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What Storm?

This morning’s athletic apparel data provides the latest read-through of how the end of December played out and just how significant the impact was from the blizzard at month’s end – the bottom-line, it was more of a snowball than a snow bank.


With this week’s numbers in, we have our first look at the impact of the storm in aggregate at least through the lens of sports apparel sales, which were up sequentially over the past 2-weeks both on a YY and Trailing 3-week basis. Recall that last week’s athletic apparel data included sales through Saturday, while the footwear data did not – Saturday through Tuesday’s sales will be released later this morning.


Looked at on a regional basis, it’s no surprise to see sales down sequentially in both New England and the Mid Atlantic, but importantly neither turned negative on a year-over-year basis. In fact New England was up 9.9%. An update on brand performance and footwear sales to follow…


Casey Flavin



What Storm? - FW App App Table 1 5 11


What Storm? - FW App Reg 1 5 11


News of a rumored plan to buyout Acosta Inc, Starbucks’ new partner for its product development, manufacturing, and marketing, emerged today.


Bloomberg reported today that Thomas H. Lee Partners LP plans to buy the Acosta Inc. food marketing company from private-equity firm AEA Investors LP for more than $2 billion and that a transaction may be announced as soon as tomorrow.


It is important to remember that SBUX announced in early December at its analyst meeting that it has partnered with Acosta to pursue a direct model approach for its entire CPG channel, effective March 1, 2011.  SBUX assured investors and analysts of a smooth transition following the termination of the Kraft distribution agreement. 


Through its new partnership with Acosta, Starbucks will be responsible for product development, manufacturing, distribution and marketing while Acosta will be responsible for the selling and merchandising of SBUX’s products within the grocery channel. 


This announcement is made more interesting by the fact that Thomas H. Lee Partners also owns Dunkin’ Donuts.  I don’t know the details of the agreement between Starbucks and Acosta, nor do I know if and how a sale to Thomas H. Lee Partners would impact that agreement, but I don’t think Starbucks will take comfort in the fact that Thomas Lee is effectively in bed with both Starbucks and Dunkin’ Donuts.


Howard Penney

Managing Director


Conclusion: SONC is not yet out of the woods from a top-line perspective, but margins are stabilizing and the company could emerge from the “deep hole” as early as 2QFY11


SONC posted a sequential improvement in comparable restaurant sales yesterday.  System-wide same-store sales declined 2.4% during the first quarter versus a 6.5% decline in the same quarter a year prior.  StreetAccount consensus was calling for a comparable restaurant sales number of -3.2%. 


Turning to our quadrant chart, it is clear to see how poorly SONC has been performing over the past 5 quarters.  From a sales perspective, partner-drive in comparable restaurant sales have declined for 11 consecutive quarters.  We anticipate the company moving out of the “Deep Hole” quadrant by next quarter and remaining safely out in 3QFY11.  The company is seeing stabilization in margins and faces easier comparisons in 2QFY11 than last quarter.  From my model, I see restaurant level margins being approximately flat to up slightly next quarter and positive in 3Q.  While this is largely due to exceedingly sharp restaurant level margin declines in the year prior, results in this range would be a significant improvement from the last 5 quarters of significant margin erosion.


From a sales perspective, things continue to trend in a positive direction.  While the company’s guidance for sequentially improving same-store sales throughout the year seems like a stretch on a one-year basis after fiscal 2QFY11 (partner drive-ins are lapping an easy -14.9% comp during 2QFY11 and a -13.2% comp on a system basis) , two-year trends should continue to improve.  Given my view that MCD’s comps will slow as the company’s beverage business will fail to maintain the same level of trial, Sonic should have less of a headwind to face in the back half of the year from a market share perspective. 


SONC: LESS BAD IS GOOD - sonc quadrant


From a sentiment perspective, Sonic is not particularly well-liked by the buy-side or sell-side.  The average short interest in the QSR space, excluding the outliers GMCR and PEET, is 4%.  Sonic’s short interest is currently at 6% which is one of the highest in the space.  While that hardly makes it the runt of the consumer discretionary litter, it is noteworthy that Sonic is one of the few stocks that have seen an uptick in short interest over the past couple of months.  


SONC: LESS BAD IS GOOD - qsr short interest


The sell-side also has a negative view of SONC.  Given an improving top line and margin trends that should improve significantly this fiscal year, I think there is a strong possibility that this chart will change markedly over the course of the next 6-9 months (especially if my view on MCD is correct).   We are nearing a turn in sell-side love, or at the very least, a decline in sell-side bearishness.


SONC: LESS BAD IS GOOD - sonic sell side ratings


Howard Penney

Managing Director

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The general decline in short interest over the past couple of months in the restaurant space notwithstanding, price performance seems to be slowing.


Some notable price moves and news items from the restaurant space:

  • COSI continues to outperform, albeit on slower volume yesterday.  Over the past month, the stock price has risen 11% to yesterday’s close of $1.28.  I have long been writing about the turnaround at COSI and the process seems to be intact.
  • SONC reported after the close yesterday and while the results were not astounding, there were reasons for optimism.  The top line beat expectations but EPS was in line excluding a settlement on a tax position.  More details to come in a post this morning.
  • SONC was upgraded to “hold” from “sell” at Stifel Nicolaus
  • MCD declined 3% during yesterday’s trading on strong volume (up 440% vs trailing 30-day average)
  • MCD McDonald's Holdings Co (Japan) December comps +11.6% y/y
  • JACK initiated “neutral” at RW Baird
  • RRGB provides update to shareholders - Red Robin released a letter to shareholders discussing its "Project RED" for 2011, which included nothing relevant
  • CAKE up on good volume - insider buying yesterday
  • PEET down on strong volume; no news and a decline in coffee prices yesterday
  • RT reporting today, declined on high volume yesterday after a +10% gain on Monday.
  • ABC Consumer Confidence Index (45) in 2-Jan week vs (44) in prior week



Howard Penney

Managing Director

Agonizing Pain

“He who will not economize will have to agonize.”



