How many people passed up buying MCD at $15 or SBUX at $10 because they were unsure of whether or not the brand can thrive and generate the revenue and profits it once did. 


You can make up 100 reasons not to buy a stock and they may all be valid.  However, finding a true turnaround story requires the ability to look past the inconsequential noise and identify positive change and value creation in a company.


Just for a minute, put aside any baggage you may carry about WEN (however justified) and take a look into what could be for a brand that has been lost for the past ten years. 

Wendy’s is traded up 7.6% yesterday on volume of almost 18m shares (+111% versus the 30-day average).  The story appears to be gaining more traction on the Street, but it is still untold with 67% of the sell-side analyst community having a hold or sell on the name.   Trading up above $5 at the time of writing, I think it could go far higher.


As a practice, we don’t set target prices but, if I were going to dream a little, I would have a $10 number in mind.  What would it take for Wendy’s to get to $10?  Such a move would almost be McDonald’s/Starbucks-esque and, while I recognize that Wendy’s is not a category leader and competes in a more competitive industry, I think it is possible.




The Wendy’s brand is very healthy and its current trends of positive comps in 1Q11 speak to the health of the concept.  Currently, management is guiding to 1-3% for 2011.  What if those expectation prove to be conservative.  Unlike a brand like Burger King, Wendy’s has a very loyal and broad customer base.  There is a possibility that the national rollout of the new cheeseburger in 2H11 resonates with the loyal customers and sparks increased usage of the brand.  The burger patty will also allow the company introduce more new product using the name of founder Dave Thomas.  


If management expectations for same-store sales prove conservative, this could provide significant upside in the stock.  The only incremental information from today’s earnings release and conference call was that comps were positive in February and will be flat-to-positive for 1Q.  The stock reacted positively to this and I believe additional improvement in comps would likely instigate another leg up in the stock price.




It’s obvious to those close to the company that the company has struggled trying to find an advertising campaign that resonates with the consumer.  As I alluded to above, the use of Dave Thomas’s name in the new hamburger could be that undiscovered marketing boost the company needs.  The Wendy’s advertising message has not resonated as strongly since Dave Thomas passed away.  Naming the new burger after him will allow the company to bring back Dave’s name and promote a message of the company going back to the basics that Dave endorsed such as high quality food and a high level of customer service.  I’m not sure how this is going to play out, but reconnecting the Wendy’s core customer to Dave Thomas could bring incremental traffic.


Initially, the company has a new advertising campaign, starring Dave Thomas daughter Wendy, which has seen a favorable response.  While this is unlikely to cure all ills for the brand, it is a start and indicates to me that management is taking a measured and targeted approach to how they drive brand awareness and image going forward.




All of management’s attention being focused on repairing Wendy’s margins over the next few years spells good news for the future.  It is important to note that the current improvement in margins has come from better operations and not leverage from increased sales trends.  Wendy’s margins have recovered from 11.6% in 2008 to 15.5% in 2010.  If the current initiatives have an out-sized impact on same-store sales, the concept is perfectly positioned to capture the flow from the increased sales volumes.  In the past cycles, Wendy’s margins peaked out at 16.5% (+/-) and the concept was never really managed with a surgical focus on operations.  Given the lessons of past business cycles and the new focus management seems to have adopted, who is to say that Wendy’s margins can’t reach 18-19%?




Investing alongside Trian could provide some upside to expectations.  In this environment (and given how troubled the brand is) just the announcement that there is actually a deal for Arby’s will be a net positive.  The Arby’s brand can benefit from being a standalone organization too.  Like Wendy’s, Arby’s needs to return to its roots and focus on operations.  This can't be accomplished as a secondary brand in a bigger organization.


Upon completion of the sale of Arby’s the WEN balance sheet will be in much better position.  The freed up capital will allow the company to buy back more stock, pay a dividend and increase the company’s domestic and overseas growth initiatives.  In the end, I would err on the side that the partners at train will come up with a deal that benefits there significant equity stake in Wendy’s.


