Below are analyst updates on our seventeen current high-conviction long and short ideas. Please note we added Tapestry (TPR), Range Resources (RRC) and Cheesecake Factory (CAKE) 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
TWTR
Click here to read our analyst's original report.
Twitter (TWTR) 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 our analyst's original report.
Noodles & Company (NDLS) is hitting on all strides, as they have trimmed their asset base to turn their focus to providing the best experience possible for their guests whether on-premise or off. With off-premise consumption at 50% of sales, management has been intently focused on convenience, highlighted by the improvement of their online ordering platform (now 13% of sales, up 460bps YoY), and installing quick pick-up shelving. One thing management said during the call that caught our attention was that they are getting ready to start talking about meaningful unit growth again. We would caution them on this, and think that they are not quite ready, their traffic problem has not been solved yet! But unit growth could provide upside to future earnings if done with discipline.
VFC
Click here to read the VF Corp (VFC) stock report Retail analyst Brian McGough sent Investing Ideas subscribers earlier this week.
TPR
Since reporting the March quarter Tapestry (TPR) shares have fallen nearly 20%.
The Coach and Kate Spade brands both reported better than expected profits in the quarter.
Tapestry also brought back two additional licenses during the quarter. That brings the number of licenses the company has taken back to four over the past three quarters. Bringing back licenses is a highly visible, capital light, and relatively easier to implement strategy to both capture more of the economics and grow your own brand.
The disappointment is in Tapestry’s Stuart Weitzman brand. Stuart Weitzman, which is 7% of sales, is having difficulty matching its product development cycle with its manufacturing capabilities. A new President has been installed and the fact that it is not a demand issue gives us confidence this will be behind the company within the year.
The handbag space has recovered and the promotional intensity has lessened, accretion from the Kate Spade acquisition is greater than the Street anticipates, and licensing is a multi-year tailwind to future sales and earnings.
The story is playing out, and we think the market is giving a gift to investors not yet long this story. Our estimates are well above consensus over the short and long term.
RRC
Below is a brief note from CEO Keith McCullough on why we added Range Resources (RRC) to the long side of Investing Ideas this week:
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Looking to buy something on red? Want more exposure to our US #InflationAccelerating Macro Theme? How about our Bullish @Hedgeye TREND view on Natural Gas? Al Richards and Jesse Root added Range Resources (RRC) to our Best Ideas list (Institutional Research Product) this week. Here's an excerpt from their research note: "With the stock off 80% from the 2014 highs and short interest hovering around ~22%, the market is punitively discounting the corporate governance and macro risks while overlooking the opportunity. At the current price of $15/share, we believe that RRC is pricing in ~$2.50 Henry Hub and ~$55 WTI versus the 12-month strips at $2.85 Henry Hub and $70 WTI." Buy things on sale. Life is better that way, KM |
CAKE
Below is a brief note from CEO Keith McCullough on why we added Cheesecake Factory (CAKE) to the long side of Investing Ideas this week:
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Spring and summer Friday's are fun because you get some price disconnects with some big decision makers on the golf course. Today we're registering an immediate-term TRADE oversold signal within a Bullish @Hedgeye TRENDstock, Cheesecake Factory (CAKE). Howard Penney's most recent industry update is as follows: "Knapp-Track is reporting April estimated comparable restaurant sales of +1.9% and comparable guest counts of -0.9%. You have to go back to February 2016 to see comparable guest counts decline less than 1%, and back to June of 2015 to see comparable restaurant sales greater than 1.0%. Knapp noted in his report that Texas comparable restaurant sales are estimated to be 3.2%, 1.3 percentage points above the U.S. average, stronger oil markets are surely to thank for the strength. California, another big market for many restaurant companies, outperformed the U.S. average with comparable sales of 2.6%, 0.7 percentage points above the U.S. average." Long CAKE is one of his Top 3 casual dining ideas on the long side and it’s on sale today, KM |
HCA
Click here to read our analyst's original report.
We reiterate our short call on HCA Healthcare (HCA).
The BLS released the Job Openings and Labor Turnover Survey (JOLTS) for March 2018 this week. Health Care & Social Assistance Job Openings accelerated to +13.5% in March but remains well below its most recent peak of +56.9% in December of 2014. We have found a strong relationship between job openings in Health Care to overall medical consumption generally, and hospital same-store admissions specifically. However, as we've outlined over the past few months, a worse flu season, improving maternity trends and higher acuity has led to a divergence.
Historically, demand for labor follows growth in the insured population and medical consumption demand. Health Care Job Openings improved to +5.5% YoY on a rolling 3-month basis through March 2018, below its peak of +38.1% in December of 2014. As a percentage of Health Care Employment, Health Care & Social Assistance Job Openings increased to 7.3%.
DPZ
Click here to read our analyst's original report.
No update on Domino’s Pizza (DPZ) for this week's Investing Ideas this week.
TSLA
Click here to read our analyst's original report.
Tesla (TSLA) Still Doesn’t Get Manufacturing: Musk continues to spout off manufacturing advice, but has yet to manufacture at a profit. Velocity and density are not the keys to successful manufacturing in our experience, despite assertions on the call. Software isn’t, either. Grandma and her walker were nowhere to be found. Typically, it starts with a culture of continuous improvement. A continuous improvement approach assumes that one starts with a decent pre-production process on a well-vetted, stable product. The Model 3 production issues remain unfixable prior to tax credit reductions and competitive entry.
HBI
Click here to read our analyst's original report.
