Conclusion: 3Q10 was a terrible quarter for WEN and I don’t think it will get a whole lot better through the fourth quarter, despite Arby’s October performance, with the food cost outlook unfavorable and management guiding to the low end of their reaffirmed EBITDA growth guidance range for 2010.


Topline trends in the third quarter were disappointing for WEN, to say the least.  For the Wendy’s concept, company same-store sales came in at -3.1% versus -0.2% consensus.  This implies a two-year average same-store sales decline of -2.3% versus the -2.1% two-year average trend in 2Q.  As far as remedies for their soft trends at Wendy’s, management was not forthcoming with much detail. 


The strategy at Wendy’s is clearly in dire need of improvement but today's earnings call did not offer much reassurance that a solution is forthcoming.  QSR management teams across the board are highlighting the value proposition as being a major driver of traffic and it is clear that Wendy’s is falling short in that regard.  The “biggest” negative of Wendy’s sales performance during the quarter was, according to management, the area of value transactions.  There are many questions to be answered as to how the company is being run and what – specifically – can be done to improve the outlook.  The January Investor Day, we were told, will add much clarity to their strategy. However, assuming that the projected rollout of their breakfast program remains scheduled for late 2011, it seems that Wendy’s stands little chance of gaining significant market share any time soon.  In addition, taking market share in the breakfast day part may also prove difficult, but I will withhold judgment until further details are disclosed. 


Arby’s trends in the third quarter were equally disappointing, printing a decline in company same-store sales of 9.5% versus -6.5% consensus.  This result implied a sequential slowdown in two-year trends to -8% in 3Q from -7.3% in the second quarter.  On the plus side, Arby’s’ performance in October was much improved from the third quarter at +5.5% growth in same-store sales.  This was largely due to an increase in transaction counts (double-digit growth) and the impact of national advertising (albeit against October 2009 which also had national advertising). 


Management stressed that October’s success was “not just about advertising” but it was about “many things that we have had in our turnaround plan”.  Management expects sales to soften for the remainder of 4Q at Arby’s as the chain moves from the national advertising it enjoyed in October, to local advertising in November and December.


Costs are certainly not working in WEN’s favor either; cost of sales as a percentage of sales increased by 222 bps on a year-over-year basis and I expect a similar increase in the fourth quarter given another difficult comparison from 4Q09 and the outlook for beef.  As management highlighted, beef costs are not showing much sign of abating any time soon, “I actually think we may have one more quarter where it’s actually a little worse from where I sit today.  And then hopefully, I don’t think we are going to see any significant declines in the first half of the year, but hopefully it will stabilize in 2011”.  This fairly clear-cut outlook, combined with the company’s focus on premium products (fresh, never-frozen beef at Wendy’s and whole muscle Angus roast beef at Arby’s), indicates that the impact of commodity costs will likely be negative for the next three quarters, if not longer.


The outlook for Wendy’s/Arby’s is uncertain.  Management was reluctant to provide much granularity in there forward looking statements, pointing instead to the Analyst Day as the date when all will be revealed.  I am not expecting any silver bullet to be revealed at this event.  From an outsider’s point of view, all signs point to the Captain and being in distress.  Operational difficulties are being compounded by what seems to be a lack of communication between Trian and management.  A very interesting comment from today’s earnings call went as follows:


“As many of you know, Trian, our largest shareholder has a schedule 13D on file with the SEC, which indicated that it received an inquiry from a third-party expressing interest in a potential acquisition involving the company. And that Trian was considering this inquiry as well as alternatives with respect to its investment in this company. Because of this disclosure, we refrained from buying stock during the quarter.


We have asked Trian to bring us to ahead as promptly as practicable, so that we as a company can continue to focus on ways to enhance shareholder value including through commencing share repurchases under our stock repurchase program as legal and market conditions permit.”


There is a clear tone of frustration embedded in the quote above and it does not bode well for the company.  I wrote a post entitled “WEN – UNDERVALUED YES, WHERE IS THE OPPORTUNITY?” in June that discussed WEN’s stock and provided a sum-of-the-parts analysis that suggested that the company’s stock was trading below its intrinsic value. 


