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SBUX | BEAST MODE

Starbucks (SBUX) delivered an incredible quarter.  The company posted a significant increase in traffic trends, a trend which requires us to remove Starbucks from our SHORT bench.

 

This was short lived skepticism for us as we were looking for a downward trend in traffic, lower adoption rates of Mobile Order & Pay, and a decrease in food sales, all of which did not occur. SBUX posted yet another record quarter of performance in 3Q15 reporting yesterday after the close, beating estimates across the board. Q3 revenue was $4.88B versus consensus estimates of $4.87 a 17% increase YoY. Comparable same-store sales (SSS) increased +7% compared to estimates of +6.1%, a 300 basis point increase YoY. Of the consolidated numbers, the Americas segment reported +8% SSS versus consensus of +6.3%, EMEA reported +3% versus consensus of +3.8% and CAP reported +11% versus consensus of +8.5%. Reported EPS ex-items for Q3 was $0.42 versus consensus of $0.41.

 

As you can see the strong performance was global, with no region disappointing. The growth seen in transactions is possibly the most impressive in the quarter, given the number of stores they have, as they are adding stores cannibalization does not seem to be an issue. Two year traffic trends in the Americas segment are turning positive, evidenced by the chart below:

 

SBUX | BEAST MODE - CHART1

 

This is truly one of the best run company’s not only in the restaurant sector but in the world. Management’s great execution across platforms is testament to their long-term strength. And although we are not chart chasers so therefore will not recommend a buy at these levels, we certainly can’t short it here either.

 


Cycles, Macro and Multiples

Client Talking Points

#EUROPESLOWING

This is probably our most contrarian theme that isn’t being bandied about yet – post the Greek clown show, in rate of change terms, European econ data continues to slow; German PMI 51.5 (new year-to-date lows) this morning and France back < 50 at 49.6 JUL vs 50.7 JUN. 

#DEFLATION

Nasty week for anything linked to this uber-macro risk; don’t forget this is a credit risk signal inasmuch as it is a draw-down one for commodity linked currencies/countries. Russian stocks are down -1.3% this morning (-8.2% in the last month); Brazil -2.1% yesterday (-6.6% month-over-month).

RUSSELL 2000

Getting lots of questions on this exposure as the Russell 2000 is now -3% month-over-month (bearish TREND signal) but the “Russell Value” (IWN) is underperforming Russell Growth by 1100 basis points (its widest margin since 2011) – we liked IWM in Q1, but definitely not here.

Asset Allocation

CASH 51% US EQUITIES 5%
INTL EQUITIES 7% COMMODITIES 0%
FIXED INCOME 25% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
GIS

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.

PENN

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.

TLT

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

TWEET OF THE DAY

TREASURIES: good wk for $TLT bulls, 2.28% 10yr as both global growth and inflation slow

@KeithMcCullough

QUOTE OF THE DAY

Living at risk is jumping off the cliff and building your wings on the way down.

Ray Bradbury

STAT OF THE DAY

0.3% of solar energy from the Sahara is enough to power the whole of Europe.


MCD | Right on Track

 

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

 

McDonald’s (MCD) reported 2Q15 earnings result yesterday, performing more or less in-line with our expectations. Global same-restaurant sales (SRS) decreased 60 basis points YoY to -0.7%, versus consensus of -0.4%, reflecting negative guest traffic in all major segments. Although negative, it is a marked sequential improvement versus the -2.3% seen in 1Q15. We will break down the numbers by segment later in the note. Company-operated restaurant revenue of $4.26B outperformed consensus estimates of $4.16B, yet still down roughly 11% YoY. Franchise operated revenue came in right on target matching consensus at $2.24B down roughly 6.5% YoY. 2Q15 EPS was $1.26 beating consensus of $1.23 by $0.03, but declining 10% YoY. 

 

Management highlighted that 80% of the decline in operating profits came from two countries, U.S. and Japan.  Highlighting that MCD is strong company with just a few regions of the world causing the company’s growth related issues. 

 

U.S. 2Q15 SRS decreased -2.0% versus consensus expectation of -1.5%, sequentially seeing a minor 60 basis point improvement. These results reflect negative guest traffic, as new products and LTO’s did not achieve the lift expected. All-day breakfast tests have been going well, and we are optimistic on the effect its rollout would have on the performance.

 

MCD | Right on Track  - CHART 1

 

Europe 2Q15 SRS sales increased +1.2%, just shy of consensus estimates of 1.5%, a notable improvement sequentially, coming off four consecutive quarters of negative comps.  Results are being affected by continued economic challenges in key markets, and charges as part of the global business turnaround plan.

 

MCD | Right on Track  - CHART 2

 

APMEA 2Q15 SRS decreased -4.5% versus consensus of -3.4%, again showing improved trends sequentially, as the effects of the supplier issue continue to dissipate in Asia.

 

MCD | Right on Track  - CHART 3

 

After listening to the call there are obviously still issues to figure out, especially domestically in the U.S., as turnaround efforts have not performed well to date. But we are very encouraged by positive performance across the International Lead Markets segment, in which management stated quarter to date performance is positive and showing strength.

