Ruth’s Hospitality Group (RUTH) is on our Hedgeye Restaurants LONG bench.



Traffic is the name of the game. In FY15 RUTH has experienced choppy traffic trends, in Q1 they were down -0.5%, Q2 up +0.7%, and now Q3 down -0.5%. Management eluded that traffic has turned to the positive LSD range in October; we’ll look to see if this positive trend continues through the end of the quarter. Beef prices are looking to moderate further over the next year, confirming our beef deflation call (CLICK HERE to view). YTD beef prices for RUTH are down 2%, and with heard size and slaughtering expected to increase, prices will continue to go down. Management is expecting beef deflation of 2-3% in 4Q15. RUTH played the beef market perfectly, deciding to buy at market, instead of contract, allowing them to capture significant savings.  We like RUTH on the LONG side, but remain skeptical on the overarching macroeconomic trends that are affecting the restaurant industry right now.



It was a decent quarter on the face, but with price up +3.0% and traffic down -0.5%, we need to see traffic growth in order to be fully convicted in the near term. Nonetheless, RUTH beat top line estimates, reporting revenue of $80.3mm versus $79.3mm. Company-owned same-store sales were +3.3% versus consensus estimates of +2.8%, breakdown of the comp was price +3.0%, mix up +0.8% and traffic down -0.5%. Strong comps coupled with lower than expected food costs resulted in a bottom line beat of $0.01, reporting EPS of $0.08 versus consensus estimates of $0.07.


Notably, management spoke to some weakness in oil and tourist regions but nothing substantial. They are still seeing robust strength in California and Florida, which are two of their bigger markets.





As we stated we are keeping RUTH on the LONG bench. The relationship between Traffic and Price at RUTH is a concerning one. Below is a chart of Traffic versus Price, management needs to figure out a balance in which they can cover their increasing costs through price while driving traffic. Lower beef prices should alleviate some commodity basket pressure, giving them the ability to keep price increases to a minimum. Management stated price in Q4 is expected to be only 2%, which will help curb the divergence between these metrics.





RUTH is currently rolling out a new menu with innovative items designed to drive incremental traffic and average check. Early tests results were positive and the new menu has been rolled out to 52 locations as of the end of Q3, all corporate locations will carry the new menu by the end of 1Q16.


Management is also embarking on a restaurant redesign project, which will take place over the next 3-5 years, aimed at improving the guest experience. Changes will include an expanded bar area, revamped dining room and enhanced private dining spaces. They have remodeled two locations thus far and plan to remodel eight to ten next year.  


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw




The Final Countdown | Income Growth = Past Peak

Takeaway: If you’re the band Europe, you sing The Final Countdown, it’s what you do.  If you’re an economic cycle, you cycle.  Income & Consumption Growth are now past peak.   



Reading through consensus economist reactions to yesterday’s advance GDP release for 3Q, the basic, collective conclusion was this: 


Bad:  Global Headwinds, Energy and broader Industrial Sector Activity


Good:  Continued strength in domestic, private sector demand


Right ... But Also Wrong:  That conclusion isn’t inaccurate.  Consumption was again good on an absolute basis (we knew that ahead of the GDP print) while export and industrial activity continued to flag (also a known-known).  


Indeed, looking at Real Final Sales or Real Final Sales to Domestic Purchasers – which strips out exports and inventories and is meant to be a cleaner read on underlying domestic, private sector demand – the numbers remained solid (but decelerating) and better than the headline.   


REMEMBER, IT'S ABOUT BETTER/WORSE:  The liability in taking an absolutist view of the data is that macro trades on better/worse, not good/bad. 


As we highlighted (again) in our latest quarterly themes deck, Consumption growth peaked in 1Q15 and the slope of the line has now been negative for two quarters.  In employing a rate-of-change-centric view of the data, going from great-to-good is bad  – or should at least serve as a red flag.


In our modern consumption economy where household spending accounts for ~69% of GDP and the balance of expenditure buckets are in retreat, negative 2nd derivative trends in the singular source of demand strength are not inconsequential. 


So, can the domestic consumption train re-accelerate?


DON'T OVERTHINK IT:  Broadly speaking, the drivers of Consumption aren’t overly complicated.  In short, consumer spending growth is a function of the growth in income, the marginal propensity to consume or save that income, and the net change in household credit. 


Together, growth in disposable income and the change in the savings rate explain most of the change in nominal consumption (PCE) growth.  Indeed, over the last 30+ years, the multiple regression between PCE growth vs. nominal Disposable Income growth and the change in the Savings Rate produces an R-squared >0.94. 


Because its convenient (and largely agrees with the data), let’s assume both credit growth and the savings rate stay largely static from here and income growth remains the predominate driver of spending growth.  In other words, the forward slope of income growth determines the path of consumption growth.  


