Takeaway: TIF traffic trends decelerate in 3Q. Rare spike in both ICSC/Redbook, compares easy until Black Friday / Dec, which is what really matters.
TIF - E-comm Traffic Trends Decelerate in 3Q
TIF just closed the books on 3Q, and the traffic trends headed out of the quarter look particularly weak. E-commerce accounts for just 6% of total sales for the company -- but because the average ticket for TIF sits at $750 there is a lot less impulse and a lot more planning before a consumer slaps down a credit card and walks away with a blue box. The metric, which looks at the relative strength of an e-commerce site relative to the internet in aggregate takes into account two metrics (unique visitation and page visits per user), decelerated from +10% YY at the end of the 2nd quarter to -5% at the end of 3Q with marked softness throughout the quarter.
Not a good barometer for brand strength in 3Q, especially when the common perception seems to be that “just because Tiffany (TIF) blew up earlier this year, it can’t blow up again.” We disagree. It actually blew up twice this year. And we think there will be another. Next year's estimates are sitting at $4.54. We think an optimistic number is $4.25. If our Macro team's bearish call plays out according to plan, TIF will be lucky to earn $4.00.
With productivity, margins and returns all near 10-year highs, and the stock trading at 19x a number we don't think is doable, we still like this one on the short side.
RETAIL sales Trends (ICSC / RedBook) - a rare spike in both indices, which happened on the same day LB put up a big comp (3Q at ~7% vs 5% expectations). On the heels of a lot of negative sentiment around retail, this offers up a 1-day reprieve. Note, however, that comps are very easy through most of November -- until Black Friday and December, which is what really matters.
LB - L Brands Reports Oct. Comp #s, Takes Up 3Q Ahead Of Investor Day
DLTR - Dollar Tree completes sale of 330 Family Dollar stores to Sycamore Partners. Stores to be branded Dollar Express.
AMZN - Amazon bookstore opening in University Village. The 5500 SqFt store will carry 5000-6000 titles.
AEO - American Eagle Outfitters acquiring Tailgate Clothing Company for $11mm, takes up 3Q guidance.
GNC - GNC expects to repurchase an additional $200mm shares by year end, raising guidance 2 cents to include the impact.
EBAY - eBay Enterprise Sold Off and Broken Up
99 Cents Only announced Felicia Thornton has been appointed as its CFO and treasurer
SHLD - Sears enters online home services market
BONT - Bon-Ton Stores Announces Extension of Private Label Credit Card Agreement With Alliance Data's Card Services Business
GCO - Genesco To Acquire Little Burgundy Chain From The Aldo Group
Sports Authority Launches New Fitness Training App
Selfridges Buys Arnotts Department Store in Dublin
Takeaway: While the CoreLogic data continues to tell a story of accelerating HPI, another emergent trend is that of serial revisions & overestimation.
Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.
Today's Focus: September CoreLogic Home Price Report
CoreLogic HPI: Over the last year, the CoreLogic HPI series – which has historically been the best, most real-time price series – has shown an alarming trend toward imprecision and overestimation.
The 1st chart below shows the revisions to the Jul/Aug data. Alongside the September release, August was revised lower by -150bps from +6.9% YoY to +5.4%. July, meanwhile, was revised lower for a second time with a revision of -70bps taking price growth down to +5.0% YoY. Price growth in July was originally estimated at +6.9% YoY, so the collective revision of the last two months has brought that down by almost a full -200bps.
And this revision pattern is not isolated to the September release – the serial overestimation in the original estimate followed subsequently by large-scale negative revisions has characterized the pattern every month YTD.
The revision is not inconsequential as it effectively (almost) changes the read-through. Whereas the original estimate has reflected conspicuous acceleration and a positive read-through for housing related equities, the revision to flat-to-modest HPI carries a less bullish read-through for the complex. In fact, the collective revision to July shows HPI decelerating modestly in the month and completely reverses the HPI-Equity Performance conclusion.
Further, historically, CoreLogic has been a very good lead indicator for the Case-Shiller HPI series, front-running the slope of HPI in Case-Shiller by 2-3 months. That lead indicator status has become increasingly suspect given the prevailing revision pattern.
Inclusive of the apparent methodological flaw in the CoreLogic series, the three primary price series (CoreLogic, FHFA, Case-Shiller) continue to tell a largely congruous story of flat-to-modestly accelerating HPI. We’re going to call CoreLogic to see if we can get some tangible underpinning for the serial overestimation in the data. We’ll report back with anything of consequence.
