Draghi, Oil and Retailers

Client Talking Points


Mario Draghi is saying the ECB “cannot be relaxed” about fighting #Deflation – so, he’s devaluing the Euro again this morning. The Euro is down -0.5% to $1.06 vs. USD, reversing what was a Dollar Down day yesterday (in other words, he’s perpetuating commodity #deflation).


WTI Oil is looking to snap $40 again as the Dollar ramps on “whatever it takes” to try to bend/smooth economic gravity - you can expect that most OCT “reflation” data is going to mean revert to bearish TREND here in NOV as commodities crash.


But, you “buy Retailers on low gas prices”, right? Gap (GPS) and William Sonoma (WSM) were the latest “misses” last night – and as long as you aren’t long anything other than AMZN, all good – U.S. Retail (XRT) is down -10.3% for 2015 year-to-date.


**Tune into The Macro Show with Hedgeye CEO Keith McCullough at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Restaurants Sector Head Howard Penney attended MCD's investor meeting in New York City early last week. His takeaway from the meeting was that it was "very very bullish" for investors. Expectations were high, but CEO Steve Easterbrook came to NYC with big changes which have ultimately exceeded those expectations. "The big smile on Steve Easterbrook's face when talking about the current quarter was very telling," Penney writes. "He could not hide the enthusiasm." MCD increased the dollar value returned to shareholders by $10 billion. Penney and his team still see +30% upside from here.


Restoration Hardware (RH) shares got caught up in the tumultuous selloff of other high-end retailers. But we're still bullish on RH. Here's why. RH Tampa has just opened. That makes 4 new Full Line Design Galleries in 90 days. And all will be open before the start of holiday shopping season and just in time to house the new product lines RH Modern and Teen. Add up the four stores and we’re looking at about 210k square feet. That alone represents about 25% growth in square footage.


When all is said and done, we still think this company has $11 in earnings power 4-years out, which is nearly double the consensus. We remain convinced that the debate should not be ‘if or when’ the stock hits $115, but rather is it going to $200 or $300? We’ll be looking at an earnings CAGR of 40-50% over five years. What kind of multiple does that deserve? 20x? 25x? 30x? We’d argue the higher end.


It was a nasty end to the week for the “growth is back” bulls. It was an equally nasty end to the week in equity markets. The S&P 500 was “going to all-time highs” Tuesday before retreating over 3% from Wednesday to Friday.


With continued data-driven confirmation that growth is slowing:

  • PPI (producer price index) printed -1.6% Y/Y for October
  • On a m/m basis, PPI declined -0.4% 
  • Declines in the energy component certainly bring the index lower, but PPI ex. Food and energy only printed +0.1% Y/Y which is ugly

**Please note we removed EDV from Investing Ideas yesterday. With the Fed hell bent on raising into a slow-down, we have to risk manage the risks associated with that. They have no idea on the economy (forecasts on growth have been wrong 70% of the time since Bernanke's un-elected reign). So the risk, is their forecast.


Three for the Road


Buy  $ZOES - very strong quarter



By associating with wise people you will become wise yourself.



Last month was the hottest October in 136 years of data, according to U.S. figures released Wednesday, making it the 8th record-breaking month so far in this year.

Join Hedgeye For Holiday Cocktails & Appetizers

'Tis the Season…. We hope you can join us at La Biblioteca (622 3rd Avenue at 40th Street – located inside Zengo restaurant) on Wednesday December 9th, from 5-9pm for some holiday cheer!


Please RSVP to Kerrie at  if you can join.


We look forward to seeing you!


-Your Hedgeye Macro Team


Join Hedgeye For Holiday Cocktails & Appetizers - he client holiday party DEC2015

The Macro Show Replay | November 20, 2015



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Zoes Kitchen (ZOES) is on our Hedgeye Restaurants Best Ideas list as a LONG.


