There will be a time Del Frisco’s Restaurant Group (DFRG) is a LONG, but for now we want to keep it on our bench as we wait for further evidence that management will make better capital allocation decisions.


At DFRG’s current market value, the Del Frisco Double Eagle segment accounts for ~74% of the market value.  The implications are that The Grille and Sullivan’s are destroying shareholder value.  Therefore, to create shareholder value from these levels significant changes must be made in the future capital deployment plans in those concepts.  Management hinted on today’s earnings call that changes might be coming, but the stock reflects zero confidence that management will make the right decisions.


There things management can do to regain investor confidence:

  1. Stop new unit growth of “The Grille” in 2016
  2. Close all underperforming stores
  3. Demonstrate confidence in the trajectory of “The Grille’s” average unit volumes


Hoping that management will see the need to make these changes is not reason enough to go LONG DFRG.


DFRG reported 2Q15 earnings this morning and it was overall a disappointing performance. Consolidated revenues increased 9.5% to $73.8 million but fell short of consensus estimates of $75.4 million. Comparable same-store sales (SSS) also missed across the board, Del Frisco’s Double Eagle reported +1.0% SSS versus consensus of +2.3%, showing a sequential slowdown over the last four quarters. Sullivan’s Steakhouse SSS decreased -3.0% versus a consensus estimate of +1.4%. And finally, Del Frisco’s Grille decreased -6.3% versus consensus estimates of -2.3%. Reported EPS was $0.16 versus consensus estimates of $0.19, further showing the current weakness across the business.


Del Frisco's Double Eagle 2-year trends are concerning, as they have decreased sequentially three quarters in a row.




Management’s reasons for poor performance were mostly blamed on external factors; weather affecting patio sales, Father’s Day shift, construction at NYC Double Eagle and conventions switching locations, among a few others. The Grille concept continues to struggle and we were hoping with the exit of Jeff Carcara, they would lessen their focus on the concept. For now their voiceover is the opposite, as they continue to sink capital into the Grille and Sullivan’s.


Recent restaurant development remains focused on the Del Frisco’s Grille concept, which just posted a  -6.3% comps. At the end of the second quarter DFRG opened a Del Frisco's Grille in The Woodlands, Texas. In the third quarter, they have already opened a Del Frisco's Grille in Plano, Texas and will be opening a Del Frisco's Grille in Stamford, Connecticut and a Del Frisco's Double Eagle Steak House in Orlando, Florida. The remaining three Del Frisco's Grille locations in Little Rock, Arkansas; Hoboken, New Jersey; and Cherry Creek, Colorado will open in the fourth quarter. Management also closed the Sullivan's Steakhouse in Denver, Colorado during the second quarter upon its lease expiration.


Management adjusted the outlook for the remainder of 2015 down, annual comparable same-store sales are now expected to be 0.5% to 1.5% down from previous estimates of 2% to 3%. Annual adjusted EPS growth between 5% and 9% versus previously projected 15% to 18%.


We remain hopefully in the underlying business and the strength of the Double Eagle concept. Management needs to get smarter about capital spending, deploying it where the best return for shareholders is created. Until we hear something along these lines we are not comfortable jumping in on the long side.


The stock market reaction to the earnings is overwhelmingly negative as it is currently trading down ~16%. We will continue to monitor the name from the sidelines as we wait for the right entry point.



Jobless Claims ... Party Like It's 1973?

Takeaway: Jobless claims hit their lowest level since 11/24/73. The labor market faces extreme resistance against improving much further from here.

Below is an excerpt from a research note analyzing this morning's initial claims data from Hedgeye analyst Josh Steiner. If you would like to setup a call with Josh or Jonathan or trial their research, please contact

*  *  *  *  *

Jobless Claims ... Party Like It's 1973? - z ccc

The chart above shows that seasonally adjusted initial claims just hit 255k, the lowest level in forty two years. The last time claims were lower was November 24, 1973, when the reading came in at 233k. While this exemplifies extreme strength in the labor market, it also represents a point of extreme resistance against claims going any lower.


We continue to point out that this party has an expiration date, which we estimate to be about five quarters from now.


In the last three cycles, once claims dipped below 330k they remained there for 24 months, 45 months, and 31 months, in the late 1980s, late 1990s/early 2000s, and 2006-2008 period, respectively before the economy went into recession. In the current cycle, claims have been below 330k for a little more than 16 months and counting. The average of these last three cycles is 33 months, which would translate to another ~5 quarters of track.

Cartoon of the Day: On a Wing and a Prayer...

