DPZ – International Remains strong and the U.S. looks to be Improving

Domino’s Pizza UK and Ireland, one of DPZ’s top 3 international master franchisees, reported strong 3Q sales trends today. Same-store sales grew 8.8%, which is an impressive number relative to last year’s comparison of up 14.1%. Domino’s UK and Ireland’s 535 stores account for about 15% of DPZ international store base. DPZ has relied on the success of its international business (represents over 25% of DPZ’s operating income) to offset recent domestic shortfalls. Going forward, the company expects a greater mix of its sales and income to stem from its international business as unit growth accelerates internationally. For reference, in 2008, DPZ continues to expect to add 200-250 net new stores despite its forecast of net negative 50-70 stores domestically.

Recent NPD trends indicate a sequential tick up in July QSR pizza category traffic. I would also expect August to have been helped by the Olympics. These two data points along with the fact that DPZ is facing an easier U.S. same-store sales comparison in 3Q (0.8% in 3Q07 vs. 4.4% in 2Q07) should benefit DPZ’s U.S. numbers. A pick up in 3Q U.S. trends would complement DPZ’s already proven international momentum.

Dublin Down

Ireland’s ISEQ Financial index jumped 27.65% on Tuesday following the Irish government’s announcement that it will guarantee, in full, the deposits in the six Irish-owned banks and building societies, as well as their borrowings, for two years. Following the US Senate’s rejection of the $700bn bailout on Monday evening, it seemed that Irish stocks were likely to face another swan dive on Tuesday after Monday’s worst single-day performance in the ISEQ Index’s 25-year history. Anglo Irish Bank had lost 46% of its value on Monday, its biggest decline in two decades, largely as a result of the bailout of its German competitor Hypo Real Estate. Finance Minister Brian Lenihan felt compelled to act in the face of what he deemed “a huge liquidity famine” for the Irish economy.

While the move is attracting foreign deposits to Irish banks (cash is king), the move is certainly controversial. The government is effectively exposing the taxpayer to the collective liabilities of the six institutions – €400bn – while Irish GDP is approximately €190bn and the national debt stands is at €45bn. This constitutes a commitment of roughly 2x GDP. To put this in context, the proposed $700bn bailout in the United States amounts to 5% of U.S. GDP.

Mr. Lenihan insists that the government is not in the business of bailouts and will be charging the banks for the guarantee. The concentration of risk that the government is placing in the banking sector is massive and, as a result, raises questions about the viability of the economy. As a long-standing member of the European Union, Ireland’s guarantee has sent ripples throughout Europe. The scheme is said to give Irish banks an unfair advantage over foreign competitors. Furthermore, the fact that the guarantee applies to branches within Northern Ireland and Britain could enhance the perceived advantage. Authorities in Brussels are investigating whether or not the guarantee constituted illegal state aid.

Rory Green


Sometimes volatility has a directional bias.

Years ago when I was just starting out in the business I worked as part of a proprietary equity derivative group at a midsized investment bank. One of the market sentiment indicators that some of the old timers in the group followed were the difference between the put/call ratios for options individual equities and Indices. The theory was that Index options were primarily used as hedging instruments by large institutions while individual equity options better reflected the hedging and speculation of smaller investors –thus any divergence between the two ratios, particularly on a day with a major directional market move, was seen as a divergence in sentiment between big investors and the rest of us. During yesterday’s rally the put/call ratio for all index options cleared by the OCC exceeded the same ratio for individual equities by 83%. That is the only time that put buyers in the index market have outpaced put buyers in the single stock market by more than 60% on a day in which the S&P was up over 1% so far this year. Obviously the put/call ratios are currently skewed by the net-short ban on financial stocks but it’s still interesting to note that in the face of a 4.3% rally in the S&P 500 the put/call ratio for indices was so heavily skewed negative.

Andrew Barber

Early Look

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Primary Insights– BKC Sales Trends

Based on our “primary insights,” or “grass roots” proprietary research, which included a survey of various Burger King restaurant managers/employees, BKC’s U.S. solid top-line trends appear to have continued in September. Fifty percent of the respondents said they are experiencing better sales trends in September relative to August. About 33% of the restaurants surveyed said trends are stable with the month prior while 17% said sales have slowed sequentially. The two most cited drivers of improved trends were increased coupons/promotions and improved customer service. The former reason is somewhat concerning as same-store sales grew 5.5% at BKC’s U.S. and Canada segment in 4Q08, but margins still declined 230 bps (net of the reimaging program). Please refer to my post from September 28 for more “primary insights” details regarding recent discounting at BKC. Stable to slowing sales trends were attributed primarily to kids returning to school/vacation is over and the slowing economy.

BKC does not provide monthly sales data so we don’t know what trends were in August, but on its August 21 earnings call, management stated that July was a positive month and that it was confident BKC will continue to deliver quarterly consecutive positive comp performance throughout FY09. Management also stated that in 1Q09, however, the company is lapping 1Q08’s U.S. comparable sales growth of 6.8% (U.S. and Canada up 6.6%), its best quarter since the beginning of BKC’s turnaround in 2004. On average, the restaurants surveyed are seeing a 4.4% lift in same-store sales in September, which is somewhat slowed from the past two quarters of 5%-plus growth, but still a strong number relative to the comparison from 1Q08.

