Below are updates on our twenty-three current high-conviction long and short ideas. We have removed Disney (DIS), Boyd Gaming (BYD), and International Flavors & Fragrances from the short side of Investing Ideas this week. We have also added Zendesk (ZEN) to the long side and Smartsheet (SMAR) and New Oriental Education (EDU) to the short side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
SFM
This past week Sprouts Farmers Market (SFM) reported Q2 EPS of $.59 vs. consensus expectations of $.37. The upside was driven by better comps and gross margins. Sales grew 16% driven by SSS growth of 9.1% vs. consensus of 7.8%. SSS peaked in May at 13% and decelerated in June at 8%. E-commerce grew more than 500% and represented 12% of sales during the quarter from 4% just prior to the pandemic.
Gross margins expanded 450bps driven by a change to its promotional strategy, easier comparisons, and shrink improvement. SG&A expenses deleveraged 270bps due to COVID-19 expenses including higher labor costs as well as e-commerce costs. COVID-19 costs were $47M of the $106M increase in SG&A expense.
Management expects July SSS to be up 9% with e-commerce at 11% of sales. So trends a month into Q3 are similar to Q2. Before the pandemic began management began changing how it used promotions in produce to drive traffic through circulars.
Due to changes in shopping behavior, food consumption, and increased demand Sprouts Farmers Market has been able to push its test further. Consumers are looking for healthier food and are no longer driven to visit stores for deals in circulars providing the company’s new strategy with an environment that nearly guarantees success. Our EPS estimates are still meaningfully above consensus and the multiple has a lot of upside potential if management can continue to execute on their strategic initiatives and accelerate store growth.
CHWY
Click here to read our analyst's original report for Chewy
Amazon reported earnings this week. It included a massive revenue beat and guide up for 3Q.
Online stores nearly doubled its growth rate to 48%, by region NA was up over 50% excluding whole foods and International more than doubled its growth rate to +41%. As it relates to Chewy (CHWY) with think Amazon’s results signal two important points.
First is the significant online consumption acceleration in 2Q and the revision of 3Q expectations higher, we think we could easily see the same for CHWY.
Second is the massive acceleration in International growth, to us that says the consumer shift we are seeing is not unique to the US and it is very much a global trend, that validates the international expansion opportunity for CHWY that we expect to see in the next 12-24 months.
NOMD
Click here to read our analyst's original report for Nomad Foods.
For the week ended July 18, the total CPG demand in the U.K. was 4% higher YOY. Total edible categories were flat vs. the prior week at +9% YOY. Total non-edible categories were up 3% YOY. The frozen category ticked up to +16% from +14% 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 seen lower levels of demand growth than the edible categories, but that gap narrowed to 6% in the latest week from 10% for the week ended June 27. The U.K. is Nomad Foods' (NOMD) largest market at 31% of sales.
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
More recent news around capital raising in home fitness this week with Tempo Fitness raising $60mm. There is a lot of interest in new fitness ideas, we’d argue that should garner higher multiples for the established brands in the space like those owned by Nautilus (NLS) as well.
We still see significantly elevated interest online for home fitness equipment in aggregate, as well as elevated interest for NLS brands and products. Given the interest in the industry, we still think room for multiple expansion, and a strong probability of fundamentals outperforming expectations over the next 12 months.
ONEM
Although One Medical (ONEM) will not release 2Q20 Earnings until August 12, we have seen nothing within our data updates which have changed our belief that ONEM will have an impressive print. As evidenced by another pre- COVID Hedgeye Health Care active long, TDOC, telehealth has become a quintessential part of the way Americans will consume health care going forward.
Long before COVID became a regular talking point, One Medical had already attracted patients with their seamless integration of telemedicine and efficient in-person scheduling for primary care. Given that telemedicine is most likely to remain at a high level for this type of low acuity visit, ONEM should continue to capture notable membership growth. We remain Long ONEM in the Hedgeye Health Care Position Monitor.
DLTR
We think Dollar Tree (DLTR) has one of the most powerful sales/earnings levers in the retail space with the optionality of breaking the dollar price point at the Dollar Tree banner. Few retailers have this a lever like this to pull.
The chart below shows the potential comps and earnings power of that change alone from driving ASP. The company is hesitant due to pushback from customers, but we’d argue you are doing a disservice to your customers by not offering value at multiple price points when you have the ability and expertise to do so.
Dollarama in Canada did this exact change pre-IPO in 2009, and it have concerns as well, but instead of being a problem it made it one of the best stocks in consumer for a decade.
