Below are analyst updates on our eight current high-conviction long and short ideas. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
IDEAS UPDATES
UNFI
Click here to read our analyst's original report.
United Natural Foods (UNFI) We don’t think investors should be blinded by strong top-line growth driven by Whole Foods representing roughly 37%, because there is immense risk embedded within the margin lines. The company is under pressure to manage operating expenses while gross margins deteriorate, we expect their ability to do so going forward will be challenged by labor costs and capacity constraints (additional capacity not coming until the Fall).
Strong sales performance continues to be dampened by rising cost pressures that we contend will not abate anytime soon, leading to further deterioration of the operating model. Given our bearishness on the independent segment and some other issues UNFI may face going forward, we are not buyers of this new CapEx cycle.
This current and continuing price competitive environment is tough for smaller players (independents represent ~25% of sales) to compete in given their lack of scale versus the larger retailers.
Also, as we've highlighted in recent weeks, we view the SVU acquisition as very troubling, that could cause problems for the company going forward.
SGRY
Click here to read our analyst's original report.
We are more bearish on Surgery Partners (SGRY) after the preliminary 3Q18 release and news of incremental capital raise (which was successful). This stock is high-beta, high-leverage, with no cash flow and makes for a great Quad 4 (i.e. U.S. Growth and Inflation slowing) short, and the stock remains significantly overvalued.
TSLA
Click here to read our analyst's original stock report.
We continue to see evidence that Tesla's (TSLA) brand is weakening given the controversy in the name. Test drive utilization is falling again in our data, and previously impervious Model X used prices have been dropping. A key risk remains the potential for an extension of the EV tax credit, potentially undermining our ‘first loser disadvantage’ downside catalyst.
In a risk to a leg of our short thesis, on the potential for an EV tax credit extension Joe McMonigle, our Energy Policy head notes that the odds of an EV tax credit extension are above current expectations: “Divided government may usher in some horse-trading on big spending bills….As in years past, we expect clean energy to be the big beneficiary here. On tax policy in particular, we think there is the potential for solar and wind tax cut extensions and other tax policy tweaks that have affected the credits. In addition, we think there is the potential for an extension of the Electric Vehicle Tax Credit or reforms like removing the 200,000 vehicle caps on individual manufacturers.”
DE
Click here to read our analyst's original stock report.
Deere (DE) is facing a challenging market with rising input costs, lower US crop prices, and elevated expectations. Wholesale sales have tracked ahead of retail, and pricing has been flat in recent quarters. Below are some additional highlights regarding our DE short call.
- Cost Increases Meet Weak Pricing: In recent quarters, equipment sales price realization has been flat. Heading into 2019, DE will likely need to reverse pricing trends.
- Inventory To Sales Elevated: While total inventories are down from peak, relative to current sales inventories remain elevated.
- Wholesale v Retail: While wholesale sales have rebounded, retail hasn’t kept pace.
- Finance Sub Accommodation: We see evidence that Deere Financial has offered accommodating lease terms and payment terms, supporting volumes during the industry downswing with costs potentially recognized on a lag.
Higher Costs, Lower Volume: We expect shares of DE to reprice downward as the company is pinched between sales volume pressure and higher input costs amid weak pricing. We expect >25% downside in share of DE into FY19.
DRI
Click here to read our analyst's original stock report.
Darden Restaurants (DRI) is on the Best Idea SHORT list, as we believe that sales trends will slow meaningfully over the next six months putting pressure on the stock price!
In the most recent quarter, DRI put up great results. Olive Garden put up one of its best quarters in recent memory, just the second quarter with a comp over 5% since FY12, and well above the five-year average comp of 1.4%! Olive Garden’s SSS was 5.3%, strongly beating consensus estimates of 2.7%, representing a 20bps sequential increase in the two-year average. Olive Garden is leading the industry in traffic with growth in 1Q19 of 1.5%, with pricing slightly below industry average at 1.9%. Importantly, 30% of the growth was driven by off-premise.
Can it get any better than this? To put this performance in context, the 10-year average NTM EV/EBITDA multiple is 8.5x and back in 2008 the stock was trading closer to 7x. With the stock trading at nearly 2 standard deviations over its 10-year average, the good news is priced in.
FL
Click here to read our analyst's original stock report.
Foot Locker (FL) is up 3.7% WoW taking part in the broader market strength realized this past week. A few notable data points came out in earnings over that time frame.
First, Under Armour (UAA) reported their 3Q18 earnings on Tuesday. Management talked up the strong sell through of select styles like HOVR, Project Rock and the Curry 5. Yet we’d point out that the Footwear segment for UAA remained flat YoY and slowed significantly from the 14% growth in 2Q18. BGFV, a lesser known retailer and FL competitor in the west also reported earnings this week. The BGFV management cited footwear sales coming in below expectations, comping down MSD with particular weakness being realized in athletic footwear styles.
These points in isolation are not enough to support our short thesis. However, in the context of our broader short call, it gives us some sense that footwear sales have slowed/underperformed relative to last quarter at least in current sales trends from an FL supplier and competitor.
MCHP
Click here to read the Microchip Technology (MCHP) stock report Technology analyst Ami Joseph sent Investing Ideas subscribers this week.
KSS
Click here to read our analyst's original stock report.
Kohl's (KSS) CEO Michelle Gass was out doing WSJ and CNBC interviews on the last few days of the quarter.
That is likely a positive read on near term sales and is driving some of the near term strength in the stock. Earlier in the quarter, KSS “reminded” investors in meetings that it is a very weather sensitive company.
The weather dynamic has inflected in recent weeks, so perhaps comps have as well and now the CEO is comfortable being in the public prior to a print.
In the context of our short case though, there was an important takeaway from the interviews and that's the read on the Amazon partnership, which is a notable part of the current bull case.
When asked about Amazon Gass said: “Based on the volume of returns we are getting, people are using the service. What we are trying to determine is, of the people coming in and returning something from Amazon, how many are crossing the aisle and buying something from Kohl’s?”
This partnership started a year ago (last Oct), it has only been scaled from 80 to 100 stores… the added 20 stores are in the Wisconsin area (near HQ) which to us says (along with Gass’s comments) that the company is still trying to assess whether this actually drives traffic and is worth the cost.
Traffic did not grow for KSS in the last 2 quarters, and we’d argue managements actions demonstrate this Amazon partnership is not driving traffic/comp as much as bulls expect.