Below are analyst updates on our thirteen current high-conviction long and short ideas. Please note we added VF Corp (VFC) to Investing Ideas on the long side this week. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
IDEAS UPDATES
VFC
This is a note from CEO Keith McCullough on why we added VF Corp. (VFC) to the long side of Investing Ideas this week.
"It surprises Brian McGough that VF Corp (VFC) is down over -5% (on light volume albeit) after what he thought was a good quarter."
Here's an excerpt from Brian McGough's Institutional Research note:
"The underlying metrics were simply stellar with revenue 17% in constant currency (plus 8% pure organic). Definitely spent up on SG&A, excluding which could have beat the consensus by an extra nickel. But why waste a beat on a stub period? Company just set up for another beat in a quarter that’s actually analyzable by the consensus (no more stub or acquisition opacity). I like this one long side. One of the best (and most stable) earnings/cash flow upside algos in larger cap retail."
TWTR
Click here to read our analyst's original report.
Management tempered its 2Q18 outlook: TWTR guided ahead of the street for 2Q18 on both EBITDA and implied revenue, but cautioned on 2H18 suggesting a return to 2016 seasonality. We don't see this as anything more than managing expectations on the heels of a considerable 1Q18 beat.
Note the mid-point of TWTR's implied 2Q18 revenue growth is slightly below its 1Q growth rate despite what should be another quarter of accelerating growth given the tailwind from the Olympics. TWTR's seasonality comments suggest 3Q18 revenues should be largely inline with what appears to be a sandbagged 2Q18 guide, so we suspect mgmt bought itself some breathing room for its 3Q guide as well.
NDLS
Click here to read the Noodles & Company (NDLS) stock report Restaurants analyst Howard Penney recently sent Investing Ideas subscribers.
FL
Click here to read our analyst's original report.
The bear case on Foot Locker (FL) remains intact.
In Q1 FL will be lapping its most difficult YY gross margin comparison. We are under the assumption that Q1 gross margins will be weak and that longer duration gross margins with continue to contract.
Adidas reported their Q1 earnings results yesterday citing that footwear sales increased only 5% marking a meaningful 1900bps deceleration. However, we highlight that amidst the deceleration Adidas sustained share gain in its core North American and European markets. FL is unwinding exposure to Nike while increasing shelf space allocated to Adidas product (typically lower ticket, lower gross profit dollars than a Nike shoe).
In addition to the Adidas margin headwinds, we would highlight the ongoing streetwear vs. athletic trend that was reconfirmed on Friday’s VFC conference call, a trend that is again a net negative to FL’s gross margins. The Van’s brand grew 39% in Q1 accelerating 400bps and providing another data point that validates our thesis of the streetwear trend having longer legs. Management expects gross margins to expand in FY2018 and we think that this will be a tall order to fill with the more likely outcome being margin contraction.
HCA
Click here to read our analyst's original report.
We reiterate our short call on HCA Healthcare (HCA).
In the aggregate, Health Care employment trends continue to weaken year-over-year, which is consistent with our Insured Medical Consumer model, and our forecast of decelerating medical consumption into 2018.
DPZ
Click here to read our analyst's original report.
Our core short thesis still holds for Domino’s Pizza (DPZ). Increasing competition will be the bane of DPZ’s existence in the long term as the US delivery space continues to mature. We are beginning to see the early stages of a changing of the guard in the delivery space as the home delivery occasion is no longer just a pizza occasion. Other players in the QSR space are taking delivery seriously, as perennial powerhouse MCD most recently launched delivery at more than 4,000 units in the US and Australia, and still has much more capacity to add delivery going forward.
TSLA
Click here to read our analyst's original report.
Tesla (TSLA) remains one of the most overvalued and uncompetitive names in our coverage. We believe our timing in adding it as a Best Ideas short near its all-time highs is a validation of our data and narrative oriented approach. Tesla remains a “blindingly obvious” short, with many catalysts now targeting the bullish story.
