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THE M3: ADELSON LOOKS TO EXPAND MBS; S'PORE INFLATION TARGET RAISED; PROPERTY TAX; GALAXY

The Macau Metro Monitor, February 17, 2011

 

 

LAS VEGAS SANDS EYES MORE SINGAPORE LAND, SPAIN CASINO Reuters, WSJ

CEO Adelson is seeking more land from the S'pore govt to expand MBS.  "We are already running out of [convention and exhibition] space. I've told the government that we need some more land to expand the [convention] space because the demand that this property is going to create is rapidly bringing us to the point where we may even have to ration space," said Adelson.  He added that MBS's convention and exhibition facilities are running at 87% capacity and that "within about 12-to-18 months" the complex will be "rationing space."  Adelson said MBS has received 11MM visitors since it opened in April last year and expects to break even within four years of operations.

 

COO Leven said there is available land at various points around MBS.  "Demand is going to be higher than supply shortly as the entire hospitality industry is running over 80% occupancy," Leven said.  Leven also said a report on the search for a new MBS CEO is due Friday.

 

Adelson also remarked, "We are seriously looking at doing what we call a 'Strip', which is essentially a mini Las Vegas. We are looking to do that in Europe and we are sort of zeroing on Spain."

 

GROWTH OF 4-6% FOR 2011 WITH ECONOMIC DECLINES REVERSED Channel News Asia

S'pore's Trade and Industry Ministry (MTI) reported 14.5% GDP growth in 2010, with 4Q GDP expanding 12% YoY.  It maintained its 4-6% GDP growth forecast for 2011 but raised the inflation forecast to 3-4% from 2-3%.

Inflation is also expected to rise to 5.0 to 6.0% in early 2011 before moderating in 2H 2011.


TAX CUT ON PROPERTY TAX APPROVED macaubusiness.com

The Legislative Assembly has passed a property tax cut bill.  The new bill reduces the tax on unleased flats from 10% to 6% and the tax on leased flats from 16 to 10%.  The bill also introduces a change allowing owners of unleased flats an automatic deduction of 10% on their taxable income.

FORMER GALAXY COO APPOINTED NON-EXECUTIVE DIRECTOR AT ARISTOCRAT macaubusiness.com

The board of Aristocrat Leisure Limited recently nominated David Banks as a non-executive director.  Banks was COO of Galaxy until March 2009.


Cupid's Bone

This note was originally published at 8am on February 14, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“And therefore is winged Cupid painted blind.”

-William Shakespeare

 

While the Greeks may disagree with Italians on this, Roman mythology tells the story of Cupid being the son of Venus, the goddess of love. In Latin, “cupido” means desire. And for America’s valentine this morning, this Hedgeye desires a strong US Dollar.

 

If you look at last week’s price action in Global Macro markets, strength in the US Dollar Index showered some love on some of the major global economic risks we’ve been pounding on for the last 3-6 months. While our call for Global Inflation Accelerating hasn’t adversely affected the US stock market, it’s hammered both bond and emerging markets since November.

 

Importantly, last week’s price action in the US Dollar Index was positive for the first time in the last 4 weeks. On a week-over-week basis the Burning Bone was up +0.54%, and while that’s not the type of long-term love you should get married to, in the immediate-term look what it did:

 

1.  CRB Commodities Index – deflated inflation by -0.3% week-over-week, and while that may not be by a lot, short-term love needs somewhere to start. This was the first week since the 1st week of January that the 19 component CRB Index didn’t close at a new intermediate-term high.

 

2.  Oil Prices – deflated big time with West Texas Intermediate crude oil losing -3.9% of its value on a week-over-week basis and breaking our intermediate-term TREND line of support at $86.98/barrel. While The Ber-nank’s driver probably didn’t talk this up on the way home Friday night, I can assure you this put some extra change in the hands of many American boys looking to buy roses after putting gas in their cars.

 

3.  2-year US Treasury Yields – inflated another +12% week-over-week to close out the week at 0.83%. This is good for the short-term rates of return on American savings accounts. Again, strong US Dollars find a funny way of empowering the gentleman in this country who is living on a fixed income to maybe buy an extra rose for his sweetheart today.   

 

Albeit with a very short leash, even I found the love in my heart to invest some of the Cash in the Hedgeye Asset Allocation Model as the US Dollar rose throughout the week. On Wednesday February 9th, I hit my lowest Cash position of 2011 at 49%. C’mon little bulls out there, pucker up – I should get at least a little peck on the cheek for that…

 

While it’s sometimes hard for a US-centric stock market investor to hear anything from me other than I’m not levered-long everything US Equities here, I think we’ve been crystal clear that there are many ways to be Bullish On Inflation in your Global Macro portfolios.

