Our "Lower-For-Longer" Call? Validated Again With Lousy GDP Report

Our "Lower-For-Longer" Call? Validated Again With Lousy GDP Report - GDP cartoon 05.29.2015


That malodorous odor you're smelling? Today’s Q3 U.S. GDP report which came in much weaker than consensus expected. Their sanguine projections (though dramtically reduced over the past three months) proved to be too high yet again.


Spoiler alert #1 > We got it right.


The Bureau of Economic Analysis’ first estimate for third quarter GDP was 1.5% quarter-over-quarter and 2% year-over-year. That was at the high end of the range we had forecasted of 0.1% to 1.5%. For those keeping score, we’ve been right about GDP for three quarters in a row now. (To read our analysis of Q1 and Q2 GDP estimates click here and here.)


Wall Street's track record? Not so good.


Check out the chart below showing consensus GDP estimates. See how the projections slowly trickled up at the beginning of the year, before the drop to 2%, back in August.


*Still too high*


Our "Lower-For-Longer" Call? Validated Again With Lousy GDP Report - 10 29 2015 Bloomberg consensus


You can read today's news analyzing, ad nauseam, what happened during the quarter. (Quickly: investments and net exports were a drag on the economy, government expenditure was a tiny net positive and consumption contributed almost all of the gains.)


More importantly, here’s what you need to know heading into Q4 2015.


Spoiler Alert #2 > It's not looking good.


As our macro analyst Darius Dale pointed out on The Macro Show this morning, the batch of recent economic data has turned red. The omnipotent central planners at the Fed acknowledged as much yesterday... opting to remove global economic concerns from its statement, while punching up language related to issues here at home.


Here's the side-by-side comparison of the Fed statements:

Our "Lower-For-Longer" Call? Validated Again With Lousy GDP Report - 10 29 2015 consensus taper 


(To read Hedgeye's compendium of bearish economic readings check out our post "U.S. Economic Data Flashed Trouble Ahead.") 


Furthermore, consumption, the one bright spot in this quarter's GDP report, is slowing. Also on The Macro Show today, U.S. Macro analyst Christian Drake pointed to a historical chart which suggests consumption peaked in 1Q 2015.  


Our "Lower-For-Longer" Call? Validated Again With Lousy GDP Report - 10 29 2015 hedgeye consumption


Given this bearish setup heading into the year-end print, you may be wondering: What are our GDP estimates for Q4 2015?


Join us and we'll keep you well ahead of the consensus.

LNKD: Thoughts into the Print (3Q15)

Takeaway: We expect a clean beat on 4Q15 guidance, which should improve waning sentiment following a series of self-inflicted wounds by LNKD mgmt.


  1. SELLING ENVIRONMENT REMAINS STRONG: Our LNKD JOLTS tracker is accelerating through the first two months of 3Q15, suggesting an improving selling environment.  Our tracker has produced a relatively tight correlation with LNKD's Talent Solutions ARPA dating back to 1Q11 (~0.75).  As a reminder, our LNKD Talent Solutions TAM analysis suggest the bulk of that TAM is in the upsell opportunity (ARPA) vs. new account volume.  See 2nd note below for detail.  
  2. GUIDANCE = WORST-CASE SCENARIO: We suspect LNKD all but removed Display Advertising revenue from its guidance (see 1st note below), so that headwind is more than baked into estimates.  That said, we see Talent Solutions as the swing factor moving forward.  LNKD should handily beat rebased 2H15 consensus TS revenue estimates barring a considerable deceleration in both ARPA and LCS account growth (see scenario analysis below).  LNKD's salesforce ramp into the improving selling environment would suggest the opposite.  
  3. BUT IT'S UP TO MGMT: We suspect the street needs a clean beat on 3Q revenues/4Q15 guidance or we'll likely see another sell-off in the name.  Fundamentally, there's nothing in the way of that (see Points 1 & 2), but the risk into any LNKD earnings release is a notoriously conservative mgmt team as it relates to its guidance.  However, mgmt already played that card twice over the last two prints, and we suspect it now realizes that was a big mistake (especially two quarters in a row).