I realize that this narrative seems far-fetched; for Wendy’s to get to $10 in two years, the company EBITDA will need to grow by 40-50%.  Yes, that seems like a big number, but if I told you two years ago that Starbucks EBITDA was going to grow by 43% by the end of fiscal 2010 you would have laughed. 


In the short run, management’s confidence in the company’s ability to grow margins next year in the face of commodity headwinds is also good news.  Again, this could prove conservative, if sales trends improve significantly in 2H 2011.  In 2011, a simply menu and investment in point-of-sale technology, coupled with sales leverage, are key to management’s optimism and I believe, having seen this strategy play out before, that the strategy will be successful.  The outline I have provided here may be fanciful and there are certainly a lot of contingencies attached to the path to $10 for Wendy’s.  Nevertheless, I see significant upside for this stock over the next two-to-three years and $10 may not seem unreasonable.


I also feel very comfortable in being out of consensus.  The sell-side community is very much not behind the Wendy’s story. 


Lastly, being bearish on MCD is bullish for WEN.  If you believe (as I do) that MCD is too focused on driving incremental sales from selling beverages not burgers, when WEN will be one of the bigger beneficiaries.


THE WEN DREAM OF $10 - qsr sell side sentiment


Howard Penney

Managing Director


A seventh consecutive month, albeit sequentially slower, of employment growth is supportive of quick service restaurant stocks.


The data, detailed in the chart below, show that the 20-24 year old age cohort saw month-over-month employment growth of +3.0% versus +3.6% in December.  Unemployment in this demographic, a key source of traffic for QSR companies, is extremely high on an absolute scale but growth in employment levels for this age group is encouraging.  Given that growth slowed on a sequential basis by 61 basis points, this data point is not as positive as January’s was.  The decline represents the largest sequential slowdown in employment growth among 20-24 year olds since October 2009.


QSR: EMPLOYMENT UPDATE - employment chart 34


MCD, SONC, JACK, BKC, YUM, and WEN have all mentioned unemployment among younger age cohorts as being a primary impediment to same-store sales growth over the past year or so. 

We will be watching closely to see how unemployment trends transpire over the next few months.  With significant commodity cost headwinds first and foremost in investors’ minds, a slowdown in unemployment growth among the key age cohorts would greatly exacerbate the impact. 


The chart below shows that for the first time since July, the Labor Force Participation Rate did not contribute to an understatement of the Unemployment Rate on a normalized basis.  I am using the trailing ten-year average Labor Force Participation Rate as the “normalized” rate to which I compare the monthly Labor Force Participation Rate.


QSR: EMPLOYMENT UPDATE - unemployment lfpr


Howard Penney

Managing Director



March 4, 2011





  • Zappos (6), Nordstrom (74), Men’s Wearhouse (87), and Aeropostale (94) are all retailers that made Fortune’s 2011 list of best companies to work for.  Number one overall was software firm SAS.
  • Keep an eye on Gap’s efforts to engage in new and creative promotional strategies.  This weekend the company will host its first “flash” sale which they are calling “Flashion”.  The 24-hour only sale focuses on just one item – a woman’s trench coat on sale for $50 (original price $89.95).  Probably not a needle mover but still something different from a coupon.
  • Kroger noted that overall inflation in the company’s 4Q was about 2.3%, driven primarily by higher meat costs.  In grocery inflation measured 1%, which marks the first inflationary quarter for the category after six quarters of deflation. 



Family Dollar Rejects Buyout, Adopts Poison Pill - rejected a hostile takeover offer from Nelson Peltz’s Trian Fund Management LP, saying it “substantially” undervalues its business, and adopted a defense to discourage unsolicited offers.  A plan outlined last year to accelerate store openings and remodelings, and to repurchase shares, is the best way to deliver value to shareholders, the Matthews, North Carolina- based discount retailer said today in a statement.  Family Dollar shares had fallen seven of the ten days since Trian’s offer Feb. 15, through yesterday, signaling investors were skeptical about the bid of $55 to $60 a share, or as much as $7.7 billion. Peltz, an activist investor who rarely buys entire companies, hadn’t arranged financing for what would be the biggest acquisition of a U.S. retailer in six years.  <Bloomberg>

Hedgeye Retail’s Take:  Take a look at today’s NY Post article for further insights into the company’s brewing battle with Peltz.  The article suggests FDO’s CEO was not amused to hear from Peltz just 15 minutes before Trian’s filing hit the tape.