 

Whether it’s leaning long in the S&P Sector exposures (last week we we’re long 2 of the 9 US stock market sectors and didn’t have anything on the short side) or leaning short in emerging market equities and US Treasury bonds, there’s plenty out there for we men and women of the risk management gridiron to fall in love with. In the Hedgeye Portfolio 14 of the last 15 positions I’ve closed have been gains.

 

That’s not to say you should love me. I have a hard enough time convincing my wife that that’s a good idea when my alarm clock blares in her room every weekday at 4AM. It’s just to say that being a risk manager means not losing money and, for those of us who still remember the wealth destruction of 2008, that’s the risk management face that more than just our mothers can love.

 

The bad news about Cupid’s Bone is that it can start burning again. Before we get too lovy-dovy with everything that benefits from a strengthening US Dollar, remember that President Obama is on deck to release his Burning Budget this afternoon. While we’d love to hope that our Big Government Interventionists will cut spending this Valentine’s Day, we are reminded that hope is not an investment process.

 

With the US Dollar Index’s rise to close out the week at $78.46, this is where it’s trading relative to our 3 core risk management durations:

  1. TRADE (immediate-term) line resistance = $78.72
  2. TREND (intermediate-term) line resistance = $78.98
  3. TAIL (long-term) line resistance = $81.67

Yes, tragically, love’s reach has its resistance levels too. And while we really want to believe that professional politicians in America will put the long-term health of this country and currency ahead of their short-term job security, that’s just a benefit of the doubt they don’t deserve.

 

On Friday I did a lot of selling in the Hedgeye Asset Allocation Model and some of it was in Fixed Income where we fortuitously covered our shorts on the lows and capitalized on a nice bounce on the long side for a trade. Versus last Monday’s Cash allocation of 52%, this morning we’re back up to 61% and here’s the complexion of the mix:

  1. Cash = 61%
  2. International Currencies = 24% (long Chinese Yuan and Canadian Dollars – CYB and FXC)
  3. US Equities = 6% (long Healthcare – XLV)
  4. International Equities = 3% (long Sweden – EWD)
  5. Commodities = 3% (long Oil – OIL)
  6. Fixed Income = 3% (long Treasury Inflation Protection – TIP)

As a reminder, my view of asset allocation is what I would be doing with my entire net wealth, not what someone with an institutional mandate to be fully invested is doing. Stylistically, we understand the differences. If you look back at what Hedgeye was doing 2 years ago, we were investing our cash position as Wall Street was cutting theirs. Now we’re in harvest mode, picking our spots.

 

My immediate term support and resistance levels for the SP500 are now 1316 and 1332, respectively. If the US Dollar Index were to hold its bid and look more American rather than Cupid’s Bone, I’ll definitely get more constructive on a lot of things.

 

Happy Valentine’s Day to my Laura, Jack, and Callie and best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Cupid's Bone - val1

 

Cupid's Bone - vall2


IF We Debauch

“We are firmly convinced that monetary and fiscal policy will continue to debase the dollar.”

-Ted Kelly (CEO of Liberty Mutual)

 

Liberty Mutual is an American insurance company that was founded in 1912 and currently sits at #71 on the Fortune 500 list. It has over 45,000 employees servicing global insurance products worldwide and has over $100B in consolidated assets. Their CEO made the aforementioned comment in a Bloomberg article yesterday by Noah Buhayar. No, Liberty didn’t pay me an advertising dollar for this paragraph.

 

Unlike The Ber-nank attempting to trade US Treasury bonds, this isn’t Ted Kelly’s first rodeo. He’s been CEO of Liberty Mutual since 1998 and his job is to manage bond market and duration risk. On the topic of real-time risk management, he went on to add that, “we are positioning our portfolio and our business to respond if inflation emerges.”

 

Notice Kelly didn’t say “when inflation emerges.” He said “IF” - and that’s a critical differentiator between a proactive risk manager (a portfolio manager) and a reactive one (a professional politician). Kelly isn’t alone in this line of thinking. Almost every world class risk manager in the world understands that governments that debauch their fiat currencies will impose an inflation tax on their citizenry.

