Below are updates on our twenty-five current high-conviction long and short ideas. We have removed Grocery Outlet (GO) from the long side this week. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
KR
In the latest week of our consumer survey, 52% of consumers report spending the same on groceries as the previous week, as seen in the chart below. The percentage of respondents saying slightly less, slightly more, and the same reached a survey high of 89%. As every state has reached some phase of reopening spending intentions on grocery appears to have stabilized at an elevated level.
SFM
Local grocers including Sprouts Farmers Market (SFM), as well as dollar stores, have benefited from COVID-19’s impact on grocery shopping. The larger grocery chains have implemented shorter operating hours, often have lines to enter the store, and public transportation is less frequent.
This has boosted the sales at food and beverage stores in closer proximity to customers. Grocery spend at local grocery stores declined 4% YOY on June 6, according to Womply (CRM provider). Sales growth broke trend since the last week of May, as seen in the chart below.
However, daily grocery sales remain elevated at local grocers that are open. On June 6, sales were up 31.6% YOY, as seen in the chart below. Sales growth has generally been better than +30% since the end of March when the stockpiling/depletion occurred.
The percentage of grocers closed has been quite stable during April and much of May, hovering between 11% to 14%. The percentage of stores closed has gone up dramatically since 11% closed on May 26, to 17% on June 6 which explains the drop in total spend while grocers open have improved recently. This could be related to ongoing protests in several cities.
CHWY
Not many places in retail that offer growth investors the kind of growth characteristics you get from Chewy (CHWY). Pet ownership is on the rise, spending per pet household is increasing, the shift to online within the category is accelerating (in part due to pet Rx share gain), and while Amazon competes in the space, it is not as dominant nor does it have the Brand recognition and consumer’s trust that you have with Chewy.
On top of that, there is a massive call option with CHWY to take the model outside the US and add a huge leg to the long-term growth story. As a kicker, it’s covid-proof and added an impressive 1.6mm net new customers this quarter – nearly double the recent quarterly run-rate. The company’s cohort analysis showed that the spending behavior for recently-added customers is at or above levels of existing customers in both basket (+11% higher order size) and frequency – suggesting that this represents a permanent shift in demand.
Financially, the company took a big leap this quarter with its first positive Adj EBITDA in company history – something we weren’t modeling for another year. Unlike models like Wayfair that have to re-acquire every new transaction, Chewy is extremely sticky and spends once to acquire a customer for life.
So it doesn’t need to restart the clock toward profitability every quarter, but rather has nearly 15mm customers consistently returning to cumulatively push this model over the profitability goal line. In other words, the company just hit the customer count it needs to generate positive cash flow, and it’s 12-18 months away from a point that will allow it to earn a profit on a GAAP basis. Not to pick on Wayfair, but it will never sustainably earn a red cent. With CHWY, there’s a clear path toward real earnings. The models are often compared as peers, but they couldn’t be more different as it relates to TAM, CAC efficacy, and sustainability of top line growth.
Ultimately, this is a best in class growth model with years of identifiable customer adds that is just breaching the path toward profitability. Is it expensive? It currently has a 3x sales multiple – which is about as high as we can argue with AMZN trading at 3.5x. But the rate of growth alone should carry this stock to $85 over a TAIL duration.
NOMD
This week Nomad Foods (NOMD) provided an update two months into the quarter, ahead of an investor conference. Nomad Foods said organic revenue is tracking ahead of expectations and is now expected to increase in the low-double-digit range.
Organic revenue growth increased by 14% through the first two months of the quarter. Management’s previous guidance was MSD% organic growth for the year. Consensus expectations for Q2 revenue were 8% growth. Shares of NOMD are still down on the year despite the acceleration in sales from COVID-19 stay at home restrictions.
Some investors may be concerned about when sales decelerate or lapping the current strength next year. Trading less than 15x consensus EPS estimates that are too low, keeps my concerns about decelerating future sales muted. Nomad Foods is benefiting from several longer tailed trends in consumers’ preference for freshness, wellness, and convenience as well as COVID-19 related benefits from more food preparation time and a shift to eating at home.
Owning consumer staples companies with momentum in their business when they lap the current period is far better than consumer staples companies that struggled despite the shift to food at home.
