A Chipotle Brand Survey Update (via CivicScience) | $CMG

Editor's Note: Below is a complimentary institutional research note written by Hedgeye Restaurants analysts Howard Penney and Shayne Laidlaw. In it, they discuss the findings of a recent CivicScience brand survey regarding Chipotle Mexican Grill (CMG) and what it tells investors about the damage to the brand following the E. coli outbreak earlier this year. To read our Restaurant team's research ping


A Chipotle Brand Survey Update (via CivicScience) | $CMG - chipotle 2


Prior to the start of the earnings season we highlighted proprietary CivicScience brand survey data on two of our favorite names, LONG Panera and SHORT Chipotle


Looking at the previous notes on PNRA and CMG, the CivicScience brand survey data pointed to improving trends at Panera, supporting our LONG position and called for continued troubles at Chipotle, supporting our SHORT case.  As both companies reported earnings, the PNRA trends remain positive and Chipotle remained negative.  At this point, we intend to publish on more company’s making further use of the CivicScience data set.  We felt, at this point it is important for everyone to understand who or what CivicScience is.


Quite simply, CivicScience is a survey company.  Their technology, which traces its roots to Carnegie Mellon University, allows them to ask anything they want, to anyone they want, in huge numbers, extremely fast.  This context is important because we can use the platform for quick-turn-around questions (to test an investment hypothesis we may have) and will typically see results in a few hours – with history and context.


Here’s how CivicScience’s process works: Through partnerships with hundreds of media companies, they embed questions inside the kinds of fun polls and quizzes you see on websites and social networks everywhere you look. CivicScience has cataloged nearly a billion responses since 2011 on thousands of topics. They’ve tracked the popularity of hundreds of brands, media consumption, technology usage, shopping behavior, and most of the key consumer trends affecting the markets. They mine all of that data, constantly, for patterns and correlations.  Importantly, due to the scale and diversity of their data sources and the fact that they are reaching real consumers, their results are scientifically-valid and appear very reliable.


At Hedgeye, we are now taking that data and correlating it with management commentary and brand performance to see where we can isolate discrepancies in market perception and stock prices.  While we don’t take advantage of it, the company even provides data feeds, via API, for some quant funds.    


To that end we are publishing the latest Chipotle brand survey, which asks consumers: How much do you like to eat at Chipotle?  The results are showing minor improvements in the trends, but not enough for us to change our short thesis. Our previous survey included the early days of 2Q16 (1,197 responses), now, as we are moving further into 2Q16 we have received 3,051 responses and are getting a better picture of the true sentiment for the brand.

  1. The “I don’t like it” crowd is up 700bps from 18% in 4Q15 to 25% in 2Q16, declining slightly sequentially from 1Q16.
  2. The “I like it” is still down roughly 100bps from 4Q15 to 17% of responses, seeing a sequentially recovery from 1Q16. Importantly this answer has significantly decreased from our initial note which showed people that said “I like it” rose aggressively to 21%.
  3. “I love it” responses were sequentially flat from 1Q16 to 2Q16, which was better than our early read which indicated a deceleration in people saying “I love it”.
  4. The “I don’t have a strong opinion” is down 700bps from 4Q15 to current levels as consumers have become more opinionated on the brand.


A Chipotle Brand Survey Update (via CivicScience) | $CMG - chipotle survey


Although the survey is showing sequential improvement in consumer opinions towards the brand, the steep rise in people saying “I don’t like it” cannot be over looked. As we continue to work through 2Q16, we will update you monthly on how the trends are evolving.

Trump's Victory Lap ... Sour Grapes From Cruz ... & Hillary's Heat-Bern

Below is a brief excerpt from Hedgeye Potomac Chief Political Strategist JT Taylor's Morning Bullets sent to institutional clients each morning. For more information on how you can access our institutional research please email



Trump's Victory Lap ... Sour Grapes From Cruz ... & Hillary's Heat-Bern - trump deal with it


The easy part may be over for the presumptive Republican nominee, and there is no looking back. Donald Trump's double-digit victory in IN has him waving the checkered flags, and now he is faced with uniting the warring factions of the Republican Party heading into the convention and throughout the long slog to November.


Trump needs about 40%  of the remaining delegates facing opposition only from John Kasich in the next four weeks, but his true task will be how he can repair his image and appeal to the focal point of every election - undecided and independent voters - not to mention skeptical Republicans. Despite a setback last night, Hillary Clinton is already vying to get out ahead of him campaigning yesterday in the battleground state of OH - even though the primary was back in March.