ZOES was never a one or two quarter call for us. Given the high multiple (EV / NTM EBITDA of ~27x) nature of the stock it is ultra-sensitive to the volatile market. Since going LONG the name on 4/08/15 (link to Black Book HERE) at a price of $31.21, we saw a peak in the stock price on 7/23/15 at $45.60 per share and now we are back down to the ~$30 range. This stock does not contain style factors that the market likes right now (high-beta, low-cap), so we expected a turbulent ride, but you must stay strong and buy on the dips. This quarter for instance is a perfect example, there was nothing wrong with it, besides the comp number missing slightly, and the stock was down 9% immediately in after-hours trading, it has since recovered slightly. People that sell on these headlines create great buying opportunities, and we are buyers of ZOES on any big down day like this.


ZOES reported revenue of $56.4 million, representing 29.4% YoY growth and beat consensus expectations of $55.7 million. Comparable restaurant sales increased 4.5%, versus consensus expectations of 5.4%. The comp was built up by +4.6% mix, +0.3% price and a -0.4% traffic. Management’s explanation for why traffic declined was because they have been pushing catering and family offerings, which reduce the actual number of transactions. By diving deeper into this phenomenon, management seemed to have created more questions for themselves than answered. Nonetheless, this was a solid comp performance given they took virtually no pricing. In select markets management is now testing price increases to assess elasticity.



Restaurant level operating margin for ZOES improved to 21.58% an increase of 174bps YoY and beat consensus expectations of 20.79% by 79bps. This improvement was led by a reduction in cost of sales by 223bps down to 31.47% from 33.70% last year. Slightly offset by an increase in labor costs, which were 28.16% in the quarter, up 83bps YoY and 29bps higher than consensus expectations. ZOES prides themselves on hiring great talent and paying higher than the minimum wage, to that end, labor will continue to be a headwind into 2016. Commodity basket deflation will be a minor tailwind for them, as they have been experiencing lower poultry costs



ZOES adjusted net income for 3Q15 was $0.09 million, or $0.05 per diluted share, beating consensus estimates of $0.03 and increasing $0.01 YoY.


Opened 10 restaurants during the quarter, for a total of 158 company-owned restaurants. Since the end of Q3, ZOES has already opened four more restaurants, bringing the 2015 count to 33 new company-owned restaurants (high end of the guidance). Looking into 2016 ZOES plans to open four stores in Colorado and three more in Kansas City, which already has one store.


For the full year 2015 the company updated guidance slightly. Restaurant sales will be between $222 million and $224 million versus previous guidance of 220 million and $224 million. Comparable restaurant sales growth of 5.5% to 6.0% versus previous guidance of 5.0% to 6.0%. Restaurant contribution margin of 20.3% to 20.6% versus previous guidance of 20.0 to 20.5%.


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw




November 20, 2015


  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
2.29 2.17 2.24
S&P 500
2,038 2,104 2,081
Russell 2000
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NASDAQ Composite
4,917 5,144 5,073
Nikkei 225 Index
19,015 19,966 19,859
German DAX Composite
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Volatility Index
14.72 20.51 16.99
U.S. Dollar Index
98.49 100.18 99.06
1.05 1.07 1.06
Japanese Yen
121.81 123.91 122.89
Light Crude Oil Spot Price
39.15 42.34 41.85
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2.20 2.38 2.26
Gold Spot Price
1,068 1,097 1,081
Copper Spot Price
2.05 2.20 2.08
Apple Inc.
111 119 118
1,215 1,339 1,284
Valeant Pharmaceuticals International, Inc.
67.01 88.26 84.00
Facebook, Inc.
103 110 106
Williams Sonoma, Inc.
62.09 68.19 66.21
Nike, Inc.
120 132 125



WSM | Not A Good Quarter

Takeaway: Earnings quality was horrible. Taking down numbers. WSM is still shortable here.