Ugg Australia to Launch Luxe Collection - Ugg Australia is exploring life beyond the shearling-clad Outback with the launch of “rugged luxury” line Ugg Collection.  Ugg Collection by Ugg Australia is a 30-piece line of handbags and shoes, sourced in Italy, being introduced for fall. The collection has an earthy palette of olive green, black and tan, with pops of royal blue and leopard. Handbag silhouettes include the side-strap satchel, a slouchy hobo and an oversize weekender bag, in Italian Toscana leather, sheepskin, merino, suede and pony hair. Ugg Collection footwear was designed to harness the comfort of Ugg Australia in more upscale designs, with booties, stacked wedges and knee-high leather boots.  “A lot of our customers carry their designer handbag with the [Ugg Australia] classic boot, so we thought, Let’s give them something else that they can wear and still feel good [in],” said Leah Larson, vice president of product for Ugg Australia. “We’ve been known for quality, and we took that and put it into a couture fashion line.”  <WWD>

Hedgeye Retail’s Take:  Not the first time the company has looked to move into accessories in a bigger way, this effort appears to be far more likely to succeed.  Still only a small part of the business, the Luxe collection should in theory provide a fashion umbrella for which the more mainstream products will benefit. 


JJB Seeks Rent Cuts  in CVA- JJB Sports set out the details of its company voluntary agreement (CVA). Under the plan, the U.K. sporting goods retailer intends to shut 43 stores on or before April 24 2012 while keeping another 46 under review until the same date in 2013. The retailer will also pay landlords 50% of the contractual pro rata monthly rent ahead of closure and other sums. JJB will make a further payment of between £2.5m and £7.5m in cash or shares to landlords 'compromised' by the CVA. The exact amount will be linked to the company's market performance. All of JJB's stores will also move to monthly rents for the next two years. The CVA must be approved by creditors and shareholders at meetings on March 22. JJB chairman Mike McTighe said: "JJB's restructuring plan is on track. Last week we completed the first capital raising to provide short term finance for the group and delivered our revised business plan to Bank of Scotland. <SportsOneSource>

Hedgeye Retail’s Take:  JJB has long been “challenged”  making the company’s CVA seem like a long shot towards a profitable recovery.  With no buyer however, this is the only option left before more dramatic measures. 


Feldenkreises to Sell Shares of Perry Ellis - The Feldenkreises are set to cash in $16 million of their Perry Ellis International Inc. stock in a offering that was priced at $28 a share Thursday. George Feldenkreis, chairman and chief executive officer, and his son, Oscar Feldenkreis, vice chairman, president and chief operating officer, each registered to sell 300,000 shares of the firm, according to a filing with the Securities and Exchange Commission. After the underwriting discount, the sale of each share will reap proceeds of $26.60  <WWD>

Hedgeye Retail’s Take:  After a substantial run in which PERY shares went from $4 in early ’09 to $28 in 2011 it’s hard to fault the “family” for taking some money off the table. 


Tom Ford Renews Eyewear Agreement - Tom Ford International is set to take its eyewear to the next level. The American designer and Marcolin Group said Thursday they have renewed their current licensing agreement for the design, production and worldwide distribution of Tom Ford optical frames and sunglasses through December 2022. The original agreement was signed in 2005. Maurizio Marcolin, style and licensing director for the Marcolin Group, said the contract was renewed well ahead of its expiration date in 2015 because of the brand’s strong sales since the products were introduced in October 2005 and the desire on both sides to plan long term. <WWD>

Hedgeye Retail’s Take:  One of the most iconic Tom Ford branded products to date, it’s clear that this high-margin accessory is key to company’s growth strategy for many years to come. 


