USD, Commodities and Restaurant Sales

Client Talking Points


To get things like Oil prices and PPI (producer prices) up year-over-year, what the Fed actually needs to do is devalue the Dollar and start talking up no-rate-hike. In other words, the bull case for stocks, commodities, and bonds is #SlowerForLonger. The U.S. Dollar Index  was down -1.4% last week (down -4.5% in the last 3 months), the immediate-term risk range is 94.01-95.98.


The CRB index is up +0.4% week-over-week (+4.1% in the last 3 months). We generally regard changes in commodity prices on the margin as having meaningful consumption implications. WTI Oil was up +1.4% week-over-week (+14.7% in the last 3 months) and Gold was up +1.0% week-over-week (+2.2% in the last 3 months).


Same-restaurant sales retracted to +1.1% and same-restaurant traffic decreased -2.3% both down 80 basis points sequentially. Traditionally, strong employment trends would suggest a healthy sales environment for restaurant operators. There continues to be a clear divergence between improvement in the employment data and same-store sales and traffic trends for the industry.    

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Penn National Gaming will likely tee off on the bears with a strong Q2, upward 2015/2016 EPS revisions, and the start of a 2 year growth period. PENN’s stock has climbed 27% this year on stabilizing regional gaming revenues, transaction-fueled optimism (real estate) surrounding the regional gaming companies and proximity to the opening of the new Plainridge racino on June 24. So what will drive even more upside? More and better. We think regional gaming trends are even better than anticipated by the Street and Q2 earnings should be a solid beat even before Plainridge contributes.


Housing outperformed in the latest week alongside choppy price action in equities and further, extraordinary volatility in sovereign bond markets.  Fundamental data was light with weekly purchase applications data from the MBA the lone release of import for the industry.  The first, high-frequency update on purchase demand in June, however, was positive. Purchase demand rose +9.7% sequentially, taking the index to its strongest level in 2 years at reading of 214.3. On a year-over-year basis, growth accelerated for a  4th consecutive week to +14.6%. Inclusive of last weeks gain, demand in 2Q is tracking +14.3% QoQ and +13.4% YoY.


The market has been jockeying for positioning in front of next week’s policy statement from Janet Yellen. We believe Yellen signaling that she remains “data dependent” (i.e. repeats what she said at the March 18thmeeting) is the most probable outcome. To be clear, we remain the long-bond bulls (TLT, EDV, MUB). With that being said we aren’t claiming to be able to predict the outcome of next week’s meeting (sure we do have biases). What we do know is that Hedgeye estimates for growth and inflation shake out much lower against both consensus and central bank forecasts for the full year 2015 (remember that this is after their forecasts have already been downwardly revised).

Three for the Road


Top Private Investor Buddy Carter Talks Process, Market Volatility and Ranges with Keith McCullough… via @hedgeye



Vision without execution is hallucination.

Thomas Edison


According to a study published in the journal BMC Public Health, the average American is 33 pounds heavier than the average Frenchman, 40 pounds heavier than the average Japanese citizen, and 70 pounds heavier than the average citizen of Bangladesh.

RH – This Convert is Pure Offense

Takeaway: The convert takes RH from net debt to net cash, and funds new concepts as well as sourcing/vendor base as the growth plan plays out.


We weren’t expecting to get hit with a press release from RH this morning about another convert offering. But it makes all the sense in the world.  As we’ve stated many times, this is kind of transformative and disruptive growth story that comes along maybe once every decade in retail. But growth does not come cheap. While the company is on the cusp of being cash flow positive, the market is presenting an opportunity – with the stock 5% from its all-time high – to lock up funding for new concepts should they test well. This deal also completely wipes out RH’s net debt position. Simply put, you don’t see great retail concepts with net debt. Now you don’t see it at RH either.


While it might seem extremely similar to the convert RH executed last summer, the intent is very different. A few considerations…


  1. Last year’s deal, which netted RH $350mm in cash and becomes dilutive after the stock hits $172, was rather defensive. Yes, RH did it when the stock was near all-time highs (like today), but there was an interesting dynamic at play.
  2. Specifically, RH was starting to sign leases beyond 3Q16, which was the exact time that its credit facility expired. The bear case therefore was that RH was building bigger stores, and signing leases past the point where it had guaranteed financing. If we were to go into a recession, then the company would be on the hook for the leases without financial backing. That’s the ‘doomsday scenario’ that RH’s last deal pretty much blew out of the water.
  3. This time around, RH is securing the capital it might need if it chooses to expand more rapidly on concepts like RH Modern, and what’s likely another half dozen that are in the works.  This is pure offense.
  4. To be clear, this is not just so RH could have capital to build out stores. That’s the least of our worries, actually. Landlords are bending over backwards to get RH as a tenant. Specifically, this capital gives RH the capital to ensure an appropriate build out of its sourcing organization and vendor network – which we think is critical to the company achieving it’s long-term plan.


