Takeaway: We are removing athenahealth (ATHN) from our Best Idea List, but staying long in the Position Monitor.

ATHN | REMOVING FROM BEST IDEA LIST - 20160520 PositionMonitor

removing from best idea list; less conviction 

We are removing athenahealth (ATHN) from our Best Idea List, but staying long in the Position Monitor.  The recent CFO and other high-level employee departures, combined with negative anecdotes related to the Streamlined rollout and what looks like an early slowdown in our tracker reduces our conviction over the intermediate term.  Over the long-term, we continue to believe athenahealth is well positioned to take share in ambulatory and the recently entered inpatient market.  What will get us out of the position completely, and possibly pivot short, is if the athena-Tracker continues to slow over an extended period.  


The other high-level employee departures include Senior Financial Officer, Parth Mehrotra, who left in March 2016 for a COO position at Brighton Health Group and Director of Enterprise Sales, Ian Ha, who left in December 2015 for a similar role at Flatiron Health.  We suspect that the Florida Cancer chargeback was related to Ian Ha's departure, as Florida Cancer currently uses Flatiron for their Oncology EMR solution.

streamlined concerns; NPS worse before it gets better

We are becoming increasingly concerned about the disruption that the Streamlined rollout is having on users. We have observed a growing outcry of dissatisfaction both from our outreach using the tracker data, and through various social media and software review websites.  We also witnessed several users discussing their dissatisfaction with Streamlined at the New England HIMSS conference earlier this month.  The reviews are fairly consistent, complaining about "too-many clicks", poor workflow design and lack of responsiveness from account managers, with some even comparing the new EMR to Allscripts.  While we understand that docs don't like change, we would be remiss to ignore the negative and potentially lasting impact this type of disruption can have in such a highly referential industry. As a result, we expect the Net Promoter Score (NPS) to get worse before it gets better and continue to be a headwind to small and group bookings as the Streamlined rollout continues through year-end. 


ATHN | REMOVING FROM BEST IDEA LIST - 20160520 Streamlined Reviews 

cfo departure is for the best; repairing damage to culture

While it is never a good sign to see a CFO leave, in this situation, we believe it is for the right reasons and a net positive for the company. As we had expected, the departure was the result of Jonathan Bush needing to step back in as the direct report to oversee and manage the culture, which had been changing for the worse under Kristi Matus's leadership and the dual CFAO role.  The management change is in response to employee comments, such as those on, as well as a struggle to balance rapid growth and maintain the important employee culture.  This is an issue they have been dealing with for some time and a decision that was not made in haste, but came to in a mutual realization recently (Jonathan Bush/Board and Kristi Matus) that they needed to separate roles and Jonathan Bush, CEO, needed to step back in.  As there was not another suitable EVP level position available, Kristi Matus decided it was best to leave for other opportunities.  


Karl Stubelis, CFO and previously Controller for 3-years, reiterated 2016 guidance, and both he and Jonathan Bush emphasized that Kristi Matus's departure was not due to financial or accounting misconduct. 




Please call or e-mail with any questions.


Thomas Tobin
Managing Director 



Andrew Freedman



McCullough: If You Don’t Do Macro, Macro Will Do You


In this brief excerpt from The Macro Show earlier today, Hedgeye CEO Keith McCullough responds to a subscriber’s question about whether he thinks there will be a “20% or more” drawdown in the S&P 500 from here. Spoiler Alert: He does.

FL | Cohones

Takeaway: This was the most beared-up we've seen FL management on Nike in 14 years. Still one of our top Shorts.