STZ
For the week ended July 18 alcohol sales in the off-premise channel grew 19%, accelerating from 17.3% in the prior week with spirits up 29.3% and wine up 19.7%. The beer category off-premise sales grew 15.4%, up slightly from the prior week’s growth of 14.9% as seen in the following chart. Volumes increased 12%. Beer sales excluding hard seltzers and flavored malt beverages (FMBs) grew 8.6%, up from 7.6% in the prior week. Super premiums grew 20.6%, craft beer grew 12.6%, Mexican imports grew 7.2% (1% lower compared to the prior week), premium lights grew 6.4%, FMBs grew 5%, and below premiums grew 0.4%.
Constellation Brands’ (STZ) and Heineken’s Mexican import brands are still being impacted by the production stoppages, but the supply chain should be caught up soon. Hard seltzers accounted for nearly half the beer category’s growth for the week and grew 142%. The beer category grew 18.4% in the convenience channel, faster than the 15.4% growth in the grocery channel.
ZEN
Hedgeye CEO Keith McCullough added Zendesk (ZEN) to the long side of Investing Ideas this week. Below is a brief note.
Despite the early morning panic-selling by people who don't have a risk management process in Tech (they're just chasing narratives and charts), we're still long of Tech and looking to add more Long Ideas to our Institutional Best Ideas product.
One new name that I've been waiting on is a name Technology analyst Ami Joseph likes on sale: Zendesk (ZEN).
Per Ami, the stock is for sale today because "in the words of the late Bush1, 2Q was bad. Real bad. 2H20 will be good. Real good.”
Oh do I love buying things on sale.
MAR & HLT
Click here to read our analyst's original report for Marriott.
The timing of the Q1 earnings season occurred during the height of COVID-19 fear, yet we we’re more negative now than we were heading into quarterly conference calls then. What’s different?
At least back then there were positive developments relative to sentiment – liquidity was in the process of being secured, going concern risk was mitigated, and local leisure travel had just started to improve.
Management teams can’t even point to sequential improvement with the recent RevPAR sluggishness and new Covid outbreaks pushing out travel even farther.
The hotel stocks have massively underperformed since we hosted our hotel presentation last month (PK is down 22% for instance in an up market), so maybe sentiment has already captured the likely negative tone of the upcoming conference calls. But without any positive catalysts and the potential for worse than expected Q3 looming, we’ll stay negative on the group overall including Marriott (MAR) as well as Hilton (HLT).
ATUS
Click here to read our analyst's original report.
While subscriber trends came in-line with our expectations, Altice (ATUS) management was very aggressive in reducing non-programming opex and therefore adjusted EBITDA was better than expected (see attached chart). Advertising revenue was also better than I expected at down 19% YoY vs my expectation for down 30%. The comp setup gets easier in the 2H so at this moment, so we are reluctant to say press.
DFS
Discover (DFS) reported 2Q20 results, posting diluted EPS of -$1.20, down -152% y/y and missing the low end of an estimate range calling for a loss of -$1.13 per share.
The earnings decline was made worse by a -3% y/y decrease in card receivables together with a -66 bp y/y compression in NIM, which came in at 9.81%. NIM compression was due to prime rate decreases and an unfavorable mix shift to lower yielding assets as result of higher cash balances and the contracting card book – the combined effects of weaker sales volumes, cautious consumer behavior (highlighted by lower cash advance fees and late fees), a scaling back in Discover’s marketing efforts, and a tightening of underwriting standards.
Continue the short.
SYF
Synchrony Financial (SYF) reported 2Q20 results, posting diluted EPS of $0.06, down -95% y/y, driven by a +40% increase in provision for credit losses tied to the reserve build for the projected impact of COVID-19 related losses and CECL adoption. Moreover, the company missed street estimates for $0.13/share in earnings, lead by a 110 bp miss on NIM.
Loan receivables contracted -3%, excluding the impact from the sale of the Walmart and Yamaha portfolios in October 2019 and January 2020, respectively. Amplified by a -222bp compression in NIM, revenues from interest and fees fell -7% on a core basis. Synchrony's NIM compression was brought on by a lower yielding asset mix due to dampened loan growth, the impact of forbearance programs, and lower benchmark rates.
SYY
Google is the first major US corporation to formalize an extended work from home policy. Google said it would keep employees home until at least next July. Google’s benefits, like free food, are generally well above the workplace standard.
However, it does influence the benefits companies that compete against it for talent offer, especially in the technology fields. Google’s policy affects nearly 200,000 full time and contract employees.
