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CHUY: Pulling a Rabbit out of a Hat

Key Takeaway

CHUY delivered a bottom line beat despite a slight top line miss in 1Q15.  Comps of +1.9% fell well short of the consensus estimate of +2.7%, but management effectively managed the cost structure in order to produce  earnings per share of $0.19.  2H15 guidance continues to look like a stretch. Nice opportunity to short here on the pop.

 

CHUY: Pulling a Rabbit out of a Hat - 1 

 

Composition of the comp. Although this was the 19th consecutive quarter of positive comps for Chuy’s, the bulk of the growth in same-store sales came from a +3.3% increase in average check (+2.8% price) and was partially offset by a -1.4% decline in traffic.  As we’ve noted in the past, traffic is the true indicator of the health of a brand.  It appears to us that Chuy’s is taking price in order to drive comps and margins, but at the detriment of traffic.  This is a highly unsustainable trend.  Management noted a -2% impact from adverse weather in Texas, Oklahoma, and parts of the Southeast.  We note that TXRH, which just reported +8% same-store sales growth, said weather was not an issue in the quarter.

 

CHUY: Pulling a Rabbit out of a Hat - 222 

 

Credit where it’s due. We like to think we’ll always give credit where it is due and, in our view, management did a very nice job controlling costs in the quarter.  While cost of sales primarily benefitted from lapping last year’s inflationary spike in dairy and produce, as well as the September 2014 and February 2015 price increases, it also benefitted from the implementation of zero based management.  On the labor line, initiatives to improve labor productivity through the implementation of best practices across the system also paid dividends, with labor costs as a percentage of sales down -30 bps y/y.  There were some questions on the call regarding the sustainability of this trend.  As one of the analysts asked, are you “maybe pushing it a little bit too far?”  We think they are and it will become abundantly clear as the year progresses.

 

CHUY: Pulling a Rabbit out of a Hat - 3

 

CHUY: Pulling a Rabbit out of a Hat - 4

 

Difficult setup in 2H15. Given the beat, management guided up full-year earnings per share from $0.74-0.77 to $0.76-0.79 while keeping same-store sales guidance flat at +2.5% (+2.8% price).  Full-year food inflation is expected to come in at 0-1%, below the prior guidance of 1-2%, but is expected to accelerate sequentially.  Getting to the core of short thesis here, new units continue to be a drag on same-store sales (as they enter the comp base) and margins.  Non comp stores are operating at a high single digit margin in the first year and a low double digit margin in the second year.  Importantly, development plans for 2015 are going to be more back-end loaded than originally anticipated, which should pressure margins despite the street’s expectations for notable margin expansion.  We believe that margins in the first quarter were more an aberration than reality and think that 2H15 is setting up to be a very difficult period for the company.


Process of Discovery

This note was originally published at 8am on April 21, 2015 for Hedgeye subscribers.

“Humble inquiry is a process of discovery.”

-Ed Hess

 

That’s a solid research thought from a section of a solid #behavioral book I finished reading on vaca, Learn Or Die. The section is titled “Asking Not Telling” and I thought a lot about that when it comes to my #process.

 

In addressing our ability (or lack thereof) to listen, Hess cites the behavioral research of Edgar Schein (MIT Professor) “who believes that the US has a culture that values telling over asking.”

 

I know more than you, and therefore, I am smarter and better than you.” Sound familiar? … “alternatively, asking says I care about what you think and I am ready to invest myself in listening.” (pg 66) Are you a good listener?

 

Process of Discovery - z li

 

Back to the Global Macro Grind

 

While I am still quite bullish on both stocks and bonds into the Fed meeting next week, I am still short of something that I always seem to be short of – time! That makes the listening exercise all the more important. It’s who/what you listen to that matters.

 

#focus

 

For the first part of my career, I listened to my bosses. Then, while my bosses were making mistake, I started to realize that if I listened more to the market, I could help them make less mistakes. Hedgeye’s #process is highly influenced by this experience.

