'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!
We look forward to seeing you!
- Hesham Shaaban
We are keeping Chipotle (CMG) on the Hedgeye Restaurants Best Idea list as a SHORT.
The 8-K CMG issued on Friday after the close was long on current details but short on what the company is going to do to fix the issues the company faces. We expect the swift decline in same-store sales caught management off guard and they are unprepared to deal with the severity of the problem.
Management’s knee jerk reaction to the bad news is a big buy back to make investors feel better. In CMG’s case the $300 million repurchase announcement is staggeringly small given there is no funded debt and over $1.2 billion in cash and total investments.
The company’s issues are just beginning and it will take time to recover from this debacle. How management handles the process from this point forward will determine the pace of recovery.
HERE IS WHAT WE KNOW SO FAR
CURRENT SALES TREND UPDATE
NEW COMPANY GUIDANCE
“Future sales trends may be significantly influenced by further developments, including potential additional announcements from federal and state health authorities.”
WHAT WE DON’T KNOW
WHAT WE NEED TO SEE TO GET MORE POSITIVE
While we have seen many restaurant companies run into problems over the years, the fall of Chipotle is nothing short of spectacular. The common denominator that most restaurant entrepreneurs have faced, comes down to one thing: hubris. The lack of humility is a killer. It’s almost guaranteed that life takes care of those issues over time!
Howard Schultz, CEO of Starbucks figured it out in 2009, but only after it was too late! How long will it take the management of CMG?
Do the co-CEO’s of CMG see themselves or their lack of knowledge and experience as the problem? The market and the investment community have put them on a pedestal so high they needed oxygen to breathe. As soon as Mr. Moran and Mr. Ells learn that humility is the only thing that can save them we will get more positive on the stock.
The direct impact of a more humble management team will be a company with a lower margin structure and a significantly slower unit growth rate. CMG is just another restaurant company and the management team needs to realize that.
In the meantime, how this unfolds will be fun to watch.
Over the next couple of days the street consensus for 2016 EPS will need to come down to $13.50 (+/- $0.50) and EBITDA will be around $820 million. With the 2016 estimates in mind, fair value for the stock is between $350 and $400.
Please call or e-mail with any questions.
Nu Skin Enterprises (NUS) is on the Hedgeye Consumer Staples Best Ideas list as a SHORT.
Heading into the investor day we thought there was a chance the stock could rally based on the two products (ageLOC Me and ageLOC Youth) being rolled out in 4Q15 and 2016. Fortunately, the company’s other troubles continue to overshadow any other issue.
Between the end of 3Q15 and the investor day (which was 37 days) was there an event that forced management to highlight an additional risk and uncertainty in its SEC filings?
In the recent 8-K, Nu Skin added an additional risk and uncertainty that was not previously there. It reads, “risk that litigation, investigations or other legal matters could result in settlements, assessments or damages that significantly affect financial results.”
Conveniently tucked away about three-quarters of the way into the paragraph this language signals to us that the SEC investigation is very real and could pose a threat to them. Although it would be pure speculation to think what the meaning of this is, we believe that the SEC investigation is coming to a head, and could have grown larger than its original scope, which was just looking into charitable contributions made in China.
HEDGEYE OPINION ON THE INVESTOR DAY
Nu Skin management did little to appease investors questions or concerns about the business during the investor day. The meeting started with addressing the recent controversy surrounding VitaMeal. Which added little incremental information to the discussion, and conveniently enough was untouched in the recorded Q&A session. Followed by a discussion about the overall MLM industry and how NUS plays within that, LTO’s / product launches, sales leaders and consumer retention. Subsequent to that, and possibly the most attention-grabbing portion of the meeting was presented by Joe Chang, Ph. D., NUS Chief Scientific Officer. Joe spoke to the age defying attributes of their new ageLOC Youth system, which in our opinion teetered on the edge of consumer deception as they claimed this “mother of all supplements” targets gene expressions so that they are able to influence the aging process in a positive manor. Management ceases to amaze us, as every time they say something they dig a deeper hole for us to look into, below we dig a little deeper into some top issues.
