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SHAK: Adding Shake Shack to Investing Ideas As a Short

Takeaway: We are adding Shake Shack (SHAK) to Investing Ideas as a short.

Editor's Note: Please note that we are adding Shake Shack to Investing Ideas today as a short. A brief explanation follows below from Hedgeye CEO Keith McCullough.

 

SHAK: Adding Shake Shack to Investing Ideas As a Short - 11

 

I'm looking for the most overbought name on our Best Ideas SELL list - and tag, Shake Shack, you're it. 

 

Yes, I realize you can't yet short the stock. But if you are long it, you can sell some - and our job, as Risk Managers, is to help you gain a better understanding of company risks inasmuch as anything else - simply because Old Wall doesn't.

 

On the Howard Penney bear case for the SHAK:

 

Based on the guidance management provided, we believe they are either 1) being less than genuine or 2) don’t know the tone of the business going forward. 

 

The most visible place of uncertainty is in same-store sales guidance.  In the model for the balance of 2015, we are assuming +6% price and +2% mix good for 8% same-store sales growth over the balance of the year.  This would result in 2015 same-store sales in the high single digit range versus guidance of low-to-mid single digits.  Baked into management’s assumptions is significant cannibalization from the reopening of the flagship store in NYC.

 

While the 1Q15 earnings release was very strong the valuation the market is awarding SHAK is mindboggling!  If we model out $40 million in EBITDA in 2016 (which is nearly double the current street estimate of $22 million) and put 30x on it the stock is worth $32 or 52% down side.  If we value the company closer to CMG the downside approaches 75% from current levels. 

 

Sell Green,

KM 


Cartoon of the Day: Fossilized

Cartoon of the Day: Fossilized - Growth cartoon 05.19.2015

 

From Hedgeye's Q2 2015 Macro Themes presentation:

 

#DemographicYields: Year after year in the post-crisis era, investors, economists and policy-makers alike have consistently seen their estimates for GDP growth, inflation and interest rates surprised to the downside. Perhaps there is some merit to the “secular stagnation” thesis most recently highlighted by Bernanke’s blog. In this theme, we pull back the curtains on the impact of demographics on the domestic and global economy. The conclusion? Lower-for-longer...


RETAIL EARNINGS OBSERVATIONS: 5/19

Takeaway: RETAIL EARNINGS OBSERVATIONS: 5/19 - WMT, TJX, DKS, URBN, KSS

OBSERVATIONS FROM EARNINGS OVER THE PAST 24 HOURS

1. #growthslowing -- is a theme that continues to steamroll through this earnings tape. We got a scent of it a few weeks back from those reporting March quarters, then a strong whiff last week from the department stores -- all of which slowed sequentially, and now the URBN debacle and WMT miss serves as the icing on the cake. 

2. WMT = Uninspiring. There was very little in this WMT print to get excited about. It wasn't bad...but rather extremely below average. If there was any positive it was that traffic was +1% (only the 3rd time in 2-years its' been positive). Gross margins were up 11bps -- bc WMT has to pay for its higher labor costs somehow (i.e. its vendors). But in the end WMT deleveraged flat revenue to an EPS decline of 6.9%.

3. URBN CEO Stock Sale. When the CEO of a company's namesake brand sells $2.2mm worth of stock two weeks before a quarter ends (tax planning or not), it usually makes sense to follow. Tad Marlow sold 50,000 shares of URBN four weeks ago at a price that's nearly 25% above where the rest of us can sell today. 

4. URBN, Time To Revisit? No. The juxtaposition of one of the best management teams in the business missing earnings significantly two times in three quarters after carefully setting out on a multi-year merchandising and distribution plan to rejuvinate the company is something that's tough to get over. It's now back to basics here for us. What's the REAL addressable market for each concept, how has the competitive landscape changed, and how much capital is needed to capture that growth? All in, there's no reason to think that those high-teens EBIT margins of old are 'owed' to URBN. This might be the new normal. At least, that's what we're going with until our research changes. 

5. Does TJX Ever Mess Up? The company beat on comp AND on merchandising margin despite the impact of foreign exchange. It's one of a small number of companies that beat expectations in the face of FX (Nike and Kate Spade also bucked the trend). The company kept guidance in tact for the year, but it sounds like a sandbag to us. 

