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