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SBUX | THE APP IS WORKING | HOW BIG IS BIG?

Starbucks has been a tricky one for us, we tried shorting it back in January of 2015, betting on the food being the demise of the brand, but admittedly the timing was off. Looking ahead, although the food is not driving traffic, we don’t believe that it is tarnishing the brand at this point. The overriding theme driving the SBUX bull case is Mobile Order & Pay.  So with the next big initiative being Mobile Order & Pay, we wanted to test out its impact on traffic, customer throughput and general customer/partner experience.

view our experience with Mobile Order & Pay at Starbucks below

 

The company has specifically set expectation high for the impact of Mobile Order & Pay.  On the 3Q15 earnings call SBUX CEO, Howard Schultz, said “By enabling our customers to order ahead and avoid waiting in line, Mobile Order & Pay is enabling us to capture more on-the-go customer occasions, and the data is clear. In those stores where Mobile Order & Pay has been deployed, lines are shorter, service is faster, and in-store operations are more efficient. The net result is increased traffic, incrementally, that is exceeding expectations, improved throughput, and an elevated Starbucks experience for our customers.”

 

With that statement Mobile Order & Pay appears to be the Holy Grail for SBUX!

 

Our initial indications are that in its early days Mobile Order & Pay is going well for the company.  The following is a survey we conducted, asking 200 Starbucks customers; “How would you rate your experience using the Starbucks Mobile Order & Pay App?” The results were largely positive, with an average rating of 3.5 stars. In addition to the survey we also tested the system with Hedgeye employees, and it probably balanced out to the same rating. Once the app was downloaded and credit card information inserted everyone had a positive experience. When asked whether they would use it again, some people prefer the in-store ordering experience, but the majority said they would use it again.

 

SBUX | THE APP IS WORKING | HOW BIG IS BIG? - CHART 1

 

We asked the store employees (partners) about the app and how it works for them. They had overwhelmingly great reviews on the app giving them more time to produce orders at an even pace. With the more even pace of incoming orders the partners are able to more efficiently produce the drinks and get them out in an orderly fashion.

 

In addition to increasing throughput and efficiency of the store, this app is meant to help drive incremental traffic. In the chart below assuming flat 2-years trends, estimates for Americas traffic,  would accelerate to 5% in 4Q15.  This would be a significant positive for the company and likely make the consolidated traffic number look conservative.  We believe with the new app launched nationwide, consensus estimates may turn out to be slightly conservative.

 

SBUX | THE APP IS WORKING | HOW BIG IS BIG? - CHART 2 replace

SBUX | THE APP IS WORKING | HOW BIG IS BIG? - CHART 3

 

This new app sets up a TREND duration bullish thesis on Starbucks. Long-term (1-3 years) we remain skeptical on the current food being a driver of growth, but at this point it is not tarnishing the Starbucks brand in any way. After our test/survey we are bullish on the company and the stock for the next 2-3 quarter timeframe.

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


Cartoon of the Day: Shaken (and) Stirred

Cartoon of the Day: Shaken (and) Stirred - denial cartoon 09.28.2015

"While the SP500 tried having a rate hike party on last Friday’s open, neither the Russell 2000 nor the Nasdaq were buying into the hype/hope, at all. They looked a lot more like Chinese, German, and Emerging Market stocks – not good. Rate hike or no rate hike? Who cares – stocks are now going down on both," wrote Hedgeye CEO Keith McCullough in today's Early Look.

 

 

 


MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT

Takeaway: Global markets focused on the risk of a slowing Chinese economy last week. Our risk heatmap shows few positive signals.

Key Takeaway:

Even with the third reading on second quarter U.S. GDP coming in at 3.9%, higher than the 3.7% expected, domestic CDS spreads widened. Moreover, CDS spreads widened globally, especially in emerging markets, on further evidence of slowing growth in the Chinese economy, which has become the number one global risk factor for investors; a preliminary reading on Chinese manufacturing activity showed factory output at its lowest level since the financial crisis. Finally, the high yield YTM in the U.S. continues to rise, increasing by 35 bps last week.

 

Our heatmap below is showing mostly red warning signals on the short, intermediate, and long term.

Current Ideas:


MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 1 of 12 improved / 5 out of 12 worsened / 6 of 12 unchanged
• Intermediate-term(WoW): Negative / 0 of 12 improved / 8 out of 12 worsened / 4 of 12 unchanged
• Long-term(WoW): Negative / 1 of 12 improved / 2 out of 12 worsened / 9 of 12 unchanged

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM15

 

1. U.S. Financial CDS – Swaps widened for 23 out of 27 domestic financial institutions. Even with positive economic data showing that 2Q15 GDP grew at a higher than expected 3.9%, perceived default risk for financial institutions rose; CDS spreads widened by 5 bps at the median.

