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DFRG: Short on Strength

DFRG remains on our Investment Ideas list as a short.


DFRG: Short on Strength - 1


‘Twas a decent quarter. DFRG delivered a decent quarter highlighted by a $0.02 bottom line beat despite a top line miss.  Management also maintained 2015 EPS guidance of $0.95-0.98.  Double Eagle SSS of +2.3% missed the consensus estimate of +2.6% and represented a 130 bps sequential decline in the two-year average.  Weather did have a negative impact on comps in the quarter.  Sullivan’s, on the other hand, delivered higher than expected same-store sales of +4.8%, driven by a +8.1% increase in average check, offset by a 3.3% decrease in customer counts.  Sullivan’s benefited significantly from the inclusion of New Year’s Eve in the quarter.  A decrease in certain discounted bar menu items once again drove the decline in customer counts.  Two-year average traffic was down -0.4% and -4.9% at Double Eagle and Sullivan’s, respectively, in the quarter.  Despite trending negative for the majority of April, system-wide same-store sales are beginning to trend in the right direction.


DFRG: Short on Strength - chart2


DFRG: Short on Strength - 3


Continued weakness at the Grille. As a reminder, management is now reporting same-store sales metrics for the Grille concept, which declined -3.5% in the quarter, primarily driven by a decrease in customer counts.  Restaurant level margin decreased 80 bps y/y to 15.2%, due in large part to higher restaurant operating expenses (occupancy, marketing and advertising costs), partially offset by lower cost of sales.  Management is holding back its first Grille opening of the year until late 2Q15, in order to give them time to decipher their market research, train new managers, and execute several other initiatives around menu development, brand messaging, and architectural design.  By pushing back Grille openings, management is effectively masking the inefficiencies associated with growing this concept over the intermediate-term.  In our view, it is by delaying the rollout of the Grille that DFRG was able to deliver a decent quarter and very well could once again in 2Q.  Interestingly enough, by delaying the rollout of this concept, management risks exacerbating the negative impact of these openings when they hit the P&L all together in 2H15.  We’d imagine they think they’ll have their issues straightened out by then, but that’s a big bet to make and one that we’ll take the other side of until proven otherwise.


DFRG: Short on Strength - chart4


Cloudier days loom ahead. We recommend shorting DFRG shares on strength this morning, given a decent but underwhelming quarter, in our view.  Importantly, there was nothing in this quarter that dispelled our bearish thesis.  DFRG continues to be loved on the sell-side, despite the risks associated with the continued rollout of the Grille concept.  If the Grille continues to struggle or new unit guidance is cut, the stock should drop precipitously.  At this point, we’re simply not willing to bet on a turnaround here.  Incremental costs are likely to build to support the rollout over the course of the year which makes EPS growth of 15.2% on 16.1% sales growth look quite aggressive to us.  DFRG is in the clear for now, but cloudier days loom ahead.


DFRG: Short on Strength - chart5

Keith's Macro Notebook 4/28: Japan | USD | UST 10YR


Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.

Global Gong Show Update: Japanese Retail Sales In the Toilet, Stocks Rise

Global Gong Show Update: Japanese Retail Sales In the Toilet, Stocks Rise  - Japan QE cartoon 04.28.2015

It’s a good thing $80-90 Trillion in QE is working right? In case you missed it, Japan reported a stink bomb of a Retail Sales report last night. Japanese Retail Sales fell -9.7% year-over-year in March versus down -1.7% in February.




What did the Weimar Nikkei do on the news?  It went up, of course! The Nikkei is up +0.4% to +15.6% year-to-date pre the BOJ meeting.

Global Gong Show Update: Japanese Retail Sales In the Toilet, Stocks Rise  - z japan


As I wrote in today’s Morning Newsletter:


As long as stock markets around the world continue to hit all-time highs, the central planners will look wholly innocent to many who think equity gains reflect economic growth. All the while, they’ll look wholly guilty to those analyzing the economic data.


