bernard Aronson, a director of Royal Caribbean Cruises Ltd. since 1993, has decided not to stand for re-election at the company's upcoming Annual Shareholders Meeting in May, citing the time commitments required of his new responsibilities.  In February 2015, Aronson was named by President Obama as U.S. Special Envoy to the Colombian Peace Process.


CCL - Following its inaugural Europe season in 2016, Holland America Line’s new Koningsdam will homeport at Port Everglades in Fort Lauderdale, Fla.

The ship will sail a series of Caribbean voyages and one cruise to the Bahamas from November 2016 through March 2017. Itineraries range from one four-day cruise to seven days and 10 and 11 days.


NCLH - is testing an enhanced room service menu on Breakaway-class ships that incurs a convenience charge of up to $7.95 per order. Room service orders by Haven and suite passengers will not be charged the convenience fee.  


No comment yet on whether this charge will roll out to the rest of the fleet.

The new room service fee comes shortly after the cruise line instated an automatic 18% gratuity on all specialty and entertainment dining.


Takeaway: Sure these changes would benefit onboard yields but why would potential cruisers want the higher costs by sailing NCL?


BYD - The Borgata casino has confirmed it will file an appeal of its property tax assessment for this year by Wednesday’s deadline, the Philadelphia Inquirer reported. Last year, the Borgata won $88.25 million in a settlement with AC over its appeal of 2014 property taxes.





March GGR shares - March GGR shares: SJM (23.2%), Sands China (21.4%), Galaxy (20.0%), MPEL (14%), Wynn Macau (11.2%), MGM China (10.2%).



Takeaway: Wynn had the most improvement month-over-month while LVS took the biggest hit. New junkets at Wynn finally making an impact.


Online bust - Mainland China police have apprehended 1,071 people allegedly involved in a large online gambling network, said Xinhua. The agency described it as the largest ever enforcement action against an illegal operation trading in bets on the results of China’s legal state lotteries – the welfare lottery and the sports lottery.



Gaming taxes - The government has reduced its estimate of revenue from gaming tax this year by 27.3% to MOP84 billion (about US$10.5 billion) in view of the downturn in the casino market, Secretary of the Economy and Finance Lionel Leong Vai Tac has said.


Leong told the Legislative Assembly that this means he now expects revenue from all sources of MOP119.9 billion, 22.4% less than before. The government now forecasts that gross gaming revenue will average MOP20 billion per month this year, having previously forecast an average of MOP 27.5 billion.


Takeaway: Leong's forecast would imply a 31% YoY decline, below our estimate of 25%.


Package tours hotel stats (Feb 2015) - Attributable to the Lunar New Year holidays, visitors on package tours increased by 13.2% YoY to 983,000. Package tour visitors from Mainland China increased by 21.5% YoY.


A total of 756,000 guests checked into hotels and guesthouses, down by 9.9% YoY. Guests from Mainland China (512,000) and Hong Kong (87,000) decreased by 6.4% and 16.2%. In the first two months, hotel guests totaled 1,559,000, down by 8.9% YoY; the average occupancy rate stood at 79.8%, a decrease of 6.1% points.




Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.

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