Trump's Victory Lap ... Sour Grapes From Cruz ... & Hillary's Heat-Bern - cruz trump


Ted Cruz brought everything and the kitchen sink to IN as final acts of desperation needed to derail Trump (his alliance with John Kasich, Carly Fiorina, and Gov. Pence's backing), but they were no match for Trump's all-star squad of endorsements and momentum coming from his Northeastern firewall.


Cruz's campaign had been in panic mode for weeks trying to convince supporters and donors that he was the only person who could stop Trump; the writing was on the wall once IN polls showed Cruz's 20-point lead vanishing in weeks - not to mention polls showing Trump ahead by 30+ points in the Golden State.  Cruz is headed back to the cartel Capitol and will resume his position as a Tea Party agitator setting his sights on other conservative battles with a future eye on 1600 Pennsylvania Avenue.



Trump's Victory Lap ... Sour Grapes From Cruz ... & Hillary's Heat-Bern - sanders 22


Bernie Sanders' victory in IN does not change the delegate math, but it definitely changes the narrative - which is sure to cause Clinton, well, heartburn until the last primary in June. As newfound momentum and the media continue to pump Sanders with fuel, we're waiting to see how Sanders deals with Clinton (and vice versa) as a prolonged and ugly fight for the next month proposes a sizeable risk of hurting her chances this fall now that Trump will devote all of his attention and resources to the general election.  


While Clinton's focus has squarely been on Trump for the past few weeks, she is keenly aware that the primary map ahead now favors Sanders  - WVA, NE, OR and KY - and has to find a way to counteract his growing leverage and keep him in the fold.  Her path the nomination is all but assured and her team has been prepping for a general election run for years (but not against Donald Trump) as one of her biggest assets is her fundraising operation which becomes even more formidable if Sanders cedes his people to her for the general.  

McCullough: Why Our GDP Forecasts Are So Accurate


In this special excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough takes subscribers “behind the curtain” on our quantitative forecasting model and how we interpret and debate evolving economic data.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.34%

5 CHARTS: Fed Forecasters Flat-Out Wrong

5 CHARTS: Fed Forecasters Flat-Out Wrong - fed forecast crystal ball


What do you call an economic forecasting outfit which continually calculates future economic growth and misses time and time again?






...Certainly not "credible."


Whichever derivative of "inaccurate" you choose to use, they all apply to the Federal Reserve's economic modeling. Incidentally, it's funny that Fed prognosticators came out so strongly in favor of future rate hikes yesterday when they seemingly have no clue whatsoever about the direction of the U.S. economy.


5 CHARTS: Fed Forecasters Flat-Out Wrong - Fed grasping cartoon 01.14.2015


Here are a few of the more shocking recent Fed governor comments that we simply couldn't ignore:


  1. “A rate hike could be appropriate, if the data is as expected.” –John Williams (San Francisco Fed Head, yesterday)
  2. The economy is offering mixed signals, but favors unemployment data.” –Dennis Lockhart (Atlanta Fed, yesterday) 


As Hedgeye CEO Keith McCullough pointed out in today's Early Look:


"Recently reported GDP of 0.5% isn’t in the area code of 'as expected.' I don’t think Williams has a lot of credibility as a Wall St. forecaster."


Meanwhile, Lockhart's Atlanta Fed updates its much-watched GDPNow estimate throughout the week. The measure seeks to project what recent data points mean for economic growth.


However, in the chart below, we show just how wrong that model has been over its lifespan (a.k.a. it has an intra-quarter standard error of 200-250 basis points!). Note: Our own GDP predictive tracking algorhythm has actually been, on average, within 20-30 basis points of getting the US GDP number right for the last 5 quarters (the historical standard error in our model is 35 basis points).


5 CHARTS: Fed Forecasters Flat-Out Wrong - atlanta fed post


That's why we're deeply skeptical of the most recent GDPNow reading of 1.8% for Q2 2016. (Note: Applying the aforementioned standard error means Q2 GDP could be between -0.7% and 4.3%!)