Yes, VitaMeal is a small portion of sales, but our numbers that we built out via company reporting (Smiles Reports) show that VitaMeal is 2.28% of revenue, 78bps above what management is claiming. Management went on to say that the average purchase of VitaMeal is 2.5 bags per month per purchaser, which represents $50 to $60 in revenue per month or $600 to $720 per year. To be conservative we took the $50 per month times three for the quarter, times 65,089 sales leaders, and this got us to 1.7% of sales for 3Q15, still 20bps above management’s number. Management’s next step should be becoming more transparent around their calculation of this number because it never adds up. Next up on the controversy surrounding VitaMeal is inventory loading. Truman Hunt, NUS CEO, stated that this issue is a possibility, but that it is insignificant given it is only 1.5% of sales. The controversy surrounding VitaMeal and the way it is distributed is not going away any time soon, as analyst and investigators are just starting to peel apart the onion.
(Source: Company Filings)
EXAGGERATED PRODUCT CLAIMS
Joe Chang was a true salesman during the investor meeting, pitching ageLOC Youth as the “mother of all supplements,” MOAS for short. It is clear from the recent DOJ announcement (for more info CLICK HERE) that they are cracking down on false product claims and consumer deception. Joe spoke very convincingly on the ability of ageLOC Youth to revert the aging of tissue so that you can appear younger; he made sure to say that it is “not in any way [intended for] life expansion.”
(Source: Company Filings)
(Source: Company Filings)
The company reiterated 4Q15 guidance of $570 million to $590 million in revenue and earnings per share of $0.70 to $0.73. The company anticipates 2016 revenue in the range of $2.29 billion to $2.33 billion, which would represent growth of 5% to 7%. Earnings per share in 2016 is projected to be $3.25 to $3.40.
12/4/15 Investor day presentation
11/11/15 NUS BLACK BOOK REPLAY
Please call or e-mail with any questions.
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***While U.S. and European economic data and policy catalysts dominated macro headlines this week, that doesn't mean the rest of the world ceases to exist. In the note below, we apply our rate-of-change, four-quadrant GIP Model framework to each of the remaining major economies in the world. Additionally, we conclude each summary by offering up our detailed thoughts on how global investors should be allocated to each country from here.***
China: It was a busy week for Chinese economic releases with decidedly mixed results. While the trend of sharp deceleration in Chinese economic growth is decidedly over, the latest releases don’t necessarily suggest all is well and good in the mainland economy – citing the official NFLP Manufacturing PMI (NOV) and Industrial Profits (OCT) data in particular. With high-frequency growth indicators continuing to consistently come in on the lower end of historical ranges and various measures of inflation continuing to decelerate on both a sequential and trending basis, it only makes sense for Western investors to anticipated increased policy support to combat this #Quad4 setup, at the margins. But with 1Y OIS pricing in a stable outlook for policy rates (-4bps spread vs. benchmark 7-Day Repo Rate; ~flat over the past 3M) we continue to pound the table on our belief that Beijing will continue to do what we think is necessary per the structural headwinds we’ve identified throughout the Chinese economy – i.e. downshift GDP growth in an orderly manner. Moreover, given that we don’t think the CNY is at risk of a material one-off devaluation (at worst, the currency is likely to be guided 15-20% lower throughout the next Five-Year Plan), we’d argue that China is decidedly “boring” again. If we’ve learned anything from this past summer’s volatility, that’s clearly a good thing. Investment conclusion: We would be neutral on China given that a near-perpetual state of #Quad4 is being counterbalanced by a continued unwind of pervasively bearish sentiment.
Japan: It was a huge week for Japanese economic releases with the preponderance of growth data coming in fairly balanced. Looking across the preponderance of key high frequency indicators, it’s fair to say that despite a number of noteworthy sequential upticks (e.g. Manufacturing PMI (NOV), Retail Sales (OCT), Corporate Credit (OCT)), Japanese economic growth is still slowing on a trending basis. The Real PCE (OCT), Consumer Confidence (NOV), Services PMI (NOV) and Corporate Sales & Profits (3Q) data all support this conclusion. Meanwhile, the positive trend in Core CPI and 10Y Breakeven Rates continue to support inaction from the perspective of BoJ monetary policy – which is being confirmed by both short and long rates. The Nikkei 225 Index has had a solid move off its recent lows (up nearly +10% over the past 3M), but we wouldn’t necessarily chase it higher given the lack of a clear catalyst for either #GrowthAccelerating or QQE expansion (recall that the BoJ altered neither its policy nor its guidance at its latest meeting). Investment conclusion: We would be reluctantly overweight given the lack of clear alternatives in the global equity space; there simply aren’t many [other] places to “hide”.