CAG
Grocery channel demand remained elevated for the week ended May 31. The following chart illustrates total grocery store sales, edible categories, and the frozen category indexed to pre-COVID levels, as reported by IRI.
Overall edible demand growth remained elevated but decelerated for the fourth consecutive week from 130 for the week ended May 3 to 121 in the last week. The frozen category, benefiting from the trends of more food preparation and more interest in freshness and wellness, has outperformed the rest of the grocery store. Frozen and refrigerated foods are roughly 40% of Conagra’s (CAG) sales.
FLO
At the peak Flowers Foods (FLO) sales were up 70% YOY in March. Many companies had difficulty keeping up with a demand spike like that, but Flowers Foods direct store delivery gave it an advantage. By remaining on grocery shelves Flowers Foods gained considerable share during COVID-19.
Millions of consumers tried Flowers Foods products for the first time. The cost of marketing to get similar customer trial in March and April is incalculable. With more meals eaten at home and cafeterias at schools and workplaces closed, Flowers Foods is positioned to benefit from the current environment.
WING
Click here to read the long Wingstop (WING) stock report that Restaurants analyst Howard Penney and Daniel Biolsi sent Investing Ideas subscribers this week.
ZM
Management decided to guide revenue flat from 2Q into 2H FY which is why the stock was down in a/h post EPS but in order to achieve that lowly guidance the company would have to lose over $200MM of quarterly revenue in churn with $0 offset from incremental customer additions, expansions, or upsells.
We can theoretically argue peak as much as we want but as long as ZM is making higher highs in billings we aren't there. We were hoping to hear more about the success of Zoom (ZM) phone but it seems at this point the company is just trying to manage the demand in core meetings before dedicating resources or attention to what comes next.
ZM remains a Hedgeye Technology Best Idea Long.
NLS
The data around Covid-19 is starting to show case growth accelerating, this was to be expected, the consensus was/is that a second wave will come, though its coming earlier than previously expected with the rapid re-openings. This is ultimately good for Nautilus (NLS).
The industry demand this spring was around those who are avid exercisers looking for home solutions when they realized their gym would be closed. The next wave of demand will be the occasional or aspirational exercisers that normally look to gyms as winter approaches and as holiday pounds are gained.
As that time of year comes rolling in, gyms will probably remain open, but the virus will still be our communities while many municipalities will probably still require masks and attendance caps for gyms, and that means much of the US again looking for home fitness products. We continue to expect industry demand to be elevated for an extended period of time and that it will mean sales at very lower marginal cost for companies like NLS.
COST
Costco (COST) certainly has one of the most powerful retail models in the market. Being open and serving its customers throughout the pandemic has likely driven further customer satisfaction and loyalty, and gradual relaxing of restrictions should help drive traffic as social distancing measures has actually made for capacity constraints and lines for entry at many stores.
As we look at the long term though, consumers for the foreseeable future will be wanting to make few store trips, going less frequently, and doing more shopping in less places. That makes the value proposition at COST even more desirable as you can shop in bulk at good prices and shop many different categories while stocking up on essentials.
We think sales and profits for COST remain strong through 2020 and that the stock is deserving of its premium multiple.
ONEM
One criticism of our 1Life Healthcare (ONEM) long has been a view that they are highly penetrated in their existing markets. We had a call with a regional manager of a large PEO that offers One Medical within their product menu. We came away much more comfortable that our analysis of the remaining market is reasonable and that ONEM has a ways to go before penetration challenges their growth rate.
In addition, customer attrition remains low implying the post-COVID rebound is likely to recover toward pre-COVID patient levels on a same store basis. We will continue to track physician counts, including those billing under the One Medical banner as well as those billing through network partners, giving us an indicator of the pace of their expansion and demand at the practice level.
MAR & HLT
Click here to read our analyst's original report for Marriott.
The daily TSA checkpoint data continues to show gradual improvement off a very low base in March, but at least some of the improvement appears to be due to seasonal dynamics. TSA throughput data for the last 7 days through 5/30 fell 88% YoY vs -89% YoY for the prior week days – again, improvement, but not v-shaped recovery type numbers.
