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I can say with certainty that every restaurant operator has been looking at CMG restaurant level margins with sheer amazement.  Undoubtedly, the financial performance has been nothing short of amazing in FY10 with restaurant-level margins that are about 1000 bps above comparable companies on average (please refer to the chart below for more details). 


CMG ON ICE? - CMG ROP margin comp


The lines that make up the biggest difference between CMG and the competitors are Labor costs and Occupancy and other.  News has emerged via the Wall Street Journal that Immigration and Customs Enforcement (ICE) officials are scrutinizing CMG’s employment practices.  Following the company being forced to dismiss hundreds of employees in Minnesota, ICE is going to examine the eligibility of CMG employees in Washington, DC, and Virginia.  Perhaps this piece of news goes some way towards explaining the “magic” CMG formula for restaurant-level margin outperformance.  If it were proven that the company has not been paying appropriate wages, it could possibly shed light on where some, or all of, the 500 to 700 basis points difference in labor costs is coming from.


CMG is due to report 4Q10 EPS on Thursday, February 10 after the market close.


I expect the company had a strong quarter, with same-store sales up 9-10% and EPS that can easily beat the consensus estimates of $1.30.  Clearly a beat would not be uncharacteristic for this company, so I expect the 2011 outlook to be a primary driver of the stock’s performance.  While significant food inflation is a given for CMG in 2011, higher labor costs might not be completely factored in.


As we can see below, Chipotle’s outperformance of another burrito concept, Qdoba, is nothing short of remarkable.  It will be interesting to gauge Chipotle management’s tone on the earnings call with regard to margin outlook and, of course, to hear the reaction to the recent ICE news.


CMG ON ICE? - burritos


Howard Penney

Managing Director


The Melt-Up: SP500 Levels, Refreshed

POSITION: no position in SPY


For the sake of risk managers out there who still respect that mean reversion is one of the most powerful mathematical forces to consider in risk management, I think I may have to preface every note I write on the SP500 from this price and beyond with the fact that this has been the most expedited 24-month move (in price) in modern US stock market history (rivaled only by the 1936 rally, which obviously ended in tears with another Big Government Intervention strategy in 1938).


That said, that doesn’t mean markets can’t melt-up before they melt-down. And this one is melting-up, right here and right now – so our job is to deal with it. Let’s do that the way we always do, across our 3 core durations: 

  1. TRADE (immediate term) – bullish on a 2.5 standard deviation move to 1330 (the +3 standard deviation move I have been talking about is 1340);
  2. TREND (intermediate term) – assuming we get the 1330 print, I have -7.3% downside risk to my TREND line of 1233; that’s your mean reversion risk (next 3-6 months); and
  3. TAIL (long term) – don’t forget that all we are doing here (like they did in Japan) is using government leverage to inflate to another lower-long-term high. 

Now 1330 is -15% below the October 2007 all-time high, but +97% above its March 2009 low (that’s not a typo). So the question really comes back to the incremental buyers who are going to fly with Buzz Lightyear to 1340 and beyond: What’s are you playing for from that price – and, more importantly, what’s the intermediate-term mean reversion risk to that strategy?


For now, we’re leaning long in the Hedgeye Portfolio and I’m very worried about it. From here, I expect to take down exposure on the way up.



Keith R. McCullough
Chief Executive Officer


The Melt-Up: SP500 Levels, Refreshed - 1

R3: URBN, ADI, AMZN, Jimmy Choo


February 8, 2010






  • A sneak peek of Jimmy Choo’s men’s line is now available, with the company expected launch 16 styles in Fall 2011.  Prices won’t be cheap, with the lineup ranging from $595 to $1095.  Recall that Choo has been expanding beyond women’s footwear as the company contemplates and IPO.
  • According to the Pew Research Center, US desktop computer ownership has fallen slightly since 2006, as laptops have gained in popularity. Currently 59% of all adults own a desktop computer, and 52% own a laptop (76% own a computer overall).  In 2006, 70% of adults owned desktops while 30% had laptops.
  • Google Insights observed that shopping related searches picked up in the “heat” of recent snowstorms on the east coast.  Specifically, apparel retailers in Philadelphia actually saw a mid-week search peak on the 27th when they were in the middle of one of the worst blizzards.  Chicago and Dallas also prove to be noteworthy case studies where weather-induced boredom has helped to drive consumers towards ecommerce.    



