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The following companies are currently enjoying positive same-store sales and margin growth as of the most recently reported quarter: CMG, BJRI, PNRA, SBUX, YUM (US), DPZ, MCD, DIN, PFCB, DRI, RT, MRT, KONA.  All of these companies, with the exception of DPZ and KONA, were operating with positive same-store sales and expanding margins during their most recently reported quarter.  Also, as one can see in the chart at the bottom of this post, these stocks saw significant price gains during the fourth calendar quarter.  It is important to note that, since the end of the fourth quarter, MCD, MRT, and RT have all slowed from a price performance perspective.


Last time around, I highlighted YUM China, TXRH, MRT, CAKE, and RT as five names that I believed were “moonlighting in Nirvana”.  As it happened, YUM China, TXRH, and CAKE dropped out of the quadrant into “Trouble Brewing”, the lower-right quadrant where same-store sales remain positive but margins are contracting on a year-over-year basis.  


RT posted a strong quarter for 2QFY11 and seems well-poised for the remainder of the fiscal year.  In the immediate term, 3QFY11 could show some weather-related top-line softness.  From here, I still believe that MRT faces significant headwinds from a margin perspective and could well drop out of Nirvana.


YUM China will likely face continuing labor, food, and paper inflation throughout 2011.  On the last earnings call, management guided to 5% food and paper inflation in China with wage inflation running in the mid-teens.   As of February 2nd, the date of the most recent earnings call, management expected the modest price increase taken by the company just before Chinese New Year to cover the majority of the company’s inflation expectations (at the time) for the year.  I would expect that inflation expectations may  have changed somewhat given that many foodstuffs have increased markedly over the last five weeks.  Clearly, given the record margins YUM enjoyed last year, driven by commodity deflation, some year-over-year margin contraction is to be expected.  It will be interesting to see if comps slow in China during this year as compares step up in difficulty.


As a side note to trends in China, MCD has reported that January/February (combined) same store sales in China were up mid-to-high single digits.


MRT is not contracted on any beef prices for 2011 and that commodity has risen sharply in 2011.  Management has expressed confidence in its ability to take price as business traffic has been increasing at their restaurants.  The company has indicated its willingness to take price if necessary to offset inflation.  Obviously, margins may come under pressure as beef costs are absorbed and top-line trends may weaken if price is passed on to the customer. 


CMG is a notable constituent of Nirvana at this juncture.  The top-line growth has been nothing short of spectacular but there are definite negative factors impacting the outlook for the company.  Commodity headwinds are impacting Chipotle at least as much as any other restaurant chain given their sourcing of food ingredients from the spot market in order to abide by their “Food with Integrity” mantra.  Labor costs are also a question mark from here; federal investigations of 50 Chipotle restaurants in Minnesota resulted in the firing of 450 workers for not possessing the appropriate paperwork.  An internal review of hiring practices in Washington, D.C., has resulted in a further 40 jobs becoming vacant. 



The Deep Hole quadrant has been vacated by a large number of names over the past two quarters.  SONC, JACK, and CPKI are still languishing down there, however, as same-store sales are negative and margins are contracting on a year-over-year basis. 


SONC is a name that has received a boost recently on the back of a sell-side upgrade and a preannouncement of 2QFY11 sales of between +1% and +1.5%.  While this will mean that SONC is due out of the bottom-left quadrant when 2QFY11 results are reported a week from Tuesday.   However, as I wrote on March 8th, compares are stepping up materially from here and the preannounced same-store sales range for 2QFY11 actually implies a slowdown in two-year average trends.  Interestingly, following a strong showing in 4Q, SONC is down almost 14% year-to-date.