However, as the CEO of Hedgeye Risk Management, Keith McCullough, is so fond of saying, “A bargain that remains a bargain -- is no bargain”.  A last comment (or lack thereof) that I would like to highlight is management’s reluctance to give any indication as to the FY11 outlook, even with respect to a directional improvement from the -5% in EBITDA growth the company is now projecting for 2010.  The general lack of guidance and confidence in management’s tone is certainly a worry and it is reflected in the data.  A look at the chart below tells you all you need to know.  WEN is in a deep hole, and I don’t see them coming out next quarter.


WEN: MAYDAY! MAYDAY! - wen sigma


Howard Penney

Managing Director

Where Are We On Financials? 4 Short, 0 Longs

Positions: Short Capital One (COF); Short Bank of America (BAC); Short Hudson City Bancorp (HCBK); Short American Express (AXP)


Currently in the Hedgeye Virtual Portfolio we have four short positions in financials and no long positions.  So if you were wondering where we stand on financials, there you have it.  Lately in our morning meetings, our Financials Sector Head Josh Steiner has been highlighting the accelerating risk with certain financial stocks and the sector more broadly.


In part, this accelerating risk with certain financial stocks can be seen in their Credit Default Swaps.  In the chart below, we’ve highlighted Bank of America CDS swaps and the fact that they are well off of their YTD lows, which signals accelerating default risk.


As it relates to the four positions above, the cliff note version of the short theses are as follows: 

  • AXP - We think that imminent growth slowdown at American Express will lead to further multiple contraction over the next couple of quarters;
  • COF – We are concerned about Capital One’s mortgage put back liabilities, which we believe are not currently priced into the stock;
  • HCBK – Hudson City Bancorp has exposure to pending real estate shocks that will eventually be reflected on its balance sheet; and
  • BAC – Another case of put back liability is Banker of America, which will take the equity lower when the issues bubble to the surface. 

Two of our shorts are based on mortgage put back liabilities.  As Josh and his team wrote in a recent note, titled “BAC – Quantifying Mortgage Putback Liability - $19.0 Billion”:


“We've tried to quantify the exposure that we think is realistic and likely. We map out every step in our assumption process as well as which pieces are our assumptions and which are Bank of America's disclosures. The bottom line: we think BAC is under-reserved for mortgage putbacks to the tune of $19.0 billion, which works out to $1.31 in tangible book value per share, or roughly 10.2% of tangible book value. That's not to suggest tangible book value will actually decline by $1.31, as it is more probable that the company will earn its way through this. While this is well below recent Armageddon-esque estimates put forward by conflicted parties, the reality is that for those who think the concerns are wildly overblown this will consume most, if not all, of next year's expected earnings.”


This is a small portion of Josh’s extensive work on this issue.  We would recommend that if you are doing work on financials or currently own financial stocks, you connect with our sales team via to learn more about Josh’s work.


Suffice it to say, we don’t like the financials.


Daryl G. Jones
Managing Director


Where Are We On Financials? 4 Short, 0 Longs - 1

European Q3 GDP Slows, Germany Outperforms

Position: Long Germany (EWG); Short EUR-USD (FXE)


Most of Europe reported its Q3 GDP results today. Below we include a table of select economies to highlight two points:


1.)    The rate of GDP improvement in Q2 was very likely the best on a quarter-over-quarter basis for 2010 as Austerity’s Bite dampens growth and consumer and business confidence into year-end and in 2011.

2.)    The divergence in growth prospects for 2010 follow our theme of the Sovereign Debt Dichotomy—Germany’s fiscal conservatism will help positively positions its economy for growth, while the PIIGS will continue to wilt under fiscal imbalances.