Hanesbrands (HBI) Investor day this week overall, was a fundamental dud. The company had good industry info and detailed slides – props there. But couldn’t answer a question with any degree of investment significance. If investors traveled to North Carolina expecting HBI to communicate how it would turn negative organic growth around into the positive, they were likely disappointed. There was no new strategy for accelerating growth, no change in investment, no acknowledgement industry risks with a plan to mitigate them.
Private label threat was dismissed as a threat, despite the company losing a brand (Just My Size) this year in WMT doors to a new private label offering , and the company thinks distribution channel disruption “has plateaued” yet two major retailers (Toys R Us and Bon-Ton) announced they are closing all doors this year. That is not a wholesale channel plateau.
As important as the structural risks to this business is that fact that management is not acknowledging them or preparing for them. We think this stock is definitely headed lower with high expectations in back half of this year that we don’t think the company can hit.
UAL
Click here to read our analyst's original report.
We continue to see United Continental (UAL) struggling to generate cash in 2018. The company is flailing as it copes with an inferior cost and hub structure in addition to a deteriorating balance sheet. With fuel prices and competitive intensity both looking like headwinds in 2018, we expect shares of UAL to trend lower.
SBUX
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We can’t remember the last time Starbucks (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.
According to The Founder's Mentality, as a company expands, growth creates complexity and complexity is the silent killer of growth. The SBUX business model is very complex and the company is in the process of removing some complexity from the business model. At the same time, the company is trying to grow the base of heavy users (loyalty members), which accounts for a majority of the SSS growth. This is a delicate balancing act that will take time to unfold. We continue to see risk to SBUX’s financial performance in FY18.
TUSK
Click here to read our analyst's original report.
We reiterate our short call on Mammoth Energy Services (TUSK).
Cobra is earning 40% margins for its PREPA work, other T&D contractors on the island are earning between 0%-10%, which is a big deal given that the contract is being paid for by FEMA (and US taxpayers). The most notable part of the earnings release and conference call was what it didn’t include. No increase in the T&D backlog, no mention of the two massive blackouts caused by Cobra energy sub-contractors last month, and no mention of potential monetary ramifications from those blackouts. The latter is troubling given reports that the Deputy Executive Director of PREPA would be seeking damages.
FL
Click here to read our analyst's original report.
Foot Locker (FL) reports earnings on Friday. We’ll have thoughts on the 1Q results next week, but this short thesis is about much more than a single quarter.
It has recently been announced that Puma will begin construction on its new flagship store located on 5th Ave. Puma is the fourth athletic footwear retailer to join 5th Ave, one of the worlds most coveted retail strips. As the fixed costs associated with such prestigious locations are astronomical we are inclined to believe that the stores are used more realistically as a marketing play as opposed to a sales/profit driver.
The real risk to FL is that these brands are going more direct, they are engaging with consumers more frequently through their retail stores and owned e-commerce channels including with branded apps like Nike’s SNKRS. Brands are pushing for direct communication with consumers, and as a matter of fact Nike's earnings growth targets depend upon it. We believe that as brands like Nike push for more direct their need/reliance on FL as a distribution channel will continue to diminish, thus presenting a unit and average price comparable sales headwind that will be difficult for FL to overcome.
ADT
Click here to read our analyst's original report.
Our favorite short in the technology sector, ADT (ADT) was already facing myriad headwinds. Now, the home and commercial security company may also have to contend with a new competitor with plenty of resources to take it on in the home security space:
Amazon.
Those in the know about ADT might be a little confused by this threat – the home security company currently has a partnership with Amazon to connect with its Alexa app.
But according to Hedgeye Technology sector head Ami Joseph, Amazon’s new “Amazon Home Services” is signaling that the tech giant could break that partnership.
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“If I were the owner of ADT, I would not want this at all—especially given the kind of partnerships that Amazon signs with industry leaders, and then comes in and basically back-doors those companies, mimics those functionalities, and then goes after their entire market,” Joseph says in the clip above. |
The still-in-development Amazon Home Services still has a ways to go to match ADT’s connection to 911. But Joseph says that given that it can already alert a homeowner digitally of home intruders, Amazon clearly is looking to enter the home security business – and take away a large portion of ADT’s share of the market.
Watch the clip above for more.
KSS
Click here to read our analyst's original report.
We saw mixed results from department stores this week as it relates to credit. M was down 2.5%, JCP up 4.8%, JWN up 23%, all better than management expected. Nordstrom is still seeing portfolio growth under its relatively new TD bank partnership on higher APRs and is the only one with some real growth opportunity. M and JCP are still expecting down year’s in credit.
Given these results we expect Kohl's (KSS) credit to be flat to down slightly in 1Q, while the year we expect to be down MSD%. With the better delinquency trends in recent months some people are wondering if we get a reversion back to credit lending expansion. Our answer has been decidedly no, as history says the cycle doesn’t revert until there is a big reset. The Fed’s Senior Loan Officer Survey this week indicated a clear trend towards net tightening in credit card lending for banks for the 2Q survey. From our standpoint, credit income is past peak for retail in this cycle.
KSS reports 1Q results on Tuesday. We think the quarter will look “good” relative to low expectations, but the stock is priced for expecting a beat and the JCP and JWN comp results mean there could be a negative surprise by KSS that would be read as a big negative. The rest of the year brings difficult comparisons, and growing credit/macro risks for KSS.
GWW
Grainger (GWW) Independent Distributor Risk Hard To Evaluate: The term ‘Mom & Pop’ operation comes up, but only because most investors haven’t seen that these are in fact competitive and sophisticated operators that are by no means small. The risk from AD and other independents that feel like they are fighting for their lives remains underappreciated in the minds of investors. Specifics like SKU overlap and geographies are difficult to quantify. Our take is that independents have been by far the biggest driver of industry margin pressure, but that isn’t the prevailing investor narrative.