See the notes below for supporting detail/analysis on our LNKD Long thesis, and let us know if you would like to disucss. 


Hesham Shaaban, CFA




LNKD: Thoughts into the Print (3Q15) - LNKD   ARPA vs. JOLTS 3Q15 2

LNKD: Thoughts into the Print (3Q15) - LNKD   Guidance slide 

LNKD: Thoughts into the Print (3Q15) - LNKD   TS FC slide


LNKD: Notes from 10-Q & IR
08/26/15 10:35 AM EDT
[click here


LNKD: New Best Idea (Long)
07/14/15 08:00 AM EDT
[click here]

FLASHBACK: Why Twitter's Problems Run Deep | $TWTR

Our contrarian Internet & Media Sector analyst Hesham Shaabban has been raising warning flags on the social media site for quite some time. Here he is back in mid June. The stock is down around 18% since.

Click here to subscribe to The Macro Show today.

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Takeaway: Pre-announced so few surprises but a relief. Positive fwd commentary with the exception of "transient softness" that looks leisure related



  • Equity markets overeacting to lodging space, intend to take advantage of the overreaction by backing additional shares
  • Expected weaker results due to holiday shifts
  • In 3Q Group revenues were flat, 2% rate up, OCC negative 
  • 4.5% increase for transient demand in July and September but August lagged 
  • Arrivals from China still postive, but the average stays appear to be shorter which is a negative 
  • HST returned more than $1 billion of capital to stockholders in 2015 through stock repurchases and dividends, to increase stock repurchase program by an additional $500M
  • Domestic RevPAR led by Boston +5.3% YoY, Los Angeles +9.1% YoY, Seattle +9.8% YoY, and San Francisco +6.2% YoY
  • NY RevPAR +1.3% YoY
  • RevPAR decreased 3.4% at its Washington D.C. hotels due to a decline in convention activity and 9.7% at its Houston properties due to continued weakness in the energy market.
  • Difficult World Cup related comps hurt RevPAR in Brazil, renovations and oil weakness hurt performance at the Calgary Marriott.
  • Intl segment offset by Asia-Pacific market where RevPAR increased 6.2%YoY and 7.7% YoY for the quarter and YTD
  • The European JV comparable hotel RevPAR on a constant euro basis increased approx 9.1% YoY in 3Q
  • Increased 10.2% YoY on constant currency basis
  • 4Q RevPAR growth driven by several of the Company’s west coast properties, as well as Boston, Atlanta, Chicago, and Florida properties
  • F&B +6.5% YoY in 3Q
  • Will be exiting AUS and NZ. Proceeds of sales $104M, expecting to sell additional properties 
  • Currently marketing over $1 billion in assets worldwide.  Volatility in the marketplace seen temporary, and see attactive valuations. Will continue to market properties as long as the valuations are attractive. 
  • Asset sales could present opportunity for special dividends in the future
  • Booking activity in 4Q positive
  • Group demand should be +4%, mostly driven by rate in 4Q 
  • Transient activity moderating thus far in OCT - leisure
  • 1Q 2016 showing some shortfalls due to calendar shifts, but rest of 2016 looking strong and group demand is promising 
  • NY weakness to persist in 4Q and 2016 
  • DC weak as the city could not retain events they had last year over the same period 
  • Houston group business is accelerating sequentially but RevPAR will likely remain negative 
  • Leverage 2.5x-3.5x range but likely to stay at the high end due to the buyback but feel very comfortable at the higher end of the range. 


