WWW- $40 in a Year

Takeaway: The core investment thesis is on track. EPS growth is accelerating which we think gets us a $40 stock in a year.

We have WWW on our Best Ideas list as a Long, and yesterday’s print played into our view.  The company beat our estimate by $0.03, which was already 20% ahead of consensus.  All that said, let’s not gloss over the fact that the growth algorithm (sales +2.7%, EBIT -6.7%, EPS -14.2%) was closer to ‘awful’ than ‘decent’. Not what we expect from this company longer-term. But that rate of change is why we think it's an interesting idea. As EPS growth goes from negative to 20%+, we think we'll be looking at 20x next year's $2.00, or $40 in 9-12 months (40% upside in a year) -- and then $48 a year later. 


The good news is that we’re seeing everything we need to support our thesis that EPS growth will accelerate meaningfully – effective immediately. This is in large part driven by better top line performance. One of the drivers is Merrell, which accounts for about 20% of the company, and only comped flat then up low single digits over the past two quarters. WWW changed up what had (unbeknownst to us) been toxic leadership inside the company. The fix should become apparent in numbers within two-quarters.


The International Story is On Track

But the bigger thing we like is the trajectory of the international agreements signed by WWW to sell PLG brands overseas, keeping in mind that only 5% of PLG sold overseas before the acquisition. People don’t give the company credit for this given that they don’t see the impact all at once. But the reality is that these agreements are cumulative in nature. Once a deal is signed, it takes a quarter or two to get set up with systems. Then the distributor markets product, which takes 1-2 quarters to build a book. Then the product needs to be manufactured, shipped, and received. That’s a 6-9 month process. Then, and only then, does WWW start to see revenue.


The point is that it could take upwards of 1.5-2 years from the time a deal is signed to actually show up as revenue.  The company started to sign these in earnest around 1Q13.  That means that the first of the deals – nevermind the subsequent 79 – just hit the top line in a meaningful way earlier this year.  We don’t think this is appropriately baked into guidance.

WWW- $40 in a Year - PLG cumulative intl rev


Aside from top-line, the area where we’re different from consensus is likely on the interest expense line. Given the cash flow characteristics, we have interest expense going to zero in four years – that’s about $0.30 per share off a $1.65 base this year. Pretty meaningful from where we sit.


One caveat is that WWW is highly likely to do another deal, and lever back up again while it scales the new brand over its infrastructure. We ordinarily don’t like deals. But the fact of the matter is that WWW is good at them, and has added meaningful value and steered shareholder capital in the right direction with almost every deal its ever done. To be clear, we don’t need a deal to make this stock work. In all likelihood it works with or without a transaction.

WWW- $40 in a Year - WWW earn table D

Slowing: Growth and Inflation

Client Talking Points


Has a chicken scratch down-day yesterday and is back up vs $1.09 EUR this morning – this is very deflationary, but anyone positioned for that from JUL (last year) to JAN (this year) knows that; bearish for multi-national revenue/eps growth too. 


Apple was not Google, and Industrials revenues are down 4% (earnings -8%) for Q2 reporting to-date. Most materials and energy (read: #Deflation risk) companies haven’t printed and guided to reality yet – stay tuned (and short Industrials = XLI).


Locally and globally, rates continue to make a series of lower-highs as sovereign bond market volatility calms (and dovish Fed rhetoric ramps) – long-term investors stayed with the Long Bond because they get growth/inflation slowing – people chasing charts, sold them (German 10yr = 0.76%, Swiss 10yr back to negative yield -0.01%, 10yr JGB down to 0.40%).


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Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The General continues to make tough calls as they work to further streamline their manufacturing footprint as part of Project Century. Last week, announcing the closure of two plants, one in West Chicago, IL and the other in Joplin, MO, eliminating approximately 620 positions in the process. West Chicago produced cereal and dry dinner products for the U.S. Retail organization, while the Joplin facility was acquired as part of the Annie’s acquisition and produced snacks. Because of union negotiations management is expecting these actions to be fully executed by fiscal 2019. We view this as a big positive for the company as they go to a more nimble asset light model, which will save on capex and allow it to be allocated to higher growth product platforms.


