Below are updates on our twenty-four current high-conviction long and short ideas. We have removed Constellation Brands (STZ) from the long side and added Fortress Value (FVAC) and Cloudflare (NET) to the the long side of Investing Ideas this week. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
SFM
Click here to read the the long Sprouts Farmers Market (SFM) stock report Consumer Staples analyst Daniel Biolsi sent to Investing Ideas subscribers earlier this week.
CHWY
Click here to read our analyst's original report for Chewy
Friday US census retail sales were reported and non store retail (which is mainly ecommerce) maintained a growth rate around 25%. Despite retailers opening up online sales have maintained momentum and we think the shift to online will be a permanent force driving outsized revenue growth for Chewy (CHWY).
CHWY customers have shown to be loyal and increase spending and engagement over time, so the new customer adoption happening now will be able to drive long term profits as more share of wallet in the pet category goes online and more and more to CHWY.
NOMD
Click here to read our analyst's original report for Nomad Foods.
For the week ended August 1 total CPG index levels in the UK grew 5% compared to the prior year as seen in the following chart. Edible categories increased 10%, outpacing non-edibles at +3%. The frozen category increased 15%, accelerating from a weak -1% last week. The only category performing better than frozen food was alcoholic beverages up 25%, accelerating from +10% the prior week. Fewer people are traveling abroad in the UK due to travel restrictions which should boost CPG sales. The U.K. is Nomad Foods' largest market at 31% of sales.
Nomad Foods (NOMD) said last week that sales in July grew double digits, similar to June. Management’s guidance is for organic sales growth of HSD% for the year and MSD% for Q3. July is the smallest month of Q3 for the company and management expects retail sell through of frozen food to decelerate in Q3. Shipments are still trying to return inventory levels at retail to normal levels, because it was unable to meet demand in Q2. The company’s tender offer for $500M of shares between $23 and $25.50 began last week and will continue through September 9.
The company’s tender offer highlights the strong cash flow the company is generating, strong balance sheet, as well as a signal that investors should not expect a large transformative transaction. Investors should be comfortable that they own a European frozen food company with steady organic growth prospects. We don’t believe the growth prospects and lower risk profile of the company is reflected in the EV/EBITDA valuation of 10.8x consensus estimates.
ZM
Competitors surging and transactions sagging was perhaps the old data; the new data looks like transactions sustaining a large jump and Zoom (ZM) sustaining leadership despite Teams continuing to chip away.
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
Nautilus (NLS) reported earnings this week, and it crushed expectations. Street was modeling 16% revenue growth, we were thinking more like 30% and it did 94%. 94% sales growth, 150% gross profit growth and turned a $10mm EBITDA loss into a 25mm EBITDA gain. The company is getting great flow through on margins as the company was already in a cost cutting/restructuring mode prior to Covid-19, its getting product mix help, and with customers looking for fitness equipment wherever they can get it, there is minimal marketing required to drive the sales.
The question now is how long does this last. Management was basically asked on that question on the call (as good as it gets?), and the answer seemed to be that they don’t know how long it goes, but its not quite over yet. The company still has a large backlog, we still see out of stocks across much of retail for some core NLS products, and interest for its brands and home fitness equipment in general remains high.
We think the outside demand growth can last until as long as the new year’s resolution period in January, as we think many potential customers opted for outdoor exercise this spring, they will need indoor options come winter time. That leaves a lot of time for upside in sales and earnings expectations.
ONEM
When we released our original earnings preview, OneMedical (ONEM) was trading a little over 14x EV/ NTM Sales. Shares had fallen from all-time highs to a more favorable entry point of 10.5x when the company reported earnings this past Wednesday. Our data updates since the original publishing continued to corroborate our original outlook for an acceleration in 2Q for membership growth and patient demand despite mounting short interest.
On August 12, ONEM reported 2Q20 revenue of $78 million well above our revenue estimate of $64.8M, consensus of $61.1M, and the guidance range of $56-66M. Following headline revenue numbers, the company continued to grow its membership base to 475,000 members, or the top end of its guidance range. We will continue to update our App Download Data and Provider Tracker which, so far, indicates
continued growth in 2H20. We remain Long ONEM in the Hedgeye Health Care Position Monitor
DLTR
Dollar Tree (DLTR) returned to YTD highs this week. We continue to think that the market is not appreciating the growth levers the company has within the Dollar Tree banner. The breaking the buck narrative and details on the company’s test have been on the back burner during the volatility of Covid-19, but we think that part of the story becomes more and more important as the year goes on.