European Q3 GDP Slows, Germany Outperforms - chart1


Temporary Inflections


Today we see an inflection in what has been an expedient rise in the credit risk over the last three weeks in Europe’s periphery, namely the PIIGS (Portugal, Ireland, Italy, Greece, Spain). In the chart below we calculate the spread between 10YR government bond yields of the PIIGS and Germany’s 10YR Bunds. We think the slight compression in government yields day-over-day  from the PIIGS is a reflection of German Chancellor Angela Merkel’s supportive comments at the G20 yesterday that “preparations are in place” for any aid requests by European Union countries facing debt crisis.


European Q3 GDP Slows, Germany Outperforms - chart2


The supportive comments from Merkel follow recent statements that tout tax consequences for European countries that fail to meet budget reduction targets, and a permanent rescue system to make bondholders foot part of the cost of any future debt crisis.  While the weight of gravity may also be pushing down yields for a few days, we’d expect (PIIGS) yields to continue to ramp up alongside investors’ credit risk fears. One catalyst to keep on the calendar is Ireland’s ability to pass through €6 billion in spending cuts and tax breaks on December 7th to tackle part of its massive 2010 budget deficit.


Quantitative Set-Up


Below we chart our quantitative levels for the equity indices of the PIIGS. Of note is that all indices are broken on the immediate term TRADE duration, a bearish indicator. Further, Ireland’s Dow Jones Index, Spain’s IBEX and Greece’s ATHEX Composite are broken on both the TRADE and intermediate term TREND durations. In contrast, Germany’s DAX is trading comfortably above both its TRADE and TREND lines, an outright bullish signal in our model.


In the Hedgeye Portfolio we remain long Germany (EWG) and short the EUR-USD (FXE) as the region’s credit risk continues to weigh on the Euro. Our TRADE range for the EUR-USD is $1.36-$1.39.


Matthew Hedrick



European Q3 GDP Slows, Germany Outperforms - Greece1


European Q3 GDP Slows, Germany Outperforms - 2. ireland


European Q3 GDP Slows, Germany Outperforms - 3 Portugal


European Q3 GDP Slows, Germany Outperforms - 4. spain


European Q3 GDP Slows, Germany Outperforms - 5.italy


European Q3 GDP Slows, Germany Outperforms - 6 germany

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%

Weekly Footwear Sales – Performance Bifurcation

Footwear sales caught our eye this week with trends decelerating across all durations – sequentially, on a trailing 3-week basis, as well as on the underlying 2-year trailing 3-week basis. While it’s clear these trends suggest the trajectory of positive footwear sales since August may now be in question in the face of more challenging comparisons looking forward – the opportunity for retailers to outperform based on portfolio mix is now greater than it has ever been over the past 2-years.


A closer look at the composition of sales reveals a critically important divergence in product categories emerging beneath the surface of aggregate athletic footwear sales trends. Take a look at the chart below. The bifurcation between performance and non-performance footwear has widened since late summer with the current 40-point spread at its widest margin in 2-years. So what does this mean exactly? 

  1. The lack of innovative/technical product in the wake of industry re-orgs during 2008 coupled with the consumer’s focus on “value” is clearly evident by non-performance consistently outperforming over a 6+month period in late 2009/early 2010.
  2. One of our key themes since Q1 has called for a reinvigorated athletic footwear product cycle beginning in the 2H of 2010. This development is clearly underway.
  3. Footwear retailers (i.e. FL & FINL) should be viewed in isolation when taking into account aggregate trends slowing on the margin. Keep in mind, our weekly sample data from NPD includes sporting goods/outdoor retailers (e.g. Modell’s, REI, TSA, etc.) as well, which tend to carry a greater percent of non-performance footwear, therefore, understating the sales performance at retail concepts more geared towards performance.  We want to be long names with high exposure to technical running, basketball, and training with a still meaningful product tailwind carrying through 2011.

The bottom-line here is that with a favorable comp outlook for athletic footwear through November getting progressively more challenging through year-end – portfolio mix between performance and non-performance footwear will be critically important in driving near-term sales performance at retailers. Our view is that footwear retailers more heavily exposed to the performance category are at a significant competitive advantage to sporting goods/outdoor retailers as well as more fashion oriented, family footwear outlets. Good for FL & FINL – Not as favorable for DKS & HIBB.