Urban Outfitters Debuts Bridal Line - There’s not a single Cinderella-style wedding gown in the Bhldn collection. Bhldn, Urban Outfitters Inc.’s newest retail concept, is the firm’s attempt to put its unique, slightly off-kilter stamp on the bridal business. Rather than traditional gowns, Bhldn is more likely to make a large, lopsided taffeta bow the focal point of a dress, give a wedding gown an unfinished hem or cover elaborate pearl-studded flowers with a sheer layer of tulle so only a hint of the decoration is visible. There’s also a design component featuring items with a do-it-yourself sensibility, such as flower garlands that look homemade but are already put together, as well as glassware, serving pieces, candelabras, cake toppers and lanterns.< WWD>

Hedgeye Retail’s Take:    Official unveiling takes place on February 14th.  Head to BHLDN.com now for a sneak peak of the brand’s aesthetic, which is very much an extension of Anthropologie (at least from the limited imagery so far).


Loehmann's Reorganization Plan Ok'd - Loehmann’s Capital Corp., which operates the Loehmann’s nameplate, expects to exit bankruptcy proceedings by March 1. A Manhattan bankruptcy court on Monday confirmed the company’s joint plan of reorganization, paving the way for its exit from Chapter 11 protection subject to its finalizing the terms for a $45 million exit financing facility. Loehmann’s said, “The plan was overwhelmingly supported and accepted by the company’s creditors who voted. The implementation of the plan will enable Loehmann’s to continue operating as normal.”  <WWD>

Hedgeye Retail’s Take:  Good news for loyal customers with one exception.  Credit and liquidity are key to the off-price business, which in turns fuels quality merchandising.  Loyalists are very much aware of how the company’s offering has suffered over the past several months.


Adidas Outdoor Collection - Adidas will bring its outdoor collection to the U.S. this fall, distributed through Agron Inc., a longtime partner and licensee of its accessory line. The 45-style footwear offering for men, women and children launched abroad two years ago and includes light performance hiking styles priced between $110 and $200, and a $230 multiday backpacking boot called the Super Trekking Formotion boot. Adidas also will deliver water and multisport styles to select retailers in June. That part of the line includes the men’s Speed Boat style that will retail for $75 and feature an easy-on EVA tongue top, and the colorful unisex Boat CC Lace shoe that retails for $65 and features drainage and Adidas’ Climacool upper. <WWD>

Hedgeye Retail’s Take:  Competition clearly heating up in the trail running/outdoor category with Adidas coming to market with an entirely new assortment.  Recall that The North Face, Merrell, Teva, and Timberland are all expanding their efforts in the category as well.

R3: URBN, ADI, AMZN, Jimmy Choo - r3 2 8 11


Big Retailers Let Their Amazon Channel Run Dry - Consumers can no longer buy products from Macy’s Inc., Buy.com Inc. and Gap Inc. on Amazon.com Inc., as each of the three retailers has decided to pull their products off of Amazon.com’s marketplace in recent months. Ever since Amazon.com Inc. started letting other retailers sell through its e-commerce platform as third-party sellers, there has been a “swinging pendulum of support and pull-back” from major retailers concerned about the ability of Amazon, No. 1 in the Internet Retailer Top 500 Guide, to use marketplace retailers' sales information for competitive purposes, says Scot Wingo, CEO of ChannelAdvisor Corp., a company that helps retailers sell through their-party e-marketplaces. <Internet Retailer>

Hedgeye Retail’s Take:  Clearly with momentum on a standalone basis, retailers themselves are looking to regain control of their distribution.  We’re just surprised it took so long for many of these retailers to realize that a direct customer relationship is more valuable than third-party affiliate arrangements.


Consumer Credit Expands - Consumers and lenders felt good enough about the economy to expand credit card debt for the first time in 27 months in December, helping to push retail stocks to a 0.5 percent gain Monday. The Federal Reserve said outstanding revolving credit inched up a seasonally adjusted 0.3 percent to $800.54 billion in December, the first monthly gain since August 2008, just before Lehman Bros. collapsed and the financial crisis took hold. Total consumer credit grew for the third straight month. The S&P Retail Index rose 2.31 points to 509.53 as the Dow Jones Industrial Average gained 0.6 percent, or 69.48 points, to 12,161.63. Investors were also encouraged by a flurry of acquisition activity, including AOL Inc.'s $315 million deal to buy The Huffington Post. <WWD>

Hedgeye Retail’s Take:   Coincidence or just a case of holiday cheer?  While shrinking credit availability and usage has been a headwind for the US consumer, this slight change in trend is certainly notable.