And we think the new CEO is likely to make that a key pillar of the strategic direction for the company in the coming 1-2 years. If the market starts to price in that optionality we see upside to ~$125 for the stock over the intermediate term, and as management executes the change the potential for a stock of $150+ over the long term.
ZEN
COVID hurt Zendesk's (ZEN) 2Q. No surprise. The linearity of the quarter produced monthly results which showed extreme weakness at the start (via churn and contraction) and strength towards the exit. Management did not want to embrace better recent activities as they guided Q3 and preferred to marinate in the predictability of volatility.
Better customer count is a bright spot especially considering the company called out “significantly elevated” contraction and churn but still put up +10% y/y total customer growth (+2% q/q) and +5% y/y DBNER customer growth (+1% q/q), same as Q1.
FVAC
Hedgeye CEO Keith McCullough added Fortress Value (FVAC) to the long side of Investing Ideas this week. Below is a brief note.
Looking for new, non-consensus, Commodity Inflation related longs?
Jay Van Sciver is out with new long idea (Institutional Research product) this morning: Mountain Pass (FVAC - Fortress Value Acquisition Corp). Here's are some details on the idea which he reviewed on Wednesday:
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With market drowning in SPAC oversupply, it is challenging to separate ones with exceptional assets from those with, well, low quality 'companies'. The Mountain Pass mine has the richest developed rare earth deposit in the U.S. at a time when the geopolitical value of those assets has rarely been greater. |
NET
Hedgeye CEO Keith McCullough added Cloudflare (NET) to the long side of Investing Ideas this week. Below is a brief note.
Some people really don't like to buy Tech exposure the way I do (i.e. on sale).
That's totally cool with me. I asked Technology analyst Ami Joseph if people should buy Cloudfare (NET) down -8% into the close on Monday...
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A: NET re-accelerated in our data and that translated to a re-accelerated 2Q with 3Q guidance. The next signal will be about 4Q-1Q21 which we will keep doing with our HT3 to make sure we capture but there is no change to our thoughts that NET is in a winning position with a winning business model. |
MAR & HLT
Click here to read our analyst's original report for Marriott.
Per the latest weekly STR release from our GLL team, total US RevPAR fell 49.4% vs the prior year for the week ended 8/8 -- this week again showed a modest acceleration vs prior week but the 4wk trend has moderated of late (see chart below).
Group RevPAR dropped 84.6% YoY, while transient RevPAR posted a 58.3% decline. For the trailing 4-wk period ended 8/8 Group and Transient RevPAR fell 88.4% and 59.9% YoY, respectively.
Urban RevPAR growth was the weakest segment, dropping 72.1% YoY, while Airport RevPAR was the 2nd weakest, down 57.7% YoY. Interstate RevPAR remained the "best" geo segment and dropped 26.7% YoY - which favors the lower end scales.
Based on daily trends, August month to date RevPAR is -48% YoY, which should be an acceleration vs July (expected to be -52% YoY). We'd expect August to come in around -45% to -50%.
Business vs Leisure market analysis continues to be a useful gauge for where and how travelers are going right now. Market by market data indicates the following for last week:
- "Leisure Heavy Markets": -57.8% YoY (equal weight average)
- "Business Heavy Markets": -63.4% YoY (equal weight average)
- Leisure markets = markets in the Top 25 where the midweek (Mon-Thurs) Average Daily Rates sell at a discount to the weekend (Fri-Sat) on a TTM basis.
- Business markets = markets in the Top 25 where the midweek (Mon-Thurs) Average Daily Rates sell at a premium to the weekend (Fri-Sat) on a TTM basis.
For the past week, Top 25 market hotel RevPAR fell 66.4% YoY - a modest improvement from prior week.
As we indicated above, we believe August should show improvement against July, though we're finding ourselves more cautious on 2H'20 as we have seen very little evidence to suggest that business travel is materially improving in relation to Marriott (MAR) and Hilton (HLT).