Widened the least/ tightened the most WoW: CB, SLM, SLM
Widened the most WoW: GNW, TRV, BAC
Tightened the most WoW: CB, AGO, MBI
Widened the most MoM: GNW, MMC, MET

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM1

 

2. European Financial CDS – Swaps mostly widened in Europe last week. The median change was a 7 bps widening as investors focused on the risk from China.

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM2

 

3. Asian Financial CDS – In Asia, a preliminary reading on Chinese manufacturing activity showed factory output at its lowest level since the financial crisis, causing swaps for Chinese banks to widen between 16 and 17 bps. Additionally, Indian banks' CDS widened between 12 bps and 17 bps.

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM17

 

4. Sovereign CDS – Sovereign Swaps mostly widened over last week. Italian, Spanish, and Portuguese swaps widened the most, by 12, 12, and 19 bps respectively.

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM18

 

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM3

 

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps widened last week, largely on worries of effects from slowing Chinese growth and a future interest rate hike by the U.S. Federal Reserve. Brazilian sovereign swaps blew out by 98 bps to 488 as data showed rising unemployment in the country and the country's central bank forecast a deeper recession.

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM16

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 35 bps last week, ending the week at 7.65% versus 7.30% the prior week.

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM5

7. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 10.0 points last week, ending at 1857.

 

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM6

 

8. TED Spread Monitor – The TED spread rose 1 basis point last week, ending the week at 34 bps this week versus last week’s print of 33 bps.

 

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM7

 

9. CRB Commodity Price Index – The CRB index fell -1.6%, ending the week at 196 versus 199 the prior week. As compared with the prior month, commodity prices have decreased -0.7%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM8

 

10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 11 bps.

 

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM9

 

11. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 1 basis point last week, ending the week at 1.91% versus last week’s print of 1.90%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM10

 

12. Chinese Steel – Steel prices in China fell 0.5% last week, or 10 yuan/ton, to 2197 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 147 bps, 2 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.7% upside to TRADE resistance and 2.8% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 


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.

An Unmistakable Crashing Sound

Biotech stocks (IBB) moved into full-blown crash mode on Friday. The sector is down-22% from its July peak. It’s now down another -3% this morning.

*  *  *  *  *

An Unmistakable Crashing Sound - zz ibb 99

 

These former high-fliers have officially joined China, Germany, Spain, Oil, Emerging markets, etc, etc in what has become the most visible, slow-moving-train-wreck I have witnessed in High Beta in my career.

 

(Oh. Nearly forgot. Latin American Stocks (MSCI) are down -27.3% in last 3 months.)

 

In related news, our fearless IMF prognosticators just cut their global growth forecasts (again) as macro markets continue to crash.

 

> Houston, we have a problem…

> Wall Street, we have a problem…

> Beijing we have a problem…

> Frankfurt, we have a problem…

> Madrid, we have a problem...

 

An Unmistakable Crashing Sound - Global economy cartoon 12.16.2014

 

*  *  *  *  *

Editor's Note: This is an abridged, brief excerpt from our morning research. Incidentally, we made the contrarian, global growth slowing macro call and its related market implications. Click here to learn more about it and how you can become a subscriber to our world-class research.


Retail Callouts (9/28): RH - Finally Tapping One of Many New Markets

Takeaway: RH - Finally Tapping One of Many New Markets (Milwaukee, WI). Marathon winner's Nike shoes struggle to make it through the race.

RH - Finally Tapping One of Many New Markets (Milwaukee, WI)

 

RH currently operates in 62 markets in the US (as we define them). All but 3 by our math could support a store over 20k sq. ft. and 38 could support a store 40k sq. ft. or lager. But, what gets lost in the conversation sometimes is the new market opportunity.

 

By our math there are 19 markets in the US and Canada with spending and demographic characteristics on par with RH's current portfolio and of those markets 10 could support an Atlanta sized full line design gallery and another 7 could support a Houston/Greenwich sized store.

 

One of those markets is Milwaukee, where it looks like RH will be opening a new 27k square foot store. Most likely a 2017 or 2018 event. It’s a market where the company previously operated (closing its mall location in 2012) and by our math could support a store as big as 45k sq. ft.

(http://www.jsonline.com/business/restoration-hardware-planned-in-third-ward-b99582884z1-328958261.html)

Retail Callouts (9/28): RH - Finally Tapping One of Many New Markets - 9 28 chart1

 

NKE, Adidas - Marathon Runner Eliud Kipchoge's Nike shoe insoles came apart in the beginning of the Berlin Marathon.  He still won the race, but fell short of his goal of a world record.

(http://www.wsj.com/articles/kenyan-marathoner-falls-short-of-record-after-nike-shoes-fail-1443375160)

 

Truth be told, Nike running shoes were originally designed to fall apart after crossing the finish line. Less materials, less glue and adhesives = lighter shoe and significantly less weight carried over the course of a few thousand strides. But the picture below is certainly not what Nike had in mind.  Didn't Eliud wear-test them first? It seems like he pulled this pair right out of the box, which is unusual for a runner on a big race. The whole thing is just weird. And Adidas probably loved that the gaffe happened in its back yard.

