FLASHBACK: Noodles & Co: Going In Short | $NDLS

Editor's Note: This note was originally published on February 18, 2015 at 12:22. Shares of NDLS are down 36% since.

FLASHBACK: Noodles & Co: Going In Short | $NDLS - Z NDLS

Last week we elevated a number of troubled growth stocks to our Investment Ideas list as shorts.  Among these was NDLS, a name we see approximately 35-45% downside in with a fair value of $14-16 per share.


NDLS is a small cap stock that has been the recipient of an unwarranted premium growth multiple.  With only ~440 Noodles & Company restaurants system-wide, management maintains that they have a tremendous runway of growth ahead of them that calls for “at least” 2,500 restaurants nationwide.  This is a lofty goal, by any measure, particularly when considering the recent surge of competitors claiming similar domestic growth profiles.  We’ve already seen signs of how difficult this will be to achieve in NDLS’ infancy as a public company.  As the company has accelerated unit growth and ventured into new markets, system-wide sales and margins have suffered.


While this is to be expected, the company believes it is facing a brand awareness issue and thinks it will solve this issue through increased marketing spend and its catering initiative.  In our view, NDLS' brand awareness problem shouldn’t be management’s top priority.  In fact, elevating brand awareness will not be the panacea most hope.  Execution and site selection are the real deterrents to the business, and these can’t simply be fixed by plowing more cash into advertising.


Despite bullish consensus estimates, we believe NDLS is facing a difficult 2015 for the following reasons:

  • Cost of sales inflation: management is only estimating 2% food inflation, but durum wheat prices are under pressure and food cost estimates could head higher as we move into the back half of the year
  • Geographic concentration: the company has a notable number of stores in the DC metro area, which is an extremely competitive market
  • Rising labor costs: 52% of company operated restaurants are in markets that are facing minimum wage increases in 2015 or 2016 (or both), the majority of which are coming this year
  • The Affordable Care Act: will add about 30-50 bps of pressure on margins in 2H15
  • Estimates are high: the street is looking for 27% EPS growth in 2015, after an essentially flat year in 2014

Management is currently guiding to between 20-25% EPS growth in 2015.  With very little flow through from same-store sales, NDLS needs to drive 3-4% comp growth in order to keep margins flat versus last year – a task we feel will be difficult to achieve. 


The biggest factor working against us on the short side is the amount of short interest in the name (~25%).  The analyst community is rather divided, with a 60%/40% split on buys vs holds, respectively.


Consensus Estimates for 4Q14 Look Aggressive As Well

As a part of our process we continually monitor consensus estimates for each of the major line items on the P&L for the vast majority of companies in our space.


In regards to NDLS, we have a difficult time understanding the rationale behind the street's estimates for COGS and, subsequently, restaurant level margins in 4Q14.  


Consensus expects cost of sales to decrease 41 bps on a YoY basis in the quarter, after increasing 51, 67, and 64 bps in 1Q14, 2Q14, and 3Q14, respectively. We've tried, numerous ways, to reconcile the extent of this sudden reversal - but to no avail.  Predictably, this leverage is expected to flow through to restaurant level margins which consensus expects to be down 36 bps YoY, after decreasing 127, 200, and 230 bps in 1Q14, 2Q14, and 3Q14, respectively.  


We think there is a material disconnect here which will become readily apparent if NDLS does not put up a well-above consensus comp.


FLASHBACK: Noodles & Co: Going In Short | $NDLS - z howard penney chart 1

FLASHBACK: Noodles & Co: Going In Short | $NDLS - 2

Data: Company Filings, Consensus Metrix Estimates


FLASHBACK: Noodles & Co: Going In Short | $NDLS - 3

Retail Callouts (5/6): KATE, M, TJX, JWN, CROX

Takeaway: KATE- We Feel Good About The Print. Macy's growth avenues=poor outlook on dept store space. Backstage analysis, head-to-head with TJX & JWN.


Retail Callouts (5/6): KATE, M, TJX, JWN, CROX - 5 5 chart2




KATE - To see our full note KATE - We Feel Good About the Print CLICK HERE


M - New Growth Strategy, Macy's Backstage



Takeaway: For starters what does it say about the department store industry when the operator who is considered best in class starts exploring alternative avenues to find growth. Blue Mercury, International, and now Macy's Backstage is actually happening. Add to that the fact that M took two top executives away from store centric functions to focus on e-comm and business development. We won't argue that that Macy's bench isn't deep, it is. We think the shift in focus from top talent in the C-suite is telling. If Terry and Karen are staring at the same long term charts we are, the decisions make more sense.

