prev

TWTR: No Easy Fix

Takeaway: The problem with TWTR is the business model and expectations. Dorsey likely can't fix the former; managing the latter won't be much easier.

KEY POINTS

  1. COSTOLO STEPS DOWN: This was more a question of when, not if, although we are surprised that it happened so quickly into the year.  The street had been calling for Costello’s head on and off since its prior blow-up on the 3Q14 release.  TWTR is now conducting a search both externally and internally for its new CEO; there is no timetable set for when it will fill the role.
  2. DORSEY DOESN’T HAVE THE ANSWER: Interim CEO/co-founder Jack Dorsey suggested that there will no change in the company’s direction/strategy; likely because there is no easy fix.  The problem with TWTR is its business model and street expectations.  The Street demands perpetual upside in both revenues and MAUs, but those two factors that have historically been working against each other (see note below for more detail).  Ultimately, that is a recipe for disappointment; we doubt Dorsey can manage that dynamic any better than Costolo has.
  3. ASSESSING THE SETUP: The switch from Costolo to Dorsey has no bearing on our thesis.  However, we have been mulling the short since the 1Q15 release; largely because TWTR has rebased expectations with both the guidance cut and cautious 2Q MAU growth comments.  However, 2016 is around the corner, and the +50% advertising revenue growth that the street is expecting will be a tall order without a fundamental shift in its monetization strategy.  In short, we see one quarter of potential upside ahead of another potential blow-up 1-2 quarters later.  

 

TWTR: No Easy Fix - TWTR   2Q13 Supply Shock w detail

TWTR: No Easy Fix - TWTR   Ad vs. MAU 1Q15

TWTR: No Easy Fix - TWTR   Consensus Ad 2Q15

 

For more detail, see note below.  Let us know if you have any questions or would like to discuss.

 

TWTR: Rock and a Hard Place (1Q15)

04/29/15 08:15 AM EDT

[click here]

 

 

Hesham Shaaban, CFA

@HedgeyeInternet 


We the People

This note was originally published at 8am on May 29, 2015 for Hedgeye subscribers.

“Government spending is taxation.   When you look at this, I’ve never heard of a poor person spending himself into prosperity; let alone I’ve never heard of a poor person taxing himself into prosperity.”

-Arthur Laffer

 

Hedgeye Early Look reader and friend Governor George Pataki officially threw his hat in the ring last night for the Republican nomination for President.   The political punditry is by and large calling him the darkest of dark horses.   And who knows, maybe they are correct – Governor Pataki has been out of public for nine years, currently is not well funded, and is centrist among Republicans.

 

The reality remains, though, that the Republican is currently ripe for a new face.  Someone that is above the fray and perhaps, on some level, embodies the “disinterested statesmen” that was originally envisioned by the Founders as a key characteristic for the Presidency.  The Republican race also needs some plain talk and who better to offer it than a candidate that has little to lose.

 

As a Canadian citizen, I can’t actually vote, so I’m no danger to any of you partisans out there, but a more centrist Republican who is trying to push the party beyond social issues and hasn’t been directly involved in the massive buildup of the federal government over the past ten years will be appealing to some.  The central tenet in Pataki’s launch video is a focus on government as the problem.

 

Certainly, a lot of politicians and political candidates pay lip service to reducing the size of the government, while few actually follow through.  If there were ever a time for follow through it is 2016, a year in which the federal government’s spending will be over $4.0 trillion and government debt will accumulate to $23.5 trillion.  Undoubtedly one point that all of us can agree on is that governments are the most ineffective allocators of capital.

We the People - z debt

 

Back to the Global Macro Grind...

 

Staying with the theme of the Presidential race this morning, there is one big challenge facing Pataki or any Republican – Hillary Clinton.   In the race for the Democratic nomination, she has a staggering lead of 51 points in poll aggregates over the second nearest candidate Elizabeth Warren. Meanwhile versus the large Republican field, Clinton outpolls the top contenders by between 8 and 10 points.

 

So, what, if anything, can stop the Clinton coronation?  Well, as we touched on it a note a few weeks ago, there are a number of legitimate headwinds to a Clinton Presidency. The top four headwinds we see are outlined below:

 

1. The Clinton Foundation - This risk is the most topical right now given the current scrutiny the Foundation is receiving thanks to Peter Schweitzer’s book, “Clinton Cash: The Untold Story of How and why Foreign Governments and Businesses Helped Make Bill and Hillary Rich.” It is also very likely an issue that will not go away.  On some level, whether the Clintons acted ethically as it relates to the Foundation is irrelevant because there is enough fodder that it will allow Republicans to continue to keep the heat on the Foundation.  To the extent the scrutiny accelerates, the Foundation has the potential to become Clinton’s “Swift Boat” moment.
  