CoreLogic HPI incorporates more than 30 years worth of repeat sales transactions, representing more than 55 million observations sourced from CoreLogic's property information database. The CoreLogic HPI provides a multi-tier market evaluation based on price, time between sales, property type, loan type (conforming vs. nonconforming), and distressed sales. The CoreLogic HPI is a repeat-sales index that tracks increases and decreases in sales prices for the same homes over time, which provides a more accurate constant-quality view of pricing trends than basing analysis on all home sales. The CoreLogic HPI covers 6,208 ZIP codes (58 percent of total U.S. population), 572 Core Based Statistical Areas (85 percent of total U.S. population) and 1,027 counties (82 percent of total U.S. population) located in all 50 states and the District of Columbia."
Joshua Steiner, CFA
Christian B. Drake
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TICKERS: CZR, BLOOM, AIRBNB, CCL, UBER
November 3: 10:00AM: NCLH 3Q CC
November 3: 10:00AM: RHP 3Q CC
November 3: 11:00AM: H 3Q CC - , PW: 52469697
Novmber 4: 4:30PM: AWAY 3Q CC - ,PW: N/A
November 4-6: Anthem of the Seas Dead Cruise/Investor Event
November 5: 8:30AM: MPEL 3Q CC - , PW: MPEL
Transit Visa Policy - The Macau Police used their WeChat page to counter the rumors regarding possible changes to the transit visa policies. Remember, Union Gaming reported over the weekend that the government was implementing transit visa changes, citing multip sources. Below is a translated snag from WeChat.
Takeaway: Interesting turn of events. The July transit changes generated more visitation through that visa scheme but did not translate into gaming revenue growth. Even if Union Gaming was correct, it's difficult to say there would be any revenue impact this time.
CZR - Caesars Entertainment Corp. is pulling out of both Cleveland and Cincinnati, where it owned and operated two Horseshoe casinos that are being taken over by Rock Gaming LLC. The Cincinnati Business Courier, a Baltimore Business Journal sister publication, reported the Horseshoe Casino Cleveland, Horseshoe Cincinnati and ThistleDown Racino in North Randall, Ohio, will be rebranded and operated by Rock Gaming. Rock Gaming already owned the Cincinnati property, and the casinos and racino will remain open during the rebranding process.
BLOOM - Philippines-based casino operator Bloomberry Resorts Corp reported a net loss of PHP189.5 million ($4.1 million) for the third quarter of 2015, compared to a net profit of PHP991.7 million a year earlier. The firm on Tuesday said its Philippine operations recorded PHP281 million in net profit for the three months to September 30, while a casino resort in South Korea that it recently took over generated PHP471 million in net losses.
AIRBNB - American Express is teaming up Airbnb to let its card members pay for their home and apartment rentals more easily. Airbnb will now accept American Express membership rewards points to pay for booking. Users will be given the option to sign into the site using their AmEx credentials and then given the ability at checkout to pay fully or partially for their home rentals using their points.
Takeaway: A valuable partnership for both sides.
CRYSTAL CRUISES - In response to cruiser and travel agent demand, Crystal River Cruises -- the new river cruise division of luxury line Crystal Cruises -- has placed orders for four new river ships, which will launch in 2017. In addition, the line has purchased an existing riverboat, which will be refurbished, renamed and kick off river cruises for the line in July 2016, a year earlier than planned.
CCL - As part of a $300-million refurbishment project, Holland America Line is planning upgrades to its top staterooms with new furnishings, colors, amenities and upgrades for all suites on the line’s Signature-, Vista- and R-Class ships. The first ships to undergo the suite transformation will be ms Eurodam and ms Oosterdam, followed by ms Nieuw Amsterdam, ms Westerdam, ms Zuiderdam and ms Noordam.
UBER - Uber expects its turnover in China to exceed that of the US by the end of the year. Meanwhile, Guangzhou has recently overtaken Chengdu to become Uber’s top city in the world in terms of booking volume. Uber entered the Chinese market in 2014. It has been operating in the major cities of Beijing, Shanghai, Guangzhou and Shenzhen for over a year. Its service now covers 21 cities, and it will continue to expand to other cities in the next 12 months.
