REPLAY | The Macro Show with Keith McCullough

Miss it this morning? Here's the replay of today's edition of The Macro Show with Hedgeye CEO Keith McCullough.



Every weekday morning Hedgeye CEO Keith McCullough distills the world's market, and economic developments in 15 minutes or less, then answers questions from individuals tuning in - all to give viewers a leg up on the trading day ahead.

Cartoon of the Day: Fee! Fie! Foe! Fum!

Cartoon of the Day: Fee! Fie! Foe! Fum! - China cartoon 04.27.2015

"The epic ramp in China continues with the Shanghai Composite up another +3% overnight to +40% year-to-date," Hedgeye CEO Keith McCullough wrote this morning. "It's now up +96% since OCT 2014 as speculation runs rampant about precisely what at this point, we do not know!"

This Sector Is the Biggest Beneficiary of Our Dovish Fed

In this excerpt from today’s edition of RTA Live, Hedgeye CEO Keith McCullough discusses an area in the market we’ve been (and remain) bullish on. He also discusses one of our Retail team’s biggest calls, Restoration Hardware (RH).

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Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

This Is Retailers' New Offensive Weapon to Win Market Share

Editor's Note: This is an excerpt from a note sent out earlier this morning by our Retail team. Click here for more information on our array of services and how you can subscribe.

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Good article today in WWD - Free Shipping: Retail's New Battleground


Takeaway: Free shipping = an offensive weapon for retailers to gain market share.


We have seen it used sporadically from players in the department store/mass channel. Most notably, Target (TGT), who over the holiday season eliminated the free shipping threshold all together, and then in February cut its free shipping  threshold from $50 to $25.


Over the next 18-24 months, it's likely we see free shipping across the board. That will manifest itself during this holiday season when retailers make a free shipping offensive play.

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We've seen retailers, most notably Kohl's (KSS), talk about how a $25 shipping threshold isn't sustainable from a profitability perspective. We agree with the company on that.


For Nordstrom (JWN), it makes sense to offer free shipping and returns given the basket size, but for the mid-tier's 600-1000 bps dilutive. The problem is that a)

  1. Consumers want it (in chart below its nearly twice as important as any other online shopping feature)
  2. If one domino falls, all others will have to move accordingly



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PNRA: Thoughts Into the Print (1Q15)

Takeaway: PNRA remains on our Investment Ideas list as a long.

No Edge On The Quarter

This was likely a tough winter for Panera, considering its exposure to the Northeast, but same-store sales estimates of +2.2% seem to reflect this as they lag Black Box industry same-store sales of +3.0%.  While we believe initiatives are driving a sales and traffic lift, incremental costs associated with these initiatives are increasing and we, along with the rest of the street, don’t have the greatest clarity around the potential impact of this.


Buy It On Down Days

While limited visibility kept us away from the long side for most of 2015, the announcement of several initiatives a week and a half ago tell us that Mr. Shaich is serious about righting the ship.  While visibility is still somewhat limited, we see an asymmetric setup to the upside here.  Estimates have come down 6% and 12% over the past three and six months, respectively, and the stock has underperformed the XLY to a large extent over the past three years.  Importantly, management has a feasible opportunity to reverse this trend.  This is a stock you need to buy on down days.


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Management Commentary Is Paramount

While the recently announced initiatives are certainly a good starting point, they’re far from the endgame here.  Levering up, refranchising, and buying back shares should support the stock over the intermediate-term as management works to operationally fix the business, but we see opportunity to go significantly above and beyond this.  This is the first time management will address the investment community in a public forum since this announcement and additional commentary will be paramount.  We laid out the activist playbook on a Flash Call immediately following this news, but don’t know to what degree management will be receptive of our suggestions.  We believe there’s a significant opportunity to enhance Panera 2.0 (or create Panera 3.0), slow unit growth, aggressively refranchise stores, reduce capital spending, cut excess G&A, and sell off non-core assets such as the distribution business.  We hope to hear about recent developments on any of these fronts on the call tomorrow.


Breaking Down 1Q15 Estimates

Same-Store Sales: The street is looking for 1Q15 EPS of $1.43 (-7.5% YoY) on sales of $659.1 million (+8.9% YoY).  The system-wide comp outlook (+2.2%) represents a 90 bps sequential slowdown in the two-year average. 


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Cost of Sales, Labor Costs, Other Restaurant Expenses, and Restaurant Level Margins: The street expects cost of sales as a percentage of revenues to increase 26 bps YoY.  We suspect PNRA could deliver a slight “beat” on this line considering the rather benign food inflation the industry is seeing to-date.  At this time last year, Panera had 80% of commodity needs locked.  Labor costs and other restaurant expenses as a percentage of revenues are expected to increase 132 bps and 5 bps YoY, respectively.  We are in-line with these estimates.  This would imply restaurant level margins of 16.87%, down 164 bps YoY.  We could see a little bit of upside to this line depending on how cost of sales shake out.  We note that this line has been a source of upside for multiple companies (CAKE, CMG) that have already announced 1Q15 results. 


