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DKS - Exceedingly Mediocre

Takeaway: This story defines ‘uninspiring’. But expectations are finally at a level where it won’t define ‘disappointing’.

This DKS Analyst day was a slight net positive as it relates to our view on the stock. To be clear, we headed into this meeting with a short bias as we thought growth and profitability expectations were too high – which concerned us at an 18x multiple and a 17% run year-to-date (39% since Oct). We still think that there are cyclical challenges as DKS grows into more competitive geographic markets as its model matures, and the only growth in the financial model comes from a margin-dilutive channel where DKS structurally has a permanently weaker competitive edge (online). 

 

That said, consider the following:  1) the company finally took down its store growth targets to a realistic level (our math had always said that over 800 stores without a big hit to profitability was a pipe dream), 2) it issued long-term comp guidance of a mere 2-3% -- when e-commerce growth alone accounts for 2-3% (i.e. it’s guiding for store comps to be flat to down), and 3) it guided to 110bp in margin improvement over 3-years. Though e-commerce is margin dilutive, our math suggests that the net effect of the weakness in golf and hunting alone hurt margins last year by about 100bp, which is obfuscated in the company’s disclosure.

 

We can beat the company up all day about how its current view of 2017 is so much weaker today than at its last meeting in 2013 (’17 revenue now $8.8bn vs prior $10bn, and margins 9.2% vs 10.5%) but that’s water under the bridge at this point. Does valuation make sense here? No. But it doesn’t make sense for most other maturing big box retailers, either. What we can say is that this is the first time in a while where we actually have a decent degree of confidence that DKS won’t miss.

 

Don’t mistake this as us getting behind the story. But we’re not leaning on it anymore, either.

 

 


ZOES: Adding Zoe's Kitchen to Investing Ideas

Takeaway: We are adding ZOES to Investing Ideas.

We are adding Zoe's Kitchen to Investing Ideas today. Please see note below from Hedgeye CEO Keith McCullough. Our Restaurants Sector Head Howard Penney will provide an additional update this weekend.

 

ZOES: Adding Zoe's Kitchen to Investing Ideas - 111

 

Howard Penney recently added ZOES to his Best Ideas list on the Institutional Research side.

 

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. 

 

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

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

And it's signaling immediate-term TRADE oversold today within our bullish TREND and TAIL research views.

 

KM


REPLAY | Germany: Still Bullish

Earlier today Hedgeye’s European analyst Matthew Hedrick led a discussion on why we are still bullish on the German equity market.

 

Watch the for a video replay below.

 

Key take-ways from the call include:

  • QE is only just beginning; the euro will continue to weaken; Germany will disproportionately benefit due to exports; and asset classes like equities will inflate due to money creation
  • The German economy sits in the sweet spot to benefit from a weaker euro as its exports account for a monster 47% of German GDP
  • Since the ECB announced QE on 1/22/15 the correlation between the DAX and EUR/USD is -0.84, a strong negative correlation that we expect to persist as the ECB keeps its foot on the QE pedal for longer than its intended target (late 2016)
  • Recommending long the DAX (HEWG or EWG) and short EUR/USD (FXE)

REPLAY | Germany: Still Bullish - 1. GER

REPLAY | Germany: Still Bullish - 2. GER

REPLAY | Germany: Still Bullish - 3. GER


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Cartoon of the Day: Beijing Bubble?

Cartoon of the Day: Beijing Bubble? - China cartoon 04.14.2014

"According to a Bloomberg report," Hedgeye's Daryl Jones wrote in today's Morning Newsletter, "margin debt in China, when adjusting for the relative size of the markets, is double that of the NYSE. With the Shanghai Composite trading at 20x earnings and GDP slowing, that is a tad disconcerting."

 


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Hedgeye Senior Macro Analyst Darius Dale discusses how to invest amid a slowing economy and secular stagnation with Fox Business anchor Maria Bartiromo on this morning's "Opening Bell."


Why Golf Is Broken (And 5,000,000 U.S. Golfers Have Disappeared)

Why Golf Is Broken (And 5,000,000 U.S. Golfers Have Disappeared) - 22

 

WHY GOLF IS BROKEN 

 

While everyone basks in 21-year-old Jordan Spieth’s lights-out victory this weekend at Augusta, let’s keep one thing in perspective about the Golf Industry: We’re seeing a massive bifurcation in participation, and it’s not particularly healthy.

 

Simply put, a significantly smaller number of golfers are playing a far greater number of rounds. The number of golfers in the United States has declined by 5mm, or 16%, in the past six years. On the flip side, the number of rounds per player is up 12% to 19 rounds per year over that same period.

 

Why Golf Is Broken (And 5,000,000 U.S. Golfers Have Disappeared) - z99

 

Two factors explain away 80% of this drop. One is the ’07-’09 recession, which took the marginal golfer out of the game (‘core’ golfers will golf in any economy, weather, zombie apocalypse, or whatever…). Then just as the US emerged from a crippling recession (6/09), Tiger Woods fell from grace (11/09), thereby removing the biggest positive mass-marketing force the game has ever seen.   

 

Fortunately, what we call ‘core’ golfers (plays at least 8 times a year) accounts for about 56% of golfers, and 85% of spending. For the most part, this is a healthy demographic. But someone who plays 20, 30, or even 50 rounds per year almost certainly does not go to a Golf Galaxy or a Dick’s. They likely belong to a Club, and buy gear at the Club’s pro shop.

 

It’s the ‘non-core’ golfer (less than 8x per year) who uses mass channels, and that group has been decimated – accounting for almost all the decline in players over the past six years. Before the Recession/Tiger Debacle, there were 13.2mm ‘non-core’ golfers. Now there’s closer to 10mm. That’s roughly a 25% decline in a customer base for the mass golf retailers.   

 

Could they come back? Of course. But we’re going to need a lot more than Tiger passing the torch to Rory McIlroy, or UA’s Spieth crushing the field at the Masters.


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