Flash Call | PNRA: The Activist Playbook

Takeaway: We’re hosting a flash call tomorrow, April 17 at 11am EST to run through the activist playbook on PNRA. Dial-in details and materials to fol

Last night Panera announced in a press release that its Board of Directors approved an increase to the company’s share repurchase program to $750 million. The company expects to repurchase $500 million over the next twelve months.  The release also highlighted the progress that Panera is making in its previously announced refranchising initiative.  The company has entered letters of intent to sell 73 cafes and is expected to reach its refranchising goal by year end (50-150 cafes).  This initiative, which is expected to be accretive to earnings, was reflected in management’s 2015 EPS guidance.


On March 3, 2015 we penned an open letter to CEO Ron Shaich detailing our activist playbook on the company:



In this letter, we recommended five steps he should consider taking in order to unlock significant shareholder value:

  1. Sell-off non-core assets
  2. Slowdown the rollout of Panera 2.0 and begin molding a concept of the future
  3. Slow unit growth and cut capital spending
  4. Cut excessive SG&A spending
  5. Aggressively refranchise stores

We believe these changes to the business model will significantly enhance the margins, returns, and overall earnings power of the company.  We put the baseline earnings power of the company between $8-10 per share and the implied stock price between $240-300.


We look forward to further articulating these recommendations on the call tomorrow.

Keith's Macro Notebook 4/16: Commodities | Australia | Eurozone


Hedgeye Director of Research Daryl Jones  shares the top three things in CEO Keith McCullough's macro notebook this morning.

Commodities, Australia and Greece

Client Talking Points


A weaker dollar is positive for commodities, as the Fed downwardly revised growth and inflation targets on March 18th the USD has been down about 1.6% against the CRB Index which has been lead by Energy. Our immediate-term risk range for the USD is 98.01-100.24 (the USD remains in a bullish formation).



The Australian Dollar is up about 1.3% this morning after a strong employment report. They added more than expected full time jobs in March about 37.3K, Australia's unemployment rate has now fallen to 6.1%. The labour force participation rate jumped to 64.8% in March from a revised 64.7% in February.


The major index in Greece is down about 5.5% on the week, the big challenge here is that there has been little to no progress with Greece’s international creditors. Germany’s Finance Minister effectively came out yesterday and said no one expects a deal to be made next week (the Eurogroup is meeting on April 24th).

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Manitowoc  (MTW) is splitting the business into two companies. While the crane business receives the most attention in part due to its cyclicality and because they are well, more noticeable, Manitowoc’s other business, Foodservice equipment, is the larger of the two in terms of operating income (60% vs. 40% for Cranes). Several indicators are pointing towards upward momentum for MTW’s Foodservice business. Restaurant same store sales have benefitted since the drop in oil prices. Furthermore, an indicator by the National Restaurant Association, RPI Capital Expenditures Index, has surged recently in part due to lower fuel prices driving restaurant traffic and restaurant owners’ outlook.


iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. The housing data was again strong in the latest week with Pending Home Sales, HPI and Purchase Demand all accelerating to close out March. Pending Home Sales rose +3.1% sequentially in February with signed contract activity up a remarkable +12% YoY, taking the index to a new 19-month high. Mortgage Purchase Applications – the most real-time, high frequency housing demand indicator - rose +5.7% WoW on the back of last week’s +4.9% advance and accelerated to +7.6% on a year-over-year basis. HPI: The Case-Shiller 20-city series showed home prices grew +4.6% year-over-year in January.  A stabilization/inflection in home price growth is important as housing related equity performance tracks the slope of home price growth strongly.


It was another week of declining long-term yields getting you paid on the long-side of Low-volatility Long Bonds (TLT). To reiterate our view over the longer-term, we pin a good chance the U.S. Dollar will reach new highs ($120 anyone?) with the probably of long-term Treasury yields reaching all-time lows very much in play.

Three for the Road


Former Fed Chairman Ben Bernanke to be senior adviser to Citadel Investment - NY Times



Never say never, because limits, like fears, are often just an illusion.

Michael Jordan


By one estimate U.S. online political advertising could quadruple to nearly $1 billion in the 2016 election (Reuters).