The decision to extend the start date was made in part to give employees flexibility in changing their residences to accommodate things like children’s schools. Google had previously told employees to expect a return to the office in January. Supermarkets benefit from the additional meals that employees working from home will purchase.
Google’s decision also negatively impacts food service distributors like Sysco (SYY) because Google provided employees free meals throughout the day. Many other large employers have cafeterias.
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.
AXP
American Express (AXP) reported second quarter diluted GAAP EPS of $0.29, down -86% y/y with the decline driven by a -29% y/y decrease in total revenue, led by -34% y/y drop in non-interest revenues, together with a +81% y/y increase in provision expense attributable to the expectation of covid-related losses and the implementation of CECL at the beginning of the year.
The decline in non-interest revenue, representing 78% of the company's total revenue, was led by a -39% y/y decrease in discount revenue, the combined result of a -33% y/y decrease in billed business and a -14 bp decrease in the average discount rate to 2.23% as the composition of spend shifted away from the higher margin T&E categories.
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
LYV lenders have agreed to further suspend Live Nation’s (LYV) net leverage covenant until 12/31/2021 (unless the company elects to resume the net leverage testing earlier). This compares to 9/30/2020 previously. In addition, the net leverage covenant test has been amended and increased on favorable terms. We don’t see any filing with SEC with additional details.
We believe consensus estimates reflect inorganic growth that is unlikely to materialize given balance sheet restrictions that limit LYV's ability to do deals. Live Nation (LYV) 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.
LYV is scheduled to report earnings after-the-close on 8/5/2020. We think it will be a negative catalyst for the stock.
KSS
There is a confluence of headwinds that make the earnings outlook for Kohl's (KSS) for the next 12 months very dire. First there is the obvious, Covid-19 forcing store closures and weak traffic.
As of the last update KSS run rates was down about 25% in stores, down 10% or so in total comps factoring in ecommerce, and Covid brings its own extra costs for cleaning and operational changes. Beyond the sales deleverage pressure is the channel shift dynamic.
Online sales are significantly lower margin, than store so the sales the company is getting are less profitable than previously, and with consumer doing fewer shopping trips, winning those trips will be even more expensive.
Then there’s wages, BBY announced a min wage increase last week, TSCO raised wages, DLTR keeps extending its $2 per hour bonus for workers, retail wages are heading higher rapidly as seen on the chart below, KSS was already below average in hourly wages for employees, it really can’t afford to match the others and still make money.
Then there is the risk we think many investors aren’t ready for, which is its credit card portfolio bad debt exposure with never before seen levels of unemployment.
SHAK
Shake Shack’s (SHAK) Q2 results this week were disappointing due to the lack of improvement and weak margins. Unlike many other restaurants Shake Shack saw no improvement in SSS from June to July which were down 39%.
The following slide is a rendering of the future SHAK drive thrus. SHAK is a company that spends little time thinking about ROI. What is the ROI on building a SHAK with two drive-thru lanes and a third lane for an app pick up?
Not one will ever be built! Why is the company opening new stores when it is comping down 39%? SHAK'S stores could not be in worse locations for this pandemic—significant urban concentrations and 40% of the suburban malls and shopping centers.
The company reported this week that urban stores are comping down 50% in July. Manhattan stores are comping down 65% while suburban stores are comping down 24%.
SMAR
Hedgeye CEO Keith McCullough added Smartsheet (SMAR) to the short side of Investing Ideas this week. Below is a brief note.
Another way to "tighten your net exposure" to Long Tech during #Quad3 in Q3 is to short individual names that we're bearish on, fundamentally.
One of those names remains Smartsheet (SMAR). It's up on fumes (decelerating volume) and insiders continued to make sales throughout July.
Here's a quick update from Technology analyst Ami Joseph on the name:
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SMAR: Data into Q2 looks almost identical to data going into Q1... |
EDU
Hedgeye CEO Keith McCullough is adding New Oriental Education (EDU) to the short side of Investing Ideas. Below is a brief note.
Looking for some green (on #decelerating volume) to sell into (and hedge your Long China asset allocations)?
New Oriental Education (EDU) remains a Best Idea Short (Institutional Research product) by Felix Wang.
Here's a summary excerpt from Felix's Institutional Research note this week:
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Same old story for EDU. Revenue estimates remain too high, and sell-side will need to start cutting given poor FQ1 2021 guidance. Management used the term "most conservative" in the text for FQ1 guidance; yet, even if results come in slightly above the US$911.2m-$953.5m range, it is still substantially below ours and Bloomberg estimate (US$1.15bn). It's not just overseas dragging EDU (overseas test prep expected to fall 60% next quarter!). |
