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BABA: Tactical Cover

Takeaway: We didn’t want to stay short this print, and beta has given us a decent exit point. Long-term bearish thesis remains the same.

KEY POINTS

  1. F1Q16 = LOW HURDLE: We’re specifically referring to the China Retail segment, where consensus is looking for 31% y/y growth vs. 39% in F4Q15.  We wouldn’t call this undue sell-side conservatism, but rather just stale estimates following the F3Q15 blow-up when consensus slashed estimates for the subsequent two quarters.  That said, BABA doesn’t need much to beat F1Q16 estimates, and with all the noise around the sell-off in Chinese stocks, we could see a relief rally on a good print.
  2. SETUP GETS WORSE THEREAFTER:  Consensus is assuming China Retail revenue growth accelerates on a y/y basis through the end of F2016, and those estimates may climb following the F1Q16 release.  GMV growth is naturally slowing, and being exacerbated by the influx of a weaker consumer, while sputtering Tmall Mix shift is pressuring commission growth.  That said, to produce accelerating revenue growth in China Retail, BABA will need accelerating y/y growth in Marketing take-rates, which will a major challenge.
  3. THE MOBILE DEBATE:  The bull case is that mobile take-rates will ascend to desktop levels.  Our bear case is that one grows at the expense of the other, and the two will most likely converge rather than meet up top.  Reason being is that we attribute the rise in mobile take-rates to rise in mobile user mix since the bulk of China Retail revenue comes from Marketing, and most of that is CPC.  That said, Mobile traffic is already breaching 80% of total traffic, so that mix shift effect is ultimately capped moving forward.  For more detail, see the note below.

 

BABA: The Mobile Debate

03/04/15 10:34 AM EST

[click here]

 

Let us know If you have any questions or would like to discuss in more detail.

 

Hesham Shaaban, CFA

@HedgeyeInternet


July 16, 2015

July 16, 2015 - Screen Shot 2015 07 16 at 8.17.33 AM


The Macro Show Replay | July 16, 2015

 


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LIVE at 1:00PM ET | IS CONSENSUS RIGHT ON CHINA?

WATCH THE REPLAY BELOW.


Today, July 16th at 1:00PM ET, we invite you to join us live for a conference call on China. Led by senior macro analyst Darius Dale, the call will detail our revised outlook for the Chinese economy, our expectations for monetary and fiscal policy, as well as the associated investment implications.

 

KEY DISCUSSION TOPICS:

  • Correction or Collapse?: Does the recent plunge in Chinese share prices represent an attractive buying opportunity (as several major sell-side and buy-side firms have suggested) or is it a harbinger of another leg down in the Chinese economy and a bearish phase transition across Chinese financial markets?  
  • Asset Class “Re-rotation” Risk: Our analysis is showing nascent signs of recovery throughout China’s real estate market. Will a continued positive inflection bode poorly for Chinese stocks?
  • Renminbi Internationalization Impact: What impact, if any, will China’s push to make the CNY an international reserve currency have on the country’s financial markets and how will the recent crash in Chinese equities impact this drive?

 

CALL DETAILS:

  • U.S. Toll Free:
  • U.S. Toll:
  • Confirmation Number: 13614418
  • Materials: CLICK HERE

 

As always, our prepared remarks will be followed by a live, anonymous Q&A session. Please submit your questions to .

 

Also, for those of you who cannot join us live, we will be distributing a replay video of the call shortly after it concludes.

 

Kind regards,

 

The Hedgeye Macro Team

 

,chart2>

 


JUST CHARTS | BWLD | SHORT

BWLD is moving to the Hedgeye Restaurant Ideas List as a SHORT. 


COMPANY OVERVIEW

Following the 1Q15 EPS miss, it’s now a back end loaded year.  The company missed by $0.11 in 1Q15 and the street has now reduced estimated by $0.15-$0.20 for 2015.  Is there another round of estimate cuts to come?  At this point it looks like the street estimates are $0.20 too high for 2015.

 

JUST CHARTS | BWLD | SHORT - BWLD CHART 1

 

PRICE PERFORMANCE

BWLD is down 6.8% year-to-date, versus the average casual dining stock up 7.5%.  Year-to-date BWLD is the worst performing restaurant stock we follow that is not considered broken.  As of last night’s close, the stock has recovered $8 of the $24 it lost following the 1Q15 earnings miss.

 

JUST CHARTS | BWLD | SHORT - BWLD CHART 2 Replace

 

SAME-STORE SALES

After stringing together 17 straight quarters of positive sales and traffic BWLD is experiencing a significant sales slowdown.  In 2Q15 we estimate that BWLD’s “Gap to Knapp” will shrink 220 bps to 2.0%, the lowest level since 2Q11. 

 

What is causing the slowdown in BWLD sales trends? 

    

JUST CHARTS | BWLD | SHORT - BWLD CHART 3 

 

Has BWLD been too aggressive raising prices over the last 4 years?  Since 2Q11 BWLD has been running annual increases of 3% every quarter.

 

JUST CHARTS | BWLD | SHORT - BWLD CHART 4 

 

No concept has the ability to take significant price increases over a long period of time and not face a slowdown in traffic.  

 

JUST CHARTS | BWLD | SHORT - BWLD CHART 5 

 

In 2Q15 the price/mix for BWLD will be 0%!  This will be the first time since 2Q13 that this metric is flat or negative. 