  • Confident in their ability to dispose assets at multiples richer than their traded equity muiltiple 
  • EBITDA impact on asset dispositions = +$20M in 2015, acquistion of Phoenician will add $6M of EBITDA for 2015
  • Overall there will be less disruption in the comp base in terms of rennovations and CapEx 
  • Also seeing some transient weakness in Q4. Group holding up very well in OCT. Group should be +6% in 2016
  • Intl travel weakness in OCT probably a reason for transient weakness, but very tough to pinpoint
  • Supply constrained in the segments where they operate. Houston, NY, and Miami are going to see strong levels of supply. Hawaii virtually no supply
  • Seeing very strong group demand next year, booking window lengthening. 2017 visibility for group is also strong
  • Fall off from Japanese travel and European outbound travel has lagged due to the strong dollar and has hurt growth in certain markets
  • 50% of asset sales going towards dividend - bullish on their ability to raise the dividend in 2016, or issue a special dividend by the end of 2016. Lots of flexibility with that. 
  • No interest to move into the select service space, becuase it is the only area seeing meaningful supply increase. Longer term it has potential, but not ready to commit capital to that space at present.
  • Implications of M&A among the C-Corps:  limited  
  • Despite selling assets, they don't see the cycle ending any time soon. Asset sales aren't meant to time the market top. 
  • Market stronger for individual assets vs. a portfolio of assets, and this is how they will proceed with asset sales. 
  • Best markets to focus on are still in the U.S., validates their plan to reduce exposure to Asia




Buffalo Wild Wings (BWLD) is on the SHORT bench and will remain there.  We made a big SHORT call last quarter that did not work out.  This business is all about timing. 


Our concerns have been focused on increasing labor costs and slowing same-store sales trends.  The company has been aggressively raising prices over the last year to mitigate the pressure from an increase in labor costs.  Ultimately, that will impact traffic trends and we may be seeing that now.  Traffic in 4Q15 is currently flat to negative, but the company expects traffic to turn positive again in 2016. 


BWLD is not immune from slowing industry trends that we are currently seeing play out in the space.  Specifically to BWLD, the Hedgeye Macro Monitor is highlighting four charts that suggest slowing same-store sales trends are not a one quarter phenomena for BWLD.  Additionally, you can see that the company stock price is closely tied to traffic trends.


1. A core demographic, construction workers, jobs are slowing which suggest slower traffic trends for the company:



2. Employment in the Leisure and hospitality space has slowed:



3. The company is aggressively raising prices above inflation, although not a strong correlation historically, in the last four quarters BWLD has priced above CPI – Chicken. Prior to this time period they were only above this metric once in the last 17 quarters:



4. Aggressive price increases will not be sustainable in a slowing consumer confidence environment:



5. Traffic vs QAV YoY:




  • BWLD earnings in 3Q15 declined 11.6% to $19.2 million or diluted EPS of $1.00 vs $1.14 last year.
  • For the first four weeks of 4Q15, same-store sales are trending at about 2.8% at company-owned restaurants and 0.8% at franchised locations.  This compares to last year 5.4% at company-owned restaurants and 5.1% at franchised locations.
  • Halloween is on a Saturday compared to a Friday last year and the Christmas holiday is on a Friday versus a Thursday last year, both of which we anticipate as a negative for same-store sales.
  • A menu price increase of 2.2% is scheduled to take effect on November 2nd, bringing the total menu price in 4Q15 to 4.1% in fourth quarter.
  • The cost for traditional chicken wings for the first two months of the fourth quarter averaged $1.80 vs the average cost for the full fourth quarter last year of $1.90 per pound.
  • In 4Q15 Labor costs are expected to be approximately 31%.
  • In 3Q15 BWLD spent $160 million to acquire 41 franchised locations in Texas, New Mexico and Hawaii, which includes two restaurants under development. 
  • The incremental costs to acquire the restaurants had a negative $0.13 impact on EPS.
  • BWLD has increased company-owned Buffalo Wild Wings locations by 24% YoY.
  • Same-store sales in 3Q15 increased 3.9% at company-owned restaurants and 1.2% at franchised locations
  • One less week of football and fewer pay-per-view events than last year negatively impacted same-store sales by 80 basis points.
  • Established affinity program for Buffalo Wild Wings - Blazin' Rewards loyalty program launched in September.
  • Blazin' Rewards is currently at 50 restaurants in five pilot markets.
  • Building its international presence through franchising - franchisee in the Middle East opened a location in Dubai in September and a second location in the Kingdom of Saudi Arabia in October. There are currently 13 international Buffalo Wild Wings in Mexico, the Philippines, the Kingdom of Saudi Arabia, and the United Arab Emirates.
  • In 2016, new markets are Panama and India. In total, international franchisees are expecting to open 15 restaurants next year.
  • Continue to invest into additional concepts – R Taco - shortened the name from Rusty Taco and created a new logo for the brand. Franchisees of R Tacos expanding in three markets and expected to launch a more aggressive franchise sales strategy.
  • PizzaRev continues its company-owned and franchise development.  There are currently 29 locations in five states and franchise locations in Nevada, New York, and Ohio are opening soon.