Stay tuned—this Gong Show is going to get really interesting.


LEISURE LETTER (04/28/2015)




  • TODAY (4:30pm) - WYNN 1Q CC: ; pw: 20173922

  • April 29 (1:00pm)  -  HOT 1Q CC: ; pw: 17589434

  • April 29: New Hampshire House vote on 2 casino bill (SB 113)

  • April 30 (9:00am) - HST 1Q CC:

  • April 30 (10:00am) - MAR 1Q CC: ; pw:  99597993

  • April 30 (5:00pm) - BYD 1Q CC: ; pw: 3858748

  • May 4 (11:00am) - MGM 1Q CC: ; pw: 1535291

  • May 5 (11:00am) - HYATT 1Q CC ; pw: 17020089

  • May 7 (8:30am) - MPEL 1Q CC ; pw: MPEL


Galaxy - Galaxy Entertainment Group Ltd’s Broadway at Galaxy Macau, in Macau’s Cotai district, “will target leisure customers” from Macau and abroad, said Gillian Murphy, general manager of Broadway Macau and senior vice president of non-gaming operations at Galaxy Macau. The company opened online bookings about a month ago and demand “is exceeding expectations,” said Ms Murphy. “We are currently about two-thirds sold out for the first 90 days,” she added.


While no public announcement has yet been made about how many gaming tables Galaxy Macau Phase 2 will get from the government, Broadway Macau is likely to open with about 30 tables, Francis Lui Yiu Tung, vice chairman of Galaxy Entertainment, said late last month.


Takeaway: Strange that a month away from opening, no formal table game allocation has been given. "Broadway" not likely to make much money but good for government relations.


MPEL - City of Dreams (CoD) Manila casino resort is in talks with junket operators to bring in high rollers to the venue, said officials from Belle Corp, one of the investors in the complex. Vice-chairman Willy Ocier said that the City of Dreams Manila is boosting its VIP market, targeting to go “full blast” after May. Ocier confirmed to reporters that Suncity Group Ltd, the largest junket in Macau judged by share of VIP chip roll, would soon have operations at City of Dreams Manila.


Activity at City of Dreams Manila, which held its grand opening in February, has been in line with expectations, Belle CFO Manuel Gana said. “Mass market has been fairly healthy. We didn’t have VIPs yet in the first quarter. Since we opened, it’s a process of Melco [sic] signing up junket operators so that’s really what has been happening,” he reportedly said, adding that the company expects to see “significant growth in the near future”.


Takeaway: We find it hard to believe that internal expectations were for very poor GGR.  We're hearing a pretty big riff is opening between the equity owners. Stay tuned.


LVS (Marina Bay Sands) - Tweaks are still being made, with multi-level flagship stores being added to its mall and the reconfiguration of certain spaces to create an alternative ballroom. Celebrity chef Gordon Ramsay is slated to open a restaurant along the MBS waterfront this year. Between 60-65% of the resort's 9,400 employees are locals. 



PAGCOR - Income from gaming operations totaled PHP8.4 billion in 1Q 2015, up by 47% YoY. 


Takeaway: This would suggest a run of PHP 33.6 billion for 2015 or +12% YoY GGR growth.


SGMS - On December 19, 2014, the Company filed a complaint against IGT in the District Court of Clark County, Nevada seeking to enforce the terms of the

Bally License Agreement. On April 21, 2015, the Company received notification from IGT purporting to terminate the License Agreement as a result of the

Company’s alleged breach of the License Agreement.


The Company believes IGT’s claims are without merit and disputes that the License Agreement has been validly terminated. The Company intends

to enforce its rights under the License Agreement and the Bally License Agreement and will pursue such other remedies as it determines are appropriate.



SGMS - to provide End-to-End Systems, Games, Table Products, and Interactive Solutions for Baha Mar Casino & Hotel. Baha Mar, the $3.5 billion resort in The Bahamas, conducted an extensive evaluation and competitive bidding process before choosing a broad array of Scientific Games' Bally, Shuffle Master, WMS and Scientific Games Interactive products for its new 100,000-square-foot Las Vegas-style Baha Mar Casino & Hotel.