Casey From VFC's Meeting

Here are Casey Flavin’s thoughts after the kick-off dinner for VFC’s analyst meeting in So Cal. Some interesting tid-bits on acquisition strategy…
Sat with CEO at Dinner. He seemed confident in guidance they've given thus far and noted that he has "crystal clear" visibility on the cost side through the spring of 2009 due to locked-in prices. After that, they are assuming 3% cost inflation internally (which sounds low).

In discussing the timing of acquisitions and the fact that the company is going to be reliant solely on organic growth in Q4, Eric Weisman (rightfully) stressed that short-term deal timing is largely out of his control, and that he is focused on the multi-year plan.

Talked a lot about the process behind which VFC acquires brands. Sounds like this will be a part of the presentation at the meeting later today.

Last year, all of the acquisitions that were consummated were companies that came to VFC, not vice versa including Seven, which was totally unsolicited. Will VFC have to go after more candidates in ’09 instead of the other way around?

The company is typically in talks with 20-40 companies simultaneously at any given point in time. There is no significant uptick in discussions to note at this time; although VFC thinks/hopes that is very likely to tick up over the next few months.

Culture and financial position of the target is very important.

The company has looked at TBL, but to date there has been either a) cultural fit issues, b) management issues, or c) state of business issues that precluded a deal. [McGough: This sounds like a tonal change from my vantage point. Sounds like VFC won’t chase this one.]

Also discussed the rumor of an interest in UA. Bottom line -- not on the board for discussion.

Other nuggets:
a. Very positive on TNF opportunity in china
b. At the end of 2 yrs they will already surpass their 5 yr targets for that business
c. Essentially trying to create and outdoor brand presence over there like Nike has done with athletic footwear.
d. North Face is "well over a Billion" dollar brand
e. Wrangler is still substantially bigger
f. TNF and Vans is ~25% of total revs

Death of Libertarian Wall Street

“I call it a bottom. Not just for the stock itself, which happens to be the venerable Bear Stearns, but for the whole stock market, and for the long-suffering housing market, too” - Jim Cramer, March 21, 2008.

Something tells me Jim Cramer is not a Libertarian. Only about 200,000 Americans are actually registered Libertarians. How then can I declare the death of a movement that barely registers on the voter registry? Was it ever alive? Indeed it was. In a 1991 Library of Congress survey of the most influential books on Americans, The Holy Bible came in first. Nobody can credibly claim that Christianity was ever dead, at least not in this country. Number 2 on the list? The Libertarian manifesto: Ayn Rand’s Atlas Shrugged.

While they may not have known it, a huge number of Americans, including much of Wall Street, shared Libertarian ideals. I write that in the past tense. The shift away from Libertarianism involves more than just less free markets, but it is here where it is most glaring. When Wall Street cheers government intrusion into our economy by sparking 5% rallies and sells with even greater force any uncertainty to that intrusion, I see a cloudy future for economic freedom.

Surprisingly, it is not the Wall Street capitalists fighting against government interference. According to Rasmussen Reports, only 24% of Americans support the $700bn bailout and 60% think the government will go too far. Bravo. For Wall Street, supposedly comprised of the best and the brightest, to ignore the economic realities of the past is shameful.

Governments have stymied innovation and capital flow, turned recessions into depressions, created a lost economic decade (the 70s), and also subsidized and unreformed Fannie and Freddie, two of the biggest blemishes on our economy. And we are begging them to get involved again? Reagan once said “Government doesn’t solve problems, it subsidizes them.”

Well, Wall Street is certainly playing for a big fat subsidy to solve its problems. So I’m calling the end of an era; the death of our 25+ year relationship with Libertarianism. But I’m making it retroactive. The deathblow wasn’t AIG, Fannie and Freddie, or the current $700bn bailout plan. I look to March 17th, when our government decided it was necessary to bail out a rounding error of our economy, Bear Stearns. Government interference with Bear Stearns did nothing to aid housing, the financial sector, or our economy but it did do something. It reintroduced “Moral Hazard” back into our lexicon and sounded the buzzer for another tip-off of the serious game of socialism vs capitalism. Except it is not a game. It is our economic future.

Not surprisingly, world markets are generally up today, although not much, following the US lead from yesterday. It looks like the roller coaster ride in the US stock market will continue as futures are indicated sharply lower. No volatility relief in sight with our government driving the economic car. Today is the first day of the new quarter. Redemptions have been on everyone’s mind and by now funds know what they have to do. Be prepared for some crazy individual stock moves over the coming weeks.

Harvard economist Jeffrey Miron wrote an interesting piece on calling for “bankruptcy, not bailout.” Sorry Mr. Libertarian, this bailout is going to happen so let’s get on with it and we can start shorting stocks again. Libertarianism is losing and its opponent has almost all of the points. The refs are controlling the game. When the best team doesn’t win its called socialism.

Try and stay free out there.

Todd Jordan
Managing Director

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