Retail Callouts (5/6): KATE, M, TJX, JWN, CROX - 5 6 15 dept store trend


As far as the Backstage concept is concerned. The company is just dipping its toe in the water to test the efficacy of the model. And M chose to stack up the 4 Backstage test concepts against 3 of the best operators in this space (TJ Maxx, Marshalls and JWN Rack), while leveraging the company’s existing brand awareness. The average driving distance to a TJ location - 2.1mi, Marshalls - 0.4mi with two locations in the same strip centers, JWN Rack - 4.0mi, and Macy's - 2.1mi.

Retail Callouts (5/6): KATE, M, TJX, JWN, CROX - 5 6 15 M dist





WWW, COH - Taylor Swift Kicks Off Her 1989 Tour in Stuart Weitzman



CROX - Crocs eliminating COO Position, Scott Crutchfield leaving


BBY, AMZN, EBAY - Best Buy Canada invites other retailers to its online marketplace



AMZN - E.U. Commission Opens Antitrust Inquiry Into E-Commerce Sector



ZU - Brian Swartz Appointed Chief Financial Officer for zulily



FL - Foot Locker to open big in Times Square with 36,000-sq.-ft. flagship



KORS - Estée Lauder's Earnings Rise on Product Launches - Strength in Michael Kors Fragrance



W - Wayfair enlists HGTV stars for new campaign



GPS - Gap Set to Launch in India



Imports Surge in March As Goods Clear Ports




Takeaway: April details brings more bad news for Macau stocks


The April details brought showers and not flowers to the headline 39% GGR decline. The market played lucky over its customers which we estimate contributed 2-5% in YoY GGR growth. In other words, it should’ve been worse. Going forward, May should look better optically. Average daily revenues will climb sequentially, particularly during the first week due to the May holiday. On a YoY basis, the % decline should improve. However, that doesn’t mean the fundamentals are improving.


In retrospect, April was a worse month than March which was worse than February, etc. In fact, seasonally adjusted gaming volumes have deteriorated since June. Our focus has been on high margin base mass revenue which has been dropping for only a few months, but at a faster rate than the other segments. The Street hasn’t picked up on it since publicly available base mass data is scant. This is evident from their estimates which remain too high for 2015 and especially 2016, primarily as it relates to margins. We believe it is because their implicit base mass estimates are way too high. While maybe the best positioned Macau operator long term, LVS may have the most to lose over the near and intermediate term.


We will be hosting a call on Friday morning at 11am to discuss our Macau outlook and analysis and to provide an in-depth look into the trends between the Shanghai Stock market and Macau GGR.


Please see our detailed note:

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Please join us live today as we step through our General Mills Activist Blackbook. The presentation will be an in-depth look into the GIS business, the competitive landscape, and how their business can return to strong growth.


Watch the replay below


Call Details:

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  • Materials: CLICK HERE



Painless Starts

This note was originally published at 8am on April 22, 2015 for Hedgeye subscribers.

“The marvelous thing is that it’s painless.”

-Ernest Hemingway


In one of my favorite Hemingway short stories on mortality (The Snows of Kilimanjaro), that’s how a dying man explained the beginning of the end to his wife.


“That’s how you know when it starts”, he said. “It’s painless.”


To be clear, I don’t mean to bug you out this morning. I just wanted to remind you that while it’s been painless to be long of Chinese, Japanese, European (and now, on the margin, American) “easing” (in bond/stock market terms), this won’t end well.

Painless Starts - bubble cartoon 09.09.2014


Back to the Global Macro Grind


‘How could you write such a thing? Et tu, brute? How can you be bullish for the last leg of this ramp and, at the same time, remind me how it all ends? I knew it Mucker… you are a perma bear! You bastard.’


Enough of my literary attempts to entertain you, eh. Let’s just stick with the data (and some hilarious headlines for this stage of what’s been nothing short of an epic inflation of global stock and bond market prices):


  1. Chinese “investors” open a record number of stock brokerage accounts week-over-week (
  2. Mystery Traders armed with algorithms rewrites Flash Crash story (
  3. Greek Contagion risks may be higher than you think (


Ok. Maybe it’s not hilarious. I was just looking for some alliteration. But it is extremely amusing (which is the definition of hilarious).