INCOME GROWTH | THE OUTLOOK: This morning we got the detailed household income and spending data for September.  Decelerating growth in aggregate hours and flat wage growth in the September employment report translated into a deceleration in income growth. 


Aggregate private sector salary and wage growth decelerated to +3.8% YoY – a -50bps deceleration relative to August and well below the TTM pace of +5.1%.  Indeed, aggregate private sector income actually declined -11bps month-over-month.    


Given the slowing trend in payrolls and progressively steeper income and consumption comps, it looks increasingly likely that aggregate income growth is now past peak as well. 


If you’re the band Europe, you sing The Final Countdown, it’s what you do.  If you’re an economic cycle, you cycle. 


Is a recession immediately imminent …  the balance of lead labor market data doesn’t suggest that, but we are in the twilight of the current expansionary cycle and the slope of the line across a growing number of indicators has gone negative.   


Our annotated summary table along with the longer-term income & consumption cycle charts are below.


Enjoy the weekend.


The Final Countdown | Income Growth =  Past Peak - IS Sept


The Final Countdown | Income Growth =  Past Peak - Income   Consumption Growth


The Final Countdown | Income Growth =  Past Peak - PCE Growth


The Final Countdown | Income Growth =  Past Peak - Salary   Wage Grwoth LT


The Final Countdown | Income Growth =  Past Peak - PCE vs Income   Savings 3D


Christian B. Drake


See LinkedIn? Hedgeye Internet Analyst Strikes (Again) | $LNKD

Takeaway: It pays to listen to Hesham Shaaban.

Some people pigeonhole our Internet & Media analyst Hesham Shaaban as being perennially bearish. The truth of the matter is he has a host of names he likes on the long side. Take LinkedIn. He added it to his Best Ideas list back in July. Shares of LNKD are rocketing higher today up 12%.  The stock has gained 14% since he added it versus the S&P 500 which is down 0.6%.


Not too shabby.


See LinkedIn? Hedgeye Internet Analyst Strikes (Again) | $LNKD - 10 30 2015 lnkd chart 2


Heading into last night’s earnings release, Shaaban was looking for a “clean beat and raise” of LinkedIn's forward guidance. That’s exactly what shareholders got. (Editor’s Note: LNKD is also on Hedgeye’s Investing Ideas list of top thirteen top holdings.)   


Here’s a snippet of what he said ahead of the print:


See LinkedIn? Hedgeye Internet Analyst Strikes (Again) | $LNKD - 10 30 2015 lnkd 3q15


And Shaaban's update today:


“No lumps of coal in guidance this time. The transition that spooked the Street in 1Q15 was due to a massive investment in its salesforce… We see that ramp as a coiled spring.


Incidentally, Shaaban correctly called Pandora's (P) move lower just last week (see here). Shares have tumbled even lower this week down 6%, after plunging 38% last week. 


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Retail Callouts (10/30): COLM - Too Soon to Short, TGT, WMT, KSS

Takeaway: COLM -- Too Soon To Short, But Start Doing The Work | WMT not offering free holiday shipping | KSS Giving the store away

COLM -- Too Soon To Short, But Start Doing The Work


We question how long this good news out of Columbia will last. With the 3Q print, and positive market reaction, we're nudging closer to the short side.


On the plus side, this is about as airtight a quarter as we’ve seen from any company in the retail space (outside of NKE) this 3Q. The earnings algorithm on the income statement was impeccable with revenues +14%, gross profit +16%, EBIT +35%, and earnings +38%, with the sales to inventory spread improving sequentially from -10% to +3%.Even if we exclude the $40mm in wholesale shipments pulled forward from 4Q, the organic growth rate for the company still improved sequentially by 250bps (excluding Fx, Prana, and China JV). If we were to poke holes in any part of the print it would be on guidance, but that’s par for the course with the COLM management team -- the king of the 'guide & beat'. In truth, guidance was far less bearish than we've seen from COLM in a while -- and today's stock reaction knows it. 


On the flip side, we can't escape three things…

1) This selling season has not started off well for cold weather apparel by a country mile. This revenue represents wholesale shipments we're seeing out of Columbia -- they were ordered six months ago when retailers still had fresh memories of extremely harsh winters over each of the past two years. Now that everyone already owns a puffy jacket (we'd argue that 8 out of 10 people reading this bought a new foul weather coat in the past two years), we're curious to see how sell-through looks this season.
2) COLM's shipments and inventory levels look great. But that's not the case in apparel retail in general. There's no question that inventory/sales ratios for the retailers have eroded-- perhaps temporarily -- in the wrong direction. It's simply too early in the season for them to turn on the discounting spigot, but as Black Friday approaches keep an eye on the category. 

