Conclusion: I continue to like COSI from a long-term perspective.  Management continues to follow through on focused revenue-driving strategies such as the “Freestyle” beverage dispensers and continued development of online systems.


Cosi Restaurants and Coca-Cola recently hosted a blog event in Chicago where Cosi was introducing their fall sandwiches and Coca-Cola was demonstrating their Freestyle beverage machine.


Coke has selected COSI to launch the Freestyle equipment in the Midwest (currently COSI has it in three locations.) The Freestyle dispensers each contain 30 cartridges of flavorings that mix up 100 different drink combinations.  The new system will give COSI more accurate inventories of the beverages they serve.   The stores will be able to view graphical drink consumption reports that rank drinks sold during specific day-parts on an e-business portal Coke has set up.  Traditionally, most fast-food restaurants collect data using point-of-sale systems that only capture beverage cup size and the number of cups sold each day.


For the short-term, at least, the new Coke freestyle machines will give the concept an unique advantage over the competitors in the Midwest. 


COSI is due to report earnings on November 11th after the market close.  The company also reported that that system-wide same-store sales for 3Q10 increased 5.2%; company-owned stores rose 6.6% and franchise-operated stores rose 2.9%.  Late in the third quarter, the company started rolling out online ordering for the company store base with which will likely accelerate growth in same store sales during 4Q.  For the quarter, we expect the company breakeven on an EPS basis and possibly even register a modest profit.  The stock is currently trading at $1.29, registering a 9% gain over the past week.




Howard Penney

Managing Director

Eye on Obama: Reviewing President Obama’s Comments on 60 Minutes

Conclusion: President Obama’s post mortem on the midterm elections on 60 minutes on Sunday night provided some insight into policies that we could see evolve over the next couple of months as it relates to taxation, stimulus, and housing.


In the note below, we’ve highlighted some key takeaways from President Obama’s recent interview on 60 minutes with Steve Kroft.  Below are the actual quotes, and we’ve provided our interpretation of the President’s statements.  We would expect more insight in our discussion with Peter Orszag tomorrow, but it does seem that the President intends to shift more towards the middle on a fiscal basis.



PRESIDENT OBAMA: There are some sincere Republicans in the Senate like Tom Coburn, Oklahoma, who is about as conservative as they come, but a real friend of mine and somebody who has always had the courage of his convictions and not, you know, bringing pork projects back to Oklahoma. 


Hedgeye Interpretation:  President Obama seems to have learned the lessons of the midterms and will make a concerted effort to reach out to the Republicans.


PRESIDENT OBAMA:  You know I think what I would have done is to be more scrupulous about sticking to some of the commitments I had made in how to get it done. For example, I made a commitment that I was gonna make sure that the key negotiations around health care were on C-SPAN. And the truth of the matter is that, you know, you have five different committees over there that are working on it.


Hedgeye Interpretation:  President Obama believes one of the failures of his first two years was the promise of transparency, so look for more transparent governing in the coming two years.

PRESIDENT OBAMA:  I had a conversation here in the Oval Office with Warren Buffett, who remains very optimistic about America's long term prospects. And he said, "Look, let's take the housing market, which is about as big of a drag on the economy as anything." He said, "We overbuilt for a lot of years. Now, we're underbuilding to soak up that inventory over the course of several years. More new families are gonna go out there and start buying homes. And slowly housing prices are gonna stabilize. And these foreclosures are gonna end and things are gonna pick up." So, some of it is just a matter of the economy recovering from a real trauma, a real body blow.


Hedgeye Interpretation:  It seems that President Obama may be leaning towards a more market based solution to a recovery in housing, which is that over time supply and demand will come back into balance; rather than further government intervention.


KROFT: Congressman Boehner is the next Speaker of the House, most likely, offered you a compromise back in September. He suggested extending the tax break for the wealthiest for two more years. And rolling back discretionary government spending to levels before the bailout in 2008. Is that something that you could live with?

PRESIDENT OBAMA: I think that when we start getting specific like that, there's a basis for a conversation. I think what that means is that, you know, we can look at what the budget projections are. We can think about what the economy needs right now. Given that it's still weak. And hopefully, we can agree on a set of facts that leads to a compromise. But my number one priority coming into this is making sure that middle class families don't see their tax rates go up January 1st.”