Casey Flavin



Weekly Footwear Sales – Performance Bifurcation - FW App Ind 1Yr 11 12 10


Weekly Footwear Sales – Performance Bifurcation - FW Perf v NonP 11 11 10


Weekly Footwear Sales – Performance Bifurcation - FW App Ind 2Yr 11 12 10


Weekly Footwear Sales – Performance Bifurcation - FW Table 11 12 10





November 12, 2010





  • JCP noted that “Cotton prices are the biggest driver of concern throughout 2011 and particularly in the second half.  In some cases, manufacturers aren't taking orders at this point. They don't feel like they can anticipate what their costing is going to be.”
  • During a recent walk through of FL’s flagship in Manhattan, Timberland had a prominent presence at the front entrance with a standalone display as well as several panels throughout the store with signage rivaled only be a few key basketball launches (UA’s new Micro G and Reebok’s new John Wall ZigTech shoe). It appears that additional SKUs in the company’s Mountain Athletics line is starting to play a key role in shelf space gains.
  • If you’re in the market for new work threads take a look at Jos. A. Bank’s weekend sale. These deals are noise at this point on the radio, but this one’s worth a callout. In a painfully obvious move to shed excess inventory, the company’s offering 2 pants, 2 shirts, and 2 sweaters with the purchase of a sportcoat or leather jacket for the first time ever. In taking a closer look, the sale applies even for sportcoats on sale for as low as $125! If a closet worth of goods for $125 doesn’t drive traffic to stores this weekend, what will…



Google Going Retail? - Google may be taking a page from eBay’s recent foray into exclusive collections with designers, if a certain anonymous fashion tweeter is to be believed. “Breaking news: Google is launching an ecommerce site with shop in shops by major designers #google #theyrgonnabepissed #geturshopon” went the tweet from @NoBtotheS. This could explain why the search company is planning a big bash in New York Wednesday night with retailers, designers and other fashion industry insiders, including a performance by the Misshapes. A Google spokeswoman said, “We are hosting an exclusive fashion party to celebrate our partners. We don’t have further details to share.” <WWD>

Hedgeye Retail’s Take:  Don’t expect GOOG to actually sell anything, but rather act as a virtual mall for the holidays.  GOOG remains very focused on driving traffic to retailers via its shopping search tool.


Skechers Int'l Retail Expansion - Skechers USA Inc. is expanding its retail license. The Manhattan, Calif.-based company bowed its first branded retail store in Ireland last month, and in December will open a second location in Portugal. And early next year, the retailer will open three stores with Canadian partners. “Every Skechers retail store is a highly effective outlet for consumer interaction with our brand,” President Michael Greenberg said in a statement. “We’re excited to deliver the complete Skechers experience through our partnerships in Ireland, Canada and Portugal. This growth illustrates the strength of our brand and Skechers’ retail licensing opportunities around the globe.” With the addition of the new stores, Skechers’ global presence will rise to more than 200 locations. <WWD>

Hedgeye Retail’s Take:  In an effort to sell through a 70% increase in inventories, it’s no surprise to see incremental openings taking place on foreign soil.  Recall that the licensed retail model is a low cost, lower risk strategy to expansion rather than pursuing company-owned locations.


Victoria's Secret Next on Facebook -  Victoria’s Secret is hitting the New York streets with an interactive slice of its annual fashion extravaganza that will be promoted on Facebook. The lingerie specialist is launching a campaign on the social media Web site to promote a display of nine vintage Angel Wings near the brand’s SoHo store, on Broadway between Houston and Prince streets, from Nov. 19 to 30. “It’s fun and artistic and engages people with the brand,” Sharen Turney, president and chief executive officer, said during the 16th annual Victoria’s Secret fashion show on Wednesday night at Manhattan’s 69th Regiment Armory, where Katy Perry was the headliner along with R&B singer Akon. “The wings represent angels and they really a re an icon for the brand.” The exhibit, which follows a test launch in Chicago last year, will showcase Angel Wings worn by models such as Heidi Klum, Miranda Kerr and Adriana Lima in huge, sealed Plexiglas cubes. The boxes will have a small step in front where visitors will be able to stand and have a picture taken. <WWD>

Hedgeye Retail’s Take:  Interestingly, though not surprisingly, Victoria’s Secret’s facebook fans are predominately male.