As it relates to very soft hotel demand, there continue to be offsets which are driving some outperformance vs what the relationship between air travel and hotel demand would suggest – e.g. drive-to leisure demand in the south and some coastal markets + economy scale demand off of highways and other non-urban areas.
Based on a variety of indicators and the TSA data in particular, the coming weeks and months should show modest improvement, but for now, RevPAR in the range of -70% to -75% should be expected. Many of the hotel stocks like Marriott (MAR) and Hilton (HLT) seem to implying a hotel recovery far more bullish than what we see in the data
We remain firm the short.
CMI
Click here to read our analyst's original report.
Estimates for Cummins' (CMI) have fallen so far that it allowed the company to stumble over consensus. Cummins also engaged in restructuring at the end of last year, helping 1Q20 reported results. EV delays in the medium-duty space, not long-haul, are the real CMI risk. ESG holders must love that conflicted section of the earnings call – diesel is cheap right now…but because transportation demand has fallen off a cliff, and that is somehow a positive?
Bailouts and central bank intervention are perhaps more aggressive, but the downturn is also vastly deeper and more global. Analogies break down, but the sharp rebound in equities like TW prior to reporting a SINGLE QUARTER of pandemic/unrest/lockdown impacted results is more alarming than emboldening.
MDLA
As vocal bears on Medallia (MDLA) even we didn’t expect 7% Y/Y growth in total billings (from +26% growth in Q4) or 12% Y/Y growth in SaaS billings (from +22% in Q4) or -29% Y/Y growth in RPO billings. The CEO's smooth tones and the CFO's lack of awareness lulled the sellside to sleep and no real questions were asked.
We understand that the CEO speaks with optimism but it is hard for us to find a reason to be bullish on the stock when MDLA is losing in the core business, billings are damaged by COVID, organic SaaS revenue deflated to the teens, the co is pursuing a lower dollar opportunity in the mid-market, making up the expectations gap with more and more M&A, but thanks to his cool accent the stock is 11x forward revenue.
MDLA remains a Hedgeye Technology Best Idea Short.
ATUS
Click here to read our analyst's original report.
We held our Long TMUS institutional presentation earlier this week. As part of that work, we updated the data we track across the broader cable/telco space for employee satisfaction and user reviews. The latest update shows that ATUS continues to rank the worst among peers across all key metrics. While everyone hates their cable company, we would note that Altice (ATUS) ranks worse than Frontier (Which is bankrupt!).
This data is further evidence that ATUS management continues to manage the business with a focus on short-term, financial engineering over long-term value creation. Additionally, ATUS high leverage of ~5.0x Net Debt/EBITDA is a style factor that underperforms in Quad3, which is the Hedgeye Macro teams expectation for Q3.
DFS
Discover's (DFS) card portfolio, despite record low household leverage amid a historically favorable labor environment, had already been deteriorating going into the Covid cliff.
As we have highlighted in our past work, we observed this downward credit trend to be a result of greater late-cycle subprime exposure brought on by adverse selection and masked by an inflationary FICO score phenomenon, starkly contrasting the company's behavior in the last downturn when it was shedding risk steadily in the years leading up to the crisis.
We remain firm the short.
SYF
We continue to hold the view that private label card operators are in a curious position relative to their general purpose counterparts due to the risk-sharing and economics-splitting nature of these relationships. On the one hand, these arrangements serve to insulate the issuer, but on the other hand, this risk-sharing may catalyze a liquidity event on the part of certain retail partners.
Accordingly, with both private label and considerable subprime consumer credit exposure, Synchrony Financial (SYF) is on the front lines of this COVID-19 downturn.
MCD
Click here to read our analyst's original report.
Casual dining restaurants same store sales were down 39% in the last week of May. In contrast many quick service restaurants are reporting same store sales increases at the same time. The drive through window has been a great benefit during the pandemic for consumers eating outside their home.
According to Womply (a CRM provider) 22% of its restaurant customers still have not opened. As more restaurants re-open their doors and dining rooms quick service restaurants including McDonald’s will see increasing competition.
The picture is quite different in McDonald’s (MCD) international restaurants where there are fewer drive throughs and the restaurants are opening dining rooms with reduced seating areas.
