Client Talking Points
In rate of change terms, at 1.88% year-over-year that was the slowest NFP print since the cycle peaked in Q1, but the Fed is going to hike on that. That’s why we signaled buy USD on last week’s Euro ramp of +2.7%. The Euro is back down -0.6% this morning to $1.08 and has no immediate-term support to $1.05; the data doesn’t matter to the Fed – the S&P 500 does.
#StrongDollar (rate hike catalyst DEC 16th) driven #Deflation Risk definitely matters to most asset classes – after a -3.8% decline last week, Oil is down another -1.1% this morning to $39.53 and the Commodities complex remains in crash mode.
Japanese Equities +1% on the Dollar Up move overnight – EM Asia continued lower (no likey Up Dollar); Thailand -0.7% (-6.4% in the last month is one of the ugliest); EM (MSCI Index) deflated another -0.9% last week to -14.3% year-to-date.
*Tune into The Macro Show with Hedgeye CEO Keith McCullough in the studio at 9:00AM ET - CLICK HERE.
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Top Long Ideas
Restaurants Sector Head Howard Penney had no material update on McDonald's (MCD) this week. However, here is what Penney wrote around when we added MCD to Investing Ideas. It's worth reiterating our high conviction in the stock:
"We continue to get more bullish every time we talk to the company, franchisees and/or customers which we have polled via conducting surveys. We are going to be looking at a much different company 1-3 years from now."
"Urgency has been instilled from the top down by new CEO Steve Easterbrook," according to Penney. "This ship is in gear and headed north. 2015 will be the last time this stock is below $100."
A lot has happened in 13 weeks... not the least of which is that Restoration Hardware (RH) is underperforming not only the market by 16%, but Retail as well (by 7%) – despite RH being more insulated from some of the issues that are clipping earnings today for retailers more broadly.
Over this time period, however, RH meaningfully accelerated square footage growth, launched two new concepts. Some say it’s bad timing. We disagree. RH is our favorite name in the retail space, and we like it across all three durations. Trade, Trend, and Tail.
On went the game of slowing last week with a little central planning un-secretive sauce. Despite the ECB’s move to cut the deposit rate to -0.30%, Draghi didn’t ring the cowbell loud enough. Meanwhile, Friday’s jobs report might have been just enough for Janet to hike rates into a late cycle slowdown. The consensus long USD crowd was crushed on the ECB news. The dollar lost over 2% on Thursday and rates were pushed higher.
If growth is going to continue to slow, with a rate hike on the horizon, a relative fixed income spread play (long TLT, short JNK) is exactly what you want on.
Three for the Road
TWEET OF THE DAY
The Best of The Macro Show This Week https://app.hedgeye.com/insights/47911-risk-manage-the-process-the-best-of-the-macro-show-this-week… via @hedgeye
QUOTE OF THE DAY
Obvious thinking commonly leads to wrong judgments and wrong conclusions.
Humphrey B. Neil
STAT OF THE DAY
Only 5% of Twitter users have more than 100 followers.
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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
- 4Q 2015 Comparable restaurant sales to be in a range of (8%) to (11%) vs FactSet +0.1%
- Non-recurring expenses during Q4 of 2015 in the range of $6.0 to $8.0M
- Restaurant level operating margins of 22% to 24%
- Diluted EPS in the range of $2.45 to $2.85 versus consensus of $4.05
- CMG has withdrawn previously-announced 2016 guidance for same-store sales. The street consensus was +3%.
CURRENT SALES TREND UPDATE
- October same-store sales were positive in the low-single digit range (we are assuming traffic was flat to slightly negative).
- Upon the announcement of the closure of 43 restaurants on November 3rd, company-wide same-store sales dropped “for the ensuing few days” to approximately (20%).
- After the announced re-opening of restaurants in Oregon and Washington on November 10, same-store sales “over the next several days quickly improved” to approximately -9%.
- On November 20th, the U.S. Centers for Disease Control and Prevention (CDC) announced four additional cases linked to the same E. coli incident; “following this announcement and related negative publicity, daily comparable restaurant sales trended down to approximately (22%).”
- Over the past five days, same-store sales “have gradually improved to an average of approximately (16%).”
- For the full month of November, comparable restaurant sales were -16%.
- If these sales trends continue, we believe comparable restaurant sales could be in a range of (8%) to (11%) for the three month period ending 31-Dec-15.
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
- How long will the current issues cause a decline in same-store sales?
- What is management’s plan to fix the company?
- Are there other hidden issues we don’t know about?
- What is the long-term damage to the Chipotle brand? (Chipotle will be forever linked to any story about E. coli with negative implications.)
- Can the company grow its units at the same rate and deliver on consumer and investor expectations?
- How much incremental G&A cost will there be in 2016 to fix the supply chain?
- What will the new margin structure of the company look like?
- Will the company need to adjust its non-GMO claims?
- Will the two class actions lawsuits gain steam because of the company’s problems hurting the brand image even further?
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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