06/11/15 10:48 PM EDT

RH - The Story Never Looked Better


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



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



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 – This Convert is Pure Offense - 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 – This Convert is Pure Offense - 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 – This Convert is Pure Offense - 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.

LEISURE LETTER (06/15/2015)



CCL- Announced it has signed a multi-billion dollar contract to build four next-generation cruise ships (total capacity of 6,600 guests, feature more than 5,000 lower berths, exceed 180,000 gross tons). The contract with Meyer Werft is part of larger previously announced strategic memo of understanding with leading shipbuilders Meyer Werft and Fincantieri S.p.A for nine new ship orders between 2019 and 2022.  The ships will be the first in the cruise industry to be powered at sea by Liquefied Natural Gas (LNG).

  • Two of the ships will be manufactured for AIDA Cruises at Meyer Werft's shipyard in Papenburg, Germany.
  • CCL CEO Arnold Donald said the contract is consistent with the company's measured capacity growth strategy to replace ships with less efficient capacity with newer, larger and more fuel efficient vessels over time.

Takeaway: These ships are enormous - CCL taking a page out of RCL's playbook on ship size. Let's hope there is enough demand in Europe by the time these ships are done. 


RCL- Royal Caribbean to begin 5-day WOW Sale with up to $200 onboard credit & 50% reduced deposit.  The WOW sale is valid on all sailings departing on or after July 13, 2015, excluding China departures.

  • 5 nights or less
    • $50 onboard credit (per stateroom) & 50% reduced deposit
  • 6-9 nights
    • $100 onboard credit (per stateroom) & 50% reduced deposit
  • 10 nights or longer
    • $200 onboard credit (per stateroom) & 50% reduced deposit



NCLH – Four extra amenities on 3-to-16-night voyages can be booked through July 31. Depending on the stateroom category, guests can select one to four extra perks: a free Ultimate Beverage Package, a free Ultimate Dining Package, $75 per stateroom shore excursion credit for each port, or a 250-minute WiFi package. These offers are in addition to Friends & Family Sail Free, in which the third through eighth guest in each stateroom sails at no cost. 




Paul Gaguin- Paul Gaguin Cruises has sold one of its two ships,Tere Moana, after less than three years in its fleet. The 88-passenger vessel, formerly Ponant's Le Levant, joined the Tahiti-based cruise in December 2012 after a renovation. According to a report by Seatrade, the ship was acquired by Boston-based Grand Circle Travel. 




MGM -  MGM chief Murren sees no new hotel-casinos on the strip for now. “It’s not my expectation during my career here that we will build another casino resort in Las Vegas,” said Murren. 





Industry News


Indiana - A second year of failing to meet target revenue for the state spurred the Hoosier Lottery Commission on Friday to restructure its contract with GTECH Indiana and substantially reduce the goals the company originally promised to meet in the 2012 bidding process.

  • The private vendor also agreed to lower its annual management fee and give the state a one-time lump-sum payment of $18.25 million.

  • GTECH's new minimum goal for fiscal year 2016 is $270 million, with an extra incentive goal of $290 million. By comparison, under the original agreement, the goal for fiscal year 2015 was $320 million and fiscal year 2016 was $365 million.

  • Last year about $251 million in lottery revenue was sent to state government. This year the number is expected to drop to $243 million. And that is after GTECH pays a $16 million shortfall payment for not meeting goals. 


 Takeaway: Like Illinois, Indiana has also underperformed in lottery sales. A restructuring agreement with GTECH was expected.


Oregon - Over the past year, the state has been replacing its old video lottery terminals with new state-of-the-art machines.  Since the new machines began going in, lottery revenues climbed 10%.  The plan is to replace all 12,000 old terminals by the end of next year.

LEISURE LETTER (06/15/2015) - oregon lottery sales



Takeaway: Oregon VLT phase 2 could be already under way. Good news for the suppliers.


Missouri - The state lottery reported that proceeds increased over the previous fiscal year. Today’s final transfer of $25,258,803 brings FY15 proceeds to $270,701,018, the third highest ever. 




Maryland - Maryland's five casinos have asked the state to let them reduce required payouts on slot machines — a move that could shift tens of millions of dollars in winnings from customers to the casinos, state records show.  Under the proposal, the state would relax a requirement that each casino must pay out an average of 90% to 95% of the money bet at its machines over the course of a year.  The casinos want to lower the minimum payout to 85%. 