The lower-right quadrant, “Trouble brewing” , is where YUM China, TXRH, CAKE, and WEN are operating at present.  With the exception of WEN, which is in the midst of a turnaround, each of these names has dropped from the upper-right quadrant as a result of declining margins in 4Q10.  WEN is a name that I have a bullish outlook on; the sale of Arby’s and simplification of the menu will lead – in my view – to continued top-line growth and leverage over costs as well as labor efficiencies.  WEN’s stock gains in 4Q were somewhat muted but, for the reason I mentioned above, the stock has performed strongly since mid-January.



The upper-left quadrant, “Life-line” is currently inhabited by EAT and BWLD.  BWLD is a unique company in the restaurant industry; continuing commodity cost favorability due to declining chicken wing prices is greatly boosting margins.  The company is vulnerable to an NFL strike and, as that situation seems to be worsening, it could definitely effect traffic at BWLD if the points of contention between the players and owners is not resolved in time to save the 2011 season.   The company’s stock price declined in 4Q10 but has outperformed year-to-date, gaining over 20%.


EAT is a name I have been positive on for some time.  Operational improvements and sales-driving initiatives are greatly improving Chili’s performance.  Sell-side sentiment is only just beginning to change on this name and I believe there is significant outperformance left for this name in 2011.  Following a gain of 11% in 4Q, year-to-date the stock has risen an additional 17%.  I believe it is likely that, as EAT reports 3QFY11 results, the company will be operating in “Nirvana”, with positive same-store sales and margins.





Howard Penney

Managing Director

Drawdown: SP500 Levels, Refreshed

POSITION: no position in SPY


All 3 factors (PRICE, VOLUME, and VOLATILITY) in my core immediate-term risk management model continue to flash bearish for US Equities: 

  1. Immediate-term TRADE resistance of 1311 wasn’t overcome on Friday
  2. Immediate-term VOLUME signals continue to flash very bearish (3/11’s DOWN day = +31% VOLUME study)
  3. Immediate-term VOLATILITY (VIX) for the SP500 continues to build upward momentum > 18.52 support 

Since we’re Duration Agnostic, it’s important to expand this view to our intermediate-term duration (TREND): 

  1. Intermediate-term TREND resistance for the SP500 remains overhead at 1343
  2. Intermediate-term TREND support for the SP500 remains lower at 1271
  3. Intermediate-term VOLUME and VOLATILITY studies support a heightening probability of a 1271 test 

On a downside test of 1271, I’ll probably get longer of US Equities. I’m in a good position to do that because I’ve proactively cut my US Equity exposure (Hedgeye Asset Allocation Model) from 9% last week to 3% this morning (sold Healthcare on the open – XLV).


No one said managing drawdown risk of -5.4% is going to be easy (1). No one here was saying you should chase US Equities into their February 18th top either. Waiting and watching for risks, ranges, and spreads will be critical in the coming days.


The crowd is still too long,



Keith R. McCullough
Chief Executive Officer


Drawdown: SP500 Levels, Refreshed - 1


Still on a pace for mid to high 30s% growth.



Through March 13th, table revenues were HK$7.3 billion month to date.  We’ve seen a slowdown compared to the last few weeks but we believe it is primarily hold related.  Nevertheless, we are now projecting full month March revenue of $17.5-18.5 billion, +33-40% YoY.  Based on just the first week’s data we had been estimating HK$1 billion higher.


In terms of market shares, SJM and LVS gained from week 1 at the expense of Galaxy.  Relative to their 3 month market share averages, LVS and WYNN remain below trend while MPEL and Galaxy are above.  We still see MPEL as delivering the most upside relative to consensus near term EBITDA estimates.



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Conclusion: Knapp Track comparable restaurant sales in February indicate that the casual dining recovery is slowly progressing.  However, a sizeable downside revision of January’s number from +0.6% to -0.1% is concerning.  Another factor that has been receiving a lot of attention is highlighted by Knapp in his report; gas prices have advanced to over $3.50 per gallon at a brisk pace.