India: This week brought us a solid 3Q GDP report, but the NOV PMI data confirmed what the SENSEX, INR and short rates have been signaling for the past month: Indian economic growth appears poised to inflect to the downside. Worse, the sequential and trending acceleration in Headline CPI is confirming what 1Y OIS are signaling – the path for the RBI’s benchmark rate is neutral at best. That was more-or-less confirmed at the recent RBI meeting in which Dr. Rajan left all policy rates unchanged. Investment conclusion: We would be underweight India in the context of the aforementioned #Quad3 outlook.
South Korea: Another solid week for South Korean economic data – particularly for the manufacturing and export sectors, which remain under pressure per the latest Business Survey (DEC), Industrial Production (OCT), Exports (NOV) and Manufacturing PMI (NOV) data. Contrasting this are sequential and trending accelerations across Household Consumption and Consumer Confidence. In addition to that noteworthy juxtaposition, muddled inflation trends (i.e. subdued Headline CPI at 1%, elevated Core CPI of 2.4% and negative PPI at -4.5%) would seem to put the BoK in a box from the perspective of monetary policy – which is being confirmed across both the long and short end of the KRW rates curve. Investment conclusion: The fundamental outlook is not bad enough to short or good enough to pound the table on the long side, so we would decidedly neutral on South Korea.
Australia: Big week for Australian economic data releases – the bulk of which confirmed the surprising resilience of the Australian economy to declining/depressed commodity prices and deteriorating outlooks for both terms of trade and CapEx. Specifically, Real GDP (3Q), Manufacturing PMI (NOV) and Retail Sales (OCT) all showed sequential strength. The AUD continues on its recent tear (up +3% over the past 3W and +6.2% over the past 3M) as the outlook for incremental easing of RBA monetary policy continues to dissipate – which is being confirmed across the AUD rates curve. Moreover, 10Y Breakeven Rates (2.24%; up +11bps MoM) would seem to suggest the path for the RBA’s policy rates may actually be higher over the NTM. Investment conclusion: A surprisingly sanguine domestic outlook that supports an overweight position is counterbalanced by our #GlobalDeflation theme which is supportive of an underweight position. As such, we would be neutral on Australia.
Taiwan: It was a light week in terms of economic releases, but the one meaningful data point that we did receive was quite positive: Manufacturing PMI (NOV). Looking across the preponderance of key high-frequency indicators, Taiwanese economic growth is generally accelerating – if not on a trending basis, then certainly on a sequential basis. Various measures of inflation are also accelerating on a trending basis, but remain decidedly subdued relative to historical observations. That coupled with a dovish inflation outlook among economist consensus should keep the CBC’s dovish tilt intact. Investment conclusion: The concoction of accelerating growth, subdued inflation, supportive policy and a relatively stable currency is fairly attractive given all that continues to transpire globally, so we would be overweight of Taiwan.
Indonesia: This was a #Quad4 style week in terms of Indonesian economic releases in that growth slowed per the Manufacturing PMI (NOV) and inflation decelerated per Headline and Core CPI (NOV). Looking across the preponderance of key high-frequency indicators, Indonesian economic growth is generally decelerating on both a sequential and trending basis – as is inflation. That said, however, neither 3M Deposit Rates nor 1Y OIS are confirming incremental monetary policy support is on the way anytime soon – likely due to the lack of currency stability associated with the country’s dual deficits. Investment conclusion: #Quad4 is bearish for risk assets – especially when there are no existing or pending policy measures attempting to offset the associated slowing – so we would be underweight of Indonesia.
Thailand: Big week for Thai economic releases with the key incremental news is the inflection in both Headline and Core CPI (NOV) from what had been a trend of acceleration and both remain expressly subdued from the perspective of historical observations. Despite this week’s soft Manufacturing Production (OCT) and Exports (OCT) data, the preponderance of key high-frequency indicators would seem to suggest Thai economic growth continues to accelerate on a trending basis – effectively implying a #Quad1 setup. Don’t tell that to the SET Index, however, which continues to make a series of lower-highs. We would expect the August lows to hold given the newfound stability in the THB, but that’s not a foregone conclusion. Investment conclusion: When the market doesn’t agree with the fundamental outlook, it’s best to remain on the sidelines and wait for confirmation. As such, we would be neutral on Thailand.
