Below are updates on our twenty-two current high-conviction long and short ideas. We have removed Medallia (MDLA) and Slack (Work) from the short side of Investing Ideas this week. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
SFM
During the week ended July 5, fresh produce sales grew 9.1%, as seen in the following chart. Frozen produce sales increased by 24.4% while shelf-stable grew 18.1%. Fresh fruit sales tend to be impulse purchases, while vegetable sales indicate meal preparation. We believe fresh vegetable demand is a better indicator of meal consumption at home, stripping out the stockpiling effect, which has lessened but has continued during the pandemic. Fresh vegetable sales still indicate elevated at-home meal consumption. According to IRI’s survey, consumers are preparing 84% of all meals at home currently, down slightly from 89% at the peak. 38% of the workforce expects to be working from home five days a week compared to 15% pre-COVID-19.
Sprouts Farmers Market (SFM) is positioned well for elevated sales of home meal consumption and produce is a disproportionate percentage of sales and a category the company drives traffic to the store with.
CHWY
Click here to read our analyst's original report for Chewy
With the big shift to online spending happening there is the underlying question of how will it impact spending for the future. For Chewy (CHWY) specifically we tried to guage this with a survey of consumers on pet spending.
The results (below) showed that online will be a clear share winner for the future, and the biggest loser will likely be the grocery channel. CHWY is poised to leverage its brand and infrastructure to grab significant share in the online channel. So with a growing industry, accelerating channel shift, and Chewy gaining share, you have big revenue growth opportunities for the company for years to come.
NOMD
Click here to read our analyst's original report for Nomad Foods.
England reopened pubs and restaurants on July 4, Wales opened pub gardens and outdoor seating for restaurants yesterday, and Scotland reopens pubs and restaurants on July 15. For the week ended July 4, total CPG demand in the U.K. decelerated to 4% higher YOY. Total edible categories decelerated to +9% for the week ended July 4 from +12% sequentially. Total non-edible categories were up 4% YOY from +2% sequentially.
The frozen category decelerated to +14% from +21% sequentially as seen in the following chart. The frozen category has generally been the second strongest category after alcohol during the pandemic in the U.K. The non-edible categories have been much less volatile, hovering between +4% to +7% for seven of the past nine weeks. The U.K. is Nomad Foods' (NOMD) largest market at 31% of sales and frozen grocery remains elevated.
ZM
Before COVID, Zoom (ZM) averaged $180 of RPO Billings per transaction and $140 of Billings per Transaction. After the impact of COVID on the business ZM averaged $93 of RPO Billings and $76 of Billings per Transaction. Net, our work leads us to see that Billings and RPO Billings may ~2x from F1Q21 to F2Q21.
ZM remains a Hedgeye Technology Best Idea Long.
NLS
This week Peloton got a downgrade from the old wall sell side on valuation which may be dragging on the at home fitness trade as a whole, which Nautilus (NLS) is a part of. When it comes to valuation though, PTON is trading at 6x EV/sales, Mirror was bought at 5x sales, NLS isn’t even quite at 1x sales. Given the elevated demand in the industry that we see as far from over, there is still room for upside in NLS estimates and upside in the multiple. If the market sentiment of PTON is dragging on NLS we’re buyers here.
ONEM
Despite the risks highlighted in our earnings preview (hefty concessions provided to health care partners, muted recovery due to the #SecondWave, and widespread telehealth availability), One Medical (ONEM) continues to demonstrate its value among its market peers. On our 3Q20 Themes Call on Monday, we will update our trackers and app download analysis which continue to support the long thesis.
We expect ONEM will have a good 2Q20 print driven by higher activation rates and claims per member. Based on One Medical’s success, we anticipate other platforms with similar business models such as soon to IPO, Oak Street Health, will come into the space. We remain Long ONEM in the Hedgeye Health Care Position Monitor.
DLTR
We’re very bullish on the long term optionality for Dollar Tree (DLTR). Dollar Tree has some real earnings growth levers with new stores, and breaking the buck price point to drive Average Selling Price comp growth. Family Dollar has gone from borderline irrelevant to perhaps a much brighter future. Last quarter DLTR’s Family Dollar banner delivered a 15.5% comp sales increase.
This is after an extended period of underwhelming sales performance. The stores are clearly capitalizing on necessity demand and governmental support of the low income consumer. With the virus cases rising, consumption in necessities will remain elevated, and congress is nailing down the details of a whole new round of stimulus and unemployment support.
According to our Macro Policy head JT Taylor, a bill is almost guaranteed to get passed, the question is just how big and when. Regardless of the scope of the bill, it will undoubtedly have elements that will support the Family Dollar consumer for several more months meaning continued sales outperformance for the banner and likely momentum for the stock.
MAR & HLT
Click here to read our analyst's original report for Marriott.
