Below are analyst updates on our seventeen current high-conviction long and short ideas. Please note we added McDonald's (MCD) to Investing Ideas on the short side this week. We also removed Cheesecake Factory (CAKE) from the long side. 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.
We viewed the series of events that ultimately led Twitter (TWTR) to restructure as the result of self-inflicted wounds on the part of an unsustainable monetization strategy (i.e. excessive ad load). However, we now believe management’s pivot to de-emphasizing legacy CPC ads in favor of Autoplay video ads is a more sustainable long-term growth strategy. Further, we don’t think it will take much to return to double-digit ad revenue growth in 2018, possibly as soon as 1H18, as the Olympics, World Cup, and mid-term elections are all positive catalysts for ad spend.
NDLS
Click here to read our analyst's original report.
Same-restaurant sales (SRS) as reported by Black Box were up 1.5% in April (strongest in 31 months), representing a 50bps sequential improvement in the 2-year average. Same-restaurant traffic (SRT) remained negative at -1.4%, but the 2-year average improved by 40bps sequentially. Despite the strong top-line growth, continued negative traffic still points to the problems the industry faces from an oversupply of restaurants and competition from independents. There is no doubt that the restaurant industry has been in a serious rut, so these results are off relatively easy compares. But they have had easy compares for years, and haven’t been able to comp them which drives our optimism for the recovery in the restaurant space in the near to medium term.
With tax reform now impacting pay checks, consumers have a little more dough in their pockets, just enough for an extra night out, but likely not enough for a big-ticket item. Black Box noted that Fast Casual and Casual Dining were the top performers in the month.
VFC
Click here to read our analyst's original report.
Foot Locker reported Q1 results this past week. Foot Locker called out Vans as a brand with a lot of heat and one of the top sales drivers in the quarter.
Foot Locker called out Vans as a top performer in both the US and in Europe. Foot Locker’s business in Europe was challenged, but management expected to see improvement later in the year driven in part by improved depth from Vans. Foot Locker also said its relationship with Vans continues to improve.
In the past five quarters Foot Locker’s management team mentioned Vans between one to three times during the conference calls, but in last week’s conference call Vans was mentioned seven times. Vans is just one of more than 30 brands that VF Corp (VFC) owns, but it is the largest at ~30% of sales and most profitable.
TPR
Tapestry (TPR) announced this past week that the Creative Director for Stuart Weitzman left for #metoo reasons. He was the first creative director for Stuart Weitzman to succeed the founder. His first collection will hit stores in the fall. This follows the appointment of a new brand President a month ago. Another key personnel change at Stuart Weitzman is a negative. His resume was hot. Vogue magazine said he was behind some of the biggest, best accessories of the last 15 years. That being said our model calls for minimal recovery in this brand – which only accounts for 4-5% of cash flow. It could suggest that the recovery at Stuart Weitzman is pushed out by a year. We have been impressed so far at the level and expertise of Tapestry’s recent hirings at Kate Spade, Stuart Weitzman and the Coach brand itself. We expect a similar caliber replacement at Stuart Weitzman.
RRC
Range Resources (RRC) is a ~$4B market cap natural gas levered E&P operating primarily in the Marcellus Shale. Range Resources retains some of the most economic and productive acreage in the U.S. E&P space and has decades of drilling runway.
Yet, within a sector that has earned a reputation for value destruction, Range has been one of the worst offenders. In the past 5 years, RRC checked the usual boxes of E&P value destructive behavior such as excessive debt and equity issuance to fund production and reserve growth. But what separates RRC from its peer group was the $4.4B equity financed acquisition of Memorial Resource Development (MRD) in 2016. The transaction gave MRD holders 31% of the proforma company and eviscerated ~$4.2B of RRC’s market value.
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.
For the better part of the last decade Domino's Pizza (DPZ) has operated in a world of its own, dominating the pizza and broader food delivery environment. DPZ was the first-mover when it came to technology-assisted pizza delivery services and because of this, independent pizza shops, Pizza Hut, and other restaurants have not been able to adequately service the delivery market.
Increasing competition will be the bane of DPZ’s existence in the long term as the US delivery space continues to mature.
TSLA
Click here to read our analyst's original report.
First Rule Of Holes: The Tesla (TSLA) brand has proven resilient…so far. Our survey from early May shows a few cracks vs. prior near perfection, but remains robust. Shorts risk forming a bit of an echo chamber of negative data, but it will take a while for it to filter out to prospective car buyers. Tax credit sensitivity is noteworthy.