2. Likeability (and accessibility) – Since announcing her candidacy more than 45 days ago, Hillary has limited interaction with the press.   Whether this lack of accessibility is ultimately perceived as a lack of a common touch (think Hillary going into Chipotle wearing sunglasses and not leaving a tip) remains to be seen. However, her favorability has taken a steady decline since she left office as Secretary of State in February 2013.

 

3. Bill’s Gaffes – While there is no question that Bill Clinton is one of the most talented politicians of his generation, there is also no question he is (and maybe increasingly so) prone to putting his foot in his mouth. In today’s hyper-plugged in digital world, where no one is safe from a rogue iPhone recording a candidate’s every word, this may pose a delicate challenge for the former commander in chief. 

 

4. Benghazi (and general track record) – In aggregate, Hillary Clinton’s role as Secretary of State is regarded favorably and without much controversy with one big elephant-in-the-room exception – Benghazi.  This was of course the unfortunate turn of events that led to the deaths of U.S. Ambassador J. Christopher Stevens and three other Americans when the U.S. diplomatic mission in Benghazi, Libya was attacked.

 

We are going to reserve analysis of the events, but believe this will become a major thorn in her side, especially as it gets into the nitty-gritty of the campaign post the nominating conventions.   The downside of having a track record is that it can and will be scrutinized.  With the eventual planned releases her emails as Secretary of State, her record will be subject to accelerating scrutiny.

 

Certainly, if the election were held today, it is hard to argue that Clinton would likely win in a landslide.  But whether it is the emergence of a new Republican contender or a current front runner breaking from the pack, the polls will narrow into Election Day as they always do.

 

For Clinton specifically, as touched upon above, her favorability ratings continue to decline.  Currently based on poll aggregates, 47.8% view her unfavorable and 45.9% view her favorably.   These are her worst readings since 2009.

 

Make no mistake about it: there will be a race in 2016.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.98-2.20%

SPX 2107-2130

Nikkei 20091-20688

VIX 12.76-14.42

Oil (WTI) 57.01-61.35

Gold 1180-1205 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

We the People - z 05.29.15 chart


Keith's Daily Trading Ranges [Unlocked]

This is a complimentary look at today's Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers weekday mornings by CEO Keith McCullough. 

Click here to learn more and subscribe.

Keith's Daily Trading Ranges [Unlocked] - z dtr

 

BULLISH TRENDS

Keith's Daily Trading Ranges [Unlocked] - Slide2

Keith's Daily Trading Ranges [Unlocked] - Slide3

Keith's Daily Trading Ranges [Unlocked] - Slide4

Keith's Daily Trading Ranges [Unlocked] - Slide5

 Keith's Daily Trading Ranges [Unlocked] - Slide6

 

 

BEARISH TRENDS

Keith's Daily Trading Ranges [Unlocked] - Slide7

Keith's Daily Trading Ranges [Unlocked] - Slide8

Keith's Daily Trading Ranges [Unlocked] - Slide9

Keith's Daily Trading Ranges [Unlocked] - Slide10


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

June 12, 2015

June 12, 2015 - Slide1

 

BULLISH TRENDS

June 12, 2015 - Slide2

June 12, 2015 - Slide3

June 12, 2015 - Slide4

June 12, 2015 - Slide5

 June 12, 2015 - Slide6

 

 

BEARISH TRENDS

June 12, 2015 - Slide7

June 12, 2015 - Slide8

June 12, 2015 - Slide9

June 12, 2015 - Slide10


The Macro Show Replay | June 12, 2015

 

 

Watch the replay with guest analysis from Internet and Media Sector Head Hesham Shaaban. Hesham gave his updated thoughts on Twitter (TWTR) and CEO Dick Costolo stepping down.

 


RH - The Story Never Looked Better

Takeaway: We have never felt better about this story, and about management’s ability to profitably create growth that skeptics think does not exist.

Conclusion: We have never felt better about this story, and about management’s ability to profitably create growth that skeptics think does not exist.

 

DETAILS

This quarter is exactly what we were looking for from RH. The company put up a 15% comp – right in line with our model – and well above the 11% consensus. That flowed through to the bottom line with $0.23 in EPS, in line with our estimate, and 15% better than the Street.

 

In addition to the beat, we saw new store productivity get better on the margin, and management noted that Atlanta (about 6% of total square footage) is running ahead of expectations. Note that this had been a point of concern over the past quarter for many on the Street, as it is the first of the mega-galleries RH will be rolling out over the next few months. If Atlanta’s productivity was not cutting it, then we could see the reason for broader concern about the future. That issue is officially put to bed.

 

We like what the company did with guidance. It beat by $0.03, but took up the lower end of full year guidance by $0.07, and the top end by $0.05. At the same time, the company noted that there would be a meaningful ramp in 2H, and as such took down 2Q. Naturally, almost all of the questions we’ve gotten since the print revolve around 2Q guidance.