  • Casino resort opens with more than 300 Bally, WMS-branded slots, including premium performers Super MONOPOLY MoneyTM, TITANICTM, WILLY WONKATM, and Wonder WomanTM 

CCL - Coral Princess arrived in Los Angeles after reporting that 71 passengers and six crew members reported gastrointestinal symptoms during the April 12-27 voyage.



MGM - has sent a letter to shareholders in connection with its 2015 Annual Meeting to be held on May 28, 2015. 


Contrary to L&B's assertions, MGM is very well positioned to continue delivering value to shareholders and has a clear strategy in place to deliver on the Company's potential.  Major strategic goals and opportunities for MGM include:

  • Free cash flow generating development projects including:
    • MGM Cotai
    • MGM National Harbor
    • MGM Springfield
    • Mandalay Bay – room remodel and 350,000 square feet of convention space expansion
    • AEG/MGM Arena – 20,000 seat world class arena opening Spring 2016
    • New park & entertainment district adjoining Monte Carlo and New York-New York and leading up to the arena
  • Leverage target of <5x within three years
  • Increase financial flexibility to pursue future growth projects
  • Drive margin expansion via top line growth and cost savings initiatives
  • Expand on the benefits that the Company generates by incorporating diversity as a business imperative


Takeaway: We’re in MGM’s camp here.  The L&B analysis is flawed.


Casinos not increasing control over dealers - SJM CEO Ambrose So Shu Fai denied that Macau’s gaming operators are taking steps to exert stricter control over casino dealers in order to make it easier to fire them.  “Compared to the first quarter of last year, the warning letters that we issued out to our croupiers have dropped 25%,” So stated.


Meanwhile, Galaxy's VP of public relations Buddy Lam Chi Seng said that Galaxy has already hired 6,200 people of the targeted 7,000-8,000 people. Sands China Ltd also stated that the company had “no plan for redundancies” of workers.


Takeaway: It would be political suicide to cut dealers at this time.


Inbound visa policy - The government of Macau has already handed to the central government in Beijing a proposal seeking to “improve” the issuance of visas to travelers from mainland China, said Macau’s Secretary for Social Affairs and Culture Alexis Tam Chon Weng. Mr Tam did not share any details about the proposal, saying only that the government wants to attract more tourists from outside China.


Chinese state media reported earlier this month that China would limit the number of visits that residents of the southern city of Shenzhen can make to neighbouring Hong Kong. China’s Ministry of Public Security’s Exit-Entry Administration Bureau will restrict residents to one Hong Kong visit a week with immediate effect, compared with an unlimited number of daily trips previously.


Takeaway: If Macau govt wants to see visitation growth outside of Mainland China, they have their hands full.  On a TTM basis, visitation from HK, Taiwan, Other Asia, and non-Asia are down 4%, 4%, 3% and 6%, respectively. Visitors from Hong Kong have dropped in 11 consecutive months. Besides, it's tough to increase visitation from outside China by reducing visas from China.


Japan - Japan's pro-casino lawmakers have submitted a casino legalization bill to parliament, sources said on Tuesday, a move Prime Minister Shinzo Abe has supported as a part of his economic growth strategy. Lawmakers have said it was unclear when the bill would be passed. It has been delayed repeatedly amid opposition from lawmakers worried about gambling addiction.


Parliamentary records showed that members of the ruling Liberal Democratic Party, the Japan Innovation Party and the Party for Future Generations had submitted the bill, but it was unclear when it would be discussed or voted on.


Some members of the Buddhist-backed Komeito, a junior partner in Abe's coalition government, oppose legalization. Lawmakers in the pro-casino camp have said this opposition made it hard for them to push for the bill even though supporters slightly outnumber opponents in parliament.