3) A significant part of the revenue upside came from Sorel, which is a great brand in its own right. But it's definitely struck a fashion chord with its women's line for this fall (see below). These trends always last longer than most people think, but let's be clear -- this is NOT COLM's core competency. It's not even close.

Retail Callouts (10/30): COLM - Too Soon to Short, TGT, WMT, KSS - 10 30 15 Chart3

Retail Callouts (10/30): COLM - Too Soon to Short, TGT, WMT, KSS - 10 30 15 Chart1

Retail Callouts (10/30): COLM - Too Soon to Short, TGT, WMT, KSS - 10 30 15 Chart2


WMT, TGT - Wal-Mart Won't Offer Free Shipping over Holidays



Why didn't WMT follow TGT down the free shipping rabbit hole? Our sense is that WMT feels that it's currently doing enough to win the Holiday battle -- 'rollbacks' starting 11/1, lower prices, higher wages/better service. And, it just couldn’t stomach the $5-$8 dollars it costs to ship a pack of pencils for free. Our sense is that WMT will compete away any shipping delta between itself, TGT, and AMZN in price which in effect takes prices down across the industry as price matching algos step into high gear.


KSS - Giving the Store Away

To be fair, this isn't a big deviation from the Halloween weekend sales KSS has run in the past with the one exception being the extra 20% off + triple points for rewards members. But, if you are the consumer (especially a fringe KSS consumer) how  do you keep the promotions straight? 50% off specials + Kohl's Cash + Rewards Benefits. It would not only take a really savvy couponer to figure out the benefits, but this looks like the type of promotion that would cater to a dedicated Kohl's shopper and doesn't solve THE key issue, which is attracting new customers. Looks like Mansell and co. is throwing the kitchen sink at its customer base.


2015 vs 2014

Retail Callouts (10/30): COLM - Too Soon to Short, TGT, WMT, KSS - 10 30 2015 chart4 


TGT - Target officially announces free shipping on all orders for the holidays, repeating last year's offer. 



DECK - Deckers appointed Stefano Caroti, former Nike and Puma exec, as president of omni-channel.



TGT - Target launched a new international website shoppable in more than 200 countries/territories.



M - Macy’s will be opening Thanksgiving with Black Friday deals starting at 6pm.



M - Macy’s Inc. discusses store plans for Abu Dhabi in 2018.


LNKD: Thank You Santa (3Q15)

Takeaway: No lumps of coal in guidance this time. Also the acceleration in organic TS revenue growth essentially puts the Lynda decoy story to bed.


  1. GOOD PRINT: LNKD beat top-line estimates by roughly 3%, beating estimates across all segments while surprising with a considerable beat on EBITDA.  Naturally, some of its upside has to do with its sandbagged guidance (i.e. Display) over the last two prints, but the bulk of its top-line beat came from Talent Solutions.  LNKD produced accelerating organic Talent Solutions revenue growth in 3Q, with ARPU also accelerating from 2Q levels.  We suspect LNKD’s heavy investment in its salesforce within an improving selling environment is starting to pay off. 
  2. CLEAN GUIDANCE: LNKD raised guidance 2015 guidance by $37.5M at the midpoint, which is basically driven mostly the 3Q beat of $32.5M.  So 4Q guidance only translates to $5M raise, which wound up being only $1M above consensus estimates at the midpoint.  Granted, $5M is not a big raise by any extent, but it was clean; no big upside surprises from Lynda or organic cuts.  
  3. BUT NOT A SLEEPY LONG: The setup on LNKD can turn any given quarter, and naturally we are cautious staying long into the 2016 guidance release since this mgmt team is notoriously cautious with guidance.  The positives into 2016 is that LNKD will start comping past two pretty big drags on revenue growth (Display and Fx), and is still ramping its salesforce into 4Q.  The potential risk is that the selling environment, which is driven by the macro backdrop.  That said, if our tracker turns, we'll likely get out of the way.   


LNKD: Thank You Santa (3Q15) - LNKD   Sales Rep Slide

LNKD: Thank You Santa (3Q15) - LNKD   ARPA vs. JOLTS 3Q15 3


Let us know if you have any questions or would like to discuss in more detail.  


Hesham Shaaban, CFA


CHART OF THE DAY: Disappointing U.S. Data Eerily Reminiscent Of 2006-2007


CHART OF THE DAY: Disappointing U.S. Data Eerily Reminiscent Of 2006-2007 - chart1 EL


"For what it’s worth," Hedgeye Macro analyst Darius Dale wrote in today's Early Look. "We think the preponderance of incremental data is likely to continue to be negative."

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