6. DKS Buying Opportunity? Today's sell-off is interesting to us. We've almost never liked this story -- ever. But at the company's analyst meeting last month it talked down growth and margin expectations to a level that we thing is solidly beatable. Today management talked down the near-term recapture of margin lost last year when its golf and hunting business went into the tank. We don't buy it. If anything, there will be less margin because the company will reinvest in growth. We'll have more detailed comments out later. But this one wins the 'most interesting stock of the day' award for us.

KSS Trying To Sneak One Past The Goalie? There is a lot going on in retail land today, so maybe KSS thought this release would slip through, but we have to scratch our heads and wonder what a KSS off-price concept would look like. To have an 'off price' concept, you need steady access to high quality brands to consistently offer the perception of great deals to your consumer. KSS is capable of none of this. The retailer just simply doesn't have the brands or the content to support an off-price concept. Yes, it's a test, but if M Backstage is indicative of an ugly department store environment, KSS Off Aisle is a nail in the coffin.

KSS - New Concept 'Off Aisle' by KOHL'S in NJ

(http://www.trademarkia.com/off-aisle-by-kohls-86564609.html>

 

  

RETAIL EARNINGS OBSERVATIONS: 5/19 - 5 19 chart1

 

RETAIL EARNINGS OBSERVATIONS: 5/19 - 5 19 chart3

 

RETAIL EARNINGS OBSERVATIONS: 5/19 - 5 19 chart4

 

RETAIL EARNINGS OBSERVATIONS: 5/19 - 5 19 chart5

 

EVENTS TO WATCH

RETAIL EARNINGS OBSERVATIONS: 5/19 - 5 19 chart2

 

 

ICSC Chain Store Sales

This morning’s ICSC sales index (80 general merchandise retailers) sharply decelerated. People will look at the 1-year trend which was +2.3% vs +2.1% last week. But the 2-year put up the sharpest decline that we’ve seen since the first week of January. 

RETAIL EARNINGS OBSERVATIONS: 5/19 - 5 19 chart6


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.57%

This Is the Currency War

Takeaway: In case you weren’t sure, this is the Currency War.

It was just a matter of time… another big league centrally planned market morning, worldwide #enjoy

This Is the Currency War - currency wars

 

The Eurocrats returned with a bang this morning. Forget the Italian (Mario Draghi) … They brought in the lefty French economist (Benoit Coeure) from L’Ecole Polytechnique and the Paris Club de creditors to devalue the Euro and “front-load QE” to this month and next.

 

In case you weren’t sure, this is the Currency War. And unless you have the timing of each incremental "easing" it's tough to risk manage. Meanwhile, the EUR/USD is right back down to the low-end of my $1.10-1.14 risk range on that. Correlation trades in motion (USD up, Commodities down)

 

Of course, omnipotent ECB central planners did not like the non-centrally-planned move in Euro Bond yields, hence the intervention this morning. The German 10yr yield is down to 0.61% on the news.

 

Not to be outdone by the Europeans, the Chinese were at it again overnight, “easing requirements for corporate bond issuance.” The Shanghai Composite Casino? It loved that, jumping over +3% to almost +37% YTD as growth there continues to slow and freak out the People's Bank of China (PBOC). 

 

As I wrote earlier today, “With both the European and Chinese economies now slowing, at the same time, there is only one play in their gravity-smoothing playbook for that: Must ease, faster.

 

More to be revealed.

*  *  *  *  *  *  *  

 

Editor's Note: This is an excerpt from Hedgeye morning research. Click here for more information on what we offer and how you can become a subscriber.


VIDEO | Darius Dale Walks Through The Hedgeye Macro Playbook

The Hedgeye Macro Playbook is a periodic, deep-dive update to our active Macro Themes and Thematic Investment Conclusions.

 

Watch Darius Dale walk through the latest updates below.

 

CLICK HERE to download the associated presentation in PDF format (25 slides).

 

CLICK HERE to download the latest refresh of our Tactical Asset Class Rotation Model (32 slides).

 

As always, feel free to ping us with any follow-up questions.

 

Enjoy the rest of your respective days,

 

DD

 

Darius Dale

Associate


Keith's Macro Notebook 5/19: Euro | 10YR | China

 

Hedgeye Macro Analyst Darius Dale shares the top three things in CEO Keith McCullough's macro notebook this morning.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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