Cartoon of the Day: On a Wing and a Prayer... - Bull   dove cartoon 06.26.2015

"Just wait until the next market move of down 10%. We haven't had one in almost 1,000 trading days," Hedgeye CEO Keith McCullough wrote recently. "Please, do not let the same people who blew you up at the 2000 and 2007 bubble tops do it again."


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Retail Callouts (7/23): UA, DKS, HIBB, WMT

Takeaway: UA - Killer growth is getting costly. DKS opens new concept in HIBB's backyard.


Link to full note: CLICK HERE


Takeaway: What’s hotter, Brand or cost structure? At some point, EPS has to grow. It will, but at 15x a best case EBITDA # 5-yrs out, timing matters.


Every headline out there today will talk about how UA is simply killing it – and it’s well-deserved. UA’s brand heat continues to roll full steam ahead, and the company is proving itself out to be one of the true generational growth stories in Consumer.


That said, we think it's more than fair to point out that Revenue growth is accelerating, but earnings growth is decelerating. In fact, this company has not grown earnings since 4Q14. When 2015 is said and done, we’re likely to see revenue, EBIT and EPS grow at 25%, 15%, and 10%, respectively. That’s not the kind of ‘World Class’ growth algorithm that we’d expect from a World Class Brand like UA.


We understand that the company is investing today in order to capitalize on (and create outright) growth opportunities tomorrow. We like when companies play offense like that. But at 75x earnings and 36x EBITDA, is it too much for us to expect that earnings grow faster than Wal-Mart? We don’t think so.


DKS, HIBB - DICK'S Opens Mobile, AL Store



This is the first 'All-American Sport Center' (which pairs a Dick's Sporting Goods and Field & Stream under one roof) concept that DKS will have opened and it's right in HIBB's backyard.  3 Hibbett stores fall within an average of a 10 mile drive of the new DKS location with an average drive time of just over 15 minutes.  It's just one store and one example, but we've seen an incredible overlap in competition over the past 15 years in this industry and we think that the regional competition gets even more difficult as DKS continues to fill out its Southern portfolio and Academy continues to push East. That's not good for HIBB where the 5,000 sq. ft. store and lack of e-commerce business doesn't come close to competing with the selection of a Dick's Sporting Goods or Academy.

Retail Callouts (7/23): UA, DKS, HIBB, WMT - 7 23 Sports locations 


WMT - Wal-Mart Is Ending Overnight Hours at Some Stores



At one point these 24 hour stores made a lot of sense, but now the internet solves at least a part of that. Probably a good move by WMT -- allowing the company to dedicate its resources to getting the in-stock and in store presentation closer to where it needs to be overnight, while chopping a little bit off cost out of the model to help pay for the minimum wage hikes and investment in e-commerce.


ICSC - Comps Decelerate, 12 More Weeks of Tough Compares


Takeaway: Sharp deceleration in the 2yr trend line, which is what we truly care about, over the past 3 weeks as retail laps tough compares through July. That continues through September and BTS.

Retail Callouts (7/23): UA, DKS, HIBB, WMT - 7 23 ICSC ytd trend

Retail Callouts (7/23): UA, DKS, HIBB, WMT - 7 23 ICSC yoy





JWN - Trunk Club to Enter Women’s



WMT - Walmart Acquires Remaining Shares to Take Full Ownership of Yihaodian e-Commerce Business in China



WMT - Walmart Opens New e-Commerce Fulfillment Center in Bethlehem, PA



WMT - Wal-Mart’s Mexican Profits Rise, Will Spend $800 Million in Bribery Case



HD - The Home Depot Announces Agreement to Acquire Interline Brands



M, AMZN - Report: Macy’s treads on Amazon’s turf



Takeaway: A big boost in Iranian crude exports is not likely until the middle of 2016 in a best-case scenario.

With all of the geopolitical hurdles that must be jumped, we expect a significant increase in crude exports to be delayed until early to mid-2016 at the earliest.


Below we outline the key catalysts to watch in the Iranian Nuclear Deal which was endorsed by the U.N. on Monday. Today Iran’s Minister of Industry, Mohammad Reza Nematzadeh, trumpeted a $185Bn investment target in oil and gas by 2020. While Iran’s energy resources are immense, the timetable and feasibility is uncertain at this point. With a myriad of undecipherable noise around the nuclear deal currently we hope to provide a more straightforward overview of the most important developments to watch:

  • Can Congress pass enough votes in the next ~50days to avoid a presidential veto (2/3rds majority)? Likely not.

