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$YELP: Mayday, Mayday! [Unlocked Research]

Takeaway: Just because YELP may be for sale doesn't mean there would be buyer. All it means is that mgmt is terrified...maybe they finally get it.

This note was originally published May 08, 2015 at 07:58 in Internet & Media

$YELP: Mayday, Mayday!  [Unlocked Research] - 90

KEY POINTS

  1. WHAT'S FOR SALE: A business that is facing declining revenue if it doesn't grow its salesforce in perpetuity.  YELP's model is predicated on hiring enough new sales reps to drive new account growth in excess of its rampant attrition, which is the overwhelming majority of its customers annually.  The issue is that its TAM isn't large enough to support its model.  That has manifested into a persistent decline in salesforce productivity, which is now devolving into a mounting exodus of its sales reps (see note below).  The latter means the story is going to turn much sooner, and get much uglier, than we initially expected.  See note & deck below for detail.
  2. WHO'S THE BUYER? There are very few who can afford, and much fewer (if any) who would be desperate enough to consider.  Remember that in any M&A transaction, the would-be seller has to open its books.  If we all can see YELP's attrition issues in its public data, any would-be acquirer would see it in its private data.  Combine that with the negative goodwill surrounding YELP's alleged business practices, and the likely sell-off of the acquirer's stock on the news, and it's basically Russian Roulette for any acquiring CEO (except there isn't an empty chamber).
  3. WHAT THIS MEANS: This could just be a manufactured story to squeeze the shorts.  If not, then management is just terrified.  The company went public in 1Q12 and now may be looking to sell in 2015 at what was a 52-wk low before yesterday's headlines.  Management may finally be coming to the realization that its model is unsustainable.  We suspect the wake-up call was what we believe was a sequential decline in its salesforce in 1Q15 after targeting 40% sales-rep growth for 2015 (see note below).  Mgmt may be hoping to eject before the model starts crashing, but we doubt it can find a buyer.  If we're wrong, let's hope none of us are long the acquirer.

 

For supporting detail, see below for our most recent deck and note .  Let us know if you have any questions, or would like to discuss further.

 

Hesham Shaaban, CFA

203-562-6500

hshaaban@hedgeye.com

@HedgeyeInternet

 

 

YELP: Short Thesis Update Deck & Replay 

02/20/15 

Deck: [click here] 

Replay: [click here] 

 

YELP: The New Major Red Flag (1Q15)

04/30/15 08:53 AM EDT

[click here]


RH: Removing Restoration Hardware from Investing Ideas

Takeaway: We are removing Restoration Hardware from Investing Ideas.

Please be advised that we are removing Restoration Hardware (RH) from Investing Ideas today. Below is a brief note from CEO Keith McCullough explaining our decision.

*  *  *  *  *  *  *

RH: Removing Restoration Hardware from Investing Ideas - 12

 

This is not a fundamental research call from Brian McGough. This is more of the same in terms of me wanting you to take down your gross exposure to the US stock market as we head into what I believe will be a volatile summer.

 

RH has had a great run for us and I want to make sure you harvest some of those gains so that you can re-invest at lower-prices if/when small cap consumer stocks get hit again. Gas prices aren’t falling anymore and the rate of change in the US labor data continues to slow.

 

KM

 


Keith's Macro Notebook 5/8: UK Election | China | Jobs Report

 

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning, with special analysis of the just-released jobs report from Macro Analyst Christian Drake.


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Can $LULU Shares Head North of $70 or $80 With Chip Wilson In The Rear View Mirror?

Editor's Note: This is an excerpt from recent research from our retail team. If you're an individual investor looking for high-quality research at a price you can afford we invite you to learn more.

 

When we added Lululemon (LULU) to our Best Ideas list back in June 2014 (we removed it from our Best Idea's List on 3/24/15) we outlined probable outcomes stemming from controversial founder Chip's Wilson’s activist push. Where we shook out after weighing the various puts and takes was:

  1. Chip would not get his way.
  2. Chip would eventually sell his stock.

Can $LULU Shares Head North of $70 or $80 With Chip Wilson In The Rear View Mirror? - 14l 

We have long maintained that Chip is a brand builder, not a brand leader. He was very vocal in an interview with PwC last year about his displeasure his non-compete imposed restraint. The writing officially appears to be on the wall for his complete exit from the company now that “Kit and Ace” (the luxury apparel brand founded by his wife and son) is nearing critical mass.

 

In our LULU Black Book in March 2015, we said that there’s $4.00 in earnings power hidden in this company, but we needed the conviction that management could find it. We are still far from convinced, though the leadership on the board has proven over the past year that it is willing to separate itself from Chip.

 

In order to justify a 30x p/e and give anyone hope of a share price in the $70s or $80s, we think that the company needs to completely reset its business model.


The UK, China and U.S. Jobs Report

Client Talking Points

UK

The UK election was a blowout verse mainstream expectations, British Prime Minister David Cameron and his Conservative Party have claimed an outright majority in Parliament, with 330 seats out of 650, and can form a new government. It was the biggest day for the UK FTSE 100 Index on a relative basis to other European stock markets of the year. There was a huge move in the British Pound over a percent this morning as well.