Knapp Track preliminary results for February suggest that the casual dining recover, which took a pause of sorts in the fourth quarter, may be back in place.  February comparable restaurant sales of +1.6% signifies a sequential uptick in two-year average trends of 95 basis points.  The revision in January’s trends means that the sequential uptick in two-year average trends in January was 80 basis points.  Q4 saw a sequential slowdown in comparable restaurant sales to +0.6% from +0.8% in 3Q10.  At present, 1Q to-date is tracking at +0.8%, almost 100 basis points above those seen in 4Q on a two-year average basis.


Comparable guest counts in the casual dining space saw a sequential gain from a revised -2.2% result in January.  February’s preliminary decline of -0.4% shows that the recovery is far from secure, especially as gas prices continue to gain and discourage discretionary travel by automobile.   Additionally, an inevitable raising of prices from here could slow any further acceleration in comps.  On a two-year basis, February’s result implies a sequential acceleration in guest counts of approximately 60 basis points.  


We continue to favor EAT and PFCB.



Howard Penney

Managing Director

R3: HIBB, ANN, Russell, PERY



March 14, 2011






  • Hibbett Sports noted that the shift in “rapid refund checks” or RAL’s had a negative impact on the company’s sales of urban lifestyle products during 4Q.  Overall, this contributed to the company’s low single digit decrease in footwear comps.  However, the trend has changed notably since 4Q closed, with comps-to-date increasing 8% against a difficult 17% comparison.
  • Ann Taylor reported one of the most substantial increases in e-commerce revenues in all of retail during 4Q.  Ann Taylor increased by 74% while LOFT increased by 77%.  As a result of the recent success, ANN will be investing in the re-platforming of both sites to offer international commerce, improve checkout, personalization, and add mobile commerce.
  • In an embarrassing corporate moment, Russell Corp – makers of Russell Athletic, recently lost a copyright infringement lawsuit against actor Russell Brand. In 2008, the actor registered his name as a trademark for apparel and footwear products in the UK – a move that will enable him to sell his collection under his entire name while Russell Corp. can only use the “Russell” label.



Perry Ellis Purchases Anchor Blue IP - Perry Ellis International Inc. said Friday it has closed on its $500,000 purchase of all intellectual property assets of Anchor Blue Inc. The assets were purchased in a Delaware bankruptcy court proceeding, due to Anchor Blue’s voluntary Chapter 11 petition for bankruptcy court protection on Jan. 11. Anchor Blue, a Corona, Calif.-based teen specialty retailer operating primarily on the West Coast with 115 stores, is undergoing an orderly liquidation of its operations. Included in the IP assets Perry Ellis purchased are the Anchor Blue and Miller’s Outpost trademarks. A Delaware bankruptcy court approved the purchase on March 11. <WWD>

Hedgeye Retail’s Take:   With the purchase of Anchor Blue’s IP secured,  it’s likely we’ll see a wholesale line emerge in the not so distant future.


VF Corp.'s Growth Plan - VF Corp. is aiming to add $5 billion in revenue to its topline and $5 in earnings per share over the next five years. The Greensboro, N.C.-based company will focus its efforts on the outdoor and actions sports categories, expanding its direct-to-consumer channels and increasing sales in international markets. If successful, VF’s sales will reach $12.7 billion by 2015 and EPS will hit $11.50. The company expects to generate $6 billion in cash over the next five years and will direct that arsenal toward acquisitions, particularly in the outdoor and action sports arena, as well as dividends and potential stock buybacks. <WWD>

Hedgeye Retail’s Take:  Despite nearer-term cost pressures, management remains confident that the outdoor/lifestyle group can continue to be the company’s growth engine over the next five years growing to greater than 50% of total sales in the process.


