Primary Insights Efforts – BKC Discounting

Our “primary insights efforts,” which included a survey of various Burger King restaurant managers/employees, showed that 78% of the restaurants surveyed are currently offering some type of corporate promotion/incentive. According to restaurant employees, these promotions include “buy one, get one free,” the Value Menu, and various meal coupons distributed primarily through newspapers and the mail. Most respondents agreed that the incentives have helped to generate more sales. We did not ask, however, how these discounts are impacting margins. On a more positive note, a handful of the BKC employees did highlight that the corporate office has introduced new and different sandwiches which are helping to drive sales.
  • As I have said before, discounting has become more prevalent across the QSR industry as restaurant operators attempt to drive increased traffic (often at the expense of margins), so BKC is not alone. Recent NPD trends also show that BKC’s percent of visits on deal has continued to tick up. The same can be said for the entire QSR hamburger category which has seen its level of discounting climb rather significantly since mid-2007.
  • We will follow up with other primary insights efforts results, including a look at BKC’s current sales trends.

Eye On Leadership: Volcker As Bailout Czar!

As Congress works over the weekend attempting to overcome partisanship and presidential election year maneuvering to pass the financial bailout bill, we continue to question the lack of leadership in Washington D.C. According to the Associated Press this morning, the bailout bill which was three pages in length a week ago now totals 42 pages, so the bill has increased in its length and complexity by 14x. In that period, Washington Mutual has gone bankrupt, which is largest bank failure in United States history.

We have reservations about government led bailouts in general, but our analysis of global credit markets continues to indicate that credit markets are tightening and the crisis will continue without some form of intervention. So our issue is not with the concept of intervention, but rather the leadership of the intervention. We have one suggestion - Paul Volcker.

In our opinion, the 6’7, cigar chomping Princeton graduate is the best hope for leadership in this crisis and both parties should come together to name him “Bailout Czar” with the role of managing the disposition of the $700BN+ mortgage securities that the U.S. government is about to take on its balance sheet.

As we have said repeatedly, facts don’t lie, people do. And the facts in regards to Volcker’s ability to manage through a prior fiscal crisis with integrity and against popular opinion speak for themselves. Volcker is rightfully credited with ending the United States’ stagflation crisis of the 1970s. Chairman Volcker abandoned interest rate targeting and adopted policy to limit the growth of money supply. His policies led to a sharp recession and were widely unpopular, but inflation which peaked at 13.5% in 1981 was 3.2% by 1983. Volcker was decisive, unpopular, but ultimately more right than any economic leader has ever been.

The only real issue with this proposal is that Volcker is as an advisor to Presidential candidate Barak Obama; so the Republicans would likely be reluctant to approve Volcker for the position. We would just remind partisan Republicans that the Democrat Volcker was appointed by President Carter in 1979 and reappointed by Ronald Reagan in 1983, an election year. As Treasury Secretary, Donald Reagan, said at the time of Volcker’s reappointment: “He’s the right man at the right time.”

While Hank Paulson getting down on both a proverbial and actual knee to ostensibly pander for bipartisan support for the “Paulson Plan” is an interesting image; and while we have no doubt Paulson is a “good man”, we just think it is once again time for “the right man”.

Daryl Jones
Managing Director
Research Edge LLC


One would be hard pressed to find a sector that benefited more from the easy money era than gaming. Unfortunately, for investors in many of these stocks we’ve come to the end of an error. Throughout most of the decade, gamers exploited the low interest rate environment to over invest and over leverage. Wall Street loved it. Long term IRR and ROI? Who cares? Growth and EPS accretion, where do I send the check? Gaming stocks outperformed the S&P by a wide margin over the past decade. As the chart shows, the level of outperformance correlated very closely to the inverse of the US corporate bond yield. In fact, the level of interest rates explained 62% (R Square=0.62) of the spread between gaming stocks and the S&P.

It should come as no surprise that gaming stocks have been pummeled by the recent credit crisis. Gaming management teams left their companies with super high leverage and significant debt maturities in an environment where cash flows are declining. As these companies refinance over the next year or two, it will become crystal clear how much they’ve over earned the past few years.

Of course, there are exceptions. There are companies on the right side of this liquidity trade. BYD, PENN, and WYNN all maintain low relative leverage and tremendous liquidity. The rest of the gamers have had religion crammed down their throats by the credit markets. BYD recently found religion on its own and suspended Echelon. WYNN and PENN never lost it.

Gaming stocks outperformed the S&P during the easy money era

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Japanese Stagflation Remains Reality...

Japan reported another 10 year high in their consumer price inflation number this morning. At +2.4% y/y, the August report remains as elevated as it was in July (see chart).

You do not want to be long an economy with a socialist government bailout policy. You do not want to be long an economy experiencing stagflation. Sound familiar?

We remain short Japan and the US via etf's (EWJ and IWM).

Please Ignore The 2:19pm FL Post

In my infinite wisdom, I entered FL instead of FINL in the headline. All other info is the same.


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…
  • 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.
  • 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.

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