Nail Polish Key M&A Target? - Nail polish is the latest hot accessory in the M&A game. Coty Inc., which already controls roughly half the retail nail market with its Sally Hansen and New York Color brands, is said to be the leading contender to snatch nail lacquer company OPI Products Inc. from the hands of its competitors in an auction. If Coty doesn’t nail down OPI — the company is believed to be asking upward of $1 billion — the runner-up could be Procter & Gamble Co., the consumer packaged goods behemoth that many consider the most logical partner for OPI because of its nail polish position, which is weaker than Coty. Private equity firms are also circling OPI. Whoever ends up owning it, the pending OPI deal could be the largest in the history of lacquered nails, trumping Coty’s $800 million purchase of Sally Hansen and New York Color owner Del Laboratories in 2007, and far exceeding L’Oréal USA’s April purchase of Essie Cosmetics, which was thought to be around $100 million. The estimates of OPI’s wholesale volume vary wildly from $180 million to $400 million. In any event, it is at least five times larger than Essie, which registered $25 million in wholesale sales in 2009, but the $1 billion price tag estimated for OPI would still be a nail care industry stunner. Recent color cosmetics mergers and acquisitions have commanded 1.8 times revenues. <WWD>

Hedgeye Retail’s Take:  Over the past year we have periodically highlighted nail polish as one of fashions most popular accessories.  Perhaps the sign of a top in the “polish” market was the recent launch of Justin Beiber’s exclusive nail polish line at Wal-Mart.  Purples and metallics are this seasons hot color themes.


Hilfiger Coming Back to TV - After a five-year hiatus, Tommy Hilfiger will return to the airwaves with a holiday TV campaign called “Feast Interruptus.” It will launch Monday on U.S. national and local TV networks, as well as Featuring “The Hilfigers,” who made their debut in the fall 2010 global ad campaign dubbed “The Ultimate Tailgate,” the commercial is directed by Francis Lawrence and styled by Karl Templer. Trey Laird, chief executive officer and executive creative director of Laird + Partners, Hilfiger’s ad agency, is the creative director. <WWD>

Hedgeye Retail’s Take:  Good news for Macy’s which is likely the key beneficiary of increased Tommy advertising given its exclusive distribution agreement.


O"Mega" U.S. Store Growth - Omega, the Swiss watch manufacturer, is planning a significant retail rollout. The company will open nine stores in the U.S. in the next six weeks, including locations in Chicago, Seattle, Los Angeles, Nashville and Jacksonville, Fla. The company currently operates one unit in the States, on Fifth Avenue in New York. Omega president Stephen Urquhart will hit Manhattan next week to reveal the company’s retail plans, which include the addition of 20 to 22 locations in 2011. <WWD>

Hedgeye Retail’s Take:  This has to be one of the more aggressive luxury growth rollouts we’ve seen in a long, long time.  We wonder if the effort actually includes taking the brand a bit downstream given its choice of locations in a-typical luxury markets such as Nashville and Jacksonville.


Social Site Marketing at its Best - Jay-Z is launching his first book, “Decoded,” with a scavenger hunt of sorts sponsored by search engine Bing — with Gucci in on the game. Pages of the book have been placed in various places meaningful to the hip-hop impresario, with clues revealed on Jay-Z’s Facebook and Twitter pages, and on a dedicated Bing site, with fans winning prizes for finding them. On Thursday, Gucci revealed two of the pages in the windows of its Fifth Avenue flagship, printed on the lining of a one-of-kind leather bomber jacket designed by creative director Frida Giannini. The display will remain on view until Nov. 16, when the book goes on sale — and then the jacket will be gifted to Jay-Z. Other places where pages from the book can be found include the bottom of the pool of the Delano hotel in Miami and underneath plates at the Spotted Pig restaurant in New York. <WWD>

Hedgeye Retail’s Take:  2010’s version of the scavenger hunt actually seems pretty cool.  Most interesting is the traffic-driving component which directs “fans” to actually physical locations as part of the hunt.  We’re just wondering who has time to run around the city collecting Jay-Z’s pages?