The Shopping Habits of Teens - Today’s teens have grown up with the internet, and their status as digital natives places them in the avant-garde of internet and technology use. eMarketer estimates that by the end of 2011, 96% of US teens ages 12 to 17 will use the internet at least monthly, significantly higher than the 74% penetration for the total US population. “The internet is not only fun, but is also indispensable for a host of tasks such as communicating, learning and shopping,” said Jared Jenks, eMarketer analyst and author of the new report, “Demographic Profile—Teens.” <eMarketer>

Hedgeye Retail’s Take: Near full saturation, an effective online presence is no longer an opportunity, but a necessity for teen retailers. Those who fail to keep pace will struggle to maintain/grow mindshare among this highly coveted demographic.


R3: GPS, KR, FDO, DECK - r3 3 4 11


Study Suggests Web Shoppers Browse more Before Buying - Online retailers are spending more on paid search ads to generate a purchase, which means they must sharpen up their bidding strategies, says search marketing firm NetElixir. Two facts lie behind the higher cost: Consumers are clicking on more paid search ads before making a purchase and the average cost per click was up 16% in January 2011 from January 2010, says NetElixir founder and CEO Udayan Bose. Bose says on average consumers clicked on 3.1 paid search ads before making a purchase in January 2011 versus 2.7 clicks in January 2009. They’re also taking more time to shop around—the time between the first click on a paid search ad and the purchase increased 12% in that two-year period. <InternetRetailer>

Hedgeye Retail’s Take: Simple supply and demand dynamics at play here given the growing U.S. consumer tendency to vet pricing more thoroughly online prior to actual purchase – however, with more comparative shopping sites surfacing we expect it unlikely to see the cost of paid search keep pace with growing online purchasing trends.




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Notable news items/price action from the past twenty-four hours.

  • WEN traded strongly yesterday as the Street warmed to their turnaround story.  February comps were positive and guidance for 1Q11 is for “flat-to-positive” same-store sales in the first quarter.
  • PEET gained 4.1% on accelerating volume as investors continue to price in the possibility of the coffee company being involved in a deal with either GMCR (consensus view) or SBUX (my view).
  • CMG is celebrating its 18th birthday by wrapping its burritos in gold foil for the next four months.  In addition to the foil, the company is adding an advertising campaign that includes outdoor, radio, and online elements.
  • CMG founder Steve Ells will feature on an NBC reality show, “America’s Next Great Restaurant”, which premieres Sunday.
  • DIN gained 1% on accelerating volume following its earnings release yesterday morning.
  • TXRH and CPKI also saw their shares rise on strong volume.
  • MSSR traded poorly, down 6.1%, on accelerating volume following a downgrade at Oppenheimer to Perform from Outperform.



Howard Penney

Managing Director



The Flows

This note was originally published at 8am on March 01, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The quality of the imagination is to flow and not to freeze.”

-Ralph Waldo Emerson


For those of you who dial into the Hedgeye Morning Macro Call every morning at 830AM EST, you know that the title and topic of this Early Look note is dear to my Canadian heart – The Flows.


In institutional investor speak, The Flows are where the fees are. For bulls, they foster the imagination. For bears, they focus the mind. The Flows represent your moneys. In a world “awash with liquidity” and sovereign debt, we don’t think you should trust. Bernanke Bubbles beware.


Last year, they flowed you into US Treasury Bonds and Emerging Markets. This year, outflow-you-go into the “safe havens” of US and Japanese stocks. Like the promise of Bernanke “buying bonds” in 2010, the promise of not “fighting the Fed” bears US stock market fruits from the heavens. Do not freeze men and women of the risk management gridiron. The chase for the last Dollar Debauched drop of equity returns is on.


The problem, of course, arises when The Flows run into these little critters called The Fundamentals. Understanding full well that our view of The Fundamentals is often 3-6 months ahead of Wall Street/Washington consensus (yes, sadly, they are now one and the same) is what it is – since October, our Global Macro view of the fundamentals remains Global Growth Slowing as Global Inflation Accelerates.


