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REMINDER: KSS – New Black Book. Putting Our Credit Thesis To The Test

Takeaway: Our new Black Book/consumer survey will test our thesis that 25% of KSS’ EBIT is at risk of going away – contrary to management’s guidance.

Please join us tomorrow, Tuesday May 12 at 1pm for a call in conjunction with our latest Black Book on Kohl’s, which is a Best Idea Short. Note that the call will be two days before KSS 1Q results. Despite the obvious strength in the stock and the business year to date, we think that earnings growth will decelerate sharply as the year progresses, and that earnings power will prove to have peaked at $4.26 last year. We think consensus estimates are high by 15% this year (after we pass 1Q), and by 30-40% over the following two years. Ultimately we think that KSS will shift from trading at a peak multiple on peak earnings, to more of a mid-cycle multiple on something closer to $3.50. That suggests a stock in the low $40s, or about 45% downside from here.


The key issue as we see it links back to the company’s credit card and rewards program. Specifically, we think that the rationale behind the recent change in KSS Rewards is evidence that KSS is in the 10th inning as it relates to finding new customers. About 85% of profits are linked to the credit card, and we think that 25% of EBIT is at risk due to the recent changes implemented by KSS management.


In order to put our thesis to the test, we are in the process of completing a very detailed consumer survey of 1,000 KSS shoppers who either hold a Kohl’s credit card or the new Yes2You rewards program. The results should give us an accurate picture as to who is shopping, how much they are spending, and how much of a customer’s incremental purchases are flowing through KSS Card or some other Third Party Card (Visa, MC, etc).


Participant Dialing Instructions (We’ll Also Have A Live Streaming Presentation in Conjunction with the Call)

US Toll Free:

US Toll:

Confirmation Number: 39610531

Materials Link: CLICK HERE

Burger Bubble: Shake Shack Is One of the Most Overvalued Stocks Out There | $SHAK

"The Shake Shack (SHAK) charade is over,” outspoken Hedgeye Restaurants Sector Head Howard Penney wrote last week.  “And I mean over and done. It’s just a matter of time.”

*  *  *  *  *  *  *

Burger Bubble: Shake Shack Is One of the Most Overvalued Stocks Out There | $SHAK - zen


Penney (who has a long and successful track record shorting restaurant stocks and pointing out Market Emperors Wearing No Clothes) took to Twitter recently to reiterate his bear case on SHAK's ballooning stock price.


One point in particular that stands out: Trading at $64 million per store Shake Shack is 5.9x time more expensive than Chipotle's (CMG) ever was!

Highlights below.


Burger Bubble: Shake Shack Is One of the Most Overvalued Stocks Out There | $SHAK - zen 99


Burger Bubble: Shake Shack Is One of the Most Overvalued Stocks Out There | $SHAK - zen 1


Burger Bubble: Shake Shack Is One of the Most Overvalued Stocks Out There | $SHAK - zen 2


Burger Bubble: Shake Shack Is One of the Most Overvalued Stocks Out There | $SHAK - zen 3

BOTTOM LINE? "It can’t defy gravity for much longer," Penney says.


If you're an institutional investor and would like more information on Penney's research ping sales@hedgeye.com.

Keith's Macro Notebook 5/11: China | Greece | UK

Hedgeye Director of Research Daryl Jones shares the top three things in CEO Keith McCullough's macro notebook this morning.

real-time alerts

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

China, Greece and The UK

Client Talking Points


The PBOC lowered one-year lending rates by 0.25% to 5.10% and decreased deposit rates by 0.25%, lowering the benchmark one-year rate to 2.25%. The chief economist said the latest rate cuts "aren't QE." Chinese equities and Asian equities broadly acted positively on the news. The Shanghai Composite Casino was up about +3% to +34% year-to-date.


European Finance Ministers meeting today to discuss the next steps with Greece. The big catalyst for Greece is obviously a payment to the IMF that is due Tuesday. Greece has come out and said that they will make that payment where as a few EU Ministers have suggested that they might not make it. Greek equities are down about 3% and the Greek Banks are reacting accordingly. 


