Conclusion: The quadrant chart posted below portrays a clear picture of the current situation for restaurant stocks.  A disproportionately large number of companies are operating in “Nirvana”; comparable restaurant sales are growing year-over-year and restaurant operating margins are expanding year-over-year.   The valuation multiples in the chart are assigned by the Street and a clear relationship can be seen between valuation assigned and operational performance (different quadrants).


The following companies are currently operating in Nirvana as of the most recently reported quarter: CMG, BJRI, YUM, SBUX, MCD, PNRA, CAKE, DIN, TXRH, DRI, BWLD, RT, MRT, and PFCB.  With the exception of DIN, DRI, BWDL, and PFCB, all of these companies were in the same quadrant as of the prior reported quarter also.  On a NTM EV/EBITDA basis, the group is trading at an average of 9.4x.  If we remove CMG from the list the multiple falls to 8.9x.


I would like to highlight several names that are, in my view, facing a possible move out of Nirvana in the next quarter or two.  Yum China, TXRH, MRT, CAKE, BWLD, MCD, CMG, PNRA and RT are the primary names I am watching in this regard.


Yum China has performed will over the last number of quarters and exceeded my expectations.  That said, I firmly believe that the company will find it difficult to extend their stay in Nirvana more than another quarter or two.  As I posted earlier today in my note titled, “YUM – WATCH CHINA CONFIDENCE”, consumer confidence is a key driver of top line trends for Yum China and took a sharp turn down in the third quarter.  Where that metric trends from here is a key question going forward.  Additionally, McDonalds announced that the company has raised prices in China due to higher raw material costs.  If Yum experiences the same pressure, it could either translate into margin pressure or, in the event of an ill-received price increase, additional drag on sales.


TXRH and MRT are obviously highly exposed to rising beef costs and many companies in the restaurant space, in the Casual Dining and Quick Service concepts, have highlighted elevated beef costs as a key concern going forward.  Additionally, for Morton’s, layoffs (that many are expecting) in the financial sector could have an impact on sales trends.  This is not helped by the fact that a sharp step up in comparable restaurant sales from 3Q09 to 4Q09 will present MRT with a far more difficult compare in the last quarter of 2010.


CAKE’s average check problem remains a concern and comps are more difficult to lap in 4Q than they were in 3Q when the company barely comped the restaurant operating margin from the year prior.  Despite the implicit message embedded in the fact that customers are trading down to smaller plates and snacks, the company implemented a 1% menu price increase in August.


Food inflation could possible take CMG out of Nirvana.  In line with its “food with integrity” mantra, the company purchases its food on the spot market and is therefore vulnerable to volatility in the foodstuffs markets.  CMG is lapping declines in food costs of 218 and 207 basis points, respectively, in 4Q10 and 1Q11, respectively.  I would consider it more likely that the company would leave the Nirvana quadrant in 1Q11 than in 4Q10.  The same is true for MCD.  The company has not yet discussed inflation trends in 2011, but they are likely to trend higher with beef prices.  Like CMG, I see MCD likely falling out in 1Q11 due to year-over-year decline in restaurant operating margin.


I remain cautious, as I was a quarter ago, about RT’s ability to maintain its operating performance in Nirvana in 2QFY11.  As I wrote in my note titled, “RT: IMPROVING BUT THINGS SHOULD SLOW”, momentum will likely slow after the first quarter of FY11 for RT.  This could mean RT moving to the “Deep Hole” quadrant, negative comparable restaurant sales and contracting restaurant operating margins.


BWLD has been enjoying favorably commodity prices since chicken wing prices peaked in January and sales in the most recent quarter were an upside surprise to me.  As the commodity tailwind goes away, it may be difficult for the company to maintain margins in positive territory on a year over year basis.  Additionally, the company has many underperforming, lower volume stores to close down and this process of “right-sizing” may take some time. 