 

The US Dollar Index backed off hard right where it should have yesterday. It closed down another -0.54%, keeping it below its intermediate-term TREND line of $78.98. Call me lucky or call me right in understanding how to manage risk around the price of the world’s reserve currency. Since starting the Hedgeye Portfolio 3 years ago, I’ve gone 18 for 18 in making profitable long/short calls on the US Dollar (UUP).

 

I’m not calling this out to pump my own tires. I’m calling this out so that the pundits who are out there cheering on Bernanke’s stock market inflation policy pay attention. Making calls on US Dollar declines helped predict bubbles in both US stocks (2008) and US bonds (2010). Sadly, unless President Obama starts listening to the likes of Ted Kelly, Bill Gross, and Jim Grant, it may very well take another US Dollar currency crisis to stop these Big Keynesian Central Planners in their tracks.

 

As a reminder, we first made our call on Global Inflation Accelerating in October of 2010, and from here on in we’ll be acutely monitoring the slope of inflation accelerating or decelerating with the following assumptions:

  1. IF we debauch the US Dollar, Global Inflation will accelerate
  2. IF we stabilize the US Dollar, Global Inflation will decelerate

That’s it. That’s the deep simplicity we’ve found in our multi-factor, multi-duration model. Remember, in principle Chaos Theory is grounded in uncertainty – so every risk management exercise starts with IF and every decision follows the THEN that’s driving correlation risk.

 

On our most immediate-term duration, some of the correlation risk associated with US Dollar Debauchery has burned off in the last 2 weeks. That’s primarily because the US Dollar was UP for the first week out of the last four. IF we debauch it from here, THEN that will change. Correlation risk gets fired up when the Buck Burns.

 

On the heels of yesterday’s US Dollar decline, here were some important Global Macro reactions to consider:

  1. Commodities – CRB Commodities Index inflated back up to its YTD weekly closing high level of 338
  2. Bond Yields – US Treasury Yields on the short-end of the curve popped back up to +0.84%
  3. Emerging Markets – Asian Equities ended their 3-day rally to lower-highs

Again, this isn’t complicated. Debauched Dollar is bullish for inflation (Commodities) and bearish for Bonds and Emerging Markets…

 

As you can see in the Hedgeye Portfolio (attached), alongside re-shorting the US Dollar this week, we re-shorted the following Macro positions:

  1. Indian Equities (IFN)
  2. Emerging Market Equities (EEM)
  3. Japanese Equities (EWJ)

Now as sure as the sun rises in the East, you can bet your Madoff that The Ber-nank won’t be talking about the interconnectedness that his Central Planning Policies and a Debauched Dollar have on Asian and Emerging Market currencies and/or their exports.

 

Let me illustrate this point (generally) with the example of how the USD is affecting South Korea:

  1. South Korean Won strength (born out of US Dollar weakness) = hurts SK Exports (50% of GDP)
  2. South Korean Import Price Inflation zoomed to +14.1% in January vs +12.7% in December = hurts SK Exporter margins
  3. South Korean Equities (KOSPI) have dropped every day this week and are now down -3.6% for 2011 YTD

South Korea’s stock market isn’t what we’d call an “emerging market.” Per capita GDP is 10x that of China and it’s an economy levered to both US Tech and Industrial demand (bearish leading indicators?). Since it’s the world’s 12th largest economy, the KOSPI recently moving to bearish TRADE and TREND in our risk management model is something worth paying attention to as you watch Bernanke and Geithner continue to erode the credibility of America’s currency today.

 

My immediate term support and resistance lines for the SP500 are now 1324 and 1339, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

IF We Debauch - ee1

 

IF We Debauch - ee2


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 80.33%
  • SHORT SIGNALS 78.51%

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - February 17, 2011


Equity futures are trading just below fair value following Wednesday's bounce following positive earnings from DELL and perceived MACRO trends. Political unrest in Bahrain and Lybia are center stage.  As we look at today’s set up for the S&P 500, the range is 15 points or -0.92% downside to 1324 and 0.20% upside to 1339.