DFS
Discover (DFS), like its peers, has had a generally positive experience with the use of forbearance programs as the size and speed of the government’s income-bridging efforts have proved pivotal. As management repeated several times on the call, 70% of cumulatively enrolled card customers have exited the program, with 80% of exiting customers now making payments and 80% of those exiting, paying customers making full payments.
However, regarding its allowance for credit losses, Discover took its reserve rate up +206 bps q/q to 9.25% of its card receivables, meaningfully trailing the likes of SYF and COF which closely mimicked the 12.5% reserve rate JPMorgan applied to its own, higher quality domestic card book. On the call, management shared the economic outlook underlying its reserving assumptions, pointing to peak unemployment of 16% in 2Q20, and expectation for ~11% through the balance of the 2020, and then recovering gradually over the next several years.
SYF
Regarding asset quality, Synchrony (SYF) increased its allowance for credit losses by +139 bps to 12.52% of period-end loan receivables, matching the reserve ratio of JPMorgan on its own card book. While the street took comfort in the company's provision expense, -13% below expectations, we see things differently. With a card book of significantly lower quality than that of JPMorgan, our view is that Synchrony remains behind the curve in terms of its provisioning and we expect further catch-ups in future quarters.
As we have seen in the latest credit card trust data, delinquencies and charge-offs have yet to reflect the impact from COVID-19, aided by the effects of expanded unemployment benefits and the relaxed accounting treatment of troubled loans introduced by the CAREs Act. In the case of Synchrony, the second quarter saw +30 Day DQs fall -130 bps to 3.13% of loans receivables, meanwhile the company's NCO rate fell -66 bps to 5.35%.
SYY
This past week Sysco (SYY) reported a loss per share of $.29 in Q4, a penny better than consensus estimates due to incentive pay reversals ($115M). Revenue was lower than expected at a 42.7% YOY decline. Total case volume declined 41.5% in US broadline operations. International Foodservice sales decreased by 52%. SYGMA segment sales decreased by 17% as the company’s QSR customers appear to be among the weaker performing QSR operators. Gross margins contracted 160bps. Bad debt was an additional $170M, in contrast to the reversal recorded at US Foods.
That puts the $1B in new business wins in a different light. The company claimed it was profitable with a 30% sales decline. A 30% sales decline is what management called the exit rate of the quarter. Sales did not improve in July which management attributed to the reversal of some restaurant re-openings in certain states. Management said they are seeing a strong improvement in Europe in the current quarter with France being the top performer. The market seems to be satisfied in any sequential improvement as long as it is in the right direction. Since the exit rate of FQ4 was down 30%, there is a lot of improvement that needs to happen for the company to meet consensus estimates for future quarters.
GOLF
Click here to read our retail analyst's original report.
With the recent strength in rounds played in golf, investors have been getting excited about the sales growth prospects for equipment industry. However one thing that should be kept in mind is there is a significant portion of sales associated with large events, in the area of 15-25% of golf shop channel sales. These would be events like corporate outings and club tournaments that are still somewhat restricted from a health recommendation perspective.
Also, many corporations have been cutting budgets and implementing their own work from home procedures, meaning they will not be running such events. These sales are often concentrated in balls, gear, and apparel.
So even if rounds prove to be strong for the foreseeable future, aggregate industry growth remains pressured vs the full investment cycle peaks in ‘18/’19.
We reiterate our short call on Acushnet Holdings (GOLF).
AXP
With both its credit and charge card portfolios, American Express (AXP) saw delinquencies and charge-offs rise y/y, although management noted that this increase did not yet reflect incremental stress as not enough time has passed for the impacts of the current environment to flow through traditional credit performance measures.
This is in stunning contrast to peers SYF, COF, and DFS, which all benefited from the upending of normal credit cycle dynamics by the size and speed of government and lender support programs.
ZI
Near term data looks ok with website visitation up 5.5% q/q in 2Q, hiring improving in July, and mainly an easy setup for 3Q Billing-per-Customer as 3Q19 average was ~$24k vs ZoomInfo's (ZI) normalized average of ~$30k. However, we also showed data from a developer who reached out to us having single handedly built a competitor to ZI of his own in the last few months with over 100m contacts (ZI = 120m) and cell phone numbers across executives and mid-level management teams which reminded us that whatever barriers may once have existed in this territory are no longer there.
Remain Short.