The Bank of England kept the base rate unchanged at 0.5%, the bank rate has been at a record low of 0.5% since March 2009. They also effectively said QE will remain unchanged as well (at £375 billion/$578 billion).

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

One way to invest in Lower-For-Longer, from an equity perspective, is being long U.S. REITS (VNQ). The highly anticipated Non-Farm Payrolls report came and went Friday, and it was largely a non-event. The change in non-farm payrolls was +223K vs. consensus estimates of +228K for April. Considering last month’s report was a bomb (revised to 85K from 126K), April had an easy comp. Our thesis on interest rates remains lower-for-longer, but that view is being tested in the short-term.


iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. It was a relatively light data week for housing with weekly mortgage application data and the March employment report offering incremental updates on the current state of housing demand.  On the market side, interest rate volatility remained a concern for the public homebuilders but one we believe remains shorter-term in nature absent another expedited, step function increase in interest rates. We think the rate related pressure will be largely transient unless we see a further back-up in mortgage rates on the order of +50-100bps from here – a potentiality we would not view as probable at this point. On the fundamental side, the drumbeat of improvement remains ongoing.


The U.S. dollar has gone on a big reversal since the Fed’s March 18th meeting. Since the meeting, the dollar has moved lower and rates higher. This short-term move in rates has caused confusion with respect to our lower for longer call. Put simply, we have been wrong on the direction of our four macro tickers in the newsletter. A continuation of this trend will force us to re-evaluate the longer term call.

Three for the Road



Breaking $BAD?

Why These Stock-Pitch Contest Winners Say Buy Badger Daylighting

https://app.hedgeye.com/insights/44021-breaking-bad-why-these-stock-pitch-contest-winners-are-long-badger-d via @KeithMcCullough



Always borrow money from a pessimist. He won’t expect it back.

-Oscar Wilde


California grows half of the fruits and veggies produced in the U.S., including more than 90% of the country's grapes, broccoli, almonds, and walnuts.


LEISURE LETTER (05/11/2015)

Tickers: HLT, PENN, CCL



  • TODAY (1:30pm) - Stations Casino 1Q CC

  • May 13 - IGT 1Q CC 8am, ; PW: 2660253

  • May 14 - Genting Singapore 1Q CC  6am

  • May 14 - Macau Legend Development 1Q CC 8:30pm


HLT - announces 90m secondary offering for Blackstone. The underwriters (DB, BofA/ML, Citi) for the share sale have an option to purchase an additional 13.5 million shares. Blackstone owns 55% of HLT's shares outstanding. 

Takeaway:  This is the fourth 90m secondary for Blackstone. HLT recovered an average of 3% off the initial drop on the announcement in the week of trading following the previous 3 Blackstone sales.


Frasers Hospitality Trust - reached a deal to acquire five-star heritage-listed hotel in Sydney – Sofitel Wentworth for A$224 million ($236 million). The Hotel will continue to be operated by the Accor Hotel Group under its luxury-tier brand Sofitel.


Takeaway: Average price per key of $541,284 for this 5-star property in Australia. 


PENN - has lost its request to reduce Bangor’s property tax assessment of its Hollywood casino in Bangor, ME by $36.8 million. PENN now has 60 days to appeal the decision. 


Genting - might be interested in buying a 51% stake in Baha Mar.


Takeaway: This resort property has been long-delayed, mired with multiple operational and financial difficulties. Baha Mar is reportedly losing $10m a month with the delays.


CCL- dry dock slated for Azamara Quest this September has been moved to April 2016. The change was made as the scope of the upgrades has been expanded. Azamara Journey's dry dock remains on schedule for January 2016.



Korean cruise casinos - plans to enable its citizens and foreign tourists to wager on new cruise ship services that will serve ports around the country, reports the Korea Joongang Daily newspaper. 


The Ministry of Oceans and Fisheries on Thursday announced that the government will launch South Korean cruises within the year.  The initiative will establish docks exclusively for cruise ships in Busan, Incheon, Jeju, and Sokcho, Gangwon, by 2016. Existing docks will also be modified to allow cruise ship access, the newspaper added.