 

 MACRO DATA POINTS:

  • 8:30 a.m.: Consumer price index, Jan., M/m est. 0.3%, prior 0.4% (ex food and energy est. 0.1%, prior 0.1%)
  • 8:30 a.m.: Net export sales (cotton, corn, soybeans, soy meal), Feb. 10
  • 8:30 a.m.: Initial jobless claims, Feb. 12, est. 400k, prior 383k; continuing claims, Feb. 5, est. 3893k, prior 3888k
  • 9:45 a.m.: Bloomberg Consumer Comfort Index, est. -43.0, prior -46.0
  • 10 a.m.: Mortgage delinquencies, 4Q, prior 9.1%
  • 10 a.m.: MBA mortgage foreclosures, 4Q, prior 4.39%
  • 10 a.m.: Leading indicators, Jan., est. 0.2%, prior 1%
  • 10 a.m. Philadelphia Fed., Feb., est. 21, prior 19.3
  • 10 a.m.: Bernanke, Bair, Schapiro testify on Dodd-Frank implementation
  • 10 a.m.: Fed’s Raskin testify on debit fees
  • 10 a.m.: Treasury’s Geithner Testifies to Senate budget committee
  • 10:30 a.m.: EIA natural gas storage change
  • 12 p.m.: Fed’s Lockhart speaks on Ireland and U.S. in Atlanta
  • 12:30 p.m.: Fed’s Evans speaks on economy in Rockford, Illinois
  • 1 p.m.: U.S. sells $9b 30-yr TIPS
  • 1:10 p.m.: Fed’s Fisher speaks in Houston on Fed, economy

EARNINGS/WHAT TO WATCH:

  • Fed ordered the 19 largest U.S. banks to test their capital levels against a scenario of renewed recession with unemployment rising above 11%, two people with knowledge of the review told Bloomberg
  • Apple’s Steve Jobs, Facebook’s Mark Zuckerberg, and Google’s Eric Schmidt are among executives meeting with President Barack Obama in San Francisco area today to discuss economy and job creation, according to person familiar with the private session
  • Bain Capital is weighing a sale or IPO of FCI, a French maker of electrical connectors valued at about EU1.6b, three people with knowledge of the matter say
  • KB Home may spend $600m-$700m on new land, mostly in Texas and California, this year as it expands its community count, CEO Jeffrey Mezger says
  • Samsung Electronics may take decision on developing TVs with Google software in 1H, Samsung’s TV unit head says
  • Aveo Pharmaceuticals (AVEO) will develop; commercialize cancer drug tivozanib with Astellas (ALPMY) outside of Asia. Aveo to get initial payment of $125m; $1.3b in milestone possible
  • Avis Budget Group (CAR) reported 4Q rev. $1.23b vs est. $1.19b
  • CBS Corp. (CBS) reported 4Q adj. EPS 46c vs est. 43c
  • Cliffs Natural Resources (CLF) reported 4Q EPS $2.82 vs est. $2.22
  • Express Scripts (ESRX) reported 4Q rev. $11.3b vs est. $11.6b
  • Itron (ITRI) forecast 2011 adj. EPS $3.95-$4.40 vs est. $4.41
  • NetApp (NTAP) forecast 4Q adj. EPS 49c-53c vs est. 54c
  • Peet’s Coffee & Tea (PEET) reported 4Q rev. $91.6m vs est. $95.2m
  • Rubicon Technology (RBCN) forecast 1Q rev. $34m-$36m vs est. $30.8m, EPS 62c-65c vs est. 50c
  • Skechers U.S.A. (SKX) reported 4Q EPS 7c vs est. 13c
  • Synopsys (SNPS) forecast 2Q adj. EPS 43c-45c vs est. 43c
  • Williams (WMB) said it plans to split infrastructure unit from exploration & production, boosts dividend by 60% to 20c

PERFORMANCE:


We have 8 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.

  • One day: Dow +0.50%, S&P +0.63%, Nasdaq +0.76%, Russell 2000 +1.02%
  • Month-to-date: Dow +3.33%, S&P +3.90%, Nasdaq +4.65%, Russell +6.03%
  • Quarter/Year-to-date: Dow +6.14%, S&P +6.26%, Nasdaq +6.51%, Russell +5.71%
  • Sector Performance: - Energy +1.33%, Materials +1.29%, Consumer Disc +0.81%, Tech +0.55%, Financials +0.54%, Healthcare +0.52%, Industrials +0.48%, Consumer Spls +0.27%, Utilities (0.22%).

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 1503 (+2196)  
  • VOLUME: NYSE 928.97 (+0.05%)
  • VIX:  16.72 +2.14% YTD PERFORMANCE: -5.80%
  • SPX PUT/CALL RATIO: 1.88 from 1.79 (+5.05%)

CREDIT/ECONOMIC MARKET LOOK:


Treasuries were weaker today with some of the adverse takeaways from the economic calendar offsetting continued geopolitical concerns in the Middle East.