 

As our process evolves, more and more of my time is spent listening to my analysts. That’s a role reversal from my beginnings. Technically, I’m the boss – but our analysts are empowered to know more than me about their respective domains.

 

In the spirit of listening to the best analyst there is (Mr. Macro Market), here’s what he’s saying this morning:

 

  1. Pain Trade in US Stocks = #on
  2. Chinese, Japanese, and European Bull Market in Equities = still #on
  3. FX and Fixed Income markets = #boring

 

Boring works. Defined in Hedgeye mathematical speak, boring is when the variance of what I call the risk range compresses. Tighter ranges are easier to risk manage. They tend to trend upwardly, as volatility falls. They don’t have a lot of chop.

 

There‘s not a lot of “chop” in raging bull markets (like the Shanghai Composite, Nikkei, or DAX) as the only things getting chopped there are fingers of the short sellers who didn’t obey the commands of the central planners.

 

If you want to discover “chop” try trading something with a widening risk range (rising variance) that goes both up and down with no discernible TREND, then drop whatever that something is -1% one day, and ramp it +1% the next. Rinse/Repeat.

 

That something, in this morning’s case (per Mr. Macro Market) is the SP500:

 

  1. She was -1.1% on Friday, then +0.9% yesterday
  2. She’s been down, up, down, up for the YTD, depending on the month you listened to
  3. And now, she’s ramping what I call the Pain Trade to test the top-end of the range (again)

 

Pain Trade is the one that the largest % of market participants are not positioned for. One very important way to listen to where the crowd is positioned is in futures and options contract terms. Before yesterday’s (and this morning’s pre-market futures) ramp, here’s where non-Commercial CFTC futures/options NET positioning stood:

 

  1. SP500 (Index + Emini) net SHORT position of -40,978
  2. The 3 month avg net position = +13,092 (net LONG)
  3. The 6 month avg net position = +31,930 (net LONG)

 

In other words, if you’re good at listening to Mr. Macro Market, then you have to be quick to contextualize what it is you think you heard. I don’t know about you, but as I get older I need to double check things as I see/hear less well! Then there’s listening to opposing thoughts across multiple durations and trying to put that within a context of rising and falling probabilities…

 

This hockey player guy still thinks the Fed is going to be less hawkish on rates in 2015, but then there’s this Japanese dude named Hamada who told Abe that he might need moarrr central planning cowbell overnight = Down Yen, Up Dollar…

 

Trying to risk manage it all can be quite humbling, indeed.

 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) across 12 big macro factors are now as follows:

 

UST 10yr Yield 1.85-1.95% (bearish)
SPX 2084-2117 (bullish)
RUT 1252-1278 (bullish)
Nikkei 19717-20058 (bullish)
DAX 11786-12576 (bullish)

VIX 12.34-15.27 (bullish)

USD 97.02-98.95 (bullish)
EUR/USD 1.05-1.08 (bearish)
YEN 118.61-121.12 (bearish)
Oil (WTI) 48.72-57.69 (bearish)
Gold 1181-1210 (neutral)
Copper 2.67-2.79 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Process of Discovery - 04.21.15 chart


1PM TODAY CONF CALL: MAY CRUISE PRICING SURVEY

The Hedgeye Gaming, Lodging, and Leisure team will host a conference call TODAY at 1PM to discuss the latest findings from our proprietary cruise pricing database.  Please contact your Hedgeye salesperson for call details or video link.

 

Points of discussion include:

  • Expanded Pricing Database 
    • Almost doubled the number of itineraries to 20,000
    • Inclusion of river cruises and other ocean brands
    • Pricing two years out (on a rolling basis)
  • Latest pricing pivots (RCL,CCL, NCLH) 
    • (NEW*) weekly sequential pricing
  • Where is European pricing headed?
  • Is RCL holding price in the Caribbean? Is it good enough?
  • New ship premiums
  • Same-store pricing
  • NCLH 1Q preview
  • Research topic: Asia 
    • Pricing vs Bookings
    • China vs non-China
    • Ocean vs River

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

#LateCycle

Client Talking Points

CHINA

It’s so slow in China (in rate of change terms) right now that the nightly rumors on the next “stimuli” have accelerated to their fastest pace. The Shanghai Composite finally gives up -4.1% in a day, so that should have the levered long brokers thinking twice (for a day).