Thankfully, not every institutional investor understood the repercussions of Quantitative Guessing II (QG2) on Global Inflation Accelerating back then. Now those who bought US Treasury Bonds and Emerging Markets are being reminded that what flows into a said haven, flows out…


From EPFR Global, here’s the latest on The Flows (per their February 18th report):

  1. USA/Japan/Europe (Equities)  - “Investors pumped $47 billion into equity funds in the U.S., Europe and Japan this year after pulling $17 billion in 2010 and $28 billion in 2009.”
  2. Bonds Funds - “Investors added $2.44 billion to bond funds globally this year as of Feb. 16, down from $11.1 billion during the same period in 2010.”
  3. Emerging Markets - “Investors pulled $1.9 billion from developing nation stock mutual funds in the week to Feb. 23, the fifth week of outflows.”

Now, as we like to say at Hedgeye, what happens on the margin in Global Macro matters most. And on the margin, The Flows into the stock markets of Developed Economies have been huge. The most important risk management part of that last sentence is “have been.”


How long can The Flows trump The Fundamentals? How much risk gets entrenched into an asset class when the storytelling starts to follow the natural confirmation bias of positive price momentum? How many times do we need to see this movie before we learn the lesson?


These are all questions that have a much clearer answer now versus then. Whether you look at the opportunities to short US and Emerging Market Equities into the peaks of fund flows of 2007 or shorting the mountain tops of a bond market bubble in 2010, history writes itself as of last price.


As a risk manager who is shorting things almost every day, I need to be really sharp on timing and price. While many institutional marketing messages preface their buy-and-hold strategy with “you can’t time markets”, we should all be very thankful for that – many of them can’t. What we’re doing is preserving capital and making probability-weighted decisions, daily, with a fundamental Global Macro research overlay.


On the scoring of Growth and Inflation, this morning’s Global Macro Grind has some positives, but more negatives:



  1. Germany – unemployment fell to another new low of 7.4% and German Equities continued higher to +6% YTD (we’re long EWG)
  2. Canada – unlike US growth which was revised down again last week, Q4 GDP growth surprised to the upside (we’re long FXC)
  3. India – the government cut taxes and sent the stock market up +3.5% (we covered our short position in IFN at last week’s low)


  1. China – Producer Manufacturing Index (PMI) hit a new 6-month low of 52 last night (we’re long CYB as China continues to tighten)
  2. Mexico – Unemployment continued higher sequentially to +5.4% versus 4.9% last month (we’re short EWZ on Latin American inflation)
  3. Iran – Consumer price inflation (CPI) was up to +15.8% in JAN vs 12.8% in DEC (that’s before this massive oil spike and is instigating tensions)
  4. Japan – Industrial Production slowed again sequentially in JAN to +2.4% y/y vs 3.3% DEC (we covered our short position in EWJ last week)
  5. Spain – Consumer price inflation (CPI) was up again sequentially in FEB to +3.4% versus +3.0% in JAN (we have no position in Spain)
  6. USA – US Consumption in JAN, adjusted for inflation, was negative for the 1st month in a year (we’re short MCD, TGT, and XHB)

But there is no but in The Flows. They are what they are until they stop. All the while, I’m most certainly not going to freeze with a strategy to short-and-hold. For the last decade, that hasn’t worked inasmuch as buy-and-hold hasn’t . Not in a market where professional politicians are sponsoring a Burning Buck, The Inflation, and Price Volatility… We have America’s sad State of political leadership to thank for that.


My immediate-term lines of support and resistance for the SP500 are now 1311 and 1343, respectively. The US stock market should make another lower-high today – one that you should outflow from, provided that US Dollar Debauchery continues to sponsor Global Inflation.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Flows - flo1


The Flows - flo2

Enabling Success

“He is able who thinks he is able.”



When I started this firm, I had a simple goal – to democratize the risk management process of a hedge fund. What does that mean? That means showing the world exactly what it is we do, real-time, in a transparent and accountable way.


What does a hedge fund do? You’ll get a lot of different answers to that question – and as industry supply of hedge funds continues to expand, you’ll get more hedge funds who really don’t do what I do – hedge. Some strategies are simply levered-long versions of mutual funds that charge higher fees. Those hedge funds tend to blow up when markets stop going up.