HBI
Click here to read our analyst's original report.
This is about as good a quarter as we could have expected from HBI, and earnings were still down 9% with the stock down 5%. There is a setup for a 15-20% miss in the back half. Maybe a near term positive catalyst on the May 15 Investor Day, but management is holding a balloon under water as it relates to cash flow trajectory for the year and we can’t imagine how management talks its way around that. We would not be shocked to see HBI back off it’s phantom $1bn in CFFO guide.
On the quarter:
- Slight rev and EPS beat in Int’l and Activewear – w EPS down 9% YY.
- Full year guide held with 2Q guided weakish, 2 cents below street at the midpoint. Innerwear down 3%, confirming continued share loss in the core for HBI.
- Activewear up 6% total with 5% from Alternative acquisition and 1% organically fueled by Champion up HSD% domestically.
- Again we see Champion slowing against tougher compares in 2H.
- International beat by 8%, up 19.4% YY, with the help of 940bps from FX (higher than we and the company expected). This segment was the main driver of the revenue beat, seeing 7pts of organic growth driven by Champion in Europe and Asia, and 3pts from the Bras N Things acquisition. Golf clap there.
- Gross margin was down as we expected vs. guidance of being positive YY, remember the company should have seen ~25bps+ from mix benefit from higher retail acquisitions. Company noting input (cotton) costs being the main drag, flowing through the P&L now, and note cotton has been making new highs recently so this headwind will remain throughout the year.
- Cash flow looks bad in 1Q, with CFFO down $100mm, capex up, and a large acquisition. CFFO has a high bar to hit annual guidance, especially considering the company's inventory looks better on the margin, up just 2% while closing on Bras N Things. Inventory clearing is a lever the company has pulled to boost cash in recent quarters, it appears that would be a challenge to repeat this year.
Are we concerned with this stock being at a 4.5-year low? No, as we see further downside to numbers and the stock as the story plays out.
UAL
Click here to read our analyst's original report.
Bottom line here is that United Continental (UAL) is a high cost airline that has struggled to generate positive free cash flow in a favorable economic environment.
The road ahead looks increasingly difficult for UAL. Our pricing data suggests they have exited a price war with a lower cost airline. What did UAL gain? Flat market share growth and lots of shareholder pain.
SBUX
Click here to read our analyst's original report.
We remain confidently SHORT Starbucks (SBUX).
We can’t remember the last time SBUX management team spoke about and revealed monthly SSS trends in any given quarter. Given how challenging the company’s 2Q18 performance was, and the need to confirm its yearly guidance, we couldn’t help but to think the sudden sales disclosure was to put a good face on a bad situation.
But when we expand the aperture on the company’s performance, it is clear that the overall business is not accelerating. The slowing sales trend is not isolated to the Americas segment…it is a global issue.
TUSK
Click here to read our analyst's original report.
We remain short Mammoth Energy Services (TUSK). This stock is worth $20.
ADT
Click here to read our analyst's original report.
It isn’t about competition (only), it isn’t about leverage (only), nor is it about the valuation (only).It is about churn
The entire bull case rests on current management’s folksy attributes to managing the business better than previous management. The evidence, they note, is the declining churn rate.
Declining churn rates have almost nothing to do with management’s effusive charm, nor their Business 101 turnaround.
There are too many missing pieces in the story. Do not be surprised when cash flow goes to M&A to keep the clock ticking, when that M&A is nothing more than un-strategic revenue filler, and don’t be surprised if you can’t get paid back buying an old, highly levered company, with a limited path forward, trading at ~25+x unlevered FCF.
KSS
Our Retail analyst Brian McGough remains The Bear on Kohl's (KSS). In a recent stock note, he writes "KSS does not need to exist, and ultimately won’t. The Street thinks that it will earn over $6.00 per share in 2-years, while we’re below $3.00."
We will send out the full note this coming week.
