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CMG | SHORT THE FUNDAMENTALS

Last week we laid out the SHORT case for CMG (click HERE to view) given the issues the company is facing surrounding the consumer perception of the brand.

 

The non-GMO tailwind is turning into a headwind.

CMG | SHORT THE FUNDAMENTALS - CHART 1a

 

Limited pricing and declining traffic suggest a lower trajectory for same-store.

CMG | SHORT THE FUNDAMENTALS - CHART 2

 

Margin pressure will ensue with slowing sales trends.

CMG | SHORT THE FUNDAMENTALS - CHART 3

CMG | SHORT THE FUNDAMENTALS - CHART 4

 

Aggressive capital spending in 2011 & 2012 led to lower productivity in 2Q12. Aggressive capital spending from 2014-2015 is leading to new lows in productivity.

CMG | SHORT THE FUNDAMENTALS - CHART 5

 

Accelerated development is increasing the pressure on the entire organization (i.e. foodborne illness)

New store productivity is the ultimate arbiter of future growth.  Based on this calculation, shown below, CMG's new stores have hovered at 85-95% of an existing store's volume since 2010.  In 3Q15, the new unit productivity is below where it was in 2Q12.  This number will likely head lower in the coming quarters. 

CMG | SHORT THE FUNDAMENTALS - CHART 6

 

Accelerated unit development in 2016 will only make the problem worse.

CMG | SHORT THE FUNDAMENTALS - CHART 7

 

The stock will adjust to a slower growth; lower margins and lower returns and a lower multiple.

CMG | SHORT THE FUNDAMENTALS - CHART 8

CMG | SHORT THE FUNDAMENTALS - CHART 9

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 

 

 

 


Fact vs. Fiction

Client Talking Points

USD

Another #StrongDollar week in the bag (+0.6% USD Index to +10.3% year-to-date) after Draghi Devaluation sent the Euro -1.2% on the week to -12% year-to-date – this is as deflationary a force as it was in the summer-time – FICC markets get that – Equities, not so much.

COMMODITIES

Crash in Copper (-1.8% this morning to $2.02) continues and Oil is down another -3%, testing $40 WTI (again) – hardly the green shoots a supply/demand bull is looking for, but we’re probably being too bearish looking at fact vs fiction.

UST 2YR

UST 2YR spike continues to 0.93% this morning as the Fed abandons the “data dependence” thing and goes with whatever the S&P 500 is doing instead. USD and short-term rates say DEC hike – so does the Yield Spread, compressing 9 basis points last week, which reads as a hike perpetuating both #Deflation and #GrowthSlowing.

 

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

Asset Allocation

CASH 68% US EQUITIES 4%
INTL EQUITIES 3% COMMODITIES 0%
FIXED INCOME 20% INTL CURRENCIES 5%

Top Long Ideas

Company Ticker Sector Duration
MCD

MCD is reducing G&A by $500 billion compared to the $300 million target announced in May the vast majority of which they expect to realize by the end of 2017.

 

Expectations going forward are for system sales to grow faster than G&A. The incremental savings are primarily derived from savings coming from a more heavily franchised and less G&A intensive structure; streamlining of corporate and former Area of the World organizations and realizing greater efficiencies through the global business services platform. The G&A savings represent roughly a 20% reduction off of the G&A 2015 base of $2.6 billion.

 

Another big shift is that MCD is now aiming to refranchise 4,000 restaurants by the end of 2018, with mostly all of them to take place in the high-growth and foundational segments.

RH

Below are two callouts from this Thursday's Willams-Sonoma (WSM) third quarter earnings print as it relates to Restoration Hardware (RH). RH will report earnings in early December.

 

  1. 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 bellwether 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).
  2. 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. It's important to mention the contract dispute because it 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. 
TLT

The long bond position is taking some heat with the rate hike fears, but that’s why you’re short JNK on the other side of it. Deflation and increasing rate hike expectations are the nemesis of poor credit. As mentioned last week, it’s called spread risk, and this leverage is fueled by low rate policy.

 

Since the Fed turned hawkish, bonds are down, rates have risen, and deflation has re-commenced. Admittedly, long-term treasuries haven’t worked. TLT is down -2.0% over the last month; BUT, if you’ve followed us with our short JNK call, that’s down -3.4%.

Three for the Road

TWEET OF THE DAY

NEW VIDEO Chipotle Will Lose in Court of Public Opinion https://app.hedgeye.com/insights/47682-penney-chipotle-will-lose-in-the-court-of-public-opinion… via @HedgeyeHWP cc @KeithMcCullough @Hedgeye

QUOTE OF THE DAY

The man of wisdom is never of two minds; the man of benevolence never worries; the man of courage is never afraid.

Confucius

STAT OF THE DAY

Oil (WTI) closed down another -1.2% week-over-week at -30.9% year-to-date and copper crashed another -6.1% last week, taking its 2015 #Deflation to -27.8% year-to-date.


The Macro Show Replay | November 23, 2015

 


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November 23, 2015

 

  • Bullish Trend
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INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
2.36 2.18 2.26
SPX
S&P 500
2,040 2,108 2,089
RUT
Russell 2000
1,138 1,192 1,168
COMPQ
NASDAQ Composite
5,008 5,149 5,104
NIKK
Nikkei 225 Index
19,015 19,966 19,715
DAX
German DAX Composite
10,729 11,161 11,119
VIX
Volatility Index
14.18 20.51 14.74
DXY
U.S. Dollar Index
98.49 100.15 99.62
EURUSD
Euro
1.05 1.07 1.07
USDJPY
Japanese Yen
121.81 123.91 122.72
WTIC
Light Crude Oil Spot Price
39.22 43.36 41.46
NATGAS
Natural Gas Spot Price
2.05 2.30 2.29
GOLD
Gold Spot Price
1,060 1,090 1,076
COPPER
Copper Spot Price
1.99 2.13 2.04
AAPL
Apple Inc.
111 120 119
PCLN
Priceline.com Inc.
1,215 1,304 1,281
VRX
Valeant Pharmaceuticals International, Inc.
66.24 91.98 91.00
FB
Facebook, Inc.
103 110 107
BABA
Alibaba Group Holding Ltd.
75.19 82.59 79.95
NKE
Nike, Inc.
127 133 132

 

 


Penney: ‘Chipotle Will Lose in the Court of Public Opinion’

Earlier this week, our Restaurants team hosted an institutional conference call outlining their Best Idea Short call on Chipotle (CMG). In this brief excerpt,  analyst Howard Penney answers a slew of subscriber questions about pending lawsuits against Chipotle and the potential adverse impact on its stock.  


The Week Ahead

The Economic Data calendar for the week of the 23rd of November through the 27th of November is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.

 

CLICK IMAGE TO ENLARGE.

The Week Ahead - 11.20.15 Week Ahead


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20 Proprietary Risk Ranges

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