The “Deep Hole” quadrant is populated by companies that are operating with negative comparable restaurant sales and negative year-over-year changes in restaurant operating margins.  From a QSR perspective, MCD is causing a lot of pain for its competitors.  Additionally, higher protein prices will begin to be felt on the bottom line in the upcoming quarter.  This has been called out by several QSR management teams.  The following companies are currently in that category: SONC, WEN, JACK, KONA, and RRGB.  Emerging from this quadrant is quite difficult in that it requires patience; management teams cannot take short cuts or rely on short term fixes. 


RRGB is one company that I believe has been taking the wrong approach for several quarters now. They have been under pressure from a check average perspective and management was recently moved to state on their 3Q earnings call that “competitive encroachment” and the concept not being “differentiated” enough is negatively impacting the business. 


EAT, on the other hand, has emerged from the “Deep Hole” quadrant thanks to a measured plan on the part of management to increase restaurant operating margins and improve sales on a sustained basis.  The former has already occurred; EAT is now in the “Life-line” quadrant and – per my recent notes on the name – I expect sales to pick up in the upcoming quarters (EAT – A BADGE OF HONOR, 11/14) and move into nirvana by FY3Q11. 


Overall, a brief glance at the quadrant chart below is enough to tell anyone that restaurant stocks performed well over the last quarter.  However, this can only persist for so long and I expect to see a more even distribution among the respective quadrants of this chart over the coming quarters.




Howard Penney

Managing Director


After an impressive start to the year MGM’s baccarat share is on the decline.



Strip Baccarat volume rose 52% in Q3.  Juxtaposing those numbers with MGM’s reported 6% decline in baccarat volume for its wholly-owned properties would show that MGM (ex Aria) lost significant baccarat share in 3Q.  With this year’s opening of 50% owned Aria, some cannibalization should be expected.  However, MGM’s baccarat volume share with and without Aria has now declined for two straight quarters.


Our analysis indicates a 14% baccarat share loss from MGM’s share (ex Aria) of 38% in 2009.  In our note, “STRIP BACCARAT TOOK A BIG BREATHER IN SEPTEMBER” (10/13/10), we wrongly concluded that September baccarat volume on the Strip declined, assuming MGM maintained its sequential share.  What we didn’t realize is that MGM’s baccarat volume share (ex Aria) had fallen so much that it was not at all indicative of the overall Strip trend.  In fact, Strip baccarat volume actually grew YoY in September.  Moreover, the chart below shows MGM’s (including Aria) baccarat volume share fell below its share without Aria in 2009.




Aria’s baccarat volume share isn’t doing much better.  Although management said on the conference call that Aria had exceptionally strong baccarat play, we believe Aria lost baccarat volume share in 3Q.  Total table drop for Aria increased 48% in 3Q from 2Q.  If we assume Aria’s baccarat % share of Aria’s total table volumes remained at 44%, Aria lost 3% baccarat volume share in 3Q.  Since we know that on the Strip, baccarat % share of total table volume rose in 3Q, Aria’s share loss was probably not as steep. 


Baccarat was the one lifeline that kept Vegas from falling into the abyss during the financial crisis.  As seen in the following chart, baccarat volume has accounted for a higher % of total table volume over a two-year span.  If MGM’s wholly-owned property baccarat volume continues to move in the opposite direction of higher Strip baccarat volume, then its wholly-owned performance will be as depressed as Nevada’s tax coffers.