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Retail Callouts (4/16): NKE, UA, CROX, KSS, JCP, ETSY, GES, SHLD

Takeaway: Athletic brands spending big on women. More wage pressure – still more to come. Etsy IPO – Good Idea or Bad Idea? CROX looking better to us.



NKE - Launches Largest Women's Campaign Ever


Takeaway: We always cringe when we hear 'biggest campaign ever'. The way we see it, if a company is growing, shouldn't every year mark the 'biggest campaign ever'? In fact, Nike generates about 20% of its sales from women -- or $5bn+. Put in context, Nike's women's sales are 10-20% greater than the combined total sales of UnderArmour and Lululemon.  That said, Nike sees that LULU will arguably stop ceding share, and they see full well that UnderArmour is putting on a full court press with the recent signing of Misty Copeland and Gisele Bundchen -- on top of Kevin Plank's statement that Womens should be as large, if not larger than its Men's business.  UA might be a threat...but perhaps the scariest number of all is Nike's $10bn SG&A budget. It could double its dollars for its' Womens line and nobody would even notice -- except the competition.

Retail Callouts (4/16): NKE, UA, CROX, KSS, JCP, ETSY, GES, SHLD - 4 16 chart1B


Giant Foods to raise minimum pay to $9 an hour


Takeaway: Some companies may use the recent wage hike trend to hug their employees with a  press release on wages that has minimal effect on the bottom line.  Here Giant Foods is taking their minimum wage up to $9 an hour, noting that 2/3 of the employees already make more than that.  Still 10,000 employees are getting a pay bump, and the Giant employees who already made $9/hr a week ago are probably now haggling their supervisors for a fair raise as well.

Our analysis shows that for wages in the department store space, KSS is at most risk with the highest potential impact to EPS, and the lowest compensation rate according to glassdoor. 

This is not an issue now, and that's fine. But when retailers inflate temporary workforces in July ahead of back-to-school, and then again (but to a greater degree) around holiday, we think that the spread between those who have proactively managed workforces (WMT, TGT, TJX, MCD, etc…) versus those who have not (KSS, JCP, M) will widen.

Retail Callouts (4/16): NKE, UA, CROX, KSS, JCP, ETSY, GES, SHLD - 4 16 chart2


ETSY - Etsy Inc. Prices IPO at $16 Share


Takeaway:  So...Etsy is going public. This is either a really good idea, or a really bad idea. We're inclined to think it is the latter. Etsy is an online marketplace for handmade or vintage items, as well as manufactured goods that fit Etsy's 'green' guidelines.   Etsy has about 54 million members -- about 39% of which are active. There are 1.4mm active sellers and 19.8mm active buyers globally.  One interesting point is that Etsy is the largest B-Corp to go public. To meet B-Corp certification standards, a company has to meet certain environmental, transparency, and accountability standards. In addition, it made a 'considerable' commitment to consider the interests of its stake holders, not just its shareholders.  That's admirable -- though as investors we need to account for how this approach accrues to shareholders. If it drives more active users -- both buyers and sellers -- then it's a pretty unique idea. But the stakes are high given that this company generates about $195mm in revenue, a 57% gross margin (good), but is losing money.

Retail Callouts (4/16): NKE, UA, CROX, KSS, JCP, ETSY, GES, SHLD - 4 16 chart3B


CROX - Crocs, Inc. Appoints Coach's Ian Bickley to Board of Directors


Takeaway: Good move by CROX -- something we like to see as the name is on our Long Bench.





TGT - Target Announces Settlement Agreement with MasterCard; Estimated Costs Already Reflected in Previously Reported Results



SHLD - Poor Returns Weigh on Sears Pension Plan



PRTY - Party City IPO values U.S. retailer at nearly $2 billion



ELY - Callaway Golf Company Appoints Robert Julian As CFO



CAB - Cabela’s Inc. Announces Appointment of James F. Wright to Board of Directors



ANF - Diane Neal to Leave Abercrombie & Fitch Board



HBC - Saks names new head merchant



H&M Plots U.S. Expansion



GES - Georges Marciano Brings Second Suit Against Guess



Rebecca Minkoff Opens in Hong Kong



Fast Retailing- Carine Roitfeld announces collaboration with Uniqlo



The Holy Grail

“We have a lot of rookies in the lineup.  More than anybody, I would say.  It’s going to be something new for them. They have to understand that it’s totally different hockey in the playoffs.  Starting with the fans, the intensity of the game, every mistake counts.”