ITW
Auto sales dropped by about 1/3 sequentially and YoY, a pace that was almost certainly worse toward the end of the month as social distancing efforts increased. According to our Macro team’s Christian Drake, a “primary read-through is to Retail Sales where autos represent ~20% of the Total.” In many ways, the dynamics of this downturn are likely to hit demand for ‘consumer’ exposed companies like Illinois Tool Works (ITW) more than some traditional manufacturing names with transportation, construction, government spending, or defense exposure.
In the end, however, we are hoping to get an entry opportunity in a quarter or two in the ROK’s and other factory automation names that are exposed to fall in automotive capacity utilization (among other categories). As we flagged in our ITW deck, used car prices are likely to fall, potentially impacting financing. Maybe I’ll finally buy a new used car if that happens, replacing a MY2011 vehicle bought in mid-2013 – flagging for the notable lag between new and used troughs.
We remain firm on the short thesis.
SYY
The Ohio Restaurant Association has, for months, conducted a weekly Business Impact poll with owners and operators to determine the ongoing health of restaurants across the state. The latest survey was conducted from June 5-9, 2020, and references information from the week of May 31-June 8, 2020. With more than 80% of restaurants now reopened, the results pose a challenging environment for operators. Independent restaurants are Sysco’s (SYY) most profitable customer segment and their outlook remains challenged:
- 82% of operators have opened their dining rooms; this is up from 70% to 80% in the past two weeks.
- Another 9% of respondents plan to reopen their dining rooms soon.
- Given current guidelines, most restaurants do not anticipate breaking even in 2020.
- Only 21% of respondents think that they will be able to reach breakeven sales in 2020 – up slightly from last week (18%).
As restaurants prepare to reopen, sales continue to underperform compared to the previous year, but are beginning to improve slightly. A total of 65% of restaurants are experiencing year-over-year sales declines in a range of -20% to more than -70%, and this is somewhat better than in previous weeks. Also, a total of 14% of restaurants are experiencing positive sales, especially in the pizza and fast-casual restaurant sectors.
GOLF
Click here to read our analyst's original report.
Temporary Coverage Restriction Notice – Acushnet Company (GOLF)
From time to time, during the ordinary course of conducting our investing research, circumstances or events outside our control can cause us to temporarily restrict or halt our research coverage of a specific security. It’s inconvenient for Hedgeye analysts and our subscribers.
But we believe it is the appropriate and ethical way to conduct business.
Please be advised that Coverage of Acushnet Company (Ticker: GOLF) has been temporary halted at this time. We hope to resume coverage soon. Unfortunately, we cannot comment further and are unaware of exactly when we will be able to resume coverage.
BYD
With the slower for longer theme in mind, we see 2020 and 2021 under significant pressure for all casino markets in the USA like Boyd Gaming (BYD), but even more so on the Strip and LV Locals markets. We’re projecting 2021 Locals gaming revenues to still reside 22% below 2019 levels. Remember, as a result of the Great Recession of 2008/2009, Locals GGR didn't bottom until 3 years after the peak.
We are firm on the short thesis.
BABA
We worry that heavy subsidies from Alibaba (BABA) is driving May’s GMV growth so it may not translate into substantial revenue growth. Furthermore, BABA is unleashing a record 14bn RMB in subsidies for the 618 festival. Despite the giant May numbers, we estimate Q2 to date core e-commerce revenue growth is trending only 1-2% above Street estimates.
We remain negative on BABA long-term.
AXp
As we acknowledged in our DFS and COF notes, and applying equally here:
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The scenario is an extremely aggressive loan loss assumption based on a constant caliber of layoffs as seen in the Financial crisis which also fails to consider mitigating factors like enhanced unemployment assistance, greater government stimulus, increase TDR usage, and the potential for a V-shaped recovery. |
Nonetheless, we still find a major disconnect between the outlook for implied incremental losses of +24.5% and +5.1% on the American Express' (AXP) loan and receivables portfolios, and the corresponding incremental ex.CECL reserve builds of +157 bps and +67 bps, respectively.
As we concluded, until we have greater clarity on which of these divergent outcomes is more likely, AXP shares remain a best idea short.