HIBB: Reaccelerating Store Growth

Yet another solid result out of the athletic footwear/sporting goods industry this morning with HIBB confirming the breadth of industry strength coming in at $0.44 vs. the Street at $0.38 and our $0.40 estimate. Here are a few callouts ahead of the 10am call: 

  • Accelerated store growth is the clear callout in Hibbett’s Q3 results. With 17 net new stores openings in Q3, the company increased its year-end outlook for net additions by 50% with only one quarter left. We suspect the majority of incremental growth is coming from existing real estate opportunities at Movie Gallery and Blockbuster locations in addition to a more aggressive approach to expand into adjacent states – added first store in South Dakota during the quarter.
  • Earnings upside was primarily driven by accelerating comp store sales of +12.5% improving sequentially on both a 1yr and 2yr basis. Similar to what we saw at DKS earlier in the week, top-line sales outperformed what management had suggested earlier in the quarter. Our read through via industry performance data suggests this strength has continued so far in Q4.
  • Margin expansion continues with gross margins up +124bps in-line with our expectations and leverage on the SG&A line (-79bps) despite higher store opening expenses better than expected. Exceeding prior peak operating margins is looking increasingly likely next year.
  • Inventories up +4% on 15% sales growth consistent with peers (FL & DKS). This is worth highlighting again as all three players are maintaining remarkable stability in the sales/inventory spread relative to what we’ve seen out of the vast majority of other retailers this quarter – positive for continued margin expansion into year-end as well.
  • Raised FY outlook:
    • Comp expectations up MSD in Q4. What’s notable is that the company would need 12%+ to keep comps flat on a sequential basis. Much like Ed Stack’s strategy at DKS, management is giving themselves a sizeable cushion in the face of potential consumer weakness. Preliminary Q4 sales will provide further color here on the call.
    • FY EPS increase to $1.63-$1.66 from $1.45-$1.55 reflects additional upside to earnings in Q4 given just over half the difference is reflected in Q3 results.

In addition to more aggressive store growth plans, it appears the company’s bet to accelerate outerwear as a percent of total sales is also helping drive accelerating top-line results. With a clear commitment to reaccelerating square footage growth already underway, not only are earnings headed higher, but so too is the company’s multiple. More to follow after the call.


HIBB: Reaccelerating Store Growth  - HIBB S 11 10


Casey Flavin


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%


TODAY’S S&P 500 SET-UP - November 19, 2010

As we look at today’s set up for the S&P 500, the range is 11 points or -0.48% downside to 1191 and 0.44% upside to 1202.  Equity futures are lower as easing worries about Ireland’s debt is offset by concern about tightening measures in China. No important economic data is expected today.

  • Autodesk (ADSK) sees 4Q non-GAAP EPS 30c-33c vs est. 34c
  • Blue Coat Systems (BCSI) forecast 3Q adj. EPS 33c-39c vs est. 40c
  • Dell (DELL) reported 3Q EPS 45c vs est. 32c
  • Foot Locker (FL) reported 3Q rev. $1.28b vs est. $1.2b
  • Gap (GPS) reported 3Q EPS in line, said expects “choppy” sales in 4Q
  • Intuit (INTU) forecast 2Q adj. EPS 36c-40c vs est. 45c
  • KeyCorp (KEY) said CEO Henry L. Meyer will retire in May; Beth Mooney, currently vice chair, will replace him
  • (CRM) raised year adj. EPS forecast to $1.18-$1.19 from $1.15-$1.17, vs est. $1.17


  • One day: Dow +1.57%, S&P +1.54%, Nasdaq +1.55%, Russell 2000 +1.85%
  • Month-to-date: Dow +0.56%, S&P +1.13%, Nasdaq +0.28%, Russell +2.49%
  • Quarter-to-date: Dow +3.79%, S&P +4.86%, Nasdaq +6.14%, Russell +6.61%
  • Year-to-date: Dow +7.22%, S&P +7.32%, Nasdaq +10.81%, Russell +15.26%
  • Sector Performance: Energy +2.20%, Materials +1.89%, Tech +1.68%, Industrials +2.03%, Financials +1.40%, Healthcare +1.41%, Consumer Spls +1.34%, Consumer Disc +0.87%, Utilities +0.60%