Failure to pass the bill would also delay the drafting of a crucial second bill on implementation which outlines details on regulations.


Takeaway: With less than 2 months until the Diet concludes its current session, the submission of this casino bill may be too late.


Less discounting hopes - “We don’t have a specific pricing promise, but I can absolutely tell you that our goal is to raise pricing as we get closer to sailing,” said Andy Stuart, president of Norwegian Cruise Line. 


“I think Norwegian and Royal are both trying to discount less,” said Debbie Fiorino, senior vice president of CruiseOne/Cruises Inc.  


Other agents said Royal still has room to improve its policy. “Almost all of our price-drop issues occur in the 30- to 60-day window before sailing, when everyone who booked early is in penalty because that is when Royal is most aggressive,” said Don Baasch, president of Last Call Cruises in the San Francisco Bay area.


Beyond eliminating discounts, several lines said they were taking a variety of steps to encourage early booking.  


Takeaway:  Eliminating close-in discounting is easier said than done. Why would consumers book early when they can wait for lower prices from other lines who are not implementing a no-discounting policy? The only reason would be brand loyalty and that's hard to come by particularly with older ships such as RCL's legacy fleet. 




Macau unemployment - The unemployment rate for January-March 2015 was 1.7%, unchanged from Dec 2014-Feb 2015. Gaming employment fell 0.7% from the previous period (Dec 2014-Feb 2015) to 86,400.


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.

All Quiet?

This note was originally published at 8am on April 14, 2015 for Hedgeye subscribers.

“It is very queer that the unhappiness of the world is so often brought on by small men.”

-Erich Maria Remarque, “All Quiet on the Western Front”


Aside from January 2nd, yesterday had the lowest volume in U.S. equity markets for the year. Was it complacency? The calm before the storm?  Or, was it simply a non-event and just a quiet day in the markets?


At the start of this note, we used a quote from the classic World War I novel, “All Quiet on the Western Front” written by German World War I veteran Erich Remarque. Far be it from us to compare stock market operating to operating in the brutal trenches of World War I, but certainly many of us do feel like we are getting up and going into battle every morning, even if in an obviously more figurative and proverbial sense.


So, as you dug into your Bloomberg and Excel trenches yesterday, how did you interpret the almost 11% ramp in equity volatility?  Is it possible that the world’s omnipotent central bankers are Remarque’s “small men”? Is it possible that in their attempt to manage the global economy, they will ultimately lead to its demise?


Those questions will largely be answered in hindsight for most stock market operators. But in the meantime, keeping our eyes on the minefield ahead is as important as it has ever been in the last five or more years. As the Chart of the Day below shows, volatility can and will pick up dramatically.


All Quiet? - z45


Back to the Global Macro Grind...


Right now, “quiet” is the best euphemism for the morning news in  global macro markets.  Probably the most disconcerting news(at least for those of us who hope for continued stock market complacency) is coming out of Greece.  Rumors are now running rampant that Greece may default on its debt if it can’t reach a deal with its main creditors (read: the Troika) by the end of the month.


Now to be fair, the Greek Prime Minister’s office adamantly denied that it would pursue the strategy of defaulting on its debt.  Conversely, the IMF, who is a key creditor, seems to be leaking to every major newspaper that Greek negotiations are not working out and that there is real potential of a default.   So, what is the truth in this Greek tragedy of a negotiation?


Like most negotiations led by bureaucrats, discerning the reality versus negotiation posturing is difficult at best.   Certainly, the markets do not seem overly concerned about adverse outcomes.   This is a bit surprising given how heated the rhetoric has become combined with the fact that Greece has more than 315 billion in Euro denominated debt outstanding. 


Currently, about 78% of that debt is owned by the Troika – EU owns 61%, ECB owns 8%, and the IMF owns 9%.  Perhaps they are comfortable that a Greek default will have no systematic effects.  (Of course, many said the same about Lehman Brothers, when those negotiations failed.)  Certainly for the Greek government though, there is no going back after a default.  As IMF Managing Director Christine Lagarde very accurately stated:


“Defaulting, restructuring, changing the terms has consequences on the signature and the confidence in the signature.”