Hedgeye Interpretation:  Taxation policy will likely include some form of an extension of the Bush tax cuts, and will likely be more to the middle than we would have expected even a couple of months ago.   We would expect Obama to give in to Republican wishes and kick the can down the road over the next two years.

PRESIDENT OBAMA: The truth is that the way this thing works out, it's folks who are millionaires and billionaires who get the biggest breaks. And, you know, if you talk to Warren Buffett, he'll tell you, "I'm not gonna buy somethin' because of a tax break, because whatever it is I need, I can already afford." And the same is true for me. And the same is true for you.


Hedgeye Interpretation: While Obama might cave to the Republicans on taxation, it will be a negotiation and he will have the likes of Warren Buffett supporting his case.


PRESIDENT OBAMA: Well, it wasn't because The Recovery Act didn't work; it's because the modeling, in terms of what to expect where unemployment would go to, turned out to be wrong. So, you know, I don't wanna pretend like I've got a crystal ball.


Hedgeye Interpretation:  If you want to know why Christina Romer is back at Stanford, now you know.  Her models were wrong.  This explicit call-out suggests that Obama will hold more of his cabinet accountable to specific goals, especially on the economic front. 


Daryl G. Jones
Managing Director

Brazilian Consumer Update

Conclusion: All told, we continue to remain favorably disposed to the Brazilian consumer, which is being supported by a significant confluence of tailwinds. We are, however, not currently invested in Brazil at this current juncture, as the outperformance looks to be in the rear view for the immediate term.


Consumer Credit Demand Falls in October, though Still Robust

Credit analyst agency Serasa Experian reports the number of consumers seeking credit fell 3.2% MoM in October, after setting a record in September.  Experian says this decline does not represent a shift in the trajectory of consumer credit, as it is primarily a calendar effect because of the observance of Children’s Day in September, and because October had two fewer business days.  Year-over-year, demand for consumer credit was up 15.2% in October and up 15.7% YTD, versus the year-ago period.


Brazil’s Relatively High Cost of Living

A report in O Globo finds common articles in Brazil can cost as much as six times as much as in other countries.  Examples include PlayStation 3, which costs R$ 2,000 in Brazil, four times the US price of US$300 (R$ 510).


A comparison of automobile prices found the Toyota Corolla XEI costs R$ 75,000 in Brazil, versus the equivalent of R$ 58,740 in South Africa, R$ 33,782 in Japan, and R$ 32,797 in the US.  Consumer advocates say this is largely attributable to high taxes and import duties, as well as to a corporate culture of maintaining exorbitant profit margins.


We think there may be significant market inefficiencies at work, as the O Globo report notes the nation’s consumer market is still evolving and lacks broad reference prices.  Also, there is still a cultural bias that foreign manufactured products are more luxurious than domestic manufacture.  Brazilians have a penchant for buying certain items overseas – even paying the 50% duty to bring in items over the US$ 500 personal limit on dutiable purchases.


Vehicle Production Rises, Sales Fall

Brazilian auto manufacturers produced 321,800 vehicles in October, 5.5% higher than September and up 1.5% over last year.  Sales for October fell 1.3%, to 303,200 units, which is still 3% higher than October 2009. 


All told, we continue to remain favorably disposed to the Brazilian consumer, which is being supported by a significant confluence of tailwinds. Brazil’s unemployment rate fell 50bps MoM to a record low in August, coming in at 6.2%. Average real incomes also increased +1.3% MoM and +6.2% YoY and the latest data (April-July) show Brazilian consumer borrowing rates are at the lowest level since 1995 (6.74% per month).


We are, however, not currently invested in Brazil at this current juncture, as the outperformance looks to be in the rear view for the immediate term. As of the end of last week, the six largest Brazilian retailers had P/E ratios that were over 3x those of the underlying Bovespa Index, suggesting there is some mean reversion to be had to the downside.


Moshe Silver

Managing Director


Brazilian Consumer Update - 1

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Bear/Bull Battle: SP500 Levels, Refreshed...



As of 2PM EST the SP500 cash level of 1221 is: 

  1. -21.98% below its 2007 all-time-high
  2. +80.62% above its 2009 cycle-low 

Now what? With the US Dollar Index up on the day and correlation risk running this high, you’d think the stock market would be down more. Think again… and again… and again… because that’s what you should be doing if a topping process is underway. These are the times that you think the market will never go down again.