Although the headline trend in US RevPAR growth continues to gradually improve each week, the data contains many divergences. Breaking down the data bit further we can capture the more relevant trends, i.e. full service trends vs the industry. Full service hotels typically known to host more business, group, and high end leisure travel continues to nose dive in relative RevPAR growth terms. Since the recovery began in April, US Luxury and Upper Upscale hotels have made new relative lows vs the rest of the industry, nearly every single week. For the week ending 7/11 the performance delta was -21.1%. In our view, the best way to play this theme is to short/underweight the Full Service REITs, but C-corps with plenty of fee exposure to the high end like Marriott (MAR) and Hilton (HLT) will not be immune, either.
ATUS
Click here to read our analyst's original report.
Altice (ATUS) completed its small acquisition of Service Electric Cable T.V. of New Jersey earlier this week for $150M. The acquisition is expected to contribute between $45 - $50M in revenue a year, and was originally announced in February 2020. ATUS is scheduled to report earnings on 7/30 and we expect them to update their guidance for the most recent deal. We will be updating our service trackers for Altice next week and will have more detail to share in next week’s update. However, we would remind investors that Q2 was the most difficult revenue and EBITDA comparison for ATUS prior to COVID.
DFS
When Discover (DFS) reported 1Q20 results, posting diluted EPS of -$0.25, down -112% y/y, driven by a +123% increase in provision for credit losses tied to the reserve build for the projected impact of COVID-19 related losses and CECL adoption.
Not dissimilar from its consumer lending peers, management is trying to focus investor attention on the company's performance during the last downturn, the magnitude and speed of fiscal stimulus, the degree of loan forbearance, and the acute nature of the overarching employment shock. Adding to this, Discover's management emphasized the improved quality of its current loan book evidenced by a lower share of the FICO sub-660 loans, along with mention of its superior liquidity, capital position, and low-cost funding stack. Those who accept this narrative see a stock trading just north of 1x tangible book value - albeit 50% greater than the all-time low of 0.5x reached during the last downturn - with considerable upside.
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) remains a short.
MCD
Click here to read our analyst's original report.
There was a point in early 2019, when we made a bearish call on McDonalds (MCD), because the US business was seeing traffic declines for four of the last five years and BBV 2020 was not working. The push back was, “but the international business was humming, and that represents 60% of the business.”
Today the tables have turned; people are bullish on MCD because “US comps improving from flattish in the latter weeks of June to +1%-2% for July-to-date.” However that represents only 40% of the business. What about the other 60%? How is that doing? Well, Latin America is down 50%; China is likely down 10%; Europe, how is that going – between China and Latin America?
Lastly, the traffic data from Safegraph seen in the chart below does not confirm the July uptick in MCD sales trends.
SYY
Independent restaurants are still struggling. This is not good news for Sysco (SYY) whose most profitable customers are independent restauarnats. Evidence of this comes from the National Restaurant Association (NRA). This week the NRA offered this Blueprint for Restaurant Revival (complete document available here) to guide Congress and the Administration as officials work to craft the next round of recovery programs. Highlights of what the Association believes its constituents need include some very big asks of legislators:
- Build on the success of the Paycheck Protection Program (PPP) and the PPP Flexibility Act by enacting a second round of application eligibility to initial eight-week loan recipients and make other changes to help extend and sustain this successful program.
- Expand the Employee Retention Tax Credit (ERTC) to help restaurants get support after a PPP loan has run out.
- Address Business Interruption insurance claims for small businesses with a federal backstop to cover losses due to a pandemic and so that insurance remains available and affordable.
- Provide Liability Protection for American Businesses because COVID-19 is a global pandemic and is not caused or spread by any one type of business or employee. Congress should enact temporary and targeted protections to stem frivolous or fraudulent lawsuits, but allow claims based on willful misconduct by bad actors.
- Prioritize testing + vaccine distribution for food supply chain employees (after health care, first responders and vulnerable populations) to help the entire food and restaurant industry continue growing, selling and serving healthy food even in times of crisis.
GOLF
Click here to read our retail 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
Airlines and the airport might have submitted higher capacity forecasts for the back half of the summer into Las Vegas, but consumers have other plans with respect to planning their next flight into Sin City. Indeed, for the fourth week in a row, search interest for flights into Las Vegas decelerated markedly. This deceleration would have been inclusive of the decision for the LV Strip to mandate mask wearing across all the casino resorts + the decision for bars and lounges who don’t serve food to also close.
This lower level of interest comes at a time when casino reopening plans are starting to stall out. Keep in mind, ~50% of the Strip’s business is of the fly-to variety, so this kind of data could prove to be a leading indicator for near term bookings. With the Covid-19 situation not really under control in nearby CA and AZ, and macro issues just starting to come to a head, we expect Las Vegas will be among the markets that struggles the most in the US. Boyd Gaming (BYD) is reliant on these economic factors so this development is at best a slight negative. Continue the short.