Outside the Atlanta Fed's challenged algorhythm, Hedgeye Senior Macro analyst Darius Dale has peeled back the onion on the Fed's official GDP projections. Unsurprisingly, these unelected bureaucrats are both incorrect and serial over-optimists:


5 CHARTS: Fed Forecasters Flat-Out Wrong - fed overoptimism


Similarly, back in October, we highlighted the absurdity of the Fed's forecasting in our 73-page Q4 Macro themes deck. Back then, the Fed was predicting the "longest economic expansion ever."


5 CHARTS: Fed Forecasters Flat-Out Wrong - CoD Fed Optimism


Now, You might be wondering...


Can't the Fed simply turn dovish like last week's "no April rate hike" soothsaying?


No. Investors betting on the direction of rates had pushed the next hike into December of 2017.


5 CHARTS: Fed Forecasters Flat-Out Wrong - Chart of the Day 4 20


So what happens when the Fed admits they are wrong about growth (and Hedgeye's economic predictions prove correct)?


Frankly, it will be too late for the Fed to save the day.


Here's the selloff that occured during the last two downturns.


5 CHARTS: Fed Forecasters Flat-Out Wrong - fed post drawdown


As we continually reiterate, the biggest risk to macro markets is believing in the Fed's serially overoptimistic economic projections.

Net Neutrality Black Book and Call

Thursday, May 5, 2016 at 11 am ET

Please join us for a Black Book presentation on the FCC's net neutrality rules. We expect imminently a major federal court decision on the legality of the FCC's Open Internet Order, a decision that will likely alter the legal entitlements of leading Internet content providers (NFLX, FB, AMZN, GOOGL, DISH) and the network management rights of wired and wireless Internet service providers (CMCSA, CHTR, TWC, CVC, T, VZ, TMUS, S).  The rules of the game for the Internet ecosystem could change in a significant way.


If the court issues its decision before this coming Thursday, we will hold a flash call discussing the outcome and implications of the decision.


 Our Opinion:  The court decision has been pending for several months.  Although absolute predictions about judicial outcomes are not possible, we expect, based on available inputs, a mixed outcome with the wired Internet service providers (cable and telco broadband)(CMCSA, CHTR, TWC, CVC, VZ, T, CTL) subject to continued regulation as common carriers, a disappointing result for them.  We expect wireless carriers (T, VZ, TMUS, S, USM), however, to gain greater freedom to manage and monetize their networks with fewer regulatory burdens, a plus for wireless carriers and potentially the network infrastructure vendors that support their growth and expansion.


The Black Book will be available before the call and can be accessed here:


The Black Book will include a focus on:

  •            The legal case to strike down the net neutrality rules
  •            Disruption of the FCC's overriding policy objective to empower edge providers over ISP "gatekeepers"
  •            How the upcoming court decision could change the rules, creating new risks for edge providers
  •            How the court decision could bolster new revenue models for wireless carriers
  •            Follow-through on potential Supreme Court review and legislative proposals in response to the court's decision

For more information, please contact

  •          Toll Free:
  •           Toll:
  •          UK: 0
  •          Confirmation Number: 13636750
  •          Materials: CLICK HERE

KATE | Find Me Another 50%+ Forward CAGR

Takeaway: Seriously, not many 50%+ names out there. The profitability is still what we thought, but we’re finally seeing consistency.


This quarter was ‘about in-line’, meaning that revenue, EBITDA, EBIT, EPS and Guidance were all at or slightly better than expected.  ‘In line’ might not seem like a big deal, but make no mistake… For KATE, ‘in-line’ is a huge deal. First off, let’s keep one thing in mind. KATE just put up a 19% comp, and 50% growth in e-comm, by our math. That’s the biggest comp in all of retail. You can say the same about KATE in 3 of the past 4 quarters. #respect. When it beat comp expectations in the past, however, it would usually manage to miss revenue (like it did all last year). Not this quarter. This time it beat. Only by 2%. But it still beat.


More importantly, this is a company that has lost money every year since 2007. Despite having strong sales momentum over the past three years, it had no EPS, and only a convoluted non-GAAP Adjusted EBITDA number that was impossible to model. When the ‘handbag space’ melted down – KATE’s brand was fine, but its stock was annihilated because it had zero earnings/cash flow and valuation support. Well, that ends now. True, we only saw $0.05 in EPS this quarter (up from $0.03 last year), but that will accelerate meaningfully both sequentially and y/y. When all is said and done, we’re at $0.85 this year and a 3-year CAGR of 54% through 2018. Even if we’re wrong and KATE ‘only’ earns the consensus, we’re still looking at a 44% CAGR. We can count on one hand the number of companies that will put up that kind growth in US Retail.