This was the most bearish that Foot Locker management has been on Nike in roughly 56 quarters. Yes, that’s 14 years…but who’s counting? No this is not a clash of the two 800lb gorillas like in 2002 arguing over FL’s order cuts in the wake of the Vince Carter Shox appealing to virtually nobody except Carter himself (not even in the Raptor’s home market of Toronto). But at least to us, FL management was super cautious on Nike. At first it was the discussion about how Basketball was down mid-single digits in the quarter. And mind you, basketball is 40% of the revenue, and Nike has a 95%+ share of FL basketball. That’s about 38% of FL revenue base that was under pressure.  But then we heard CEO Johnson talk of the ‘big turn’ at Adidas, and how he would like more product from both Adidas and UnderArmour. 


Then one thing became abundantly clear to us…


As FL took its ‘Nike Ratio’ (the % of product it sells that is Nike) from 40% to 73% over this economic cycle, it lost the ability to think and act on its own. You heard it in management’s tone “we WANT more Adidas and UnderArmour, but Nike won’t let us.”  Our sense is that FL wants maybe 50% of its store to be Nike, but unfortunately it has to take a lot of Nike’s junky product (yes, Nike makes some junk) and excess inventory in order to be assured premium allocation of the good stuff.


Well…that’s all fine and good if FL is comping high single digits, EPS is growing 30%+, AND as a kicker, minimal SG&A investment and capex are needed given that Nike is giving them the growth for free. As such, ROIC went from 5% to 28%, and the stock went up by 5x.


But, Nike stuffing FL with swooshes is absolutely NOT ok, when comps decelerate, FL’s most profitable business is down, it’s missing out on hot product from other brands that are gaining momentum, expenses pick up – causing FL to delever SG&A in a 1Q for the first time since the Great Recession, and EPS growth slows to the lowest rate since 4Q09.


Even though we think FL is a solid short, we absolutely believe that the company has a good management team. A good management team, however, will look at its brand portfolio, and take action when 72% of its business belongs to a brand that is changing up the footwear distribution paradigm. It’s got to be clear to FL management that this dependence on a single brand is no longer working – at least if it wants to accelerate growth and returns. The risk there is that FL cuts 2-3% of expected sales, and then Nike responds by cutting 10% -- and giving the increment to DKS in order to stabilize that part of the wholesale channel.


All in, we give FL all the credit in the world for its comments. But the reality is that it sticks with 70%+ Nike and faces an eroding earnings algorithm, or it diversifies away from Nike and faces potential business risk. Sure, FL is down today in an up tape. But this short call is far from over. Estimates remain too high, and we think we’ll see multiple compression repeatedly over the next year.


FL remains on our Best Idea list as a Short.

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The Good Stuff: Reports and News Articles you May Have Missed This Week

Takeaway: The best of the best : our favorite reading material from the week of May 16 and a tribute to the King of the Texas Troubadours.


Happy Friday! In case your attention was turned toward, say The Fed for example, and you missed some of the more interesting health care articles/videos/podcasts, we have listed our favorites here:


Health Care Services

Fighting for Assisted Living Centers, The Hill, May 17, 2016 (Includes discussion of Nursing Homes) - <KND> <GEN> <DVCR>

You Mean I Don't Have to Show Up? The Promise of Telemedicine. NYT, May 16, 2016 <TDOC>

Mental Disorders Top The List Of The Most Costly Conditions In The United States: $201 Billion, Health Affairs, May 2016 <AAC> <ACHC>


Clinical Labs

Theranos Plans Bold expansion Even as it Reels From New Setbacks, Stat News, May 19, 2016


Health Insurance Coverage

Health Insurance Coverage: Early Release of Estimates From the National Health Interview Survey, 2015, Centers for Disease Control, May 17, 2016 <All Health Insurers>


Durable Medical Equipment

Providing Quality, Affordable Durable Medical Equipment for Beneficiaries, The CMS Blog, May 17, 2016 (with links to recent accessibility data) <IVC> <MDT> and others



Health care data as a public utility: how do we get there? Brookings, May 18, 2016 <CERN> <ATHN>



When Drugs Don't Work, The Economist, May 21, 2016 <All Pharma>

Growth in Specialty Drug Spending from 2013 to 2014, Blue Cross and Blue Shield Association, May 2016 See esp Hep C treatments <GILD>