Borders Scrambles to Be Lean - Borders Group Inc. hopes to exit bankruptcy-court protection by summer's end after getting a head-start on its restructuring by targeting 200 superstores for closure, Borders President Mike Edwards said in his first interview since the bookstore chain filed for Chapter 11 protection. Borders president Mike Edwards said the bookseller is receiving new titles from major publishers on a cash basis, thanks to its recent financing. Borders is exploring closing as many as 75 additional stores and hopes to present a formal business plan to publishers and other creditors in early April. The ultimate goal: exit bankruptcy in August or September, ready to ramp up business for the key holiday selling season, Mr. Edwards said. "You've got a window, and you have to move decisively," he said. The companies that have failed in Chapter 11, he added, held onto their money-losing stores too long. <WallstreetJournal>

Hedgeye Retail’s Take:  While emerging from Bankruptcy is a step in the right direction for restoring confidence with suppliers, we believe this just the beginning of the end for the struggling specialty retailer. 


Neiman’s Sees Ready-to-Wear Rebound - Shoes and handbags have led the luxury rebound, but ready-to-wear is showing signs of life, according to Neiman Marcus Group president and chief executive officer Karen Katz. “The big change between fall and resort was that the ready-to-wear business picked up pretty significantly. Trends for spring are selling very, very well,” Katz said, citing bohemian influences, corals, flat sandals and floral prints. A lack of color and fabrics that were too heavy dragged down the fall rtw season. “The minute we started receiving early spring and resort, the business in ready-to-wear started lifting,” Katz said. <WWD>

Hedgeye Retail’s Take: While non-apparel has largely been the reason behind luxury’s strength, these comments are notable coming from THE country’s leading luxury department store.


Gilt Groupe Sells Big Ticket Item on iPad - Score a big one for iPad commerce: The most expensive item sold on Gilt Groupe so far, a $24,000 vintage watch, was purchased by a shopper using the less than year-old tablet computer from Apple Inc., according to Chris Maliwat, vice president of product development for the private-sale e-retailer. He was speaking this week about iPad shopping trends at the Innovate 2011 conference in San Francisco. The conference was organized by the National Retail Federation, a trade group. Gilt Groupe, one of the leading companies in the growing online private-sale industry, launched its iPad app in April. The retailer, which has some 4 million members and sells products from more than 1,000 brands, says 177,000 consumers have downloaded its iPad app. As of January, about 100,000 consumers a month actively use the iPad app, he says, compared with about 300,000 a month for the flash-sale site’s iPhone app. <InternetRetailer>

Hedgeye Retail’s Take:  Not sure why this is newsworthy given the 14+ million consumers that have embraced the iPad as a new way access the internet.  Big ticket selling online is nothing new although flash sales selling $24,000 watches certainly is.


Cost Crisis Impacts Shoe Firms - For months, footwear manufacturers worried about the prospect of rising expenses for producing shoes. Now, thanks to big bumps in raw materials and labor costs, those fears are the new economic reality for the fall season. “Everything is going up like crazy,” said designer Stuart Weitzman. “It’s really the biggest story of the season, more so than whether a platform [heel] is important or not.” As previously reported in Footwear News, sourcing costs across the board, for labor, raw materials and shipping are slated to rise sharply in 2011. “The material costs are up and the labor cost also is significantly up this season, at least 10 percent, and some are higher than that,” said Maxwell Harrel, president of Corso Como. <WWD>

Hedgeye Retail’s Take:  Perhaps this shouldn’t be so surprising given the sharp increases we’ve seen in raw material, labor, and freight across the board in the apparel sector.  Leather remains a key culprit in y/y increases.


Quake Disrupts Key Supply Chains - The earthquake that struck northeast Japan Friday forced shutdowns across a broad spectrum of the country's industries, but the bigger impact for companies could come in the weeks ahead as the disruptions make their way through the global supply chain. The 8.9-magnitude earth quake, one of the largest on record, has crippled activity for now in a country that is a critical source of parts for consumer electronics, as well as a key producer of automobiles, auto parts, steel and other goods.  Plants don't appear to have suffered widespread, catastrophic damage, but production delays could be enough to affect some tightly calibrated industries. The earthquake affected operations at dozens of semiconductor factories, raising fears of shortages or price increases for a number of widely used components—particularly the chips known as flash memory that store data in hit products like smartphones and tablet PCs. <WallstreetJournal>

Hedgeye Retail’s Take:  This is likely to become a bigger story as time passes and existing inventories in key categories begin to diminish.