 

Let’s be clear about something…companies up and down the S&P and Russell are ‘conservatively’ guiding to down revenue, down margins and down earnings. With RH, not only did it take up guidance for the year – when it otherwise did not need to – but the mid-point of guidance for its worst quarter of the year calls for 15% revenue growth, improving new store productivity, and 23% earnings growth. That’s a pretty impressive algorithm in itself, especially given the fact that we start to see the benefit of new square footage growth in 2H15 as well as the impact of its new RH Modern concept.

 

The point here is that if the biggest thing people are worrying about is 2Q guidance, then we’ll take that any day given the fundamental setup that will likely allow RH to best its guidance while simultaneously staring at a meaningful 2H acceleration square in the face.

 

RH Modern: We think that most reports out this morning are likely to miss the mark on Modern. This is a lot more than a new category or concept for RH. We think it’s more like a classification. Think about it…everything that RH currently sells – whether it be Sofas, Chairs, Tables, Lighting, Flooring, Kitchen – that all falls under the traditional RH aesthetic. RH Modern, however, allows the company the opportunity to take every single category it sells, layer them over a new classification, and sell to a completely different customer.

 

If we have any concerns about this it will be the availability of retail space to sell the product – and the potential that RH takes space away from existing items to make room for RH Modern while it ramps up (which will take some time). Our sense, however, is that the stores will be getting bigger because the company will have the need for even more space. We’re going to follow up with another RH Black Book where we dive into the company’s real estate strategy in great detail. Expect that in the coming weeks.    

 

 

Here Are Some Of Our More Detailed Thoughts From Earlier this Week

 

06/09/15 05:16 PM EDT

RH – ROADMAP INTO THE PRINT

  

Takeaway: When a Consumer story is this explosive and disruptive, every quarter is an event. Fortunately, this story is very much on track.

 

Our team remains convinced that RH is one of the unique TAIL opportunities in Consumer/Retail as the company disrupts a large fragmented space of localized high-cost competitors, and changes the paradigm for how people shop for Home Furnishings. This is, at most, in the second inning and the types of changes we’ll see to product classification, consumer type, purchasing experience and ensuing financial characteristics are neither in Consumers’ sights, or Wall Street’s models.

 

When all is said and done, we still think that this company has $11 in earnings power 4-years out, which is nearly double the consensus. We remain convinced that the debate should not be ‘if or when’ the stock hits $115 (22% upside -- the highest sell-side price target out there), but rather when we all have to adjust estimates for last year’s convert, which becomes mildly dilutive at $172 (83% upside).  At that point, we’ll be looking at an earnings CAGR of 40-50% over five years. What kind of multiple does that deserve? 20x? 25x? 30x? We’d argue the higher end, but regardless, we’re talking a stock between $225 and $325. We won’t bicker which one it is with the stock at $94 today.

 

So there’s our TAIL call. And despite our confidence in where it’s headed long-term, we have to respect the near-term volatility in the market, and in particular, such dynamic transformational stories like RH. With all of that said, here’s a look at our key modeling assumptions for the quarter and the year, and more importantly, what can go wrong on Thursday after the close that might be a negative surprise to the market (i.e. let’s flesh it out now).

 

RH - The Story Never Looked Better - rh financials

 

What Could Go Wrong

 

1. Revenue Weakness. This is the obvious item for a high multiple controversial growth stock.  RH guided to revenue growth of 13-15% for the quarter. We’re at 16%. Considerations…

    • Furniture sales ticked down materially industry-wide in April, though actually accelerated to the upside on a 2-year basis throughout the quarter. WSM noted this as well – but its sales accelerated on a 2yr basis by 300bps in 1Q even with the slowdown. Adding back the $30mm from the port strike sales accelerated 560bps

RH - The Story Never Looked Better - retail furniture

 

2.  Management reset the topline bar when it issued guidance in March for FY15, and expectations look very conservative for both 1Q15 and the full year. 20% DTC growth (an almost 10 percentage point deceleration on the 2yr trend line sequentially) alone would support an 11% brand comp in the quarter, just a couple basis points shy of the current consensus numbers. The revenue backlog looked extremely positive headed out of 4Q14 with deferred revenue up 37% YY. In prior quarters deferred revenue has been a tightly correlated indicator of future growth.