As you know, mainstream media (especially Financial media), chases its own tail in its perpetual quest to prove to its advertisers that yesterday’s news matters today. #RatingsAtAllTimeLows


The way that these headlines work is that they are pro-cyclical to price action (i.e. they chase stories/price):


  1. Chinese stocks (Shanghai Composite) ramped another +2.4% overnight to +36.1% YTD
  2. Storytellers have been trying to become famous writing about the Flash Crash for years
  3. Oh, and if you didn’t think Greek stock market risks were real, you’re losing money long that


Since I haven’t had one real Institutional Investor ping me on the latest trader to sport the orange jump-suit risk for flash crashing the party (for a day), I give you a few more fun facts about Chinese and Greek stocks, instead:


  1. CHINA: since growth and inflation really started slowing in OCT, the Chinese stock market is +92%
  2. GREECE: since mainstream media started trumpeting “Greece Fixed” in DEC, Greek stock market -32%


In Hedgeye-speak, that makes China a bullish intermediate-term TREND and Greece a bearish one. If intermediate-term (3 months or more = TREND duration) is too short-term for you, look at both of these country stock markets year-over-year:


  1. CHINA: Shanghai Composite Index = up +112%
  2. GREECE: Athens General Share Index = down -44%


“So”, what I’d really need to get bullish on Greek stocks is:


  1. The Greeks telling the world the half truth (like China did) about slowing growth and #Deflation
  2. The Germans confirming that they get the truth, but have no intention of letting Greece “exit”
  3. And the mother of all Greek bailouts right when CNBC/Bloomberg are as bearish as they were on China last year


The death of the lies is where the painless progression starts, no?


It worked in Ireland and Iceland (sort of). And while I completely disagree with the policy to bailout losers, my political view on that front would have rendered my research opinions useless for the last 5-6 years too.


Can you imagine being the “smartest” man on earth right now (per yourself) and short Chinese stocks from last year’s lows? There is nothing painless about hubris. And I’ll define that in market terms for you too – not respecting Mr. Macro Market’s message.


I’ve lived and learned through this entire central planning circus alongside you, writing and ranting about it, almost every day for 7 long years…


I’ve always thought this won’t end well. But “ends” are processes, not points. And I’ve tried to time the beginning of the end as painlessly as possible. Because realizing perpetual P&L pain is no way to live.


Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:


UST 10yr Yield 1.85-1.95% (bearish)
SPX 2082-2112 (bullish)
RUT 1250-1275 (bullish)
DAX 11683-12195 (bullish)

VIX 12.37-15.27 (bullish)
USD 97.04-98.76 (bullish)
EUR/USD 1.05-1.08 (bearish)
YEN 118.99-121.14 (bearish)

Oil (WTI) 49.35-57.69 (bearish)
Natural Gas 2.44-2.65 (bearish)
Gold 1182-1209 (neutral)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Painless Starts - 04.22.15 chart

Front-running A Bad Jobs Report?

Client Talking Points


Asia is not a headline story (yet) but our model is signaling multiple breakdowns across Eastern stock markets. Indonesia broke a few weeks ago and India’s (BSE Sensex) recent breakdown was confirmed overnight with another -2.3% drop to -2% year-to-date.  Australia cut rates and its stock market dropped -2.3% (with Commodities up!). The Shanghai Casino Composite is -5.6% in 2 days #MarginCalls.


Oil experienced an epic 6 month crash, then rally – the inverse correlation between Oil/USD is screaming right now (yes, we know supply/demand narratives help too) with USD signaling immediate-term lower-highs and Oil higher-lows into this U.S. jobs report (bad jobs report = USD bearish, Oil bullish).


The Russell 2000 does not like Down Dollar, and that makes sense to us as the “tax cut” from lower gas prices is, well, getting cut! This is going to be a problem for a narrative that even Janet Yellen has recently been forced to acknowledge (#StrongDollar, Down Oil, Stronger Consumption). The Russell 2000 is in the midst of a -4.7% correction – overlay that with what’s happening with the USD and you’ll get the point.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Russell 2000 does not like Down Dollar, and that makes sense to us as the “tax cut” from lower gas prices is, well, getting cut! This is going to be a problem for a narrative that even Janet Yellen has recently been forced to acknowledge (#StrongDollar, Down Oil, Stronger Consumption). The Russell 2000 is in the midst of a -4.7% correction – overlay that with what’s happening with the USD and you’ll get the point.


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.


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


VIDEO (1min) Get. Out. Of. The. Way.… via @hedgeye



One of the facets of extreme originality is not to regard as obvious the things that lesser minds call obvious.

Jack Good


New York City Mayor Bill De Blasio is committing $70 million to low-cost broadband access in the city.

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