AXP
During the first quarter 2020, American Express (AXP) reported first quarter diluted GAAP EPS of $0.41, down -77% y/y due to a +$1.4B (+224%) y/y increase in provision expense, driven by a +$1.6B reserve build related to the economic downturn caused by the Coronavirus pandemic. Interestingly, American Express reported "core" earnings of $1.98 per share. In this case, core excludes reserve-build for higher expected loan losses. We can't recall a precedent example of a lender itemizing loss reserves as non-core.
IFF
In more normal trading markets, we’d expect International Flavors & Fragrances (IFF) to pop on the garbage Old Wall takes about accelerating growth and whatnot in the quarter, and then trade off.
Incremental data and field work have increased our confidence in the bear thesis. We have assumed that investors would see the N&B deal as a bit desperate - faddish assets pursued to paper over the troubled Frutarom deal. IFF may look defensive, but it isn’t. Mature, ‘seasoned’ business lines have trended flat to down, while poor capital allocation aimed at offsetting core trends have likely destroyed billions in shareholder value
IFF is not a quality name worthy of a premium multiple – it is super risky, we think, and pursuing the N&B transaction to paper over the mess with Frutarom. This behavior stinks; once a company loses reporting credibility, it is very hard to get it back.
ZI
Some of the other negatives we have to know include the non-software roots of ZoomInfo (ZI). The “research” team at DiscoverOrg was not building software. They were cold-calling companies pretending to have a research project and taking notes on the org chart, key titles + responsibilities, and contact information.
On the + side, ~40% of the business comes from US software companies - i.e. the traditional early adopters of the best tools and tech - contrary to companies throwing around "digital transformation" to create fomo induced buying from old + losing market players.
The net is we believe the company has tail risks on the business model, that its current growth rate incorporates a re-pricing period that is not reflective of adoption demand, that S-1 data points themselves point to a period of steep churn in 2019, and other elements wherein we remain convicted on our ZI Short.
Remain Short.
LYV
As the largest producer of live music concerts globally, Live Nation (LYV) is among the hardest-hit companies from the pandemic in our coverage. While LYV is well-positioned to capitalize on the reopening of the experience economy, at 15x Adjusted AOI and 3.9x leverage (...on 2022 numbers), the market is already pricing in an optimistic recovery scenario.
Additionally, we believe the street is basing LYV's valuation on numbers that overstate the company's true economic earnings due to acquisition accounting and adjusted financial metrics. In addition to promoting events, Live Nation owns the leading live entertainment ticketing platform, Ticketmaster.
In 2019, approximately 220 million fee-bearing tickets were sold on the Ticketmaster platform representing a gross-transaction-value (GTV) of $20.7 billion across music, sporting, and live theatre events. We believe the supply and demand for events will be slow to recover in 2021. In the case of sports, for example, many leagues have planned their return but on a condition of no fans in the seats. Live Nation has also been active in rolling up the fragmented promoter industry, with a 38% share of gross ticket sales in 2019 among the top 100 promoters worldwide.
We believe consensus estimates reflect inorganic growth that is unlikely to materialize given balance sheet restrictions that limit LYV's ability to do deals.
DIS
Disney (DIS) reopened Disney World in Florida in the last week with limited capacity. However, with the number of COVID cases accelerating in Florida, we question how long it may be until another shutdown. We would note that just as U.S. theme parks were reopened this week, Hong Kong Disneyland closed again on 7/13 after a spike in COVID cases.
We continue see risk/reward skewed to the downside as parks continue to operate at limited capacity and theatrical releases remain on pause. Meanwhile, production delays due to COVID are delaying the highly anticipated August release of ‘Falcon & the Winter Solider’ on Disney+.
KSS
One of the biggest impending risks for the Kohl's (KSS) stock is the company’s exposure to consumer credit with its private label card portfolio it has in partnership with Capital One.
Credit (other revenue) was up slightly in 1Q, and is roughly $850mm on an annual basis. We expected minimal change in the first quarter as April COF card metrics indicated the delinquencies were not changed much yet given forbearance actions, so we won’t see a credit impact until 2Q or potentially even 3Q numbers. The street is expecting a 25% decline in other revenue in 2Q, then a low to mid teens decline in 2H. The company guided that it expects credit to be down due to the reduction in sales, but what management is leaving out is the shared risk with COF in terms of defaults in the credit portfolio.
We think the default risk will be much greater than what the street is forecasting. We are modeling $400mm in lost revenue from credit in 2020, but with the current state of unemployment, the downside could be much worse than that. So as the street is expecting the model to rapidly improve, we think there is another big profit hit in the coming quarters from credit risk.