Inasmuch as the outlook for Greece is bleak and the consequences for a Greek default are real, in much of Europe things actually appear to be getting better on the margin.  Later today at 11am (ping sales@hedgeye.com for details), we will be walking through the case to remain bullish on Germany.


The German finance ministry bolstered this case, albeit marginally, when they upped their outlook for growth in 2016 to 1.6% from 1.5% in 2015.  At the same time, they emphasized that overall government debt to GDP should fall to around 70%.  Clearly, those aren’t GDP growth rates that get any of us overly excited. But much like a company, we do like the set-up of a country that can beat top line expectations.


China, on the other hand, seems to be faced with the opposite scenario of German.  GDP appears poised to miss expectations and debt is set to accelerate.  On the Chinese debt front there are actually two important points to highlight:


  1. According to a Bloomberg report, 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; and
  2. According to a BofA index, leverage for Chines companies is at the highest level since 2004 and debt relative to assets is that the highest level since 2007.

By any measure, that is a lot of speculative debt for a country whose growth is slowing.


So, even if things are all quiet on the Western front, they may not be on the Eastern economic front in Asia for long.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.85-1.98%

RUT 1248-1269
VIX 13.03-16.08
USD 98.62-100.19
EUR/USD 1.05-1.07
Oil (WTI) 47.65-53.98 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


All Quiet? - 04.14.15 Chart

Is An Easier Fed Already Priced In?

Client Talking Points


It’s a good thing 80-90 Trillion in QE is working – Japanese Retail Sales are down -9.7% year-over-year in MAR vs -1.7% in FEB and the Weimar Nikkei goes up on that, of course. The Nikkei is up +0.4% to +15.6% year-to-date pre the BOJ meeting.


A Lower-For-Longer Fed may be priced into stocks, but it’s not yet fully priced into USD – that’s down again this morning with the EUR/USD +0.2%, tapping the top-end of our 1.06-1.09 risk range. If the Fed says anything remotely hawkish vs. expectations, USD can easily have a big move on the “news” from here.


Has a yield of 1.93% priced the Fed in? It is hard to tell as it’s been hanging out in the middle of its 1.86-1.99 risk range for the last week, and then we have the jobs report to deal with on May 8th (which could very well be hawkish, on the margin versus the last one) – lots to think about short-term.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Has a yield of 1.93% priced the Fed in? It is hard to tell as it’s been hanging out in the middle of its 1.86-1.99 risk range for the last week, and then we have the jobs report to deal with on May 8th (which could very well be hawkish, on the margin versus the last one) – lots to think about short-term.


iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. Housing went 4 for 4 in a data heavy calendar for the sector this week with demand improving across both the new and existing markets and the fledgling acceleration in price growth finding some positive confirmation. The builder stocks had a choppy week of performance as investors held mixed opinions of earnings reports and management commentary out of DHI and PHM but, from a fundamental data perspective, the Trend remains one of discrete improvement.


Ten-year rates dipped 12bps on the week (forward-looking growth expectations) and the USD got crushed for a 1.5% loss. Growth and inflation expectations get priced in AHEAD of the more dovish policy tone resulting from any sign of deterioration in the labor market. Wednesday’s Fed meeting will be the next catalyst that will steer the market’s expectation on forward-looking growth and inflation. We expect the dots (forward-looking federal fund rate expectations) to be pushed out….again.

Three for the Road


The Macro Show, Live with Keith McCullough at 8:30AM ET https://app.hedgeye.com/insights/43749-the-macro-show-live-with-keith-mccullough-at-8-30am-et… via @hedgeye



The important thing is this: to be able at any moment to sacrifice what we are; for what we could become.

Charles Dubois


68, the total number of ingredients required to make all the items on the menu at Chipotle. 

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