TIF | TIF Will Miss Again

Takeaway: The market might be blowing off this ugly print, but we’re not. TIF will miss again.

We’re staying short TIF in the wake of the company’s 3Q results. Simply put, in the absence of 2016 guidance, the consensus will remain too high – likely in the range of $4.30-$4.40. We’re clocking in about $0.30 lower. Is that a huge miss? No. But

a) we also don’t assume a material worsening in the economy in our model, which could push numbers closer to $3.50.

b) After last holiday’s blow-up, the Street was at $4.45 for FY15, and now is at $4.02. Not a huge earnings miss by our standards – yet the stock is down 28% year to date.  There’s no reason we can’t, and won’t, see that again.


The key question we ask is why earnings NEED to grow next year. If TIF is going to have a flat year in FY15 in an otherwise decent US and Global economy, what kind of consumer climate do we need to assume in 2016 to get earnings higher? That’s especially the case given the following…

a) Sales productivity at historical peak of ≈$3,450

b) A Brand that might be Great to the person typing this note, but one that is simply ‘very good’ to Millennials.  

c) Minimal square footage opportunity (2% long term)

d) A business that structurally does not lend itself to online (only 6% of sales)

e) Gross Margins currently at peak levels of 60%

f) EBIT margins still at 19% this year despite the company’s challenges – with 2-3 points of potential downside.


Ultimately, while we have no doubts in the quality of the management team, the reality is that there are no obvious margin levers to offset the declining growth profile in the business, especially amidst increased late cycle risks.

The price has come off, but so have earnings. It is trading near a peak multiple on our numbers (18x) on peak margins (21%), and peak earnings that are not likely to grow for 2-3 years. 

On Fox Business: The Global Growth Slowdown Threat

On Fox Business’ Mornings with Maria, Hedgeye CEO Keith McCullough discusses Q3 U.S. GDP, slowing global growth and the ramifications of radically divergent monetary policy around the world with Cumberland Advisors CIO David Kotok and Vining Sparks’ Craig Dismuke.


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Client Talking Points


Expectations for liftoff have creeped right back into the equation. The bid yield of December Fed funds futures is higher than it’s been since before the September meeting at 22.5 bps. In addition to the risk the Fed hikes into a late cycle slowdown, the risk to consensus positioning is that it looks similar to late August. If the hawkish tone over the last month was a de-facto tightening, no hike would be the catalyst for an un-winding of deflationary consensus positioning in FX and commodities. That’s a policy risk within our deflationary Q4 view.      


Brent crude oil up nearly +2% on news of Turkey downing a Russian fighter jet near the Syrian border. Turkish officials reported having warned the plane to exit Turkish airspace nearly 10 times in the five minutes preceding the strike. Russian officials may or may not react in kind, but the country's benchmark RTSI Cash Index is down over -3% (leading declines in the Emerging World) and signaling an escalation in the conflict emanating from the Middle East. Can the the U.S. economy handle the 1-2 punch of a #StrongDollar tightening cycle that has been bearish for manufacturing, exports and corporate profits AND rising fuel prices that is bearish for the consumer?


The German IFO business survey showed month-over-month improvement in November (Expectations rose for a 3rd straight month to 104.7 vs 103.9 in the prior month). Meanwhile, the ECB’s Executive Board member Sabine Lautenschlaeger said that the central bank shouldn’t undertake any further monetary stimulus measures for now, saying that “data in the last few weeks indicate that the euro-area economy has so far shown itself to be resistant to uncertainty in the global economy.”  Lautenschlaeger’s views are clearly divergent from those of ECB head Mario Draghi who is supportive of increased QE to support ailing growth and inflation. We reiterate our #EuropeSlowing theme and expect the 12/3 ECB meeting to be a catalyst for Draghi to signal additional supportive measures for the region. 

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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.


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.


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).

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. 


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


$CMG claims to be the first non-GMO restaurant but the @NonGMOProject (the gold standard) does not recognize them as non-GMO! #problems



The less men think, the more they talk.

Baron Montesquieu


The NTF estimates that in 2013, more than 240.0 million turkeys were raised, more than 200 million were consumed in the U.S. According to the NTF 46 million of those turkeys were eaten at Thanksgiving, 22 million at Christmas and 19 million at Easter.


Please join us on Thursday, December 3rd at 11:00AM EST, for our Thought Leader call with Rick Berman.  On the call we will be discussing a number of important topics facing the restaurant industry, from labor issues, to the potential for increased restrictions on alcohol consumption at restaurants.  In addition, Rick will talk about the Center for Consumer Freedom and the number of issues they have with Chipotle.  The Center for Consumer Freedom has been very critical of Chipotle advertising message among other issues. 


Here is the link to the center for Consumer Freedom web site -

In addition, here is a link to the Chubby Chipotle web site -


We will provide more detail about the call early next week.


Rick Berman Bio

Rick Berman is President of Berman and Company, a Washington, DC-based public affairs firm specializing in research, communications, and creative advertising.


Berman has founded several leading nonprofit organizations known for their fact-based research and their aggressive communications campaigns.


A long-time consumer advocate, Rick champions individual responsibility and common sense policy. He believes that democracies require an informed public on all sides.


Berman was previously employed as Executive Vice President of Public Affairs at the Pillsbury Restaurant Group, where he was responsible for the government relations programs of all restaurant operations. He was also a labor lawyer at the United States Chamber of Commerce, the Dana Corporation, and the Bethlehem Steel Corporation.


Rick Berman has testified on numerous occasions before committees of the various state legislatures, the U.S. Senate and the U.S. House of Representatives. The Hill, a popular Washington, DC newspaper has named him a “Star Rainmaker” on Capitol Hill. Rick has appeared on all the major broadcast and cable television networks, and has organized national coalitions to address a wide variety of issues.


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw






CHART OF THE DAY: A Granular Look At Existing Home Sales


CHART OF THE DAY: A Granular Look At Existing Home Sales - EL 11 24


Below is a brief excerpt and chart from today's Early Look written by Hedgeye US Macro analyst Christian Drake. Click here to subscribe.


"... Existing Home Sales: EHS declined -3.4% MoM – predictably recoupling to the Trend in Pending Home Sales. Recall, pending home sales = contract signings while existing home sales = closings so Pending sales effectively signals existing sales a month in advance. There are a couple notables. First, inventory held below the traditional balanced market level of 6-months for a 38th consecutive month as continued supply tightness remains supportive of price trends. Second, in contrast to the headline decline in sales, sales to 1st-time buyers rose +3.2% MoM and accelerated +220bps sequentially to +11% year-over-year in October." 



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