FL: 3.5 Weeks Not Enough To Kill A Year

Mr. Mo did not like the comp deceleration in the first 3.5 weeks of Sept. But I think FINL has 2 points of margin over a year, which is tough for me to find anywhere at 4.1x EBITDA.

Ok, I get it. Comps decelerated for the first 3.5 weeks of September. But a double digit hit to the stock? Clearly Mr. Mo had high expectations into this one. While he heads for the exit, I’m staying put fundamentally. Management’s cautious tone on the past few weeks will keep estimates low, and as noted this morning I think that FINL’s business and margins are on the upswing. I think FINL has 2 points of margin over a year, which is tough for me to find anywhere.

A couple of points to consider about the company’s tone…
  • 1) The way I am doing the math, if I assume the first 3.5 week’s erosion carries through the quarter, and then assume very little change in the multi-year run rate, I still get to a positive comp number by 4Q and EPS better than consensus. Beyond the overly simplistic ‘extend the trend’ mindset, I’m still firm in my view that we’ll see competition heat up between the major brands over the next 12 months, which will incrementally help FINL. I’m at a 5% comp by 4Q and earnings a dime (15%) better than consensus for the year. I’ll take that at 4.1x EBITDA.
  • 2) The trajectory of comp guidance is also noteworthy. The company had a massive miss one year ago. The tone suggested +lsd comps, and they ended coming in -4.7%. Not good. Then FINL’s business and tone about the upcoming quarter were cautious in January and April, and FINL came spot-on with plan. But then in 1Q09, FINL faced another significant deceleration after the first 3 weeks. Still reeling from wounds from a year ago (and from the past three years of pain), FINL does itself no justice in setting a high bar going into the back half.

Is the top for the Chinese Yuan in?

This didn't get much air time on consensus TV this morning, but that doesn’t mean that it doesn’t matter. The Chinese Yuan had its biggest down day since 2005.

Within the picture of the long term Yuan chart, Andrew Barber has highlighted the short term down move. The intermediate term "Trend" in the Yuan's strength is finally starting to deteriorate, and this is one of those big Queen Mary charts that the world will need to pay attention to if it were to turn.

The Chinese government cut interest rates for the 1st time this month, and as economic growth continues to slow, we do not think that the 1st cut was the last. Cutting rates should beget further weakness in the Yuan.

That would be deflationary for the world altogether. This is a movie that economic historians have seen before. It is global this time, indeed.

Restaurant Industry Financing Issues

So far this week we have learned that Bank of America and GE Capital will limit new loans to franchisees. We have already articulated how this might impact the MCD franchisee community, but there are others that are clearly impacted too.

The companies that are likely impacted the most are YUM, MCD, SONC and JBX and CKR. Outside of MCD, these companies are all in the process of pursuing rather aggressive refranchising programs. In reference to its goal to reduce U.S. company ownership to below 10% by the end of 2010, YUM management said, “Obviously the credit market conditions have affected refranchising efforts, and as a result the credit markets have increased their equity requirements for the buyer. Additionally, lenders have intensified their review process, which has added time to complete certain larger transactions. In this environment, therefore, it has become more difficult to complete larger deals, so we expect our transactions this year to be skewed towards smaller deals.” And, this comment was made before this week’s announcements regarding Bank of America and GE Capital. Unfortunately, nobody is immune in this environment.

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Short Selling Ban, Part V: Is Mr Ed A Bank(er)?

We have been very vocal in expressing our concern with the SEC’s ban on short selling financial stocks. Not only because the ban itself threatens basic free market principles, but the list itself is very arbitrary and includes many non-bank institutions. This morning the SEC updated the list and added 7 names, which included Sears Holdings (“SHLD”) and AutoNation (“AN”).

Is SHLD a bank? Our review of the FDIC website this morning shows that SHLD is not registered as a bank and according to SHLD’s 2007 10-K:

“We compete with a wide variety of retailers, including other department stores, discounters, home improvement stores, consumer electronics dealers and auto service providers, specialty retailers, wholesale clubs and many other competitors operating on a national, regional or local level along with Internet and catalog businesses, which handle similar lines of merchandise.”

In addition, SHLD’s actually breaks out revenue into merchandise sales and credit and financial products. In 2007, SHLD reported $50.7BN in merchandise sales and $0 in credit and financial services revenue. That is not a typo.

SHLD is not a financial company! It begs the question who is adding these companies to the list and why SHLD has been added. SHLD has been out of the credit business for more than three years, the stock is down only 8% on the year, and the borrow fee for shorting are in the mid 20% range (i.e. almost impossible to borrow and thus short). Not a likely target for protection from “evil doers” in our estimation.
Perhaps it was added because SHLD’s largest shareholder is ESL Investments, the hedge fund of former Goldman Sachs luminary Ed Lampert?

In adding both SHLD and AN, which comprise ~64% of the value of ESL Investments collectively, the SEC is doing nothing more than protecting the assets of a hedge fund manager.

We hear Ed is a good guy. We have nothing against him personally, or hedge fund managers altogether. They are the great equalizers of daily trading, provided that they are not selectively banned from the game.

Additionally, Lampert is a Yale guy… so he deserves our partisan Yale Blue bias up here in New Haven. It’s hockey season, and we all stand together in the stands! That said, Keith and I were Yale hedge fund managers too, and no one is giving us this club deal.

Daryl Jones
Managing Director

Wachovia (WB) Down -23% today; it should be down more...

Those "evil doer" short sellers aren’t the ones selling it either. Look at 2yr Wachovia bonds trading at 50 cents on the dollar.

In English, 50% chance of bankruptcy within 2years.

Chris Cox and “Investment Banking Inc.” can ban short sellers all they want. Gravity cannot be banned, in the end...

Charting Gold: We're still long GLD in the Portfolio

My short term price target in the gold etf (GLD) is $951. The Federal Reserve is going to be forced into the politically pandering the wind here, and cut rates on October 29th. Cutting rates de-values the US Dollar and re-flates hard assets like gold. The CRB index is up +3% for the week to date, and the S&P 500 down almost -5%. The intermediate term correlations between the US Dollar's "Trend" lines and that of US Equities continues to hold.
  • KM
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