  • 3Q15 revenues totaled $455.5 million, up 22%. Company-owned restaurant sales for the third quarter increased to $431.8 million, up 23.2%.
  • System-wide sales were $897.3 million, an increase of 10.5% over the third quarter of 2014.
  • 3Q15 same-store sales, at company-owned stores increased 3.9% vs 6% last year. Average weekly sales increased by 3.7%
  • Menu price increases at company-owned restaurants was 3.9%.
  • BWLD operated a 109 additional company-owned Buffalo Wild Wings in 3Q15, up 24% unit increase.
  • Our royalty and franchise fee revenue for the third quarter grew 3.6% to $23.8 million versus $22.9 million last year even with 18 less franchised Buffalo Wild Wings units in operation at the end of the third quarter versus a year ago.
  • Same-store sales at franchised Buffalo Wild Wings locations increased by 1.2% compared to a 5.7% increase in third quarter last year. Franchised average weekly sales volumes at Buffalo Wild Wings locations in the United States for the quarter increased by 2%, 80 basis points higher compared to the same-store sales percentage.
  • Cost of sales for the third quarter was 29.4% of restaurant sales compared to 29.1% in third quarter last year, a 30-basis-point increase.
  • Wings were $1.79 per pound in 3Q15, or 19% higher than last year's average of $1.50.
  • Traditional and boneless wings reached 21% of restaurant sales flat YoY
  • Cost of labor for the third quarter was 32.2%, up 20 basis points YoY. Health insurance and workers' compensation expenses were the primary drivers of the year-over-year increase. We continue to see wage pressure in our restaurants.
  • We estimate that the transition of the 41 unit franchise acquisition had a negative 10 basis point impact on labor as a percentage of
  • In 3Q15, restaurant operating expenses were 14.7%, a decrease of 30bps YoY driven by lower advertising cost per restaurant partially offset by increased repairs and maintenance expense related to the acquisition.
  • In summary, restaurant level cash flow 18.2% vs 18.4% last year. This decrease in cash flow is primarily a result of the higher traditional wing cost and increased labor as a percentage of restaurant sales.
  • General and administrative expenses were $33.7 million in the third quarter, or 7.4% of total revenue, compared to $27.8 million, also 7.4% in the prior year.
  • Excluding stock-based compensation of $4.5 million in the third quarter and $2.6 million in the prior year, G&A expenses for the third quarter would have totaled $29.3 million or 6.4% of total revenue compared to 6.7% last year. Third quarter G&A expense was aided by a $500,000 loss on deferred compensation investments.
  • Opened seven new company owned Buffalo Wild Wings during the quarter. This compares to nine new Buffalo Wild Wings and one PizzaRev location opened in the third quarter of 2014.
  • Preopening costs for company-owned Buffalo Wild Wings averaged $253,000 per new restaurant during the quarter, compared to $314,000 in the third quarter last year.
  • The effective tax rate in 3Q15 was 30.1% vs 26.9% in the prior year. The effective tax rate in 2015 will be about 32%
  • On our balance sheet on September 27, 2015, our cash, cash equivalents, and marketable securities totaled $20.2 million, compared to $112.9 million at the end of 2014. Our unsecured line of credit had a balance of $47 million as of the end of the quarter.
  • Cash flow from operations was $66 million and cap ex was $56.9.  2015 capital spending will be $378 million, including the $210 million spent to acquire franchise locations.



“I would say that the top line revenue is the primary contributor to our reduced guidance for 2015.”