Ocean Container Lines Foresee Potentially Tight Q3 - A rebounding U.S. economy will likely lead to a tight supply of vessel space and equipment during the peak third quarter shipping season, according to Transpacific Stabilization Agreement (TSA), which represents the major container shipping lines serving the Asian-U.S. trade.  The group said its forecast of 7-8% growth in container traffic for the Asian-U.S. trade indicates that additional ships now being delivered will be needed and well-utilized in the upcoming third-quarter, when Asian-U.S. shipping peaks. “After demand growth of more than 15% in 2010, we expect further growth in the 7-8% range for 2011,” said Y.M. Kim, President and CEO of Hanjin Shipping Co. “This continued cargo growth, from a much higher base, is in our view a very positive sign of recovery.” <SportsOneSource>

Hedgeye Retail’s Take: Recall that Q3 volume hit record highs in 2010 as retailers pulled shipments forward looking to shirk both spiking shipping and input costs so while full-year growth expectations are robust on top of a strong 2010, expect the majority of that growth to be front-end loaded.


Superbowl Commercials Underwhelm- Advertisers paid about $3 million for every 30 seconds of air time during the Super Bowl last night and used those pricey seconds to showcase their best creative efforts. Teen sensation Justin Bieber and heavy-metal icon Ozzy Osbourne hawked for Best Buy, Chrysler used Eminem to uncover Detroit’s soul and GoDaddy followed the hot chick formula that’s proven useful for the brand in the past. But one digital marketing expert says that marketers generally stumbled in connecting their TV commercials to their web assets in a way that would strengthen ties with consumers. “We were surprised that there weren’t more and better uses of digital,” says Dennis Bajec, chief creative officer of Resource Interactive, a digital marketing agency. <InternetRetailer>

Hedgeye Retail’s Take: This was a big year for advertisers looking to generate more than just a 30-second impression with pre-game efforts to ‘reveal’ spots directly on company/branded sites as well as post game promotions with the former representing a marked change from years past. In case you missed it, Volkswagen’s successful Star Wars inspired spot went viral in the week leading up to the game creating a significant buzz among parents of budding Lord Vaders.




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MCD reported global sales of 5.3% which surpassed consensus expectations of 4.4%.  By region, it seems that the U.S. slowdown I have been anticipating for 2011 may be kicking off.  MCD beat the consensus in every region of the world but the USA.  As you know, I believe that MCD has issues in the USA that have not been fully addressed by management.  


Despite an easy -0.7% compare, MCD printed a 3.1%, which implies two-year average trends sequentially decelerated by 60 basis points.  On a calendar-adjusted basis, two-year average trends accelerated slightly (by 17.5 bps) from December’s disappointing result.  January’s result for the U.S. was significantly lower than the Street’s expectation of +4.4% for the U.S.


The decline in MCD's two-year average trends to 1.2% clearly puts a same-store sales decline of 2-3% in play for March 2011. 




Europe saved the day for MCD, printing a +7.0% comp, which implies a 335 basis point sequential acceleration in two-year average trends from December.   On a calendar-adjusted basis, two-year average trends accelerated 412.5 basis points. 




APMEA results came in above my expectations and those of the Street.  Two-year average trends decelerated sequentially on a two-year average basis by 20 basis points.  On a calendar-adjusted basis, APMEA two-year average trends accelerated by 57.5 basis points. 





Howard Penney

Managing Director


Notable news items and price action over the past twenty-four hours.

  • CMG is generating headlines as Immigration Customs Enforcement officers scrutinize the company’s alleged employment of illegal immigrants. 
  • JACK is offering a limited time offer Fish Sandwich for $2.99. 
  • There was little in the way of price action yesterday, with the overall space trading sideways. 
  • CHUX and EAT both declined on accelerating volume.
  • China raised rates overnight to combat inflation. Both MCD and SBUX have raised prices to combat inflation in China.



Howard Penney

Managing Director

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