Enabling Success in a hedge fund model is best achieved by having short positions that don’t hurt you when the market goes up. It’s a trivial exercise to buy something when everything is going up – that’s called beta. Managing losses is the key to this game – not chasing relative returns.


I don’t run money anymore, and a lot of people still ask me why. Three years ago, I thought I might eventually go back to doing it again – not anymore. I’m having too much fun building a real company with real cash flows. I absolutely love reading and researching so that I can put myself out there every morning. The challenge for me isn’t how much money I make, it’s how big of an arena I can play this game in.


I’m certainly not walking through these thoughts for any other reason than this is what I am thinking right now. I only have 45 minutes to write you these missives every morning – so I have to roll with what’s in my head. That requires a risk management process in and of itself – editors!


Enabling clients to look inside our risk management process seems to be the most empowering part of what we do. In order to Enable Success in this business, I think you need to let independent minds explain their research perspectives so that you can weigh them against your own. Whether our research is top-down, bottom-up, or quantitative – it seems to elicit plenty of feedback. Constant feedback enables success too.


How have we enabled this research platform to deliver an 81.6% batting average on the short ideas since inception in 2008? It certainly hasn’t been by sitting on my positions. Short-And-Hold isn’t a repeatable strategy across market cycles inasmuch as Buy-And-Hold isn’t. If you want to compound positive absolute returns on the short side over time, you have to keep moving.


Enabling Success on the short side of your portfolio is also driven by finding asymmetric opportunities. Since I attach the Hedgeye Portfolio at the bottom of this note every morning, you can monitor this real-time. But the upshot of it all is that you can witness a raging bull-run in US stocks and, at the same time, find ways to make money on the short side. If you broaden your scope, there’s always a short selling opportunity somewhere.


When I was younger, I was pigeon-holed into following US Retail and Restaurant stocks – so automatically, I was handcuffed to fishing in the creek that was in my area code. I was in the right place at the right time however, because 2000-2002 were bearish US stock market tapes, so there were plenty of names that were going down. Timing, like gravity, matters.


As I get older, I’ve simply broadened my horizons to fishing in oceans around the world across asset classes. At the same time, I’ve expanded my research team to 40 people (the largest team I managed at a hedge fund was 6).  


Enough about that. I just felt like writing about it this morning. I think it’s important to be transparent about what it is we do.


Since I only have 15 minutes left, here’s what I’ve been doing this week in the Hedgeye Asset Allocation Model:

  1. Reduced my cash position from 58% to 49%, taking advantage of some lower prices earlier in the week
  2. Expanded my invested position in International Currencies (Chinese Yuan and Canadian Dollars) as the Buck Burns
  3. Expanded my invested position in German Equities (EWG) where we remain bullish
  4. Bought back Gold on yesterday’s correction (GLD)
  5. Stayed long Oil and Grains (OIL and JJG)
  6. Stayed long US Healthcare (XLV) – my favorite US Sector alongside Energy

On the long/short side of the Hedgeye Portfolio, the main investment theme remains being long of The Inflation:

  1. Long Stocks with top line leverage to The Inflation (bought Petrobras (PBR) this week)
  2. Short stocks without pricing power whose margins get jammed with The Inflation (McDonalds (MCD), Target (TGT), etc.)
  3. Short Bonds and Emerging Markets – The Inflation is bad for them

Yes, there are some names in the Hedgeye Portfolio that aren’t working – there always are. There are also names that don’t always fit the top down and quantitative themes we’re focused on like a glove. These are names that my analysts like on either a turnaround or operating basis (SBUX, WEN, IGT, etc.).


Altogether, Enabling Success in terms of asset allocation, security selection, or net exposure is really best achieved managing your mistakes so that they don’t suppress your ability to generate repeatable absolute returns across market cycles.


My sincerest thank you to all of you who have enabled this platform to thrive. We don’t have to wake up every morning looking for some central planner in government to help us employ people. In an industry that is in dire need of evolution, you’ve enabled us to be the change we want to see in the world.


My immediate term support and resistance levels for the SP500 are now 1318 and 1342, respectively.


Happy birthday to my baby girl, Callie.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Enabling Success - yy1


Enabling Success - yy2

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