 

WHERE IS THE LABOR LEVERAGE?

In 2014, BWLD added about 100bps in labor costs to roll out its Guest Captain experience in the stores.  The biggest increases to labor costs were seen in 2Q14 & 3Q14.  Ironically, beginning in 4Q14 the company has not been able to make the consensus EPS estimates, despite seeing acceleration in same-store sales trends.  While wing prices have increased over the same time, that issue should not have been a surprise.     

 

Looking at the trends for 2Q15, if the Guest Captain initiative is a driver of incremental traffic, why are same-store (traffic/mix) slowing?  Going forward, if BWLD has limited pricing flexibility and same-store sales are slowing it will be very difficult to leverage labor costs.

 

RESTAURANT LEVEL MARGINS

If same-store sales are slowing can the company leverage the incremental labor costs running in the P&L?  Therefore, the recovery in restaurant level margins in the 2H15 and 2016 look unlikely. 

 

JUST CHARTS | BWLD | SHORT - BWLD CHART 6

 

OPERATING MARGIN

To offset some of the pressure on restaurant level margins BWLD management needs to get aggressive in cutting G&A to limit the damage to the EPS line.

 

JUST CHARTS | BWLD | SHORT - BWLD CHART 7

 

EARNINGS ESTIMATES

Estimates for BWLD FY15 have been coming down, but they still seem aggressive.  The EPS recovery story in 2H15 will likely not materialize. 

 

JUST CHARTS | BWLD | SHORT - BWLD CHART 8 

 

VALUATION

BWLD looks to offer good value relative to others in the space, but with estimates too high, the cheap valuation can be deceiving.

 

JUST CHARTS | BWLD | SHORT - BWLD CHART 9

 

SHORT INTEREST

At 11.59% of the float, BWLD’s short interest is higher than most casual dining companies.

 

JUST CHARTS | BWLD | SHORT - BWLD CHART 10

 

SELL-SIDE SENTIMENT

Sentiment is very positive on the company with 61% of the analysts having BUY ratings.  This bias is reflected in the consensus estimates for a recovery in profitability which is unlikely to happen.

 

JUST CHARTS | BWLD | SHORT - BWLD CHART 11

 

HEDGEYE RESTAURANTS IDEAS LIST


JUST CHARTS | BWLD | SHORT - BWLD CHART 12


June Restaurant Sales and Employment Trends

Black Box Sales, Traffic

Black Box released same-restaurant sales and traffic estimates for the month of June last week that showed a strong acceleration versus a weak performance in the month of May. Same-restaurant sales grew to +2.1% up 100 basis points (bps) sequentially, and 200 bps YoY and same-restaurant traffic decreased -1.5%, an 80 bps sequential improvement, and up 20 bps YoY.

 

June Restaurant Sales and Employment Trends - June Chart 1

June Restaurant Sales and Employment Trends - June 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. In June there is a minor uptick in traffic, and it will be interesting to see if this negative trend continues to reverse.

June Restaurant Sales and Employment Trends - June Chart 3

 

Knapp June Sales Trends

Knapp reported that comparable restaurant sales in June 2015 were +1.3% for same-store sales and -1.3% for guest counts.  This represents a +20 and +60 basis point sequential improvement, respectively, for the month.  On a 2-year basis, sales accelerated to +0.2% and traffic matched May’s 2-year average, down -2.0%. 

 

Employment Growth Slowing

The month of June was a mixed bag of results for employment. Employment growth continues to be largely attributable to the 25-34 YOA (+2.55%) and 55-64 YOA (+2.21%) which accounted for 39% and 34% of the growth, respectively. The downward trend is concerning, especially given that a large portion of the growth is in the 55-64 YOA cohort, with a considerable amount of that employment being part time.

 

 

June Employment Growth Data:

  • 20-24 YOA +1.07% YoY; +32.6 bps sequentially
  • 25-34 YOA +2.55% YoY; -86.1 bps sequentially
  • 35-44 YOA +1.04% YoY; +26.9 bps sequentially
  • 45-54 YOA -0.35% YoY; -62.5 bps sequentially
  • 55-64 YOA +2.21% YoY; -40.1 bps sequentially

 

June Restaurant Sales and Employment Trends - June Chart 4

 

Thoughts from our macro team on June Retail Sales

Sequential slowdown on the Headline # in June – we knew the headline would decelerate sequentially given the slowdown in auto sales off of 10Y highs in May but this was worse than expected.

 

Headline: Down -0.3% MoM and decelerating on both 1Y/2Y

 

Headline: ex-Autos & Gas: Down -0.2% MoM, decelerating YoY and flat sequentially on a 2Y basis

 

Notables:   

  • Gas:  Gas prices were up ~3% in June which translated to a +0.8% gain in Gas Station sales
  • Auto’s:  Auto’s & auto parts down -1.1% MoM.  Vehicle sales were down -3.5% to 17.1mm units in June – down from May’s gangbusters 17.7MM figure (a 10Y and post-recession high)… vehicles sales were out on 7/1 so we already knew this
  • Industry Momo: 9 of 13 Industries decelerated sequentially on a YoY basis
  • I/S:  We’ll get the I/S ratio’s a bit later but those continue to deteriorate with Inventories growing at a premium to sales

 

 

Words from our fearless leader (CEO) Keith McCullough on June Retail Sales

 

US Retail Sales “miss” (vs. sell side expectations) confirms our #LateCycle slowing view.

 


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