According to Gaming, Lodging and Leisure Sector Head Todd Jordan, additional state gaming agencies have reported revenues for the month of June. The good news here is that Penn National Gaming remains on track to beat second quarter estimates this Tuesday July 23rd. In addition, PENN will be hosting an investor day on July 24th. We will be there and communicate any noteworthy color and developments. Bottom line? The company remains one of our favorite names on the long side and boasts the best new unit growth story in domestic gaming.


After an awful retail sales print on Tuesday, the confluence of growth slowing data reared its ugly head Friday with a +0.1% year-over-year headline CPI print for June and a UofMich consumer sentiment reading that declined to 93.3 from 96.1 in May. Note that a +0.1% inflation rate is a heck of a long way from the Fed’s 2% target. These two prints were successful in taking the 10-Year Treasury yield down 10 basis points from Monday’s highs to finish the week at 2.35%. We remain one of the lonely bulls on Treasury bonds (bearish on yields) via TLT, EDV, VNQ.

Three for the Road


VIDEO (2mins): Gold vs. Central Bankers? … $GLD@KeithMcCullough


The significant problems we face cannot be solved at the same level of thinking we were at when we created them.

Albert Einstein


In more than 135 years of global temperature data, four of the five hottest months on record all happened in 2015: February, March, May, and now June.


The Macro Show Replay | July 22, 2015


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July 22, 2015

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CMG | Is a Friend to Investors not a Faux

Chipotle is on the Hedgeye Restaurants Best Ideas list as a LONG.


Chipotle (CMG) delivered an impressive 2Q15 when you digest the numbers and get past the same-store sales comp miss. Reported revenue was $1.20B missing slightly versus consensus estimates of $1.22B.  Same-store sales (SSS) were +4.3% missing consensus estimates of +5.8% by 150 basis points. The build-up of the comp consisted of +4% price, traffic was slightly negative at -0.3% but offset by +0.6% mix driven by catering and kids meals. Diligent management of cost of sales enabled management to deliver a bottom line beat with reported EPS of $4.45 versus consensus estimates of $4.43.


CMG maintained its full-year 2015 guidance for:

  1. Comps of low-to-mid-single digits
  2. Unit development of 190 to 205


Given current trends and the outlook for the balance of 2015 the current consensus estimate for EPS of $17.34 appears to be conservative. 


A few things that impacted the quarter:

  • Poor management of the labor schedule as teams work to integrate the new software caused a $0.16 impact to EPS in Q2. This is expected to be resolved through Q3 and by Q4 management expects to make up some of this headwind.
  • Regulatory calls for higher wages, CMG already pays above minimum wage, but to continue to maintain the high quality workforce, they need to stay above it.
  • Absence of carnitas is obviously still an issue but with a new supplier online CMG expects to have all restaurants loaded with pork by early Q4. No bounce back from carnitas has been included in company guidance, providing possibility of further upside.
  • Commodity inflation, Avocados sourced from California and Beef system-wide will add pressure to the cost of sales line item, but management is adamant to try to pass some of the cost onto the customers.


Although traffic was negative for the quarter management stated that it has turned positive in the low-single digit range in July. We continue to be encouraged by Chipotle’s continued robust growth driven by strong employees and one of the most loyal fan bases. The opportunistic share buyback program will continue to support this stock, as management steers it towards growth for many years to come.


Below is a look at CMG’s performance versus a year ago and consensus estimates for this quarter. Please note that green is positive performance, while red is negative performance.