Retail Callouts (9/28): RH - Finally Tapping One of Many New Markets - 9 28 chart2

 

WBA - Walgreens automated pharmacy system went down last Tuesday following planned maintenance, the problem was fixed on Friday.  Pharmacists had to manually fill prescriptions during the outage.

(http://www.chainstoreage.com/article/report-walgreens-pharmacy-system-goes-down)

 

WFM - Whole Foods is cutting 1,500 jobs (1.6% or workforce).  Company expects some of the displaced workers to find a job from 2,000 open positions the company currently has.

(http://www.sec.gov/Archives/edgar/data/865436/000110465915067547/a15-20321_1ex99d1.htm)

 

ROST - Ross stores continuing aggressive store openings, 8 new openings over 2 weeks.

(http://www.chainstoreage.com/article/ross-stores-continues-aggressive-store-growth)

 

APP - American Apparel receives delisting warning from NYSE.  NYSE states "financial condition has become so impaired that it appears questionable, as to whether the company will be able to continue operations and/or meet its obligations as they continue to mature"

(http://wwd.com/business-news/financial/nyse-warns-american-apparel-of-possible-delisting-10242668/)

 

CONN - Appliance and Furniture retailer Conn's is on track to open its 100th store next month.

(http://www.chainstoreage.com/article/here-comes-conns-100th-store-sight)


Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

9/23/15 WHAT’S IN STYLE?

9/23/15 GIS | SEEING THE LIGHT AT THE END OF THE TUNNEL

9/16/15 UNFI | LOVE THE LONG THESIS

9/15/15 K | NICE MOVE, BUT NOT ENOUGH

9/11/15 REPLAY | GOING LONG UNFI BLACK BOOK

 

UPCOMING EARNINGS

Monday, September 28

K | Announced that it has acquired Mass Food Group, Egypt’s Leading Cereal Company for approximately $50mm (ARTICLE HERE)

WFM | Announced a plan to cut 1,500 positions (ARTICLE HERE)

 

Thursday, September 24

DMND | Rumored that Diamond Foods is working with Credit Suisse to sell itself

 

Wednesday, September 23

POST | Acquiring Willamette Egg Farms, the business is expected to contribute $80mm in sales and $15mm of adjusted EBITDA (ARTICLE HERE)

 

Tuesday, September 22

GIS | Delivered 1Q16 bottom line results that were above consensus estimates. Although, overall top line numbers came in short of expectations; the U.S. Retail division beat both internal and external expectations. Although it is just one quarter, we remain optimistic on the name long term (HEDGEYE NOTE HERE)

 

SECTOR PERFORMANCE

Food and organic stocks that we follow underperformed the XLP last week. The XLP was up +0.6% last week, the top performers on a relative basis from our list were Amira Natural Foods (ANFI) and Diamond Foods (DMND) posting increases of +31.2% and +8.8%, respectively. The worst performing company on a relative basis on our list was Lifeway (LWAY), which was down -13.2%.

Monday Mashup - CHART 2

 

XLP VERSUS THE MARKET

The XLP has fared better than most other sectors in the YTD time period and as of late especially. In the last five trading days while the SPX was down -1.4%, the XLP was actually up +0.6%, outperformed only by XLF (Financials) and XLU (Utilities).

Monday Mashup - CHART 3

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLP is bearish on a TRADE and TREND duration.

Monday Mashup - CHART 4

 

Food and Organic Companies

Monday Mashup - CHART 5

Monday Mashup - CHART 6

Monday Mashup - CHART 7

Monday Mashup - CHART 8

 

Keith’s Three Morning Bullets

IMF cutting global growth forecasts (again) as macro markets continue to crash:

 

  1. USD – a one-day move higher (off the lows) in USD and rates does not a credible rate hike make – no follow through so far on that w/ Yen actually +0.2% vs USD this morning (Nikkei doesn’t like that, down another -1.3%)
  2. RATES – bond market doesn’t believe Yellen – neither does the growth data; 0.69% 2yr and 2.16% 10yr both remain bearish TREND signals for yields as Utilities (XLU) continue to breakout (+1.2% in a down tape last wk, +2.9% in the last 3 months)
  3. CRASHES – Biotech stocks (IBB) moved into crash mode on Friday (-22% from the July peak) joining China, Germany, Spain, Oil, Emerging markets, etc. in what is the most visible slow-moving-train-wreck I have seen in High Beta in my career; Latin American Stocks (MSCI) -27.3% in last 3 months

 

SPX immediate-term risk range = 1; UST 10yr 2.07-2.21%

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


Early Look

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