“If we can achieve comp store sales in excess of our price increase, we'd be happy at least for the fourth quarter of 2015.”         


“That's what we are modeling, yes.” (Expect positive traffic in 2016)


“As you look at the back half of the year, there is not a lot favorable happening to the events calendar on a year-over-year basis which would cause us to anticipate particularly high same-store sales. And again, if you look at the market as a whole, I think there has been a same-store sales softening and we do tend to flow with the market, although outperforming”


“With the stores that are in Texas, Nevada and Hawaii, there is a handful of stores that are being affected by the downturn in the oil industry”


“So I think we are taking a cautious look on 2016 right now, exceeding 20% is very doable”


“Well, I'll walk through the menu price increase that will be in effect next year quarter by quarter after we get the November price increase in our stores. So, first quarter next year would go to 3.1%, Q2 would be 3% and then it would roll down to 2.6% in the third quarter next year and then down to 0.9% in fourth quarter.”


“So, we think on a year-over-year basis, we will have a lower average price per pound for wings in 2016 than we did in 2015”


“And we did raise our line of credit to $200 million. So we are open to debt on our balance sheet. We have conversations with our board of directors regularly and I'm sure it will be a topic at the next board of directors meeting to talk again about capital allocation and structure for the future.”


“But the – on traffic we are not – I think when you adjust for events that aren't matching year-over-year, we are not suggesting we are seeing negative traffic.”


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw





YELP | We All Must be Really Dumb (3Q15)

Takeaway: Mgmt must have thought we all wouldn’t notice that it used Display as a scapegoat for deterioration in its core…Great quarter guys


  1. DISPLAY HEADFAKE INDEED: We thought this might be a remote possibility, but should have known better with this mgmt team.  The source of the 3Q beat was entirely Brand Advertising (aka Display); it missed everywhere else.  Note that YELP annouced on its last call that is planning to shutter that segment by year end, and also provided 2H15 Display revenue guidance of $10M (tranlated to -56% y/y decline vs. -8% in 1H15).  YELP actually produced $9M in Display revenue in 3Q15 alone, which was as acceleration in growth from 2Q15 levels.  YELP also refused to provide an update to Display Guidance for 4Q15.  So the only reason why YELP was able to guide inline for 4Q was because it sandbagged 2H15 Display guidance on the 2Q release, which consensus baked into 4Q estimates...Great quarter guys.  
  2. DETERIORATION AT THE COREYELP has missed consensus Local Ad revenue estimates for the past last 3 quarters.  While YELP was able to essentially maintain both new LAA growth and attrition rates at 2Q levels, Local Ad revenue growth still decelerated to 36% from 43% in 2Q15 (vs. 51% in 1Q15, and 60% in 4Q14).  That’s because attrition is exerting more pressure across its model.  The more accounts YELP enters any period with, the more it will lose, and the more brand new accounts (and sales reps)  it needs compensate.  The one positive is that YELP was able to ramp its salesforce to plan in 3Q (+35% y/y), but its still struggling to drive new account growth in excess of the rate that it's hiring reps.
  3. NOW WHAT? We'll be monitoring consensus estimates from here since the 2016 guidance release remains our next short catalyst.  As it stands now, YELP would need to maintain its new LAA growth rate from now through the end of 2016 with historically low attrition rates in order to hit consensus Local Ad Revenue estimates.  But we're not expecting YELP's Display headfake to completely evade the sell-side; especially since mgmt dodged two direct questions on the matter.  That said, there's a chance the sell-side may disproportionately cut 2016 Local Ad estimates off this print, which could accelerate an exit on our short position, albeit temporary since YELP remains a secular short until it blows up its model.


YELP | We All Must be Really Dumb (3Q15) - YELP   LAA New Net Lost 3Q15

YELP | We All Must be Really Dumb (3Q15) - YELP   LAA New vs. Sales 3Q15

YELP | We All Must be Really Dumb (3Q15) - YELP   Scen 4Q15 4Q16



Let us know if you have any questions, or would like to discuss further.   


Hesham Shaaban, CFA


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