Please note we are adding McDonald's (MCD) to Investing Ideas today.
Our restaurants team led by Sector Head Howard Penney will send a full stock report detailing our fundamental view later this week.
Hedgeye CEO Keith McCullough in today's Early Look
"After making up a 7.0 GDP number in Q2, the Chinese have quite publicly landed on their head. And, as you’re all accustomed to by now, the only ideological central-plan for that in this day and age is a currency devaluation..."
SHAK is on the Hedgeye Restaurants Best Ideas list as a SHORT.
SHAK may be the second coming in the hamburger space, but its valuation reflects its superior status as a public company. That being said, I’m not telling you something you don’t already know.
I’m an old school restaurant analyst and I can’t get past what I see as a classic mistake being made by the management team. Instead of taking the conservative approach of building out its new units with a geographic concentration that allows for SHAK to maintain economies of scale and building brand awareness, management has gone the route that has been the death of nearly every concept that has tried. By opening stores in vast geographic locations, it’s nearly impossible for the young company to maintain its high standards of execution which make up the current brand cache!
This strategy is more commonly known as planting flags. With only 71 stores opened, if SHAK is successful with the current real estate strategy of planting flags globally, it would be the first company I have ever followed to successfully create shareholder value in this way. Of the 71 stores, there are 29 licensed SHAK’s opened in 8 different international countries.
So that makes the SHAK empire currently operating in 13 states and 8 countries! Amazing stuff for such a young company. In a consumer business in which maintaining brand integrity is critical, SHAK is pushing the envelope on growth making that integrity very hard to maintain.
Importantly, the company is not slowing down the aggressive geographic expansion. In 2Q15 the newest state the company added to the list is the first unit in Texas. Over the past year it has opened units in New York, New Jersey, Illinois and Florida. In 2016, the company plans to open new units in two new states, California and Arizona.
OTHER THINGS TO CONSIDER:
AGGRESSIVE PRICE INCREASES - Same-store sales increased 12.9% in 2Q15 versus a 4.5% last year. This consisted of a 4.3% increase in traffic, combined with an 8.6% increase in price and mix.
HEDGEYE - In a raging bull market, operating most of your stores in NYC, the company might be able to get away with this. Clearly, this is not sustainable and is inflating the margin structure of the company. What do you think will happen to margins when traffic slows and management needs to be more promotional?
LIMITED INFORMATION – In an unusual move for any restaurant company the comparable Shack store base includes only those Shacks that are open for 24 months or longer. Of course management feels that this “is the best comparison given the long honeymoon periods at our new Shacks.” A comp is a comp by the way! Therefore, the comparable Shack base in the second quarter of 2015 included only 16 Shacks compared to only 10 Shacks in the second quarter of 2014 in which NYC represents 37% and 60% of the comp base, respectively.
HEDGEYE – Until we see more stores enter the comp base in non-core markets, will we see how the company is really performing. Given the two year lag on getting stores in the base it could be an extended period. Two years is a long time and anything can happen to the brand status with consumers.
SIGN OF THINGS TO COME – Since-same store sales will provide only limited analysis on the company’s performance, average weekly sales will be more of a focus over time. In 2Q15, average weekly sales for domestic company-operated Shacks increased 7.4% to $102,000 for 2Q15 from $95,000 last year. This growth was significantly below the 2Q15 12.9% same-store sales figure. Additionally, average weekly sales figures were driven higher by menu price increases and the Las Vegas unit opening in 2H14.
HEDGEYE - I can only imagine what AUV’s would look like without the Las Vegas store. I suspect Joe day trader and the media don realize that average weekly sales over the long-term will be in a secular decline!
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TICKERS: LVS, MPEL, 880.HK, XHR, Airbnb, RCL, NCLH, CCL
August 11: 8:00am: IGT 2Q CC ; PW: 2521829
August 11: 4:30pm: STN 2Q CC
August 28: 10:00am: PENN - Meeting with Management at Plainridge Park
LVS - Insider Transaction: Robert Goldstein, the President & COO, unloaded 153,254 shares with an average market price of $56.50 for a total transaction sum of $8,658,85.
Takeaway: Not a lot of confidence exuded exude by the #2 guy at LVS. Big sale after a mini runup in the stock - still well off its 52 week high
MPEL - City of Dreams Manila, is said to have “suspended” 100 workers as a cost-cutting measure.
MPEL - MelcoLot Ltd, a Hong Kong-listed company controlled by MPEL co-chairman Lawrence Ho, says it expects a second-phase public tender for a casino resort near Barcelona, Spain, to start “shortly."
880.HK - Angela Leong On Kei, executive director of SJM Holdings Ltd., says the company has not considered more cost-cutting measures despite the city’s 14-month decline in gross gaming revenues. “For other gaming companies, I still cannot see it [more cost-cutting measures] being introduced,” Ms. Leong remarked yesterday.
XHR - Announced that it has agreed to acquire the Hotel Commonwealth in Boston, Massachusetts for a purchase price of $136 million. ($399K per key)
Airbnb - Quebec will be the first province in Canada to legalize and regulate Airbnb, starting this fall. The government will pursue tax revenue and increase the number of inspectors on the ground.
Takeaway: A nice win for Airbnb in Canada.
HLT - Today introduced Digital Key, an all-new feature of the Hilton HHonors app.
RCL - Details for Royal Suite Class
NLCH - Announced yesterday the launch of a secondary public offering of 20 million of its ordinary shares by certain funds affiliated with Apollo Global Management, LLC, Star NCLC Holdings Ltd. and certain funds affiliated with TPG Global, LLC. NCLH will not sell any ordinary shares in the offering and will not receive any of the proceeds from the offering. The offering is pricing at $59.25.
Takeaway: Their last offering in May was also for 20 million shares. Apollo, Star NCLC, and TPG have now reduced their ownership positions to 17.1%, 13.3%, and 2.3% respectively. We anticipate more secondaries in the future.
CCL - announced that its new social media Internet packages, which are now available on more than half of its ships, are scheduled to be implemented fleetwide by the first quarter of 2016.
Takeaway: This upgrade is coming in a quarter ahead of schedule. This is a good response to RCL's Voom internet package.
Alaska Air-Quality Regulations - The violations were revealed Friday in Norwegian Cruise Line's quarterly Security and Exchange Commission filing. SEC filings filed July 31 also indicate that the Alaska Department of Environmental Conservation cited Royal Caribbean International and Celebrity Cruises for similar alleged violations.
China Loan/Deposit Growth - China July new yuan loans CNY1.48T vs consensus CNY750B and CNY1.28T in June
Singapore GDP - The Singapore economy grew by 1.8% on a YoY basis in 2Q 2015. Real GDP growth in 2015 is expected to be between 2.0% and 2.5%.
On today's edition of The Macro Show, Hedgeye CEO Keith McCullough discusses China's biggest devaluation in 20 years and the implications to capital markets throughout Asia.
Hedgeye is hosting a visit to PENN’s Plainridge Casino in Plainville, MA on Friday August 28th at 10am. We will meet with PENN’s COO Jay Snowden and Plainridge’s GM Lance George and tour the facility as well. As you know, Plainridge is a big growth driver for PENN and could contribute an estimated 15% of the company’s property EBITDA in 2H 2015.
Following the PENN meetings, we will drive over to visit Plainridge’s primary competitor, the Twin River casino in Lincoln, RI, about 30 minutes away.
Please let Todd Jordan or your Hedgeye salesperson know if you are interested in attending. Thanks.
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