-Jaromir Jagr


Last night the pursuit of Lord Stanley’s Cup began in earnest with the first series of games in the NHL Playoffs.  Certainly, the team at Hedgeye is over indexed to the love of the great game of hockey.  But whatever your athletic passion, it’s hard to deny that playoffs are an exciting time of year.


For those of you who don’t follow hockey closely, the quote at the outset is from one of the true iron men of the NHL.   At 43 years of age, Jagr was the oldest player to play in the NHL last season.  His first season was 1990 and with the exception of a few seasons in Russia, Jagr has been playing in the NHL ever since.  In fact, he is the only player in the history of the NHL to play in the playoffs as both a teenager and a 40-year old.


Being the wily vet that he is, Jagr’s aforementioned quote is spot on.  Whether in sport or business, you need to let the rookies play, but as their GM or boss you also need to realize that their experience is limited and when the intensity picks up during crunch time they need to know that every mistake does matter.   And if they don’t, the experience will teach them that very quickly.


Before we get into the macro grind today, I’ll give you my pick to win the holy grail of hockey.   Since the team Keith and I own with some friends, the Arizona Coyotes, is out of the running, I’m going with the New York Rangers over the Chicago Blackhawks with New York winning at home in game 5.


Who is your pick to win the Cup?


The Holy Grail - a. Jagr


Back to the Global Macro Grind


It seems that our friends at the IMF weren’t settled into their chairs watching playoffs last night.  The Financial Times is reporting this morning that the IMF is warning that the Fed’s first rate hike could lead to a so-called “Taper Tantrum”.  In effect, the IMF is concerned that volatility in U.S. rates will spike dramatically in conjunction with the first rate hike.


In the Chart of the Day we look at the U.S.  10-year yield versus U.S. unemployment going back as far as the data was available.   In stating the obvious, as the chart shows, we are certainly in an unprecedented period of monetary policy.   Will we get a massive spike in interest rate “vol” when the first hike happens?  It’s tough to say without a crystal ball.  But what IS already happening is a spike in opinions on when and how to raise rates.


On that front, the esteemed Bernank (aka former Fed Chair Ben Bernanke) weighed in this morning on when and how to guide rates higher.   Not surprisingly part of the Bernank’s plan is to keep the balance sheet larger for longer and also focus on the repo rate and other short-term money market rates.   Some of his views probably have credibility, but whatever happened to central bankers focusing on the data?!


Speaking of extremes, the Energy Information Administration (EIA) yesterday reported that crude inventories rose less than expected by a mere 1.3 million barrels on the week to 483 million barrels in total.  According to EIA records dating back to 1920, this is the most inventory the U.S. has had on hand since the 1930s (that was back when the NHL only had six teams for crying out loud!).


In conjunction with that, a Federal Reserve index showed that crude production rose 1.3% in March.  This increase took it to the highest level since 1973, which was before I was born and I’m no spring chicken.   If that isn’t enough, Iraq crude exports hit a record of 3.0 million barrels in March and the Saudi’s did exactly what they said they would do and took production up to 10.3 million barrels per day.


Earlier in the week we used a quote from Templeton about waiting to buy when there is blood in the street.  Certainly there is truth to that if we look at investing history.  When it comes to getting long of oil, due to the lack of storage, we may literally get a chance to buy it when it is in the streets!


In Europe, Greek’s clock is running down.  Yesterday, it was leaked that the Greeks approached the IMF about a rescheduling of repayments and were told categorically that no rescheduling of debt is possible.    As a result, yields on 2-year Greek notes spiked by more than 180 basis points to 25.7% and 10-year yields were up 100 basis points to 12.65%.  If the IMF wants interest rate volatility, they got it.


As for Greek catalysts, there are a couple to focus on:

  • The Eurogroup meeting next week on April 24th; and
  • The next payment to the IMF due on May 12th of 747 million euro.

Overtime for the Greek debt market is here! Let’s hope they have a good goaltender in PM Alexis Tsipras.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.86-1.96%

SPX 2083-2117
VIX 12.34-15.49
USD 98.01-100.24
EUR/USD 1.04-1.08
Oil (WTI) 48.19-56.69

Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Holy Grail - 04.16.15 chart

Early Look

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