EURO

After tapping the top-end of our $1.06-1.13 refreshed risk range, the Euro has backed off (again) at lower-highs to $1.10 and European stocks love that! The Euro saw a big 2-day rally off oversold lows, but the question is can it hold now that European economic data is slowing sequentially? (UK Construction PMI 54.2 APR vs 57.8 last).

UST 10YR

After rallying to lower-highs in both DEC (2.27%) and MAR (2.25%) the UST 10YR has done it again (this time to 2.13%) and we can get you to where we started 2015 (2.17%) but what happens after that? Almost everyone we talk to is thinking better jobs report Friday – what if it’s worse? #LateCycle.

Asset Allocation

CASH 47% US EQUITIES 8%
INTL EQUITIES 10% COMMODITIES 0%
FIXED INCOME 31% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
ZOES

We view ZOES as a very strong long-term investment. Part of what we like about Zoe’s is its strong new unit economics.  Not only does Zoe’s have strong restaurant level margins, but also has best-in-class build out costs and cash-on-cash returns.  In addition, we believe Zoe’s new units are exceeding management’s targets, driven by higher than expected year three average unit volumes. While it may be difficult for some investors to swallow Zoe’s valuation, we believe it represents one of the best early stage restaurant growth chains trading on the public market.  

ITB

iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. Builder performance was choppy in the latest week alongside beta volatility and investor attempts to square the net impact to housing from rising rates and ongoing improvement in housing fundamentals. As it stands currently, rates remain a tailwind to affordability relative to last year and would require a significant, expedited increase to have a material negative impact on housing activity in the immediate/intermediate term. Elsewhere across Housing Macro, the fundamental data continued to roll in strong.

TLT

Insomuch as the April Jobs Report may prove to be a bearish catalyst for Treasury bonds, slowing growth data over the next two quarters should prove decidedly bullish. Fighting buy-side consensus on the long side of Treasury bonds been a great call thus far so we’d be booking gains and taking down our gross exposure to this asset class on the next immediate-term pop. Ultimately, we think our #LowerForLonger theme prevails, but volatility is likely to pick up in the interim.

Three for the Road

TWEET OF THE DAY

LIVE | INTERACTIVE | SMART

The Macro Show, Live w/@KeithMcCullough at 8:30AM ET https://app.hedgeye.com/insights/43899-the-macro-show-live-with-keith-mccullough-at-8-30am-et… via @hedgeye

@Hedgeye

QUOTE OF THE DAY

Recognizing power in another does not diminish your own.

Joss Wheadon

STAT OF THE DAY

It costs the Department of Justice $6.5 billion annually to operate the federal prison system.


CHART OF THE DAY: The Bond Battler $TLT

CHART OF THE DAY: The Bond Battler $TLT - z 05.05.15 chart

 

Editor's Note: This is a brief excerpt and chart from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. If you'd like to stay a couple steps ahead of consensus, we courage you to subscribe.

 

If you can take a punch (both in this game and the one I used to play on the ice), your career will last longer. Here’s what the body blows have looked like on rallies (in Long Bond Yield terms) for the last 6 months:

 

  1. December 2014, US 10yr Treasury Yield rallies to 2.28% on expectations of accelerating Q1 US growth
  2. March 2015, UST 10yr Yield rallies to 2.25% post another #LateCycle US Jobs report
  3. May 2015, UST 10yr Yield rallies to 2.14% on…

...Yep. I’ll take the bi-monthly black eyes for staying long Treasuries (TLT). For the next 3-6 months we think year-over-year US growth continues to slow. Staying with the process isn’t always easy. But we’ve got to be tough.

 


The Bond Battler

“You got to be tough.”