Hong Kong: Big week for Hong Kong economic releases in terms of both volume and outcome. Specifically, an inflection in Hong Kong economic growth was confirmed by the Exports (OCT), Imports (OCT) and Retail Sales (OCT) data. While the Composite PMI came in flat for NOV, it continues to accelerate on a trending basis. That plus trending deceleration in Headline CPI readings effectively imply a #Quad1 setup. Investment conclusion: The confluence of a positive domestic fundamental outlook and receding bearish sentiment surrounding mainland China would render us overweight of Hong Kong.
Singapore: Big week for Singapore in terms of economic releases, highlighted by sequential slowing in the Composite PMI (NOV) and Industrial Production (OCT). That plus extremely subdued Headline CPI and PPI figures (the former of which is slowing on a trending basis; the latter of which is down -14.3% YoY) would seem to imply a #Quad4 setup. In spite of this, market participants are not betting on incremental monetary policy support out of MAS judging by recent deltas in the SGD (up +1.9% over the past 3W) and in SGD rates (10Y Yield up +8bps WoW). Investment conclusion: Much like in Indonesia, we would look to be underweight this #Quad4 setup in the absence of meaningful policy support.
Brazil: There continues to be a lot going on in Brazil from the perspective of both the real and political economies. Looking to the former, sequential accelerations in the Services PMI (NOV), Composite PMI (NOV) and Consumer Confidence (NOV) would argue that the services/consumption side of the economy is searching for a bottom, while sequential decelerations in the Manufacturing PMI (NOV), Industrial Production (OCT) and Real GDP (3Q) would seem to suggest Brazil’s worst recession in 25 years remains ongoing. Not to mention, a key measure of broad inflation accelerated in NOV and confirms the ongoing stagflation seen across trending accelerations in Headline CPI and PPI. On the political front, additional arrests of key ruling party members threaten to incrementally derail President Rousseff’s already-fledgling economic reform agenda – as most recently highlighted by BCB’s decision to leave its benchmark SELIC Rate unchanged for the third straight meeting in spite of the aforementioned peak rates of inflation. Investment conclusion: We’ve appropriately avoided the value trap that is Brazil’s seemingly never-ending #Quad3 setup and would remain underweight. Also, the BRL’s recent bounce to 3.75 per USD presents a decent short-selling opportunity in the context of Brazil’s fundamental outlook and ongoing #GlobalDeflation.
Mexico: Big week for Mexico in terms of economic releases and it was a fair fight in terms of sequential improvement (IMEF Manufacturing Index (NOV) and Consumer Confidence (NOV)) and deterioration (Unemployment Rate (OCT) and IMEF Non-Manufacturing Index (NOV)). The Manufacturing PMI held flat in NOV, which more than likely sums up the Mexican economy – stalling. Juxtapose the trending deceleration in Household Consumption growth and trending acceleration in Consumer Confidence and it’s easy to paint a mixed picture for Mexican economic growth. On the inflation front, Headline CPI, Core CPI and PPI are all subdued relative to historical observations, but trending accelerations in the latter two series plus a outlook among economist consensus for a material ramp in the former over the NTM would seem to suggest Banxico is likely to get increasingly hawkish, at the margins. This is being reflected in the MXN (up +1.7% over the past 3M), as well as across the rates curve (3M Deposit Rates up +13bps MoM, 1Y OIS Spread at +87bps wide and 10Y Yields up +23bps MoM). Investment conclusion: An uninspiring fundamental outlook in conjunction with our bearish bias on the U.S. consumer that is already showing up in Mexican Export growth (down -7.4% YoY and decelerating on a trending basis) would render us underweight of Mexico.