Is 29x current year EPS rich? No, it’s not. Within 12-18 months, people are likely to be eyeing $2+ in EPS power – and that’s with the company investing at a continued high rate in the brand to facilitate such profitability. Importantly, our margin forecast in 2018 is 19% -- well below the 32% peak achieved by competition such as KORS and COH. Those companies underinvested and over-earned. That won’t be the case with KATE. In the end, we think that $2.00 in EPS power at a scant 0.5x PEG multiple (or 25 p/e) suggests a $50 stock by the end of 2017. Basically, that’s a double from where we are today in a very underowned stock. 


KATE | Find Me Another 50%+ Forward CAGR - 5 4 2016 KATE chart1



When Boring Is Good – Over the past 3 years and change (13 quarters) KATE has been consistently inconsistent in its quarterly numbers. Here’s a quick recap: comps beat consensus expectations 100% of the time, this quarter was no different with comps coming in at 19% vs. the Street at 12.5%. Despite the consistent comp outperformance sales have missed consensus expectations in 8 of 13 quarters, including every quarter in 2014. This quarter KATE actually beat, as the noise which clouded most of the models due to discontinued operations (Jack Saturday) and the conversion of Intl businesses to JV/distributorship agreements is now completely in the rear-view. The flow through to EPS has historically been just as noisy, with the company missing earnings expectations in 7 out of 13 quarters, but this quarter the print was right in line. While we can poke holes in the flow through to EBITDA margins from a 19% comp, the fact is that KATE is now a model-able company actually earning money on a GAAP basis, which we think quiets a lot of the concerns which plagued the name for the better part of 2015.


“Mid-Tier Distribution” – This is an evil word in retail nowadays, and may give bears a negative to latch onto from this print. And to be fair, management could have done a better job clarifying just how dep down the value curve the brand was going in order to open distribution. But, we give them credit for sticking to the distro game plan. Over the past few quarters it’s clear that the store growth would be calculated in North America. We’d much rather see the company open the tightly guarded wholesale distribution pipeline on a case by case basis to hit 2nd or 3rd tier markets rather than opening hard physical assets in markets that may not support the ROI KATE has become accustomed to. That distribution strategy makes even more sense now that KATE has cleaned up its promotional posture within wholesale accounts. Overall we view this as a positive.


Noise, Over and Done With – Now that we’ve passed this 1Q print the noise on the P&L is over and done with. The last remaining remnant of the 2015 restructuring was the SE Asia/China JV which cost the company $6mm in sales this quarter. From here on out we are looking at an apples-to-apples comparison within the operating segments. We still have issues with adjusted EBITDA numbers and lack of clarity on the size of segments by channel (retail, wholesale, and licensing), but KATE is lightyears ahead of where it was at this time last year. That’s bullish for anyone incrementally new to the name trying to wrap their hands around this business model.


Key points on line items:

  • Unit/Sq. Ft. Growth:  Total owned units were up 11% YY in the quarter, with the total store count up 24% inclusive of partnered unit growth. That’s primarily a function of metered growth in NA and a shift in the international store growth in newly minted JV/distribution JV territories. We think it’s important to point out the extremely big e-comm growth rate despite the slower store opening cadence in NA, which speaks to KATE’s ability to reach beyond its store footprint to attract new customers on the e-comm side.
  • Top Line: Comps 19% on C$ basis, though Fx was neutral. That translated to 15% reported growth (or 20%+ excluding the $10mm watch inventory sale in 1Q15 and $6mm in sales from China/SE Asia). The non-comparable Asia and watch anniversaries explain away the delta between comp growth and reported top-line. On the e-comm side, the channel added eleven percentage points to the reported comp. At just over 20% of sales that means the e-comm channel was up 40%-50%. We expect more of the same as the company laps two more quarters of negative Flash Sale growth.
  • Gross Margin: No flow through from a 19% comp as 80bps of merch margin improvement were offset by 100bps of headwind from Fx and a promotional outlet channel. If we had to pick a bone with this print it would be on the GM line and corresponding inventory level, but management set the bar from improved GM flow through for the balance of the year which translates to accelerated earnings growth. We’ll stomach near term choppiness for the longer term picture as licensing categories pick-up steam and Li&Fung benefits are recognized.

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