  • ADVANCE/DECLINE LINE: 1894 (+1283)  
  • VOLUME: NYSE: 1198.94 (+27.13%)
  • VIX: 18.75 -13.83% - YTD PERFORMANCE: (-13.51%)
  • SPX PUT/CALL RATIO: 1.19 from 1.60 -25.29%  


  • TED SPREAD: 15.35 0.203 (1.340%)
  • 3-MONTH T-BILL YIELD: 0.15% +0.01%
  • YIELD CURVE: 2.38 from 2.39


  • CRB: 302.51 +2.40%
  • Oil: 81.85 +1.75% - NEUTRAL
  • COPPER: 383.85 +2.80% - BEARISH
  • GOLD: 1,351.85 +1.09 - BEARISH


  • EURO: 1.3615 +0.62% - NEUTRAL
  • DOLLAR: 78.617 -0.59%  - BULLISH



European markets:

  • FTSE 100: (0.54%); DAX +0.02%; CAC 40 (0.08%)
  • Indices in the region trade flat to lower following a good show yesterday.
  • Investors cautiously watch the progress in the Irish debt talks. Chemicals and Media are among the best performing sectors, while Basic Resources and Banks are in the red.
  • Tech stocks are higher boosted by good Dell figures.
  • Germany Oct PPI +4.3% y/y vs consensus +4.2% and prior +3.9%
  • Germany Oct PPI +0.4% m/m vs consensus +0.2% and prior +0.3%

Asian markets:

  • Nikkei +0.1%; Hang Seng (0.1%); Shanghai Composite +0.8%
  • Asian markets were mixed in a fairly tight range today.
  • Worries about Ireland’s debt began to ease, and sentiment was boosted by a positive reaction to General Motors’s IPO.
  • South Korea rose on expectations of a resolution of Ireland’s debt crisis. Tech issues supported the market, but shippers fell on a lower Baltic Dry Index.
  • Tech stocks and carmakers gave Taiwan a slight rise after the island’s Q3 GDP growth beat estimates.
  • Japan rose early, but shed most of its gains as the day went on, as concern rose about declines in China and Hong Kong.
  • Australia slipped, with sentiment harmed when the QR National IPO was priced at the low end of its expected range.
  • Coal, metals, and banking shares paced morning falls in Hong Kong and China, but the markets rebounded in the afternoon. 

Howard Penney
Managing Director

THE HEDGEYE DAILY OUTLOOK - levels and trends














The Macau Metro Monitor, November 19th, 2010



According to hospitality sources, overall hotel occupancy will be 80% this week and 90% for Friday and Saturday.  They expect most of the hotels will be up to full occupancy once the Grand Prix event starts this weekend.  ADR is 10% higher YoY.



From Jan-Oct 2010, Macau fiscal revenue reached MOP $62.64 BN (up 37.2% YoY).  Gaming tax revenue hit MOP $52.15 BN (up 58% YoY).  Macau total government expenditure during this period grew 14.7% YoY to MOP $27.3 BN.



The Nevada Supreme Court threw out a lower court's decision to award Richard Suen, a Hong Kong businessman, $58.6 MM for allegedly helping LVS win a gambling license in Macau, ruling that the district court's errors warranted a new trial.  However, legal experts say that a new trial may not be LVS's favor because of the potential bad publicity and because one of its key witnesses, former LVS President William Weidner, is unlikely to be cooperative. Mr. Weidner resigned in March 2009 after almost 14 years at the company amid disputes with Adelson.


China's central bank will raise the reserve ratio by 50 bps to 18.5% from Nov. 29.  The PBoC said the hike "will strengthen liquidity management and control credit."

The Ber-nank Blame

“When you cease to exist, then who will you blame.”

-Bob Dylan


For a global macro analyst, the early morning grind is usually bland. It’s always dark and now it’s getting cold. This morning, however, fired me up! At 530AM EST, Ben Bernanke and his Fiat Friends were holding an academic groupthink session on live TV from Europe.