Russia: It was actually a pretty solid week from the perspective of the Russian economy, highlighted by sequential accelerations in the Services PMI (NOV) and Composite PMI (NOV) and sequential decelerations in both Headline and Core CPI (NOV). The Manufacturing PMI was more-or-less flat MoM as well. The consumer remains the lone holdout in terms of finding a bottom in Russian economic growth. Specifically, Household Consumption growth continues to crash (down -11.7% YoY = the worst growth rate in at least 10Y) while Consumer Confidence also continues to decelerate on a trending basis. While various measures of inflation are indeed trending lower across the board, they remain too elevated from the perspective of historical observations to support a material inflection in consumption growth at the current juncture. 3M Deposit Rates (down -10bps MoM) and 10Y Yields (down -41bps MoM) would seem to support a resumption of rate cuts, while the level and trend in 1Y OIS Spreads (currently +49bps wide and +14bps wider MoM) suggest investors are likely to be disappointed by whatever incremental easing may occur. Investment conclusion: Russia’s fundamental outlook is more #Quad4 than it is #Quad1 – especially in the context of ongoing #GlobalDeflation. As such, we would be underweight.
South Africa: This week’s slew of economic releases was generally disappointing, as highlighted by sequential decelerations in Business Confidence (4Q and NOV) and Manufacturing PMI (NOV) and a sequential uptick in PPI (OCT). The Composite PMI (NOV) and Vehicle Sales (NOV) were lone bright spots, but the absolute level of both would seem to suggest tepid economic growth at best. Looking across the preponderance of key high-frequency indicators, South African economic growth is decidedly decelerating, while Headline CPI has recently infected from a trend of deceleration. This points to an obvious #Quad3 setup and that much is implied by economist expectations for GDP growth and CPI in 2016. Moreover, the recent monetary tightening out of SARB is likely to weigh on South African economic growth on a lag, but inflation may remain sticky due to a lack of transmission to the currency market (ZAR down -3.6% and -13.9% over the past 3M and 6M, respectively). Moreover, 10Y Yields (up +22bps MoM) and inflation expectations ( 10Y Breakeven Rates = 6.91%; up +34bps MoM) both support a resumption of rate hikes in the not-too-distant future. Investment conclusion: The South African economy is mired in a classic #Quad3 stagflationary setup, which is more than enough reason for us to be underweight.
Turkey: Mixed week from the perspective of Turkish economic releases, as highlighted by the acceleration in Manufacturing PMI (NOV) and both Headline and Core CPI (NOV). PPI ticked down in NOV, but remains in a state of acceleration from a trending perspective. Layer on the murky juxtaposition between extremely subdued growth rates in both Household Consumption and Industrial Production (the both of which are decelerating on a trending basis) and decent Consumer Confidence and Business Confidence readings (the both of which are accelerating on a trending basis) and it’s easy to paint a confused outlook for the Turkish economy. That said, however, Turkish financial markets are clearly pricing in a #Quad3 setup over a #Quad2 outcome with the Borsa Instanbull 100 Index down -11.3% MoM, 3M Deposit Rates up +23bps MoM, 1Y OIS Spread +30bps wider MoM, 10Y Yields up +64bps MoM and the TRY down -1.1% MoM. Investment conclusion: In the absence of a high-conviction bullish fundamental outlook, we do not find it prudent to fight the market(s) here. As such, we would be underweight of Turkey.
Mind the Data!
While our competition likes to focus solely on survey readings and diffusion indices, we continue to think investors would be far better served to apply a more holistic view of economic trends to their respective investment processes. Below we contextualize the current state of the global growth using amalgamated trends across key high-frequency indicators throughout G20 economies. The simple conclusion is that global growth continues to slow on a trending basis.
Retail Sales: On balance, growth continues to decelerate on a trending basis across the G20.
Industrial Production: On balance, the trend of decelerating growth appears to be stalling out across the G20.
Exports: On balance, growth continues to decelerate on a trending basis across the G20. We simply can't understand how any investor can arrive at the conclusion that "global growth has bottomed" when export growth is down over -8% YoY, on average, across the G20. What does the crashing trend in global trade portend about world GDP and EPS growth in 2016?
Composite PMIs: On balance, the trend of decelerating growth appears to be stalling out across the G20.
Business Confidence: On balance, growth continues to decelerate on a trending basis across the G20.
Feel free to email us with any follow-up questions and/or thought-provoking comments. The capsules above are intdened to be brief, so we're more than happy to provide additional color to the extent you'd like to dig deeper into any specific country. Enjoy the rest of your resepctive weekends!
Miss The Macro Show this week? Here are three clips featuring Hedgeye CEO Keith McCullough's trademark rants that detail how to use his risk ranges and some key portfolio considerations ahead of the much telegraphed Fed rate hike.
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