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G&A Expenses and Operating Margins:

G&A as a percentage of revenues is expected to increase 13 bps YoY to 5.91%.  We have little clarity on this line given the timing of certain initiatives, but wouldn’t be surprised if it proved to be conservative.  Operating margins are expected to decrease 192 bps to 9.15%. 


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Sentiment and Valuation

With a $177 average target price and only 37% buy ratings, the sell-side community remains rather cautious on the name.  Short interest comprises 10.9% of the float.  At only 12.1x EV/EBITDA (NTM), Panera trades at a significant discount to the majority of its quick-service peers.  An accelerated transition to an asset light model should result in immediate multiple expansion.


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Source: FactSet


Monday Mashup

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Recent Notes

04/20/15 Monday Mashup

04/20/15 Flash Call | PNRA: The Activist Playbook

04/21/15 EAT: Becoming A Victim Of Its Own Success

04/22/15 CMG: Rinse & Repeat

04/22/15 YUM: It’s A Win-Win

Events This Week

Monday, April 27

  • ARCO annual general meeting 8:00am EST
  • QSR earnings call 8:30am EST

Tuesday, April 28

  • FRGI annual general meeting
  • DFRG earnings call 8:30am EST
  • PNRA earnings call 8:30am EST
  • BWLD earnings call 5:00pm EST

Wednesday, April 29

  • BLMN annual general meeting
  • PZZA annual general meeting 11:00am EST

Thursday, April 30

  • KONA annual general meeting
  • DIN earnings call 11:00am EST
  • FRGI earnings call 4:30pm EST
  • HABT earnings call 5:00pm EST

Friday, May 1

  • RUTH earnings call 8:30am EST
  • YUM annual general meeting 9:00am EST


Recent News Flow

Monday, April 20

  • BWLD launched the B-Dubs Fast Break Lunch program, available weekdays between 11:00am – 2:00pm at U.S. locations and 11:00am – 3:00pm at Canadian locations.  The program offers food choices tailored for guests looking to eat a quick lunch.  Under the program, guests can select from one of seven entrees alongside one of seven sides.  BWLD will advertise for the program through a national radio campaign in addition to its social and digital channels.
  • JMBA Chairman, President and CEO, James D. White, presented at the Franchise Times Franchise Finance and Growth conference.
  • RRGB introduced the new Spring Chicken Burger and The Oh, My Darlin’ adult cocktail for the spring season.
  • PLAY announced that Patricia H “Trish” Mueller has been appointed to the board as an independent director.  Ms. Mueller has served as Senior VP and CMO of The Home Depot since February 2011 and has held prior roles at The Sports Authority, American Signature, Value Vision, and ShopNBC.
  • RUTH announced that Mark Osterberg, Principal Accounting Officer, has notified the company of his pending departure, effectively immediately.  Current CFO, Arne Haak, will assume the responsibilities of Principal Accounting Officer.  In addition, Michael Hynes, Controller and Director of Accounting, has been promoted to VP of Accounting.  Mr. Osterberg will continue to serve as an advisor to the company.

Tuesday, April 21

  • PLKI announced the pending retirement of R. William Ide, III, who has reached the mandatory retirement age for board members.  Mr. Ide has served on the company’s board of directors since 2001 and will not stand for re-election at the annual shareholder meeting this year.

Thursday, April 23

  • JMBA celebrated “25 Years of Healthy Living” with a free juice and smoothie giveaway from 9:00am – 11:00am to guests across the nation. 
  • DNKN announced that John Costello, President, Global Marketing and Innovation, will retire in mid-2016.  Mr. Costello will continue to serve in his current position until he retires, but will transition to a more strategic role focused on the evolution of the company’s brands with a particular focus on the international businesses.
  • DNKN announced that its board of directors declared a quarterly cash dividend of $0.265, payable on June 17, 2015 to shareholders of record on June 9, 2015.

Friday, April 24

  • PZZA announced its latest limited-time offer, all-new Garlic Knots, that will allow guests to pair a large two topping pizza with new Garlic Knots.  Guests that order online will receive a $1 discount.  The LTO will run through May 24.



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Sector Performance

The XLY (+3.2%) outperformed the SPX (+1.8%).  Quick service stocks, in aggregate, outperformed the XLY, as casual dining stocks underperformed.

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Quantitative Setup

From a quantitative perspective, the XLY remains bullish on an intermediate-term TREND duration.

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Casual Dining Restaurants

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Quick Service Restaurants

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