Philippine Gaming Investment - Philippine property firm Megaworld Corp and casino operator Travellers International Hotel Group Inc are spending an aggregate of PHP65 billion ($1.4 billion) to develop a 31-hectare (76.6-acre) “leisure and entertainment township” at Entertainment City in Manila Bay. The companies will be allocating a total of about US$300 million to build the residential portion of the project, Megaworld said on Monday. It will be next door to a new casino project called Resorts World Bayshore, to which Travellers International is already committed.
Texas Roadhouse (TXRH) is on the Hedgeye Restaurants LONG bench.
TXRH reported a strong quarter for 3Q15. Top line growth is some of the best in the industry and the momentum continued into October. If October is truly choppy, TXRH is not seeing it. TXRH reported revenue growth of 13.7% driven by a 6.6% increase in average unit volume and a 7.7% increase in store weeks. The flow through to EPS was limited, reporting only 8% EPS growth.
The guidance for 2016 looks to be calling for more of the same. Beef price declines will be a major driver of margin improvement in 2016, TXRH is looking to have LSD total commodity basket deflation. But there were a few questions on the potential impact lower prices could have on top line trends.
No change to our view. We like the trends and the direction the company is headed in, just looking for an opportunity to get more aggressive.
- Comps in the third quarter were up 6.9%, including traffic growth of 5.2%.
- Momentum has continued into the fourth quarter with comps increasing approximately 5% in October.
- TXRH expects low single-digit food cost deflation in 2016
- The overall labor market continue to show signs of tightening expect ongoing labor inflation into 2016. “Kent and I just spent three weeks meeting with all of managing partners, and many were commenting on how wage rate competition has been intensifying”
- TXRH plans to take approximately 1.7% of pricing in mid-November.
- Expect positive comparable sales growth to continue in 2016.
- On track to open approximately 30 company restaurants in 2015 with 27 restaurants opened so far
- Franchise partners have opened three restaurants this year, including our third restaurant in Kuwait, which opened last week.
- Targeting 25 to 30 restaurant openings in 2016 and sites have been selected for almost all these locations.
- Development growth next year will continue to be focused on Texas Roadhouse restaurants, but plan to open at least five Bubba's 33 restaurants next year.
- “In 2016, we'll remain focused on returning capital to our shareholders in the form of dividends and share buybacks and protecting the strength and flexibility of our balance sheet.”
- 3Q15 comp sales increased 6.9%, comprised of 5.2% traffic growth, and a 1.7% increase in average check.
- By month, comparable sales increased 7.6%, 7.1% and 6.1% for our July, August and September periods respectively.
- Comps were up approximately 5% in the October period.
- Expect 4Q15 to be negatively affected by approximately 0.5 points, due to Christmas shifting from Thursday to Friday.
- Restaurant operating profit increased 12.1% and restaurant margins percent decreased 22bps.
- COGS were up 6bps as food inflation continued to outpace our menu pricing actions. For the quarter, our food cost inflation was approximately 3.4%, driven by beef, bringing the year-to-date increase to approximately 6%.
- 2015 food cost inflation will be approximately 5%.
- Labor costs were 32bps higher driven by wage rate inflation and higher healthcare costs. Wage rate inflation to continue to be in the 2.5% to 3% range for the remainder of the year and into 2016.
- G&A costs were up were essentially flat as a percentage of revenue
- The tax rate for the quarter came in at 29.9% which was lower than the 31.4% rate last year due to higher FICA tip credits.
- The quarter with $72.6 million in cash and $70.7 million in debt.
- TXRH generated $35.1 million in cash flow from operations, spent $52.3 million on capital expenditures and $1.6 million on share repurchases.
- 2015 capital expenditures are now expected to be $160 million driven by spending on new units
- locked on approximately 75% of our beef needs for next year.
- expect low single-digit food cost deflation in 2016.
- Expect labor headwinds to continue due to ongoing wage inflation, along with state minimum and tipped wage rate increases.
- Expect significant free cash flow generation after projected capital expenditures of $155 million to $165 million.
IMPORTANT COMMENTS FROM Q&A
- And on the Bubba's front, we're still trying to figure everything out.
- Those look like they're still coming in as expected, around $4.7 million.
- $50 million of the Cap Ex will be for remodels
- “no doubt if you're in New York State and your tip wage is going from $5 to $7.50, which is a 50% increase, you're going to be thinking in terms of a little bit more pricing. If you're in California where your tip wage was $8 two years ago and now it's going to be $10 in January 1, you're thinking in terms of a little bit higher pricing”
- Star Bar Remodels - “I want to say that the count is probably nearing 300. And, I think at some point we'll probably have all of them in the system done, maybe in the next 12 months. Yeah. Our goal was to finish them up by 2016. It just kind of gives a fresh look to the bar area. And then, gives a few more TVs for people to look and at while they're in the bar area, it adds a little more energy. Some of the things we've kind of picked up at Bubba's. So we've kind of moved them over to Roadhouse.”