 

RH - The Story Never Looked Better - rh def rev

 

3. Atlanta Opening. There has been so much negative noise around the new Atlanta Design Gallery, which opened in November. The source? None other than negative YELP reviews – all 8 of them. We actually couldn’t believe how many times we were asked about this. Maybe YELP is reliable to find a good cheeseburger for $12, but not for a $20,000 bedroom set at RH. Yes, it would be extremely negative if the company came out and said that Atlanta is a bust. But that is so highly unlikely. Think of the timing. It opened in November, then built local awareness for a few months, and did not really book any material revenue until 8-10 weeks later (i.e. March). As of 3-months ago, it had the second best opening of any store in the fleet. Things are highly unlikely to have turned so fast.  So…we flag this as a risk, but it’s not a big one.

 

4. Backlog. The West coast port slowdown and lower inventory position (sales growth was in excess of inventory growth in 4Q14) will mitigate the flow of the product back log in 1Q, but that’s already in consensus numbers. The $10mm - $12mm revenue push from 1Q15 to 2Q15 management guided to shaves 250-300bps off the top line in the quarter the company will report of Thursday. But, that is far less exaggerated than the 500-600bps revenue hit WSM experienced. That’s because a) 95% of RH’s business is cash and carry compared to WSM at less than ~50% and b) WSM relies much more on seasonal product which is much more dependent on inventory in-stock positions.

 

5. New Concepts – On the call, RH should give detail on the two new concepts that it has had in the hopper for the past year (two of many, we should add). If it does NOT, however, then the Street will be left wanting. It might also cost the company revenue in 2H, as these concepts have probably started to fuel expectations.  While the company didn’t officially say that it would unveil its two new lines on the 1Q call, the timing of the 2Q15 print (the company’s next officially scheduled opportunity to communicate with the street) doesn’t fall until early September. By that point it’s possible that the two source books scheduled for a Fall release will already be in homes. Thursday seems like the most logical time for the company to announce the new product coming down the pike.

 

6. The Biggest Loser. The Sourcebook that was just delivered weighed in at 6.5lbs, compared to 17lbs last year. That’s a huge improvement, particularly given that the Sourcebook was somewhat of a bust in 2Q14. That said, it also had twice the amount of product that we see in this year’s book. Is this the right formula? The company thinks so otherwise it would not have made the change. But the fact of the matter is that the Sourcebook remains a crutch for the company until its’ real estate profile is rightsized. Eventually, it won’t need it anymore. Until then, there will be hits and misses. Fortunately, this year we’re comping against a miss.

 

The Set-Up on the Top Line Improves as RH Exits 1Q.

  • 2Q15 – Benefit of at least $10 - $12mm (2.5 to 3 percentage points of growth) of demand push from 1Q to 2Q due to the West Coast port delays at the same time the company laps the change up in Source Book strategy which cost the company by our math $12mm - $18mm in sales last year. RH decoupled its Outdoor Source Book (the most seasonally important book from a timing perspective) from the big Source Book mailer (which arrived in our offices yesterday) to get the category refresh in front of the consumer a month earlier than last year.
  • 3Q15 – We’re modeling 3 new store openings in the quarter, 2 Full Line Design Galleries in Chicago and Denver and the re-opening of the Beverly Boulevard store in a new category/Baby & Child format after going dark when the Melrose Ave Design Gallery opened in 3Q14. That’s paired with the launch of 2 new categories. Expectations for the new lines are low as the company gains mind share, but any outperformance with the product launch could provide meaningful upside.
  • 4Q15 – 2 additional Full Line Design Gallery openings in Austin and Tampa with the benefit of the new square footage added in 3Q starting to be recognized on the P&L. The 8-12 week delivery window for new product means we will begin to see the real benefit of the square footage additions in 4Q. With additional upside opportunity from the 2 new category launches.

Margins – The company guided to 100-130bps of Operating Margin expansion for the year on 14-16% revenue growth mostly attributable to ad spend leverage with ‘modest’ Gross margin expansion. There are puts and takes on both line items by quarter, but the fact that the company feels so confident in its operating margin expansion for the year, the company actually walked consensus EBIT margin expectations by 40bps on 14-16% top line growth for the year when it released guidance in February, is a bullish set-up for the year assuming the company can deliver on the top line.

 

Additional details on 1Q15…

  • Gross Margin – We’re modeling 40bps of expansion driven by the price increases the company introduced when it released its Source Book in 2Q14. With DC occupancy pressure from the new West Coast distribution center and dead-rent for new stores opening in 2H partially offsetting the benefit. The West Coast port delays could drive additional shipping expense if product flow issues cause the company to make multiple in-home deliveries for multi-item orders.
  • SG&A – The ad savings benefit will not be realized until we get into 2Q15. Because catalog costs are capitalized and then amortized over a 12 month window, the commensurate costs associated with the 2Q14 Source book will land in 1Q15. Which means marketing spend will be elevated on a YY basis. We’re modeling SG&A growth slightly below sales growth after two quarters of deleverage in part because of the absence of pre-opening related marketing expenses for new Design Galleries.

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.

next