  • TED SPREAD: 20.80 +0.101 (0.490%)
  • 3-MONTH T-BILL YIELD: 0.13%
  • 10-Year: 3.62 from 3.61
  • YIELD CURVE: 2.76 from 2.77

COMMODITY/GROWTH EXPECTATION:

  • CRB: 338.21 +0.57%; YTD: +1.62%  
  • Oil: 84.54 +0.79%; YTD: -8.33% (trading -0.47% in the AM)
  • COPPER: 443.75 -1.40%; YTD: -0.05% (trading -0.99% in the AM)  
  • GOLD: 1,377.05 +0.17%; YTD: -2.89% ( trading +0.17% in the AM)  

COMMODITY HEADLINES:

  • Cotton Rises Above $2 for First Time as Supply Tightens on Chinese Demand
  • Copper Falls to Two-Week Low on Stockpiles; Tin Slides Most Since November
  • Brent Oil Near Two-Year High as Protests Spread Across Middle East, Africa
  • Pan Pacific, Tongling Win Copper Fee Hike in Change to Six-Month Contract
  • Drought-Hit Wheat in China to Recover Even as Some Losses `Irreversible'
  • Tin Output From Indonesia May Extend Slump on Rains, Executive Forecasts
  • Gold Demand Rose 11% in Quarter on Jewelry, Investment, Gold Council Says
  • Food Prices to Rally, Soybeans May Outperform, Standard Chartered Predicts
  • Coffee Rises on Speculation Weather to Hurt Crops in Brazil and Colombia
  • Wheat Rebounds as China Drought May Curb Output, Boost Demand for Imports
  • Gold Imports by India Advance to Record on Jewelry Demand, Price Outlook
  • Palm Oil Drops for Third Day on Speculation Prices May Have Reached a Peak
  • India Food Inflation Slows to Two-Month Low as Winter Harvest Aids Supply
  • Rusal Trails Alcoa as Oligarch Delivers $12.8 Billion Snub to Shareholdersn.

CURRENCIES:

  • EURO: 1.3547 +0.21% (trading +0.06% in the AM)
  • DOLLAR: 78.223 -0.45% (trading +0.04% in the AM) 

EUROPEAN MARKETS:

  • FTSE 100: (0.08%); DAX: +0.04%; CAC 40: (0.03%) (as of 06:00 EST)
  • European markets trade mixed, having fluctuated either side of unchanged, with earnings in the spotlight.
  • Indices, close to 30 month highs, appear on hold with unrest in Bahrain raising the possibility of further political contagion across the region
  • The Bank of England's latest economic forecasts underestimate upside risks to inflation, and interest rates need to rise faster than markets expect to bring it back to target, according to Andrew Sentance. "My judgement is that the upside risks to inflation are understated in the published fan charts. And monetary policy would most likely need to be tightened faster and by more than the markets currently expect to bring inflation back to target," says Sentence "The value of the pound on the foreign exchanges therefore needs to be one of the key areas of focus for the MPC as we seek to steer ourselves out of the current phase of high inflation," he said.
  • Spain's treasury sells €2.47B 2020 bond, bond average yield 5.200% vs 5.446% last auction
  • There are no major MACRO data points

ASIAN MARKTES:

  • Nikkei +0.26%; Hang Seng +0.63%; Shanghai Composite +0.10%
  • Asian markets were mixed tending up today, with markets getting a boost from positive sentiment generated by US performance.
  • Financials and energy companies led the rise in Hong Kong.
  • China announced new rules to curb speculative home purchases, causing China Resources Land and China Overseas Land & Investment to fall 2% each.
  • Profit-taking limited the advance in Japan.
  • Positive earnings from Qantas and Santos allowed Australia to finish with a slight gain of 0.17%. Qantas rose 5%, and Santos rose 3%.
  • China was flat after property shares fell 2-3% on new rules restricting speculative home purchases. Higher steel prices took steelmakers like Inner Mongolian Baotou Steel Union up by the 10% daily limit.
  • Taiwan fell -0.33%, but Acer edged up on announcing a $500M contract with Suning Appliance.
  • South Korea declined -0.60% after opening gains spurred by Dell’s earnings, falling to a loss as people took profits in shipbuilders and construction companies.
  • Japan February tankan manufacturing index +14 vs +11 prior. February tankan non-manufacturing index +3 vs (2) prior. December composite index of coincident economic indicators revised to 103.5, +1.1 points m/m, vs preliminary 103.1.