CMG | Is a Friend to Investors not a Faux   - CHART1




Takeaway: Q2 is a wildcard for the stock but 2H 2015 and 2016 headwinds are stiff and valuation is high


For the first time in many quarters, for any Macau operator, we’re actually in line with Street EBITDA estimates for a quarter.  That’s the good news.  Lucky play on the Macau VIP tables could be a $30m contributor to EBITDA (3%) and is probably the reason we’re in line.  Not exactly bullish but it may be good enough.  We’re actually not sure how the stock will react to Wednesday’s Q2 earnings release.  However, we believe estimates are ultimately headed materially lower owing to declining [high margin] base mass, falling market share (already happening in July), too optimistic non-gaming expectations and a full valuation.


As you can see from the following chart, Hedgeye is very much in line with the Street for Q2 revenues and EBITDA.  It’s unclear whether high VIP hold in Macau is reflected in the Street estimates but it is in the Hedgeye projection.  Our projections are not much different than those laid out in our monthly Macau conference call on July 7th.




We don’t have a specific call on the stock action immediately following the Q2 release but do believe the stock is ultimately headed lower. Here are the push and pulls for Wednesday night:

  • Dividend – The odds are pretty high and seem to be priced in that there will be no change in the dividend policy.  Any softening of management’s tone regarding protection of the dividend would be a huge negative for the stock.
  • High hold % – We know LVS held high at Sands Macau, Four Seasons, and Sands Cotai Central.  It’s unclear whether high hold is reflected in consensus.  In our model, we’re projecting a $30m positive contribution from good luck (3% of overall EBITDA).  Gaming stocks will sometimes trade up on a meet or beat even if it is related to luck, but that is usually short-lived.
  • Base Mass – Another significantly down quarter in this segment should force down 2015 and 2016 estimates given the high margins in this area.
  • Non-gaming - The Street pays little attention to non-gaming revenues as Macau is seen as a gaming market. However, RevPAR and other non-gaming revenues are headed materially lower, much of which will drop to the bottom line. At some point, the analysts' models will have to reflect that.
  • MBS – We’re slightly higher than the Street on EBITDA from the Singapore property but this property is always a difficult one to model.
  • Forward commentary  – While management may positively spin some of the government signals of late, the data suggest July is not a good month for the market, nor is it good for LVS.  How much of LVS’s 2%+ share loss vs trend is due to new competition from Galaxy Phase 2 and how much is hold related?  Phase 2 does seem to be ramping, at the expense of the market, and it is targeted at LVS’s core segments.

2015/2016 OUTLOOK

While our Q2 estimates are consistent with the Street, we remain well below for 2015 and 2016 as shown in the chart below.  Our primary concern remains the trend in Base Mass – the highest margin segment - that appears to be eroding faster than the Street expects.  Our analysis of average minimum table bet levels (see our most recent analysis, “MORE MACAU PRICE CUTTING” on July 10th) shows more elevated minimum bet cuts for Base Mass than even Premium Mass.




The following chart shows the breakdown of Mass between Premium and Base for the last several quarters for Sands China.  Following a flattish Q4, Base Mass revenues began to fall YoY in Q1, 2 quarters behind the first Premium Mass decline.  We believe Base Mass will continue to decline, possibly throughout 2016 which will have significant margin and EBITDA ramifications.




Moreover, we think LVS market share is at risk.  Following a few hold-aided months, market share appears to be headed south.  At 22.0%, LVS’s market share is tracking 220bps below recent trend during July month to date.  Galaxy Phase 2 has not grown the market and appears poised to continue to steal share, much of it from LVS.  Supply growth over the next 2 years will be aimed squarely at LVS’s Base Mass segment.  The hotel segment and other non-gaming should also be a drag on YoY profitability with room supply peaking at ~25% next year in an already declining rate environment.  LVS is the most exposed operator to rooms.


Stock action on Thursday could go either way but the intermediate trend in the stock price should be lower. There are just too many headwinds for the Macau market in general and LVS in particular to justify a 13-14x EV/EBITDA multiple, at the high end of the historical range.

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