- “in the few restaurants that we have that are West Texas, South Texas, you have seen more of an impact from the slowdown with that part, but most of Texas for us is just chugging right along, I would say unaffected. And we're pretty consistent across the country otherwise we're growing sales in every part of the country.”
- “turnover is definitely up year-over-year. I guess 7% or 8% year-over-year is what we're up on an hourly basis. Our management turnover hasn't changed much. But on an hourly basis, it's definitely up and not unexpected as unemployment continues to fall. Usually that's what we've seen in the past, unemployment falls and our turnover tends to go up a little bit.”
Please call or e-mail with any questions.
Client Talking Points
CREDIT RISK RISING
Moody’s noted that the speculative grade default rate increased 40 basis points to 2.5% in Q3. While the 4.8% default rate of speculative grade energy sector bonds is the highest since 1999, the more damning takeaways of the broader corporate credit cycle are twofold: 1) defaults in the year-to-date are up 1,800% YoY (38 vs. 2) and the energy sector accounted for ONLY 37% of the 2015’s defaulted issues. In the context of our #SuperLateCycle call, we continue to anticipate a structural widening of credit spreads – as we have each interval since calling the bottom 3Q14.
Looking ahead to Friday, we don’t pretend to have a convicted point estimate on the monthly NFP figure. While the net gain in OCT could be better or worse sequentially, the Trend remains one of conspicuous deceleration. Indeed, with 3M Ave < 6M Ave < 2015 Ave < 2014 Ave, net monthly payroll gains have been slowing all year. And from a 2nd derivative perspective, payroll growth should continue to slow off the FEB peak of +2.34% YoY – note: NFP in Oct would have to be +745K to re-breach that FEB RoC peak to the upside. Moreover, given the outsized gains at the end of last year, payroll comparisons are the toughest they’ve been in 5-years into year-end. Be patient; let the late-cycle breathe.
Chevron followed other majors BP, Shell, Total to round out last week in reporting steep YoY earnings declines for Q3 against difficult comparisons (summer 2014 triple digit crude prices). Like the others, Chevron is reducing headcount and capital spending out to 2018. Lower for longer in growth, inflation and subsequent prices is turning out to be more than a short, bad dream for those leveraged to commodity prices.
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Top Long Ideas
Last week was a big week for McDonald’s (MCD), as they reached the inflection point we were predicting. Post earnings, the next catalyst for the stock is going to be the November 10th analyst meeting.
The meeting will be an opportunity for management to shed more light on the progress of all day breakfast, additional G&A cuts and the potential of doing a REIT. Our Restaurants team remains bullish on the name, and they look forward to giving you some material updates after the meeting.
Restoration Hardware (RH) shares gained 5.8% this past week. The margin story here is explosive. Margins were sitting below 10% on Friday, and we think they will be above 16% in 3 years. The key reason is that expense leverage on these new properties is like nothing we’ve ever seen (i.e. RH pays only 10% more for square footage that’s 300% larger).
In addition, the company does not have to proportionately grow its sourcing organization with the growth in its store base OR its category expansion.
Our estimate is that the company will add $3 billion in sales over 3-years and climb to $11 in EPS. The earnings growth and cash flow characteristics to get to that kind of number would support a 30+ multiple. In the end, we’re getting to a stock in excess of $300.
Our forecasts for domestic economic growth continue to be more accurate than the consensus. We anticipate economic growth will get a lot worse from here. That is why you want to own long-term bonds (TLT, EDV).
Three for the Road
TWEET OF THE DAY
Recession Coming? McCullough and Hilsenrath Square Off https://app.hedgeye.com/insights/47282-recession-coming-mccullough-and-hilsenrath-square-off-on-fox-business… @KeithMcCullough @FoxBusiness
QUOTE OF THE DAY
Life is about making an impact, not making an income.
STAT OF THE DAY
In 1991, Sennheiser unveiled the Orpheus HE90, a combination headphone amplifier and pair of headphones meant for the most rabid audiophiles. Only 300 sets were made and they sold for $16,000 each, currently an Orpheus HE90 could cost you around $50,000.
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