That’s obviously as silly as thinking that the US stock market would never go up again in March of 2009. I don’t want to be silly. I just want to be right from now until whenever I make my next move. Currently my position is to stay short this market. That’s despite registering another higher-high of resistance up at 1234. That’s despite getting hundreds of emails reminding me not to “fight the Fed.” That’s despite people saying its different this time.


The global macro calendar this week is going to be as hawkish as we’ve seen it in months: 

  1. Wednesday = US Import Prices for October (inflation)
  2. Thursday = G20 meetings begin (US Dollar bullish)
  3. Thursday = Chinese inflation data for October (inflation) 

I know, I know… “they” say what they said in late 2007. The world is “awash with liquidity” and inflation in the US is not a concern - chase yield.


Immediate term TRADE support is -1.8% lower at 1199.



Keith R. McCullough
Chief Executive Officer


Bear/Bull Battle: SP500 Levels, Refreshed...  - 1


The first week of November averaged HK$562m per day in table gaming revenues and currently is on track for HK$17.0-17.5bn in total gaming revenues including slots. 



It’s only one week of data and we don’t know the hold percentage but if current revenue levels continue, November would be up 43-47%.  At that rate, we would view November as more impressive than October because:  1) November didn’t contain a Golden Week, 2) November is seasonally slower, and c) the November comparison is much tougher than October.  As a reminder, November gaming revenues were up 60% in 2009.


The market share numbers are shown in the table below.  Obviously, LVS looks very low (usually between 19% and 20%) and Wynn and MPEL are very high.  We assume hold played a big role in those market shares so we’d expect them to moderate.  What is clear is that MPEL’s jump in market share the last 4 months looks sustainable.



R3: Loyalty, Royalties, Cotton, and Promos

R3: Loyalty, Royalties, Cotton, and Promos

November 8, 2010



  •  Over the weekend UA’s CEO Kevin Plank experienced a historic win at the track as an owner of Shared Account, the 46-1 long shot filly, who came away with the Breeder's Cup $2 million Filly & Mare Turf race. By far Planks' biggest win Since purchasing Sagamore Farms in an effort to reinvigorate Maryland horse racing, it  may only be a matter of time before he mixes business with pleasure.    Doesn’t every racehorse need compression gear or UA horseshoes?
  • The British are still coming.  This time Brit Prep retailer Jack Wills makes a stateside move with two new retail outlets in the northeast, one in Boston and one in Soho.  The retailer of “university prep” sells a wide range of men’s and women’s apparel as well as accessories.  There is also a fully functional e-commerce site highlighting the company’s collections.
  •  Holiday marketing campaigns are creeping up earlier than ever, with most retailers launching their efforts a full two months in advance.  This year Best Buy launched its official holiday campaign on November 1st, a full 10 days earlier than last year.




 The wellness market is growing beyond its core companies. While rocker-bottom specialists MBT, Ryn and FitFlop remain category leaders, many comfort players are seeking to carve out niches in the rapidly expanding wellness arena. Strong brand recognition, accessible price points and enhanced technical features are giving brands such as Easy Spirit, Spring Step and Waldlaufer an opportunity to join the movement. And retailers said there is space for them, provided they have something new to offer. <>

Hedgeye Retail’s Take:   As “wellness” shoes permeate the comfort market, it’s possible this could provide an opportunity for the category to expand far beyond traditional athletic channels and deeper into family, specialty, and brown shoe retailers.


Cashing in on the family name. The Jackson brothers are hoping the fashion business is as easy as ABC.  Jackie, Tito, Jermaine, Marlon and Randy Jackson — along with the estate of the late Michael Jackson — are launching their first licensed apparel line under the J5 Collection name, commemorating their decades as The Jackson 5. The men’s and women’s T-shirts and jackets will be in stores in February and incorporate imagery from their years as the so-called First Family of Music <>

Hedgeye Retail’s Take:  With MJ’s secret long lost songs being strategically released what better time to also jump on the Jackson bandwagon. 


Know your audience. From intimate apparel to gowns and fine jewelry, the Middle East is a growth engine for luxury brands, but it takes more than razzle-dazzle to sell in the region.  Understanding Islamic religious practices and cultural traditions, which can vary from country to country, is a necessity and partnerships among Western brands and local companies are the most effective way to surmount obstacles and avoid any misunderstanding. <>

Hedgeye Retail’s Take:  While it may sound simple, we would not be surprised to see many Western brands fail at their Mid-East expansion efforts as a result of under spending on market research. 