This was absolutely not a good quarter from WSM. Sales growth was decent at 7.8% – but to be clear, the company bought it. Gross Margins were -112bps, leading to Gross Profit growth of just 4.6%. And if the company didn’t pull the goalie on the SG&A line (corporate), EBIT would have been down 6%. To be clear, this was the WSM’s greatest SG&A leverage this cycle – and on a mediocre comp. Add on a lower tax rate, and earnings would have been $0.13 lower than the reported number, or an $0.08 miss. Oh yeah…cash flow was down 50%. No one talks about that.  We’re taking our 2016 number down to $3.70 vs the Street at $3.90. Does that make WSM a raging short? No. But we’d argue that unlike RH, only 40% of WSM’s mix is defendable in the face of a weakening consumer. All in, this stock has seen 12-13x earnings during a downward revision cycle. Let’s generously say 14x $3.70 next year – that’s a $52 stock vs $66 today. We’ll take that.


Comps – The company actually missed comp expectations by 50bps though sales beat as International revenue made up the difference. But, all concepts with the exception of Pottery Barn showed underlying strength accelerating on a 2yr basis. Ex-West Elm, by our math the company put up a 2.5% comp the lowest number since 4Q12. As noted above the company bought the comp.


Weak Guidance – WSM guided the mid-point of comps, sales, and earnings 200bps, 2%, and 6% below the street, respectively. There seemed to be a fair amount of caution embedded in the guide as the company held full year guidance and backed into the 4Q implied numbers with little confidence in the outlook for Holiday. That’s what happens when the rest of retail is imploding, mall traffic remains weak, and the 4Q comp is much more levered to things like Peppermint Bark and gifting than actual home furnishings. 4Q numbers look hittable, but the lack of a ringing endorsement by the management team is worth calling out.


West Elm – i.e. the only concept within the WSM family of brands that is growing square footage put up a 15.7% comp in the quarter which equated to a 40bps acceleration on a 2yr basis sequentially. The concept has always been a good bell weather for RH from a directional standpoint. The consumer/concept are much different, West Elm productivity is in the $800/sq.ft. range compared to RH at $3,300 (inclusive of e-comm) in the same size box, but it’s the only concept growing square footage. We are modeling a divergence in 3Q15 as RH pushed its growth into 2H from 1H with the release of two new concepts this Fall (Modern and Teen).


WSM | Not A Good Quarter - RH WE COMPS


GM – was down 110bps in the quarter, with merch margins relatively flat offset by dilution from International franchise growth and increased shipping expense as WSM continues to iron out its inventory position from the West Coast port contract dispute that we should mention was resolved nine months ago (and yet the company still talks about it). On the shipping front, new rate hikes at FedEx and UPS haven’t hit the P&L, so this was all self-inflicted. Each of the negative drivers on the GM line appear to be unique to WSM and shouldn’t be contagious to a name like RH.


SG&A – SG&A leveraged by 95bps with all and then some of the leverage attributable to unallocated corporate expenses, which was down 100bps (the best leverage we’ve seen this cycle). By our math that’s an $0.08 benefit to earnings or all and then some of the 3Q beat. If International (which was called out as the biggest drag to Gross Margin) is in fact EBIT margin accretive, we didn’t see it this quarter. Holding the unallocated corporate expense % of revenue line flat in the quarter EBIT would have been down 6% instead of up 6%.


International – We’re not convinced that this is a winning strategy for WSM. It’s not a new thought to call out the fact that WSM is desperately looking for growth in any corner of the globe it can get its hands on, but the gross margin drag we saw this quarter isn’t a one off, and the EBIT accretion associated with that trade off didn’t show up. Consider this for a second, RH hired Doug Diemoz, previously of WSM, back in March of 2014 (he has since left to be the CEO of Crate & Barrel). At WSM he was charged with structuring the International licensing agreements for Pottery Barn in the Middle East. So, RH acquired first hand knowledge on the ins and out of that business and has subsequently talked down its International growth opportunity. 

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