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YELP: Thoughts into the Print (1Q15)

Takeaway: The stock could see a bounce on this release, but at the cost of a much worse blow-up after the dust settles in 2Q15 (3Q15 latest).

KEY POINTS

  1. 1Q15 = INORGANIC TAILWINDS: We’re expecting a top-line beat with support from inorganic tailwinds; 2Q15 revenue guidance should follow suit for the same reason.  There will be a lot of noise distracting the street from the mounting pressure in its core Local Ad business, and without a clear downside catalyst, we wouldn’t be naked short into this print.
  2. SMOKE & MIRRORS:  Any upside from acquisitions/ancillary businesses could provide a temporary distraction from its core Local Ad business, but we believe mgmt can only play that card once; consensus will raise the bar on any material upside.  More importantly, we don’t believe the street will give YELP a pass if it misses on Local Advertising, or issues light quarterly guidance; both of which could we’re expecting on the 2Q print, latest 3Q.
  3. WHAT WE’RE KEYING IN ON: Salesforce productivity, which will be somewhat tougher to isolate since mgmt is pulling its legacy account metric, but we should be able to extract what we need from the print. If there was ever an admission that YELP’s business model is broken, it's that salesforce productivity has already seen a sustained decline, which speaks volumes to the size of its realistic TAM, and the viability of its model.

 

1Q15 = INORGANIC TAILWINDS

We’re expecting a top-line beat with support from a full quarter of revenues from its two international acquisitions from 4Q14, and potentially Eat24 revenues.  2Q guidance should follow suit for the same reason. 

 

YELP reported a fairly strong surge in 4Q14 int’l revenues on 2 months of acquired revenue.  While not a game changer, it could be enough to push Local Ad revenues over the line.  On Eat24, all we know is that mgmt expects “60% plus growth in 2015” on $24.5M in 2014 revenues.  The associated guidance raise of $36M (~11 months of revenue) on the announcement translates to exactly 60% growth, so the question is the magnitude and timing of that “plus”. 

 

The takeaway is not that any of these acquisitions are a game changer; it’s really just how much of an incremental lift they can collectively contribute to results this year, particularly in 1Q15 when no one really know what to expect given the lack of historical context.

 

YELP: Thoughts into the Print (1Q15) - YELP   Int l rev 4Q14 

 

SMOKE AND MIRRORS

Any upside from acquisitions/ancillary businesses could provide a temporary distraction from its core Local Advertising business, but we believe mgmt can only play that card once.  Consensus will raise the bar on any material upside, likely back-weighting its estimate raises into 2H15/2016.  

 

More importantly, we don’t believe the street will give YELP a pass if it misses on Local Advertising, or issues light quarterly guidance; both of which we are expecting to occur on the 2Q15 release, 3Q15 at the latest.

 

We’re expecting attrition to exert greater influence across YELP’s model as it struggles to find enough new account growth to effectively mitigate that pressure.  Our scenario analysis below illustrates this point, with YELP needing both a considerable acceleration in new account growth (ex Qype) and historically low attrition to hit consensus 2015 Local Advertising revenue.  

 

YELP: Thoughts into the Print (1Q15) - YELP   2015 Local Scen Anly 

 

WHAT WE’RE KEYING IN ON

Salesforce productivity, which will be somewhat tougher to isolate since mgmt is pulling its legacy account metric, but we should be able to extract what we need from the print. 

 

Our Short thesis in a nutshell is that YELP's Local Advertising business model is unsustainable; it is plagued with rampant attrition, and YELP's TAM isn't large enough to support it.   

 

If there was ever an admission that YELP’s business model is broken, it's that salesforce productivity has already seen a sustained decline, which speaks volumes to the size of its realistic TAM, and the viability of its model.  For more detail, see the notes below.

 

YELP: Thoughts into the Print (1Q15) - YELP   New Acct vs. Sales 4Q14 3

 

YELP: Salesforce Productivity?

03/16/15 08:10 AM EDT

[click here]

 

YELP: Debating TAM

06/30/14 01:10 PM EDT

[click here]

 

 

Let us know if you have any questions, or would like to discuss in more detail.

 

Hesham Shaaban, CFA

@HedgeyeInternet


REPLAY | The Macro Show with Keith McCullough

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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.


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"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!"


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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).


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.

*  *  *  *  *  *  *

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.

This Is Retailers' New Offensive Weapon to Win Market Share - 99 t

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 space...it'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

 

CLICK IMAGE TO ENLARGE

This Is Retailers' New Offensive Weapon to Win Market Share - z retail


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.

 

PNRA: Thoughts Into the Print (1Q15) - 8

 

 

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. 

 

PNRA: Thoughts Into the Print (1Q15) - 1

 

 

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. 

 

PNRA: Thoughts Into the Print (1Q15) - 22

 

PNRA: Thoughts Into the Print (1Q15) - 33

 

PNRA: Thoughts Into the Print (1Q15) - 44

 

PNRA: Thoughts Into the Print (1Q15) - 55

 

 

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%. 

 

PNRA: Thoughts Into the Print (1Q15) - 66

 

PNRA: Thoughts Into the Print (1Q15) - 77

 

 

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.

 

PNRA: Thoughts Into the Print (1Q15) - 10

Source: FactSet

 


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