California Sues Brazilian Blowout - The state of California filed a complaint in Superior Court for injunctive relief and civil penalty against GIB LLC, the company that is doing business as hair-smoothing treatment Brazilian Blowout, alleging that it failed to warn consumers and stylists that the treatment contains formaldehyde, a violation of California’s Safe Cosmetics Act. The firm has “knowingly and intentionally exposed salon workers and customers to formaldehyde,” states the document, which was filed in Alameda County by the state attorney general’s office of Jerry Brown, governor elect of California, on Wednesday. The formula of Brazilian Blowout was brought into question in early October after the Oregon Health & Science University’s Center for Research on Occupational and Environmental Toxicology released lab results that indicated the Brazilian Blowout formula contained formaldehyde. The tests were conducted after stylists at two Portland-based salons complained of eye irritation, burning noses and other symptoms, and submitted samples of the product from their salons to the center. <WWD>

Hedgeye Retail’s Take:  Formaldehyde=bad PR=not good for business.


Social Stickiness - Social media marketers who have successfully attracted fans of their brand to their Facebook or Twitter page have only just begun their real task: keeping those fans interested and engaged, and hopefully turning them into advocates on the brand’s behalf. According to a September 2010 survey by social media marketing agency Cone, incentives remain the biggest draw for consumers connecting with brands online. New-media users expect deals, but also look for brands to help solve their problems and get their feedback on products and services.  What they aren’t looking for is equally important. The top two reasons new-media users said they stopped following brands online, tied at 58%, were brands sending out too many messages or acting irresponsibly. A majority of respondents also complained about content being irrelevant. <emarketer>

Hedgeye Retail’s Take:  Note to brands, don’t over saturate your most loyal customers with relentless digital marketing.  These are already your most informed consumers, not ones that need additional motivation to spend.


R3: JCP, JOS, GOOG, SKX - R3 11 12 10


China's Expanding Sportswear Market - China’s leading sports shoe company Pou Chen has further stepped up its production of sports goods and marketing to seek more business opportunities in the mainland market. Currently, China and other Asian countries have overtaken the US and the EU to become the world’s largest sports footwear market. For example, mainland China consumes 2.2 billion pairs of shoes each year. Sportswear market in China represents 0.3% of total gross domestic product. There is still a huge gap as compared with 1% to 3% in developed countries. With increasing of income and sales of outdoor sports clothing, China’s fashion sportswear market is expected to expand to US$5.1 billion by the year 2012. <FashionNetAsia>

Hedgeye Retail’s Take: Don’t think Chinese domestics are the only brands salivating at the fat-tailed growth potential here. With foreign brands stepping up their own presence on domestic soil, expect U.S. powerhouses to step up their own offensive in this nascent athletic market.




While Genting’s Q3 was a disappointment, Singapore is off to a roof blowing start, even eclipsing Macau in some metrics.



Genting Singapore’s disappointing quarter notwithstanding, the overall market rose handily in Q3 as did the important productivity metrics.  Net gaming revenue increased from S$983 million in Q2 to S$1,164 million in Q3. 


As can be seen in the following charts, win per slot, revenue per VIP table, and revenue per Mass table all increased in Q3.  Not surprisingly, win per slot is much higher in Singapore than in Macau where mainland Chinese are not as enamored with machines as southeastern Asians are.  Singapore is pretty close to Macau in terms of Mass revenue per table but overtook Macau in VIP revenue per day in Q3.  No doubt, the favorable tax rates on Singapore VIP has been a boost.


In terms of Singapore market share, with a fully quarter under its belt, Marina Bay Sands (LVS) has moved ahead of Genting’s Resorts World.  As can be seen in the last chart, the market share war is close on all of the important metrics, although MBS is winning each battle.  We expect MBS to continue to grow its market share.










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