The Oceans Ministry said it plans to operate two trial runs to major tourist destinations in South Korea and Japan within the month. The runs are intended to check for glitches, including dock usage as well as the departure and arrival process.


According to the ministry, in 2014 the spending by each tourist on South Korean cruise ships averaged KRW1.17 million (US$1,075). Total spending exceeded 1.22 trillion won, as there were 1.05 million cruise tourists that travelled on South Korean ships.

Takeaway: Is this a precursor for an eventual lift of the ban on locals land casino betting?  Kangwon Land is the only land-based casino that allows locals betting.


Indiana land casinosGov. Mike Pence has decided to allow legislation permitting on land casinos to become law without his signature, paving the way for Tropicana in Evansville and Majestic Star in Gary.  The new law also gives other riverboats the option to build new on-land casinos on property near their current locations. 


Indiana April SS revs: -3% YoY

Missouri April SS revs: +2% YoY

Illinois April SS revs: -1% YoY

Pennsylvania (slots only) April SS revs: +4% YoY

Takeaway: April has been mixed but overall, it is a little better than our model projection for flat growth.


D LV/Golden Gate - owner Derek Stevens bought all gaming machines and tables from just-shuttered Riviera, the Las Vegas Review-Journal reported. Stevens bought 852 machines, four roulette wheels and spare machine parts for an undisclosed price. He will sell about 500 slots at auction next month.  Not all of the Riviera equipment was for sale, Stevens said. Popular, vendor-owned machines such as Wheel of Fortune and Megabucks were sent back to IGT. The other games will be installed at D and Golden Gate before Memorial Day.




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.


Monday Mashup

Monday Mashup - 1


Recent Notes

05/04/15 Monday Mashup

05/04/15 MCD: Investors Left Playing the Waiting Game

05/05/15 CHUY: Pulling a Rabbit out of a Hat

05/05/15 NDLS: Earnings Disaster

05/06/15 WEN: Making All the Right Moves

05/08/15 Restaurant Sales, Employment, Etc (April > March)

Events This Week

Tuesday, May 12

  • ARCO earnings call 10:00am EST
  • DNKN Annual General Meeting 10:00am EST
  • JMBA Annual General Meeting

Wednesday, May 13

  • SHAK earnings call 5:00pm EST
  • DFRG Annual General Meeting 10:00am EST
  • CMG Annual General Meeting
  • YUM Investor Conference (China Day 1)

Thursday, May 14

  • JACK earnings call 11:30am EST
  • COSI earnings call 5:00pm EST
  • LOCO earnings call 5:00pm EST
  • PBPB Annual General Meeting
  • YUM Investor Conference (China Day 2)


Recent News Flow

Monday, May 4

  • BOBE price target was decreased to $68 from $75 at APB Financial due to slower than anticipated cost cutting and continued operational weakness.

Wednesday, May 6

  • WEN announced its intention to refinance its existing credit agreement through a securitization.  The company will use some of the net proceeds of the facility (~$1.1 billion) to return cash to shareholders.
  • WING Wingstop filed for an $86.3 million IPO through Morgan Stanley, Jefferies and Baird.

Thursday, May 7

  • KKD entered an agreement to open 12 shops in Guatemala over the next four years.

Friday, May 8

  • MCD reported April global comps of -0.6% vs the consensus estimate of -1.9%.  The US, Europe, and APMEA regions all outperformed consensus expectations.


Sector Performance

The XLY (+0.33%) slightly underperformed the SPX (+0.37%) last week.  Casual dining stocks, in aggregate, undperformed the XLY, while quick service stocks outperformed.

Monday Mashup - 3

Monday Mashup - 4


Quantitative Setup

From a quantitative perspective, the XLY remains bullish on an intermediate-term TREND duration.

Monday Mashup - 5


Casual Dining Restaurants

Monday Mashup - 6

Monday Mashup - 7


Quick Service Restaurants

Monday Mashup - 8

Monday Mashup - 9

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