 

Notable comments during the call:

  • Financial results remain disappointing but they are seeing early signs of momentum, expecting to see positive growth globally in Q3, led by International Lead Markets and High Growth Markets.
  • International Lead Markets segment is moving in the right direction, Australia, Canada and UK are seeing strong performance, France is gaining share and Germany is turning the corner.
  • UK, 37 consecutive quarters of positive comps.
  • Canada focusing on convenience, rollout of dual lane drive-thrus, strong breakfast growth, free coffee promotion earlier this year and new salads on the core menu.
  • Germany, 1st quarter since 2Q12 of positive comps.
  • Developmental license agreement for 100 new sites along the Autobahn in Germany.
  • China as a whole had a -3% comp in 2Q15, the top five cities which represent 50% of sales are flat quarter to date. While lower tier cities are being effected by macro-economic factors and not recovering as quickly.
  • U.S. remains disappointing, low price structure implemented this year was an important first step. Northwest region was top performing, having positive results in the first month of Q3.
  • Launching mobile app in Q3, designed to streamline customer service experience. Initially will have limited capabilities, but will be updated over time to include mobile ordering.
  • Expanding all day breakfast into a limited number of new markets to learn more.

 

We at Hedgeye believe Q3 will be the inflection point to this turnaround, as a lot of the little things management has implemented will have ample time in the market to take full effect.

 


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July 24, 2015

July 24, 2015 - Slide1


The Macro Show Replay | July 24, 2015

 


BYD Q2 2015 CONFERENCE CALL NOTES

Takeaway: A big beat was in the offing but this was pretty impressive, particularly with the flow through

BYD Q2 2015 CONFERENCE CALL NOTES - byd

 

Conf Call 

  • Consumers growing more confident 
  • LV Locals:  all 4 major Local properties achieved EBITDA and non-gaming gains. Expect roadwork (impacting Suncoast/Sam's Town) to be completed by Labor Day. On a combined basis, the Orleans and Gold Coast generated revenue growth of more than 6% and EBITDA growth of more than 20%. This was the best second quarter EBITDA performance for these properties since 2008.  The release in Gold Coast our growth throughout the business with increases in gaming revenue, non-gaming revenue and cash ADR.
  • Downturn LV:  gaming and non-gaming revs up YoY.  Increase in table games and slot volumes.  2015 visitation has been strong.
  • Midwest/South:  11 out of 12 properties grew EBITDA. IP rev grew $3m and $4m in EBITDA.  IP has delivered 3 straight quarters of double digit EBITDA growth. Treasure Chest- good performance among casual players.
  • Delta Downs:  hit record EBITDA in April.  Flooding in May/June resulted in slightly lower EBITDA in 2Q.
  • Blue Chip:  continue to increase market share
  • Kansas Star:  record 2Q EBITDA (+10% YoY); improved operating margins by 130bps 
  • Atlantic City:  Borgata posted 5th consecutive quarter of EBITDA growth.  Borgata sold 5k additional room nights in 2Q and F&B was up. 
  • Non-gaming grew across the portfolio in 2Q
  • Delta Downs doesn't have enough hotel rooms to meet demand; will be adding 167 hotel rooms/suites
  • Paid down $45m in debt in 2Q. YTD, debt reduction has been $125m
  • 2Q Capex:  $39m ($5m at Peninsula). YTD invested $58m.
  • Delta Downs $45m project:  expect to spend $10m in 2015 and remainder in 2016.
  • 2Q Borgata Capex: $10m
  • FY 2015 GUIDANCE: 2H Wholly-owned net revs same as 1H.  65-75% EBITDA flowthrough.  Expect LV Locals EBITDA to grow 5-5.5% for FY 2015.  Downtown EBITDA to grow 14% in FY 2015. Expect Midwest/South to grow EBITDA to 7-8% YoY. Expect $170m in EBITDA (BYD receives 50%) and increased property taxes for Borgata.
  • Borgata leverage at end of 2Q was 4x
  • Will save $12m in interest expense savings when they do decide to retire Borgata's 9 7/8% notes in the next 12 months

Q & A

  • Nice Cash ADR growth in LV Locals
  • July trending similar to Q2 across all properties
  • Continue to have conversations about acquiring assets
  • Revenue growth in-line with expectations. Strong flowthrough 
  • Consumer is getting stronger
  • Customer spend is up, including unrated play and casual play
  • Buy MGM's part of Borgata? Happy with partnership. Would want the right price to buy their share.
  • No comment on PNK/GLPI deal
  • AC promo environment: normal
  • LV Locals margin opportunity:  still sees more opportunity. Current margins are sustainable.
  • Delta Downs $45m project:  expect to attract younger demographic
  • NOL: just under $982m
  • Maintenance capex for slots:  will stay as is
  • M&A:  Hope to do something at least leverage neutral
  • Downtown charters:  today, they run 4 charters a week (used to run 7/wk). Lower because commercial airlines have increased their lift from Hawaii.  
  • Rated play from Hawaii is up
  • No timing on when they will receive $88m tax refund

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.

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