Sitting at my desk in New Haven this morning, what I do know is my own pain. What I don’t know, is what someone else’s feels like. We’ll see how the levered-long US stock market bulls feel on the first tweak today. This isn’t a snap, yet – this is a tweak.


The agony of defeat isn’t new to global macro markets as of this morning. It’s been new to US Treasury and Emerging Debt Markets since November. It was new to the Gold market yesterday during a $40/oz swoon (we’re short GLD). What goes around in terms of mean reversion risk, eventually comes around. You can learn this lesson in a variety of ways in life. In markets, the best way to learn this lesson is the hard way.


If you didn’t raise your Cash position in the last week, it wasn’t because we didn’t tell you to. We started the year with a 61% US Cash position in the Hedgeye Asset Allocation Model and the US Dollar Index has been up every day for the year-to-date (including this morning).


Yesterday, on commodity market weakness we invested 6% of our cold hard cash into oil and corn. Now we have 55% of our hard earned capital in cash. Being in Cash means you can invest it lower.


To be sure, there is absolutely no doubt that you can ride Hi-ho, Silver and call yourself Captain Cowboy on the ride to everything making higher-highs, until they don’t. So you better have a risk management plan when the music stops.


In addition to Gold selling off hard yesterday, US small cap and housing stocks got creamed, trading down -1.8% and -1.5% respectively (XBH and IWM). This morning, European stock markets and US Futures are getting hit hard after Portugal raised 6-month paper at a yield of 3.68% (vs 2.04% last!) and Asia closed down across the board.


This interconnected game of risk has always been “on” – it’s just when everyone stops paying attention to the moving parts that it starts to be a lot more fun. On balance, our intermediate-term TREND view on the global economy remains intact:


1.       Global Growth Slowing

2.       Global Inflation Accelerating

3.       Globally Interconnected Risk Compounding


Now, before a US centric stock market bull gets his/her shirt in a knot about this, allow me to kick off this morning’s Global Macro Grind with a remedial reminder that all of the aforementioned points start with the word Global. That’s right, say it just like Paul Newman had the owner of the Charlestown Chiefs say “H-owned”… G-lo-bal… G-lo-bal…


In terms of the global macro data points that are in my notebook for 2011 to-date, here’s the grind:

  1. South Korean inflation (CPI) jumps to +3.5% in DEC vs +3.3% in NOV and the Korean government declared “war on inflation”
  2. South Korean exports slow, sequentially, from their NOV highs of +25% to +23.1% in DEC
  3. Polish Inflation (CPI) jumps to +3.1% in DEC vs +2.7% in NOV and 2-year bond yields in Poland are pushing to +4.9% this morning (highest in a year)
  4. Chinese manufacturing (PMI) drops for the 1st time in 5 months (53.9 DEC vs 55.2 NOV) as growth continues to slow
  5. German manufacturing (PMI) accelerates again sequentially to a new high of 60.7 DEC vs 58.1 NOV
  6. German unemployment stays unchanged m/m at 7.5% for DEC vs NOV
  7. Brazil’s newly elected President, Dilma Rousseff, kicks off the New Year calling inflation trends pushing to +6% y/y “the plague”
  8. Pakistan’s PM loses his majority and a key Governor is murdered overnight as Pakistan now has to face the Taliban and +15.48% inflation
  9. UK manufacturing (PMI) remained flat, sequentially, in DEC vs NOV at 58.3
  10. Indonesia’s inflation (CPI) accelerates, sequentially, to +6.96% DEC vs +6.33% NOV
  11. European Union inflation (CPI) accelerates to a 2-yr high of +2.2% in DEC vs +1.9% in NOV
  12. Australian manufacturing index slows for the 4th consecutive month (pre JAN floods) at 46.3 DEC vs 47.6 NOV
  13. Thailand inflation (CPI) ramps, sequentially, to +3.0% DEC vs +2.8% NOV

I’ll go Lone Ranger (sans le hi-ho, Gold) and stop at point #13 just to push my own book and summarize that if Captain American Stock Picker (he’s back!) wants to tell me that “growth is back!”… and that the rest of the world’s growth and inflation risks cease to exist… that he/she may want to, at a bare minimum, economize that bullishness and wait for lower prices.


Back to the USA, where consensus is running rampant that the US consumer is Just Lovin’ It (except the collapse of MCD’s stock), this morning’s ABC Consumer Confidence reading (it’s weekly) dropped for the 2nd consecutive week (i.e. dropping both weeks post Christmas shopping) back down to minus -45. That’s only a few points away from its all-time low and even a Thunder Bay Bear on some things US Equities would call that agonizingly cold!


My immediate term support and resistance lines for the SP500 are now 1261 and 1270, respectively. A close below 1261 puts 1237 in play.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Agonizing Pain - 1

CHART OF THE DAY: The Next Mean Reversion



CHART OF THE DAY: The Next Mean Reversion -  chart of the day

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