Congress provides the statutory basis for most U.S. sanctions. However, the executive branch is the party responsible for interpretation and implementation. Most importantly, POTUS has the authority to waive all or some of any repealed measures from Congress.

In May, President Obama signed into law provisions for congressional review that place restrictions on his prerogative to waive sanctions. Under this law, the House and Senate foreign relations committees have 60 days to review the agreement. During this 60 day period, Obama cannot loosen sanctions. However, for Congress to derail an agreement, it would not only have to vote it down but muster a two-thirds majority to override a presidential veto.

  • If all goes smoothly, what will it take for Iran to prove to the IEAE (International Atomic Energy Association) that it has taken steps to reduce its stockpiles of fissile materials and centrifuges?

In 1974, Iran signed the IAEA Safeguards Agreement. Under the agreement, it promised to never become a nuclear-armed state. In the early 2000s, indications of work on Uranium enrichment renewed international concerns which started several rounds of initial sanctions from the U.N., EU, and U.S. attempting to block Iran’s access to the necessary materials needed to develop nuclear capabilities. The root of current Iranian Sanctions dates back to 2005 when the IAEA (International Atomic Energy Association), part of the U.N., found that Tehran was not compliant with its international obligations. The U.S., U.N., and EU have since hit Iran with a multitude of sanctions which have had crippling effects on Iran’s access to international capital. 

Some sanctions will be lifted if Iran can prove to the IAEA that it has taken steps to reduce its stockpiles of fissile materials and centrifuges. The beginning of this proving period won’t commence for at least several months.

  • When will Iranian crude potentially be released onto global markets?

In November of 2013, Iran and the P5+1 signed the JPA Agreement (joint plan of action) that provided some sanctions relief and access to $4.2Bn in previously frozen assets. Tehran agreed to limit uranium enrichment while permitting international inspectors to access geographical sites of interest.

This joint plan of action capped Iran’s crude exports at 1.1MM B/D (they are right at 1.1MM B/D in exports currently, down from 2.4MM B/D as recently as 2007).

Washington and Brussels will keep the terms of the JPA in effect until the IAEA has verified that Iran has followed through on an agreed-upon set of steps to limit its nuclear program, which, as mentioned, will likely come several months after the July 14 agreement.

Richard Nephew is the Program Director for Economic Statecraft, Sanctions and Energy Markets at the Center on Global Energy Policy at Columbia. He outlined the lengthy steps needed just for Iran to prove its compliance with the IAEA before most IOCs can even begin their capital plans in a REPORT  last week.

“First, the agreement involves an extensive procedure for ascertaining the support of home legislative and other legal bodies for it. In the US system, this will take at least 30-60 days as Congress will need to receive the text of the deal, hold hearings on it, and decide what to do.

Second, the implementation will itself take months. Iran’s list of nuclear steps is long, as is appropriate considering they are the party in need of building the most confidence. I’ve noted for a long time that removal and storage of centrifuges will be the long-pole in the timing tent, and nothing in the text contradicts this. Based on the schedule in the document, all of this work will not even start until after 90 days from today (the end of October) and it will take months from that point to fully execute the remaining changes to Iran’s nuclear program.

Third, sanctions relief itself will not flow until these nuclear steps are completed.”

  • Will Iran Change the incentive structure for IOCs to make the riskiness of fixed investment worthwhile? Even if IOCs take the plunge

The National Iranian Oil Company (NOIC) is responsible for all upstream oil and nat. gas projects. The Iranian constitution prohibits foreign or private ownership of natural resources. However, international oil companies can participate in the exploration and development phases through buyback contracts:

Here’s how it works currently…

An IOC puts up its own capital through an Iranian subsidiary (service-type contract).  After the project is developed and the field is producing, the projects operatorship refers back to NIOC or relevant subsidiary.  IOC gets no equity rights and NIOC uses oil and gas revs to pay back IOC for capital cost.  The annual repayment rates are set at a pre-determined percentage of the field’s production at a rate of return usually in the 12-17% range.


A quick look at global production will tell you that a surplus of crude oil is still coming out of the ground at an increasing rate globally. While a reversal in the USD from March to June and signs of declining U.S. production gave the market a psychological boost, much of the production increase has come from OPEC members, Iran included.  

Although Iranian exports are capped at 1.1MM B/D under current sanctions, Iranian crude production has increased by double digits YY and they have an estimated 20MM barrels in storage, ready to release onto the global market when sanctions are lifted. Iran has used its domestically produced crude by satisfying a much higher percentage of its growing energy needs internally. With that being said, we believe it will take an extended period of time before exports pick-up. The Iranian catalyst adding to the global supply picture is more noise than anything for now.