Columbia's Battle with a Cancer Drug Company Could Set A Global Precedent for Generic Meds, Vice News, May, 19, 2016 <NVS>

Actions by Congress on Opioids Haven't Included Limiting Them, New York Times, May 18, 2016

How Big Pharma Uses Charity Programs to Cover for Drug Price Hikes, Bloomberg, May 19, 2016 <All Pharma>



Shameless Self-promotion -Hedgeye Health Care Notes/Calls/Musings:

 CY 2017 End Stage Renal Disease Annual Reimbursement Update Sent to White House for Approval, May 19, 2016



CY2017 Home Health Annual Payment Update & Changes to Medicare CoP Sent to White House, May 18, 2016

The Hospital Lobby Making Progress on Site Neutral Payment Fix but it is Still Early, May 18, 2016



Lastly and having nothing to do with health care policy, regulation or legislation, the King of the Texas Troubadours, Guy Clark died this week. It is Friday, So Let Him Roll...


 Follow me on Twitter for more throughout the week

About Everything | Millennials: Are We There Yet?



In this seventh edition of About Everything, Howe discusses why the Millennial Generation is coming into adulthood, but delaying traditionally big steps like homeownership and family life. Howe explains why and explores the broader investing implications.


Click here to read the associated About Everything writeup.

Good Intentions Gone Bad: $15 Minimum Wage Killing Fast Food Jobs | CivicScience

Editor's Note: Below is an institutional research note written by Restaurants analysts Howard Penney and Shayne Laidlaw. To access our institutional research email In the note, Penney and Laidlaw discuss the "debilitating afftects" the proposed $15 minimum wage is having on Restaurant companies and how the industry is now fast tracking new technologies as a result.


Their conclusion? "It’s no secret that minimum wage laws are having a meaningfully negative impact on the restaurant industry," Penney and Laidlaw write. "As a result, restaurant companies are fighting back, and their actions will end up hurting the very employees the government actions are intended to help."


Good Intentions Gone Bad: $15 Minimum Wage Killing Fast Food Jobs | CivicScience - wendys


It’s no secret that minimum wage laws are having a meaningfully negative impact on the restaurant industry. As a result, restaurant companies are fighting back, and their actions will end up hurting the very employees the government actions are intended to help.


Restaurant companies, especially the quick service ones, have begun to fast track the implementation of technology in their restaurants in order to offset the rising wage pressure. In simple terms, this means computers are taking jobs from humans. The QSR industry simply cannot afford the rising minimum wage instituted by the government and in turn they are looking to technology to help maintain their already thin margins.


In a previous note we published in September 2015, we highlighted the debilitating affects $15 minimum wage would have on the QSR industry. Part of the inspiration for the note was driven by Andy Puzder’s (CEO of CKE Restaurant) op-ed piece in the Wall Street Journal (click HERE to view).


In the table below we run through a hypothetical (but close to reality) scenario analysis of a typical QSR restaurant doing average unit volumes of $1.2 million, $1.4 million and $1.6 million. As you can see in the table on the left, the industry already operates under very thin margins.


On the right side of the slide, is the impact on profitability of taking minimum wage up to $15 per hour. What this analysis does not contemplate is the Andy Puzder scenario of pricing a significant reduction in the number of jobs and the impact of new technology (automation) on profitability.


Good Intentions Gone Bad: $15 Minimum Wage Killing Fast Food Jobs | CivicScience - CHART 7


As WEN is facing 5% to 6% wage inflation, the loss of jobs is now becoming a reality, WEN recently announced their intentions to install self-order kiosks at its 6,000+ locations, which will be installed by the end of 2016. Others have begun to do it on a smaller scale and in other international markets, yielding positive results.