Atlantic City SS Revs: +4.35% YoY


Saipan - Imperial Pacific International Holdings Ltd, a company that has pledged to spend as much as US$7 billion on a casino resort on the Pacific island of Saipan (pictured), said in a Friday filing that it would launch and operate a “temporary casino” there in the third quarter.





China - Stock market gains in China has created an extra one million millionaires, according to the Global Wealth Report. 




Singapore - Unemployment rate falls to 1.8% in Q1 from 1.9% in Q4 2014. 


Hedgeye Macro Team remains negative on 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.

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 80.47%
  • SHORT SIGNALS 78.70%

May Restaurant Sales Not Tracking With Improved Employment Trends

Takeaway: Same-restaurant sales retracted to +1.1% and same-restaurant traffic decreased -2.3% both down 80 basis points sequentially

Traditionally, strong employment trends would suggest a healthy sales environment for restaurant operators.  There continues to be a clear divergence between improvement in the employment data and same-store sales and traffic trends for the industry.    


Black Box Sales, Traffic

Black Box released same-restaurant sales and traffic estimates for the month of May last week that showed a slight deceleration versus an improved April. Same-restaurant sales retracted to +1.1% and same-restaurant traffic decreased -2.3% both down 80 basis points sequentially, and down 60 bps each on a 2-year basis.


May Restaurant Sales Not Tracking With Improved Employment Trends - CHART 1 

May Restaurant Sales Not Tracking With Improved Employment Trends - Chart 2 


It appears that restaurants are continuing to raise prices despite declining commodity prices. While this is a short term benefit to margins, long term it is testing the elasticity of their customers.  As you can see from the chart below, there is a clear divergence between the operators taking price and a decline in traffic.

May Restaurant Sales Not Tracking With Improved Employment Trends - CHART 3 


Knapp May Sales Trends

Knapp reported that comparable restaurant sales in May 2015 for 5 weeks were +0.9% for same-store sales and -2.0% for guest counts.  This represents a -10 and -40 basis point sequential slowdown respectively for the month.  On a 2-year basis, sales slowed to +0.1% and traffic down -2.0%. 


Strong Employment Data in All Age Groups

All age groups had positive employment growth during the month, highlighted by the 25-34 YOA group up 3.42%. As predicted last month, the sequential improvement seen in April in the 20-24 YOA group resulted in an impressive move to positive territory in May, up +0.75% versus last month down -0.22%. The older age groups 45-54 and 55-64 saw sequential deceleration of -8.9 and -90.3 bps respectively but still remain strong. These are very encouraging numbers for the restaurant industry, and we hope to see this trend continue through the summer.


May Employment Growth Data:

  • 20-24 YOA +0.75% YoY; +96.1 bps sequentially
  • 25-34 YOA +3.42% YoY; +24.9 bps sequentially
  • 35-44 YOA +0.77% YoY; +25.4 bps sequentially
  • 45-54 YOA +0.27% YoY; -8.9 bps sequentially
  • 55-64 YOA +2.61% YoY; -90.3 bps sequentially


May Restaurant Sales Not Tracking With Improved Employment Trends - CHART 4 


Takeaway: Bad number off of easy comp


We continue to like the Macau stocks – on the short side. After some signs of stability recently, the month of May looks more like an anomaly and not the trend. When the month ends, June should prove trendy, that is, more consistent with Macau’s 15 month long sequential slide than May’s respite. We’re now predicting a YoY decline of 33-36%, down 3% from our forecast last week. This past week was supposed to be an easy comp.


More important than just the weekly slide, the bigger concern for us is the degradation in the high margin base mass segment.  The disparity from Street expectations may be wider and worse in the base mass segment than any other which should have an outsized impact on estimates going forward. Indeed, we remain well below Street EBITDA estimates for 2015 and especially 2016 for all of the Macau operators, particularly for the base mass leader LVS.


Please see our detailed note:

CHART OF THE DAY: Classic Wall Street Back-End Loading

Editor's Note: This is a chart and excerpt from today's morning note written by Hedgeye CEO Keith McCullough. Click here to learn more and how you can become a subscriber.


...As you can see in the Chart of the Day, after the Old Wall and its media got blindsided by the Q1 earnings season (smoked in January) it proceeded to cut earnings estimates for the 1st half of 2015. In the 2nd half (and 2016) it’s right back to rainbows and puppy dogs.


CHART OF THE DAY: Classic Wall Street Back-End Loading - Chart of the Day

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