Global Production Picture: Crude Everywhere


IRAN NUCLEAR DEAL: Key Catalysts - Global Production Monitor


IRAN NUCLEAR DEAL: Key Catalysts - OPEC Crude Production


IRAN NUCLEAR DEAL: Key Catalysts - chart 3 global crude production


IRAN NUCLEAR DEAL: Key Catalysts - chart4 monthly production surplus


Sanctions Effect on the Iranian Economy:

  • Iran has not had a new oil field enter production since 2007
  • Nearly all western companies have pulled investment
  • Few Chinese and Russian Companies are still participating (CNPC, Sinopec, PEDCO)

IRAN NUCLEAR DEAL: Key Catalysts - Foreign Direct Investment


Trade Impact:

  • Iranian crude oil and condensate exports have dropped from 2.5MM B/D in 2011 to 1.1 MM B/D in 2013 due to tighter U.S. and European sanctions
  • In 2012 came the insurance and re-insurance bans from the E.U. (European insurers underwrite the majority of insurance policies for the global tanker fleet).

Iranian crude sales, even in Asia, were impeded by the insurance ban.  Iranian exports dropped to less than 1MM B/D in July 2012 as Japanese, Chinese, Korean, and Indian buyers scrambled to find insurance alternatives.  


IRAN NUCLEAR DEAL: Key Catalysts - Crude Exports


Fiscal and Currency Impacts:

  • Value of the Rial declined by 56% between January 2012 and January 2014, a time in which inflation reached 40%
  • The IMF estimates that Iran's break-even point, the price per barrel at which the country can balance its budget, is $92.50.
  • Iran’s energy prices are heavily subsidized (particularly gasoline). At the end of 2010 the government initiated the first phase of subsidy reform, decreasing the subsidies on energy prices to discourage waste. Subsidies have been a huge fiscal drag. 

IRAN NUCLEAR DEAL: Key Catalysts - Iran Fiscal Breakeven


  • Oil production, given the lack of capital investment, has also declined significantly

IRAN NUCLEAR DEAL: Key Catalysts - Iran Crude Productionm


Reworking the Addressable Market:

  • Iran has now become somewhat of a closed energy economy for the time being.  Growing domestic demand needs have been met internally. The country has continued to increase its refining capacity
  • Meanwhile, Iran has found opportunity in the highest growing regions; Iran has refocused its key customers to Asia and India where the highest global demand rates are forecasted

IRAN NUCLEAR DEAL: Key Catalysts - Domestic Refining Capacity


IRAN NUCLEAR DEAL: Key Catalysts - Iran Trading Partners


IRAN NUCLEAR DEAL: Key Catalysts - Opec Forecasted Demand Growth


IRAN NUCLEAR DEAL: Key Catalysts - Opec Forecasted Demand Growth 2


Energy Potential


The potential in the energy space in Iran is immense, and Iran’s potential trading partners are not limited to high growth, eastern countries. A year before the 2012 sanctions, the EU was the largest importer of Iranian oil, averaging 600,000 barrels per day, according to the Congressional Research Service) :

  • 4th largest proved crude oil reserves (10% of global crude reserves)
  • 2nd-largest natural gas reserves (17% of world’s proved natural gas reserves (2nd only to Russia)
  • Despite the fixed investment crippling sanctions, Iran still ranks among the top 10 oil producers and top 5 natural gas producers. Crude oil production is up double digits Y/Y (+370K B/D)
  • Almost all of Iran’s export increases have been to China and India, and other Asian countries

As mentioned previously, with all of the geopolitical hurdles that must be jumped, we expect a major increase in exports to be delayed until mid-2016 at the earliest. Even then, the risk for IOCs is immense should Iran fail to comply with strict requirements from the IAEA. Sanctions relief will permit new business with Iran, but uncertainty over Iranian compliance and US politics will deter long-term deals for the next 18 months. But, if these steps cross the sanctions line, the Obama Administration has made clear that it will be forced to act which could provide a huge risk for capital that is tied-up.  


Ben Ryan








Takeaway: What’s hotter, Brand or cost structure? At some point, EPS has to grow. It will, but at 15x a best case EBITDA # 5-yrs out, timing matters.

Every headline out there today will talk about how UA is simply killing it – and it’s well-deserved. UA’s brand heat continues to roll full steam ahead, and the company is proving itself out to be one of the true generational growth stories in Consumer.