Before I get into Bernanke’s proactively predictable opening remarks, here’s your morning go-juice:

  1. Bernanke said that calling what the Fed is doing “Quantitative Easing” is “inappropriate”!
  2. As Bernanke was speaking, the Chinese raised rates on their reserve requirements by another 50 basis points (5th time this year)

It’s actually pretty funny. These academic Fiat Fools obviously take themselves quite seriously and while their god of Big Keynesian Government Intervention was speaking, the Chinese poked him again.


At 533AM, the play-by-play hitting the newswires looked like this:

  1. Bernanke says “inflation is expected to be subdued for some time… and the FOMC remains committed to price stability…”
  2. China raises rates again on “global inflation concerns”

You’ll never know what World War III looks likes until it’s staring you in the face, but this war may very well be in motion – a global economic war of both rhetoric and action between the Fiats and the Chinese.


While we wholeheartedly agree with Bernanke that calling Quantitative Guessing (QG) by any other name is “inappropriate”, what we completely disagree with this morning is Bernanke effectively joining the political arms race of blaming the Chinese for American economic problems.


Canadians will remember a South Park song titled “Blame Canada” (it was actually nominated for the Academy Award for Best Song in 1999). For whatever reason the lyrics of this damn song started playing in my head while I was watching Bernanke chirp the Chinese:


                “We must blame them and cause a fuss

                  Before somebody thinks of blaming us!”


It’s really pathetic and sad altogether that the 2010 equivalent of a South Park video has turned out to be the best explanation of what’s really going on here. Xtranormal’s cartoon “Quantitative Easing Explained” video ( has been spreading to the world’s inboxes like wildfire in the last few weeks – last count as of this morning = 1,796,284 views.


Being at the hub of the Hedgeye exclusive network certainly has its privileges. I get to see what we call “the heat” in terms of what serious people care about on a real-time basis. Serious people aren’t just money managers. We have plenty of upstanding people around the world who work in a variety of professions who are sick and tired of being lied to. We offer them a platform to share their voice.


Washington has abused the global privilege of being the world’s fiduciary of the global reserve currency. Everyone who isn’t paid to be willfully blind gets that by now. The days of conflicted and compromised politicians and financiers living in the shadow inventory of American opacity are ending. If it takes a cartoon to expose the truth, sorry Heli-Ben, YouTube is going to smoke your academic dogma out of its hole.


In a roundabout way, this is all very good news. I don’t think I can handle watching American capitalism fold into the hands of crony-socialism for much longer. Plenty of foreign-born entrepreneurs hiring in the American business community feel the same. This isn’t the country that I came to in 1995.


I’m game to play American Capitalist against the socialists. I’ll even wear the red, white, and blue jerseys instead of my homeland’s. While The Ber-nank’s broken promises have perpetuated nothing but JOBLESS STAGFLATION and a global blame game against America’s #1 client (China), I’ve gone about bootstrapping my own American small business, hired 43 Americans, sucked up Obamacare costs like a slurpee, and liked it.


Back to the data, the lastest Nielson survey shows 89% of rural Chinese citizens expecting to see inflation in the next 12 months. Chinese consumer confidence just fell for the 1st quarter in the last 6 and the #1 concern was, take a wild guess blame gamers – inflation. Meanwhile German producer prices (PPI) came in higher again sequentially (month-over-month) this morning at +4.3% year-over-year growth.


Chairman Bernanke, it’s time to think outside of your Great Depression box and strap on some of global macro and accountability pants. If you don’t start seeing the data as it’s reported real time, “when you cease to exist, who will you blame?”


My immediate term support and resistance levels for the SP500 are now 1191 and 1203, respectively. I sold our entire US Equity position (6% position in the Hedgeye Asset Allocation Model) on yesterday’s fleeting US stock market strength. I don’t buy-and-hold what I don’t trust.


Best of luck out there today and have a great weekend,




Keith R. McCullough
Chief Executive Officer


The Ber-nank Blame - 1

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