 Cotton talk commonplace across the globe. Chinese textile companies were quoting price increases of as much as 30% at the massive Canton Trade Fair, telling customers that a global cotton shortage and persistent labor shortages were driving up costs, according to several reports.  Spot prices for standard grade Chinese cotton have risen to 30,000 Yuan from as low as 15,000 yuan earlier this year as a global shortfall of the fiber and speculators have driven up prices. Meanwhile, Chinese factories continue to have trouble recruiting and retaining workers, who increasingly have options closer to home or are demanding higher wages and benefits.  <>

Hedgeye Retail’s Take:  Interesting comment here suggests manufacturers and mills have been building inventories of raw textiles in an effort to circumvent near-term price spikes.  


Middle-income not the same in every market.  China’s middle-income and affluent consumers will probably almost triple in 10 years with the bulk of the increase coming from smaller cities, Boston Consulting Group Inc. said today.  There will be 270 million more consumers whose annual household incomes exceed 60,000 yuan ($9,000) in the world’s most populous country by 2020, said Carol Liao, a partner at the Boston-based consulting company. That would lift the total number of middle-class and affluent Chinese to 415 million from 148 million now, she said.  “China is no doubt the highlight of the global consumer sector, and second-tier and third-tier cities are the main driving force within the Chinese market,” Liao said at a briefing in Beijing today. Three-quarters of the growth will come from smaller cities as incomes rise, she said. <>

Hedgeye Retail’s Take:  With China’s definition of middle income hovering around $9,000 in HHI we remind investors that not all markets are created equal.  Perhaps middle income by local standards, but certainly not the “affluent” audience that western brands need to drive exponential growth. 


Loyalty not what it used to be.  For as long as anyone can remember, companies have relied on the tried-and-true loyalty program to keep customers. You know how it works: The airline, the hotel, the drug chain, etc., gives customers a nifty-looking VIP card and, with it, the chance to earn bonus points that accumulate until the "valued customer" can redeem them for some goody or other. But in an age rapidly redefined by digital technology, I'm prompted to ask: What, exactly, are all these companies really accomplishing with old-fashioned programs like these?  Not as much as they think. The bad news is that the days of bribing and tricking customers with points are over. The good news? A huge opportunity has opened as a result. <>

Hedgeye Retail’s Take:  Keep an eye on truly targeted loyalty offers, which are now sophisticated enough to understand price and item elasticity on a case by case basis.  Loyalty rewards alone are no longer a differentiated factor.

ASOS shoppers won't be hit by soaring prices as online retailers sees its profits jump.
Price rises announced by some fashion firms will not hit ASOS shoppers, the British online fashion retailer said today as it posted a 59 per cent rise in first-half profit.  ASOS, which targets internet-savvy 18- to 34-year-old women looking to emulate the designer looks of celebrities like Kate Moss, Sienna Miller and Alexa Chung but at a fraction of the price, today pledged not to raise the price of its own-brand products which represent half of its total offer.  That is in contrast to rivals such as Next, Britain's No. 2 fashion retailer, which last week warned its shoppers to expect price tags to rise by close to 8 per cent as the group said there was no sign of an end to the bubble in cotton prices. <> 

Hedgeye Retail’s Take:  Complete opposite approach to fashion based retailer, Next, which was vocal last week in expecting to raise prices 8-10% to combat cost inflation.

Traffic generated from a Facebook-based promotion overwhelmed the site. crashed late last week after traffic generated by a Facebook-based promotion overwhelmed the site. The Lowe’s Black Friday Sneak Peak Party started at 12:01 a.m. and offered 5,000 coupon codes for 90% off on a first-come, first-serve basis, and another 20,000 coupon codes for 20% off, along with other offers. Black Friday is the day after Thanksgiving. The resulting traffic overwhelmed the site, the company says, although the retailer did not say how long the site was down, and information from web monitoring firms was not immediately available. <>

Hedgeye Retail’s Take:  Facebook promos are heating up and actually having a real impact.  In this case the impact was overwhelming, but the power of a targeted promo is clearly alive and well. 

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