That said, we think it's more than fair to point out that Revenue growth is accelerating, but earnings growth is decelerating. In fact, this company has not grown earnings since 4Q14. When 2015 is said and done, we’re likely to see revenue, EBIT and EPS grow at 25%, 15%, and 10%, respectively. That’s not the kind of ‘World Class’ growth algorithm that we’d expect from a World Class Brand like UA.


We understand that the company is investing today in order to capitalize on (and create outright) growth opportunities tomorrow. We like when companies play offense like that. But at 75x earnings and 36x EBITDA, is it too much for us to expect that earnings grow faster than Wal-Mart? We don’t think so.


We’ve always said that the cost of growth in this space is headed higher. In fact, UA was fairly explicit on its call in saying that it would capitalize on brand heat in 2H by spending more on athletes and endorsements. While that makes sense academically, and probably financially if executed right (which UA probably will) the reality is that Nike will make this very difficult.


Keep in mind that this is the first time Nike and UA will truly be going toe to toe in a meaningful way since UA came along and created a space (compression apparel) that Nike arguably had the technology for first – but failed sorely to execute on. We got a little taste of the endorsement battle with Kevin Durant, which UA fortuitously lost to Nike to the tune of ~$30mm/yr.


As a point of reference, Durant represented 33% of UA’s existing endorsement obligations this year, but only 3% for Nike. UA ‘lost’ Durant, but stuck it to Nike with Spieth, Copeland, Curry. In other words…Nike is not happy right now. NKE’s Sports Marketing group is feeling heat it has not felt in over a decade. Do you think that just MAYBE Nike is going to step up its marketing spend by a couple hundred million to secure its dominance? You betcha.




We’re not saying that Nike will secure dominance – we’re just saying that it is going to spend in its attempt to get there. Also keep in mind it has a brand new CFO who comes from the brand side of the house, who is more likely than Don Blair (one of the best CFOs we’ve seen in all of Consumer Discretionary in 23 years) to rubber stamp spending that might be ROIC dilutive.    


The bottom line on the stock is that as much as we like the multi-year top line growth potential, we’re reasonably certain that it will come at the expense of margins and ROIC. But that’s hardly a reason for us to be short a name that’s earned its spot as the clear #2 player in a global oligopoly where retailers are begging for an alternative to Nike. But even if we assume that UA continues to grow mid to high 20% EVERY year for five years resulting in $9bn in sales, AND overcomes near-term margin pressures and pops back up to 12% EBIT margins, we get to an even $3.00 in earnings. That’s a 32.5x p/e and 15.5x EBITDA multiple on a number 5-years out that takes a whole lot of positive assumptions to get to. We’re simply going to sit back until the research call suggests a more asymmetric setup – in either direction.



1) Top line continues to look very very strong accelerating on a 2yr basis. Int'l and footwear (the two categories where UA is still establishing a beachhead) ticked up on a 2yr basis and now both account for over 10% of revenue. The guidance raise of $60mm after a $20mm beat with no lift to margin dollars was enough for the bulls to get excited about.




2) On the margin front -- the company cited  gross margin pressure from Fx, connected fitness dilution, and extra air freight cost for the 160bps whack in op margins, but that doesn’t explain the 70bps decline in the NA business. Brand Houses (ie the 30,000 sq. ft. store on Michigan Ave in Chicago) are significantly more expensive on a unit basis then the legacy Outlet locations, but we'd expect a little more leverage on 22% revenue growth in its biggest region.

3) The athletic footwear and apparel market in the US had a monster 2Q. NKE and UA grew at 13% and 22% respectively totaling $560mm in revenue. That’s good for at least 3 points of growth for the entire athletic footwear and apparel market alone which did about $16.75bil in LY's 2Q. DTC at UA kicked it up in a big way growing 33% in the quarter -- up 1200bps sequentially on the 1yr and 700bps on the 2yr trend line.

4) As noted above the investment cycle is no where near close to being over. On the call management talked a number of times about the fact that fulfillment rates and global infrastructure is not anywhere close to where it needs to be as evidenced by the 50bps hit or $4mm in incremental air freight expense during the quarter. That makes sense given the fact that Int'l penetration has grown by 5 percentage points on a TTM basis over the past 18 months. There is a lot of track that needs to be built in order to support this global network.

5) The last piece of the puzzle is the company's move to a sports/category focused org. structure rather than the simple 2 dimensional structure that exists today. UA has been hiring leadership talent to facilitate this transition, but if we use Nike as the model when it switched to the category offense -- we are looking at least 3 years of growing pains before the model is optimized – and that’s if it executes perfectly.  Given UA’s impressive execution track record, management will probably get it right by hiring all the right people into the appropriate roles. But this takes time.  

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