-Hemingway

 

In classic Ernest Hemingway terms (tight and to the point), that’s what a young man by the name of Nick was told by an old street fighter after he got busted by a brakemen (thrown off a train) up near Macelona, Michigan. #BlackEyes

 

The short story is called The Battler – and it’s a beauty for those of us who have to (and love to) grind it out every day. Win, lose, or draw – there’s a lesson to be learned from every experience.

 

After being bearish on Treasury Bonds in 2013, I’ve been battling it out on the long side of these barbarous low-volatility-high-return Long Duration Bonds for going on 17 months now. Every time bond yields bounce to lower-highs, I hear it from every corner of the Twitter-sphere. You got to be tough to fight off the perma Bond Bears.

The Bond Battler - 3  yield Godot 07.27.2014

 

Back to the Global Macro Grind

 

Being deaf would probably help me too.

 

If all I did was what you should do when you are trying to handicap the probability of Long-term Bonds rising/falling (front-run the rate of change in growth/inflation), I’d concern myself less with daily moves. But some of you pay me to fight. So fight today, I will.

 

“They all bust hands on me – but they couldn’t hurt me.” –Hemingway

 

If you can take a punch (both in this game and the one I used to play on the ice), your career will last longer. Here’s what the body blows have looked like on rallies (in Long Bond Yield terms) for the last 6 months:

 

  1. December 2014, US 10yr Treasury Yield rallies to 2.28% on expectations of accelerating Q1 US growth
  2. March 2015, UST 10yr Yield rallies to 2.25% post another #LateCycle US Jobs report
  3. May 2015, UST 10yr Yield rallies to 2.14% on…

 

On what?

 

  1. Global Bond Yields having their biggest 6-day % move (off the all-time lows)?
  2. The Almighty Bond “Bubble” finally popping, for real this time, because it’s “expensive”?
  3. Expectations of a mean reversion back to #LateCycle jobs gains in the US (May 8th report)?

 

Triple Crown fans, if we’re betting on expectations, I’ll take all 3 for the trifecta. And I’ll fade #3, staying long The Battler (Long Bond) to win at Friday’s run for the roses.

 

I obviously get that all 3 of the aforementioned expectations can come to fruition. But I also get this thing called probability that I won’t fade unless I have fundamental reason to do so.

 

It’s been what, 37 years, since Affirmed won the Triple Crown? While it hasn’t been that long for Bond Bears to get paid (2013), don’t forget that the key wager then was that US growth would accelerate from 2012. And it did.

 

Put another way, until our models signal real US #GrowthAccelerating (year-over-year), we’re probably staying with our biggest asset allocation horse.

 

Since I gave the bears some air-time, don’t forget to contextualize what actually happened after those December and March Lower-Highs for 10yr yields:

 

  1. JAN-FEB 2015 = re-test of the all-time lows at 1.67% after bad US GDP data
  2. APR 2015 = two separate selloffs to 1.84% after a bad March Jobs report

 

In other words, “long-term investors” (i.e. those who understood that Global Growth and Inflation expectations were too high) who have remained bullish on Long Duration Bonds have been paid to take a few punches from the pundits.

 

But, but… according to consensus, jobless claims are “good.” C’mon now – that’s not true. They are actually fantastic! And that’s the point about the cycle. See slide 13 of our #LateCycle Macro deck – they are as good as they get.

 

In that same slide deck (slides 12-17) our Macro Research Team reviews the mean reverting #history of the labor cycle, reminding you what that economic indicator is – one of the latest and lagging indicators there are.

 

Yep. I’ll take the bi-monthly black eyes for staying long Treasuries (TLT). For the next 3-6 months we think year-over-year US growth continues to slow. Staying with the process isn’t always easy. But we’ve got to be tough.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.86-2.17%

SPX 2096-2126
RUT 1
VIX 11.73-14.70
EUR/USD 1.06-1.13
Oil (WTI) 54.85-60.39
Copper 2.79-2.97

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Bond Battler - z 05.05.15 chart


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