LYV
Brutal quarter. Everyone knew it was going to be bad, but to actually see it…
From the press release: “Our expectation is that live events will return at scale in the summer of 2021, with ticket sales ramping up in the quarters leading up to these shows.”
Estimates need to come way down for Q3/Q4/Q1 of next year. It will be interested to see how the stock reacts to the negative revisions. In May, they thought they would be back to concerts at scale by Q1 (consensus was at +10% YoY going into this). The risk of course is that it gets pushed back again and Live Nation’s (LYV) loses out on another big summer season.
“The company's operational cash burn rate estimate is $125 million per month and estimated gross burn rate is $185 million per month, both on average for the second quarter through the end of the year.”
While they have enough liquidity to keep the lights on… the problem is that this business didn’t produce much free cash flow in peak times and therefore deleveraging once we do recover will take time. Either way, it is bad for LYV’s equity value.
KSS
Kohl's (KSS) will be reporting 2Q Tuesday August 18th. To review, 1Q sales were down 43%, and around the print in late May stores were still running down 40-50% YY, in late June CEO Michelle Gass said stores will running at 75% of last year (ie down 25%). Ecommerce is making up some portion of that.
But we think the comp rate has likely stalled out somewhere around down 10-20%. So 2H is where we could have a poor back to school season, a stalled out consumption recovery, an overly stuffed apparel retail channel with high promotions, continued covid procedural cost pressures, competitor and covid driven wage inflation, credit cycle risk to the card portfolio, and retailers looking to be extra lean within seasonal goods heading into holiday to preserve cash and mitigate further markdown risk which means less sales.
Since the end of April, KSS 2021 street EPS has gone from $3.03 to $1.44, 2022 has gone from $2.77 to $1.70… though the stock is up a bit over that time period. We still think these ‘recovery’ earnings numbers are too high, the question is when will the market decide that is the case (assuming we are correct), and when will the market decide that giving KSS a mid-teens EPS multiple or higher is perhaps not the best move given the leverage.
We think fundamental performance vs expectations here in 2H is likely to be the negative catalyst for the KSS stock.
SHAK
According to New York City’s leading landlords, brokerage firms, and employers fewer than 10% of Manhattan office workers have returned to the workplace a month after the city allowed workers to return to their buildings. CBRE Group said only 8% of employees who work in downtown office buildings it manages have returned by the end of July. In midtown it was only 9%. Microsoft said the earliest it would reopen its New York office will be October. As of this past week ridership on Metro North trains was down 76%. Many of Shake Shack’s (SHAK) highest volume restaurants are in New York City and traffic in the once bustling areas are still some of the most impacted by the pandemic. The recovery for Shake Shack will take a lot longer than other restaurants with much less exposure to high density urban locations.
SMAR
We see risks to the Smartsheet (SMAR) adoption curve, with seat growth already well below revenue/billings growth, enterprise adoption well along the way, 15 years into the journey with under 1MM paid seats and decelerating versus messaging of a TAM infinitely larger which together points to a much smaller landing spot for SMAR.
We see peers outgrowing SMAR adoption rates, large competitors refreshing their tools, tens of millions of potential users who have trialed Smartsheet and passed, tens of millions of users sitting in the free tiers of competitors, and we continue to see SMAR taking price on their free base of users.
EDU
Similar to New Oriental (EDU), TAL Education Group (TAL) turned more prudent regarding its marketing expenses this past Q but G&A cost growth accelerated as TAL paid more money to staff.
Compared with EDU, TAL has a significant advantage in terms of enrollment and revenue growth and is more focused on the online side and investing more dollars in online technology and tutors. Because of this, TAL is scooping up market share at a faster pace than EDU.
We remain short on EDU.
MGM
Management executed on their emergency cost cutting plan, but after seeing BYD’s results last week, the magnitude was not exactly inspiring. At least not inspiring enough to offset a dire top line outlook – even during the period the properties were open and with pent up demand, MGM’s (MGM) core Strip properties could only muster 50% of the revenues generated last year in Q2. And that was with an abnormally high table games hold percentage and newly cashed stimulus checks.
Indeed, July already sounds weaker than June. The Strip is in a depression that will last a long time – we don’t see the Strip recovering 2019 demand levels until 2023 at the absolute earliest. Convention and group meetings are so integral to the modern Strip and the status of that business will weigh heavily on the Vegas recovery.