CHINA

You simply can't ignore what is going on in China. The PBOC came out and effectively said they were not going to do a massive QE. Export growth was down -6% year-over-year and imports were down -16%. China's economy is slowing at an accelerating rate, Chinese brokers are trying to create rumors about stimulus and the central bank is saying don't expect QE...all this was met by a rally in the stock market.

JOBS REPORT

Total NFP was basically inline with estimates, seeing an improvement sequentially. This is not much of a surprise since last month was the lowest number we have seen since December 2013. The jobs report showed a creation of 223,000 jobs and an unemployment rate of 5.4 percent. CLICK HERE to watch the special jobs report edition of The Macro Show.

Asset Allocation

CASH 60% US EQUITIES 4%
INTL EQUITIES 5% COMMODITIES 0%
FIXED INCOME 29% INTL CURRENCIES 2%

Top Long Ideas

Company Ticker Sector Duration
RH

We think people are missing the magnitude of earnings growth at Restoration Hardware (RH), the sustainability of that trajectory over a long period of time, and ultimately the degree to which that will accrue to equity holders. The question is not whether the stock will go to $110 vs $120 (where we see most price targets), but whether it will get to $200 vs $300. We think the catalyst calendar looks healthy starting with the 1Q15 print set to be release in early June. Following that, RH is set to pick up the cadence of its store opening, with 4 new stores set to be open in the back half of the year. This remains our favorite name in retail.  

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

If you want the truth about the jobs numbers, start with sources who actually model them

@KeithMcCullough

QUOTE OF THE DAY

When he worked, he really worked. But when he played, he really PLAYED.

Dr. Seuss

STAT OF THE DAY

The average American consumes 48 pints of ice cream each year.


Retail Callouts (5/8): KATE, LULU, AMZN, EBAY, WMT

Takeaway: LULU/Kit & Ace conflict of interest makes Chip exit more likely. KATE - Buy the stock for Mother's Day. AMZN/EBAY ChannelAdvisor Comps.

EVENTS TO WATCH

Retail Callouts (5/8): KATE, LULU, AMZN, EBAY, WMT - 5 8 chart2 B

 

 

COMPANY HIGHLIGHTS

 

KATE - To see our full note KATE – Happy Mother’s Day CLICK HERE

 

LULU - Kit&Ace Conflict of Interest, Chip Exit More Likely

 (http://www.wsj.com/articles/an-exotic-cashmere-upends-lululemon-1431044063)

 

Takeaway: When we added LULU to our Best Idea's List in June of 2014 (we removed LULU from our Best Idea's List on 3/24/15) we outlined the probable outcomes resulting from Chip's activist push. Where we shook out after weighing the puts and takes was a) Chip would not get his way and b) eventually sell his stock. Chip is a brand builder, not a brand leader and he was vocal in an interview with PwC in 2014 about his displeasure his non-compete imposed restraint. The writing appears to be on the wall for his complete exit from the company now that Kit and Ace is nearing critical mass.

In our LULU Black Book in March 2015 we said that there’s $4.00 in earnings power hidden in this company, but we need the conviction that management could find it. We are still far from convinced, though the leadership on the board has proven over the past 12mnths that it is willing to separate itself from Chip. In order to justify a 30x p/e and give anyone hope of something in the $70s or $80s (presumably what you’re playing for in buying it today) we think that the company needs to completely reset its business model.

 

 

OTHER NEWS

 

EBAY, AMZN - ChannelAdvisor April Comp Sales

Retail Callouts (5/8): KATE, LULU, AMZN, EBAY, WMT - 5 8 chart1

 

WMT - Wal-Mart grabs some former Target Canada assets for $350-million

(http://www.theglobeandmail.com/report-on-business/wal-mart-grabs-some-former-target-canada-assets-for-350-million/article24326484/)

 

KSS - Kohl's expands 'shop online, pick up in-store' service

(http://www.retailingtoday.com/article/kohls-expands-shop-online-pick-store-service)

 

RL - Ralph Lauren Launching Luxe Concept in Milan

(http://wwd.com/retail-news/designer-luxury/ralph-lauren-launching-luxe-concept-milan-10125740/)

 

John Legend to Open H&M Store

(http://wwd.com/retail-news/mass-off-price/john-legend-to-open-hm-store-10125422/)

 

Warby Parker continues to expand, opens store in Chicago

(http://www.chainstoreage.com/article/warby-parker-continues-expand-opens-store-chicago)

 

JCP - Joe Fresh to be pulled from J.C. Penney stores in 2016

(http://www.theglobeandmail.com/report-on-business/international-business/us-business/joe-fresh-to-be-pulled-from-jc-penney-stores-in-2016/article24310076/)

 

Advent brings IPO of perfume chain Douglas forward - sources

(http://uk.reuters.com/article/2015/05/07/douglas-ipo-idUKL5N0XY5BW20150507)

 

Fitbit Files to Go Public

(http://www.nytimes.com/2015/05/08/business/dealbook/fitbit-files-to-go-public.html?_r=0)

 


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