Howard Penney

Managing Director

 

THE HEDGEYE DAILY OUTLOOK - setup


PFCB – RISKS TO FY11 GUIDANCE

Comp trends improved on a two-year average basis during the fourth quarter at both the Bistro and Pei Wei, but fell short of the street’s expectations, particularly at the Bistro where same-store sales growth came in +0.1% versus the street’s +1.0% estimate.  At first glance, it appeared that PFCB’s reported $0.64 per share easily beat the street’s $0.57 per share estimate, but after a closer look, we learned that it was a low quality beat as a lower tax rate during the quarter added about $0.07 to $0.08 per share to earnings.

 

Management maintained its 10% FY11 EPS growth guidance; though off of the $1.95 per share base, which excludes the full-year tax benefit in 2010, rather than the reported $2.01 per share.  That being said, the company slightly lowered its revenue growth guidance to up 3-4% from its prior mid single-digit growth range and reduced its planned Pei Wei openings to 6-8 from 10-12 (company maintained its two-year goal to open 25-30 Pei Wei restaurants).

 

Management said that it expects to achieve 1-2% comp growth at both of its concepts during FY11 and seemed encouraged by the fact that comps at the Bistro and Pei Wei were running up about 1% quarter-to-date in 1Q11.  Based on recent two-year average same-store sales growth trends at the Pei Wei, I think the 1-2% full-year comp guidance is achievable and the high end of the range is likely.

 

I am more wary of the company’s ability to pull off +1-2% comp growth at the Bistro, however, as it implies a significant acceleration in two-year average trends throughout the year.  Although the +1% comp at the Bistro quarter-to-date signals the company is on the right track toward achieving +1-2% growth for the full year, it is important to note that the company faced its easiest monthly comparison from 2010 in January when comps declined 4.4%.  The comparisons get increasingly more difficult at the Bistro as we progress through the quarter (-1.8% in February 2010 and -1.4% in March 2010) and though the year with comps having turned positive in May 2010 and remained positive through November 2010.

 

PFCB’s FY11 guidance assumes a YOY improvement in restaurant level margins.  The bulk of this YOY favorability is expected to fall in 1Q11 as the company laps the nearly 220 bp decline in margin that occurred in 1Q10 as a result of inefficiencies associated with last year’s Happy Hour rollout.  Margins should be helped in FY11 from the growing contribution of PFCB’s global brands business, which is a high-margin business (management guided to a nickel more of earnings from this business alone in 2011 relative to its reported $0.01 per share earnings contribution in 2010).  Offsetting this benefit, however, is the expected inflationary headwinds which are expect to hit the COGS, labor and operating expense lines of the P&L.  Specifically, management guided to a 3-4% increase in its total commodity basket, higher wage rates and healthcare costs and increasing energy and supply costs.

 

In order to protect and grow restaurant-level margins in 2011 (as is assumed by management’s guidance), the company stated that it will rely on price increases at both of its concepts, improved traffic and operational efficiencies.  PFCB already took a small price increase at Pei Wei during the fourth quarter and anticipates implementing a menu price increase at the Bistro during FY11 (took its last price increase at the Bistro in May 2010).  What worries me about PFCB’s guidance is that it relies on both taking price and growing traffic to offset inflation.  Unfortunately, these two strategies do not always work in unison.  Instead, price increases often stunt traffic growth, particularly during challenging economic times.

 

Although management highlighted that it will only take a small price increase, they seemed confident that they have pricing power at both the Bistro and Pei Wei.  They also stated that some of the YOY price increase will result from eliminating some of the recent discounting on the fringe at the Bistro.  I would not be surprised to see a fall off in traffic when the company implements its price increase.  Regardless, the traffic comparisons get more difficult at the Bistro come 1Q11, which alone, will make it more difficult for the company to grow traffic going forward.   Traffic declined for the first time in 2010 during the fourth quarter when average check increased, not surprisingly, also for the first time in 2010.  Traffic declined 0.9% during 4Q10 and that was off of a negative YOY traffic trend in 4Q09.  Traffic turned positive in 1Q10, up 0.8% and remained positive in 2Q10 and 3Q10, up 2.6% and 2.8%, respectively.  Growing traffic on top of these more difficult comparisons, particularly with increased pricing and/or less discounting, will prove challenging and could pose a threat to the company’s full-year margin growth target.

 

PFCB – RISKS TO FY11 GUIDANCE - Bistro traffic vs. check

 

PFCB – RISKS TO FY11 GUIDANCE - Bistro SSS

 

PFCB – RISKS TO FY11 GUIDANCE - Pei Wei SSS

 

Howard Penney

Managing Director



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