During WEN’s 2Q15 earnings call, CEO, Emil Brolick made a strong statement against the rapid rise in minimum wage,


“I think the reality is that what you will see in some of these markets like New York, where there’s significant increases [is that] our franchisees will likely look at the opportunity to reduce overall staff, look at the opportunity to certainly reduce hours and other cost reduction opportunities, not just price. You know there are some people out there who naively say that wages can simply be passed along in terms of price increases.”


Emil went on to say, “…unfortunately, we believe that some of these increases will clearly end up hurting the people that they are intended to help.” These comments were clearly a precursor for what was to come, and we can expect many other QSR’s to follow in a similar fashion more aggressively as the wage rate increases are phased in over time.


Although we do not currently have a firm call on Wendy’s (WEN) we wanted to share a survey with you conducted by CivicScience, which sheds some light on what the installation of self-order kiosks means for the consumer’s experience.


The business and political implications of this move could be profound. Wendy’s can gain a leg up in the market by reducing its labor costs, thus pushing other restaurant companies to speed up their technology initiatives. Perhaps more importantly, they could also drive a huge wedge in the public debate over minimum wage increases.


But it all hinges on a few big questions: How will consumers respond? Will the promise of more convenience and (theoretically) lower-cost food bring diners through Wendy’s doors? Or will the job market implications and (theoretically) poorer customer service keep diners away?


When the news broke on Friday, CivicScience (CS) launched a nationwide survey of U.S. adults to gauge their attitudes about Wendy’s announcement and kiosk ordering in general. They started by looking at how people felt about the socio-political trade-offs of self-serve kiosks:


Good Intentions Gone Bad: $15 Minimum Wage Killing Fast Food Jobs | CivicScience - civic science survey results


The sample of just over 1,500 U.S. adults painted a clear picture. 39% of respondents believe kiosks will have a net negative impact, compared to 22% who believe it will be positive. Notably, twice as many people believe the negatives “greatly” outweigh the positives, versus those who believe the contrary.


What’s driving these numbers?


The first thing CS noticed was gender. Women were much more likely than men to view kiosks as a negative.


Good Intentions Gone Bad: $15 Minimum Wage Killing Fast Food Jobs | CivicScience - CHART 2


Age was another strong factor. GenXers are clearly the most supportive of kiosks, while Boomers are the most likely to be against them.


Good Intentions Gone Bad: $15 Minimum Wage Killing Fast Food Jobs | CivicScience - CHART 3


Let’s look at the only numbers that really matter: How do frequent QSR diners feel about kiosks?


Good Intentions Gone Bad: $15 Minimum Wage Killing Fast Food Jobs | CivicScience - CHART 4


The ratio among the most frequent fast food eaters holds pretty steady with the overall numbers. Negative sentiment outweighs positive sentiment by just under 2 to 1.


All of this must spell doom for Wendy’s, right? Maybe not. Look what happened to the results when we asked specifically about Wendy’s.


Good Intentions Gone Bad: $15 Minimum Wage Killing Fast Food Jobs | CivicScience - CHART 5


These numbers tell a much different story. Yes, 9% of respondents and 24% of Wendy’s diners say that they will eat there less as a result of the kiosks. However, 12% of respondents and 34% of ‘in-market’ diners say they will eat at Wendy’s more. The largest group of regular Wendy’s diners will be unaffected.


The numbers look even better for Wendy’s among the most frequent QSR diners. 17% of respondents who eat fast food at least once a week say they will visit the restaurant more because of the kiosks. 10% say they will visit less.


Good Intentions Gone Bad: $15 Minimum Wage Killing Fast Food Jobs | CivicScience - CHART 6


It’s obviously way too early to tell how Wendy’s kiosk initiative will shake out and whether they’ll inspire more QSRs to follow their lead more aggressively. A lot will depend on the execution, the marketing, the ease of use for customers, and the overall experience.


But, for now, it’s interesting to see the disparity between how people feel from a socio-political impact perspective and how they intend to behave. People may care a lot about the minimum wage – they may just care about convenience and savings a lot more.

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