Pakistan: Tanners Association Urges for Reliable Supply of Utility - The leather industry in Pakistan is facing a decline in exports of up to 30%, partly due to a lack of basic facilities such as gas and electricity, said Khurshid Alam, chairman of the Pakistan Tanners Association (PTA). The Association has recently demanded the government to ensure uninterrupted supply of gas and electricity to tanners in the province of Punjab. He stressed that despite previous efforts to bring these issues to the attention of ministers, there has been no change. <FashionNetAsia>

Hedgeye Retail’s Take: With reliability of the country’s supply chain clearly in question, it seems highly unlikely that Pakistan will ever emerge as a leading global leather supplier.





The Macau Metro Monitor, March 14, 2011




There was yet another article out this weekend that had more details about the current LVS investigation aparked by Steve Jacobs' allegations.  Some interesting tidbits from the latest article include:

  • Apparently, not only is the SEC and and Justice Department looking at Sands' actions, but the FBI has joined the party as well. 
  • According to a Reuter's Investigative Reporting Program  (IRP),  U.S casino executives have discussed with U.S. diplomats the pervasive influence of the triads in the junkets for years - yet nothing has changed.  Some of these allegations included:
    • Provincial officials were providing "sweetheart" land sales, business licenses, and government contracts to junket operators, in exchange for bank deposits or cash sums paid to the officials upon arrival in Macau.
    • DICJ does not enforce its own reporting requirements
    • "All of the junket operators are directly or indirectly involved with the triads"
  • Manuel Joaquim das Neves, the long-standing head of DICJ, was quoted saying that,  "I cannot say that in Macau we don't have triads, but things are under control."



Community Development, Youth and Sports Minister Vivian Balakrishnan has assured Singaporeans that if the need arises, that more safeguards will be introduced to identify and protect those who are most vulnerable to problem gambling, at a forum for contributors to the government feedback portal, REACH.  He added that the casino novelty amongst locals is wearing off and the number of residents at the casinos is gradually declining.



The Government will launch the open tender of the Barra Traffic Nexus project in the first half of next year.  According to the Planning Coordination Taskforce, "the Barra traffic nexus will be an important hub for arrival and departure, transfer and articulation of the traffic between Macau and Zhuhai, the Macau Peninsula and the Islands, the old neighbourhoods and the new land reclamation areas.” The project is estimated to cost MOP 1.3BN and consists of a 3 floor building which includes pedestrian and shopping facilities, bike parking, and features 9,000 SQ meters of green areas and an outdoor bus depot which will be connected to the LightRail Train System (LRT).  Construction of the Barra Traffic Nexus is expected to be concurrent with the first phase of the LRT.



The construction of the Shiziqang tunnel, which commenced in Nov 2007, crossed the Pearl River in South China’s Guangdong Province with a length of 10.8 kilometers that allows trains traveling at a speed of 350 kilometers per hour, making it the fastest underwater tunnel ever built.  The Guangzhou‐Shenzhen‐Hong Kong express rail link is scheduled to be put into operation in 2012 which would slash travel time between Guangzhou and Hong Kong to 40 minutes from the current two hours and join with the country's express railway network.  This would shorten the trip between Hong Kong to Beijing to only 8 hours.



China’s CPI rose 4.9% YoY in February, same as January’s record and above the government's 4% target.  PPI rose 7.2% YoY in February.



China's trade deficit in February was recorded at US$7.3BN, the highest in 7 years due to the CNY holidays in the month. Exports grew 2.4% YoY in February while imports grew 19.4% YoY.

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