HBI
Click here to read our analyst's original report.
Hanesbrands' (HBI) stock has been rallying on insider buys following the investor day. Management believes in it’s long term plan, we just think it’s a flawed plan and results of the last 2 years show that.
This week though there was callouts from TGT’s earnings that are bad for HBI. At the Investor Day, HBI’s CEO refused to acknowledge that private label brands are a risk in the future. Meanwhile, TGT (13% of HBI Revenue) is launching 7 new private label brands in 1H18 in various categories. The mass channel is changing, and HBI is not prepared for what is coming.
UAL
Click here to read our analyst's original report.
Airfares Not Gaining With Fuel Higher, Management Tensions: Fuel costs are up, but economy airfares continue to decline. United Continental (UAL) commented that it feels confident with its existing guidance, but fares may be telling a different story. There are clearly management tensions at UAL (with the recent departure of the CFO), and tensions tend not to arise when everything is working perfectly.
SBUX | MCD
Click here to read our analyst's original report on Starbucks.
Adding technology such as kiosks and mobile order & pay are not always the silver bullet that management teams portray them to be. McDonald's (MCD) is pitching that the additional technology will be additive to transactions, throughput, and eventually labor savings, but we contend that the consumer adoption curve is much steeper than they are leading on. Look no further than Starbucks (SBUX), who touted mobile order & pay as a transaction driver, but now they have been faced with negative/flat traffic, definitely no silver bullet for SBUX!
Still Starbucks management continues to believe that technological innovation will be the main growth driver going forward, but we do not see this as a viable differentiator. As we have been saying, “technology may be the future, but they still have to get the coffee in the cup,” and Mr. Johnson has failed to do so, thus far.
We remain below consensus expectations, with the gap widening in the out-years. We continue to predict a rocky road ahead for SBUX.
TUSK
Click here to read our analyst's original report.
On their recent earnings call, Mammoth Energy Services (TUSK) management noted that the company was proactively looking at 35 acquisitions. Areas of interest include crude gathering/trucking assets in the Permian, sand logistics in the Permian, and some way to play the IMO 2020 sulfur regulations. All business lines called out by name today will just add more exposure to cyclical and competitive businesses.
FL
Click here to read our analyst's original report.
Foot Locker (FL) reported 1Q18 earnings earlier this morning. The print at face value was solid, comp and EPS beat expectations, which is obviously bullish. It is important to highlight that the two year average comp decelerated 190bps, this is material. Gross margins contracted 110bps on an easy comparison and the company’s largest FX tailwind of the year.
Our math suggests that merchandise margins were down more in 1Q18 than then reported contraction of -40bps in 1Q17. SG&A deleveraged 50bps with management attributing 20bps to FX and 30bps to digital investments. Management stated that Basketball was down low single digits in the quarter and will continue to be challenged moving forward. This is in line with our thesis as it relates to Nike’s heightened focus on tighter distribution policies.
We continue to believe that this is one of the better TAIL shorts, with my estimate closer to $3 in 2 years than the Street near $5. The culprit is the NKE ratio going from 68% (was at 73%) down to 55%, which costs $50-$75 in productivity and $1.50 a share in EPS due to fixed cost deleverage. Doesn’t matter today, but setting up for good 2H short – especially since I think Nike will hit another new bottom in 6-9 months.
ADT
Click here to read our analyst's original report.
ADT (ADT) Management downplayed the threat of Amazon’s new home services security offering indicating that it was just a different strain of what Amazon already does. We see Amazon as taking incremental steps to replicate more and more of the benefits of ADT's offerings at a considerably lower price.
KSS
Click here to read our analyst's original report.
Kohl's (KSS) beat the quarter this week, but the comp was not good enough to sustain a positive stock move. New CEO Gass flowed the 1Q beat to FY guide in anticipation of traffic pick-up that will likely never come – at a time when KSS faces the toughest compares in 5 years. That’s mistake built on hope that cost 7% in a day after the stock was +7% pre-market. New leadership sounded terrible on the call, and did not answer questions with any degree of coherence. In order to own this name, you have to believe that it is a growth stock. Period. We’re $0.05 below for the upcoming quarter, 8% below for the year. And 20% below next year.
There are always spikes on this name around the quarters, but if KSS could not win in this one – then it likely never will come. My confidence in shorting KSS into the summer when retail sales comps get ridiculously tough rivals that of HBI – which says a lot.
GWW
Click here to read the Grainger (GWW) stock report Industrials analyst Jay Van Sciver sent Investing Ideas subscribers earlier this week.
