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COSI - HEADED TO PROFITABILITY

The reported 4Q10 results and management’s comments from the conference call were all very positive for the company:

  1. The quarter ended with 10 months of positive same-store sales (and continues into 1Q11 with positive comps in January and February)
  2. The same-store sales trends in 1Q11 suggest that the company’s two-year average numbers are now positive in March.
  3. Restaurant-level cash flow in 4Q10 grew to $1.84 million from $1.72 million, up 7%.  Margin improved YoY for the second consecutive quarter, up nearly 130 bps.

The company has implemented a number of sales drivers, the most important of which, is online ordering.  During the past quarter, the company rolled out online pick-up to all of its company stores.  The company commented that they are seeing steady progress and adoption by consumers. 

 

Over the next couple of months the company is going to step up the communication and marketing of online ordering, which should drive significant incremental sales volumes.  Due to the urban proximity of the company-operated restaurants, the goal would be to drive an incremental 50 to 100 transactions per restaurant per day.  We estimate that this could add 20%+ to company store sales volumes.

 

Additionally, catering appears to be gaining significant traction.  In 2010, management made an investment behind catering to help them reach new clients and encourage increased frequency.  In late 1Q11, COSI launched a separate loyalty card program specifically for catering.  Catering sales trends in NYC have been so strong that the company added another sales person in that market to reach new customers. 

 

In 2010, the company made significant progress in reducing the company’s cost structure, which should lead to positive net income in 2011.  If the current trends continue, it looks like 2Q11 will be the magical quarter.  One thing to keep in mind is that with 51 million shares outstanding, the company needs to earn about $500,000 to report a $0.01 per share profit. 

 

 

COSI - HEADED TO PROFITABILITY - cosi comps

 

Howard Penney

Managing Director


LIZ: Positive Delta

 

LIZ’ guidance update provides us with a few nuggets on the state of business through February. There are puts and takes, but for a company that has only dished out disappointing news, this is somewhat of a positive. We still think that LIZ continues to have one of the most positive asymmetric risk profiles in  retail.  

 

In looking through the details of the release, the reality is that with the company maintaining its 2011 EBITDA outlook there is little to dissect here beyond the current sales performance within the company’s Direct Brands. As you can see in the chart below tracking comp trajectory by brand, sales have improved sequentially at both Mexx Europe and Lucky following disappointing December results, Juicy has picked up as well after decelerating in January and Kate Spade remains off the charts with comps up 90% YTD. These trends are consistent with an acceleration in the 2-year comps as well. Mexx Canada is the only negative callout with sales decelerating on the margin in February. As a reminder, while Fx is expected to provide a modest tailwind for Mexx in Q1, it provided a positive benefit of more than 6% last year suggesting that underlying sales are indeed improving. Overall, sales in the Direct Brands appear to be coming in slightly better than expected.

 

As it relates to Q1, the company also provided initial EBITDA guidance that suggests profitability is coming in lighter than the consensus (though LIZ did not offer any guidance before hand). The implied EBIT guidance suggests a loss of $57mm-to-$52mm compared to our estimate of a $29mm equating to EPS of (-$0.53-$0.57) vs. our (-$0.34E) and the Street at (-$0.27E) assuming a 25% tax rate. While likely due to a combination of both gross margin contraction as a result of both inventory clearance and inability to leverage SG&A, we expect the former to improve with stronger sales over the balance of the year and an update on the later at the analyst day in April.

 

It’s also worth noting the timing of the analyst day which was moved from the original date of March 31st. The sole reason for moving back the analyst day is due to management’s roadshow associated with the proposed offering of $200mm senior secured notes – the proceeds of which will be used to refinance the 5% Euro notes due July 2013 providing added flexibility.

 

Net/net, this is not a name without hair – the 1H was and continues to be one that is expected to be a choppy; however, with the full-year EBITDA outlook unchanged and sales trends improving on the margin, we view the announcement as a slight net positive for LIZ.

 

LIZ: Positive Delta - LIZ Comp Traj 3 11

 

Casey Flavin

Director


TALES OF THE TAPE: COSI, SBUX, BJRI, DPZ, THI, JACK, PNRA, BKC, WEN, YUM, DRI

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

  • COSI reported strong sales trends for 4Q10 and continues performance into the current quarter.
  • SBUX, BJRI, DPZ, THI and JACK are speaking at the JP Morgan conference.
  • PNRA was downgraded to neutral from buy at SunTrust Robinson Humphrey
  • BKC co-chairman of the board, John W. Chidsey, will resign next month.
  • WEN plans to offer a super-foods-based salad this summer containing blueberries, strawberries, almonds and a dressing made with açaí juice.
  • KFC have unveiled a bun-less burger known as the double in New Zealand.  According to The Age, it has double the chicken, double the bacon, double the cheese, and doubles your risk of a coronary.
  • DRI recovered nicely yesterday after trading poorly in light of earnings last Thursday after the close and Friday’s cautious commentary from management during the earnings call on Friday.

TALES OF THE TAPE: COSI, SBUX, BJRI, DPZ, THI, JACK, PNRA, BKC, WEN, YUM, DRI - stocks 329

 

Howard Penney

Managing Director


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - March 29, 2011

 

We are looking at the short end of the yield curve to tell us where the political wind is blowing – that’s where the politicization is – and we’re seeing a huge move higher in 2yr yields here, implying no Quantitative Guessing III (QG3).

 

As we look at today’s set up for the S&P 500, the range is 31 points or -1.39% downside to 1292 and 0.98% upside to 1323.

 

PERFORMANCE                 

 

As of the close yesterday we have 5 of 9 sectors positive on TRADE and 8 of 9 sectors positive on TREND.  The XLU is the only sector to be broken on both TRADE and TREND. 

  • One day: Dow (0.19%), S&P (0.27%), Nasdaq (0.45%), Russell (0.25%)
  • Month-to-date: Dow (0.23%), S&P (1.28%), Nasdaq (1.85%), Russell (0.2%)
  • Quarter/Year-to-date: Dow +5.36%, S&P +4.18%, Nasdaq +2.93%, Russell +4.86%
  • Sector Performance: Healthcare (0.03%), Consumer Staples (0.03%), Industrials (0.09%), Energy (0.24%), Financials (0.33%), Utilities (0.35%), Materials (0.46%), Tech (0.23%), and Consumer Discretionary (1.04%)

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING GLOBAL

 

EQUITY SENTIMENT

  • ADVANCE/DECLINE LINE: -587 (-1526)  
  • VOLUME: NYSE 784.29 (-4.91%)
  • VIX:  19.44 +8.54% YTD PERFORMANCE: +9.52%
  • SPX PUT/CALL RATIO: 1.82 from 1.99 (-8.92%)

CREDIT/ECONOMIC MARKET LOOK

 

Treasuries were weaker for an 8th consecutive session.

  • TED SPREAD: 21.07 -1.724 (-7.567%)
  • 3-MONTH T-BILL YIELD: 0.11% +0.02%
  • 10-Year: 3.47 from 3.46
  • YIELD CURVE: 2.66 from 2.67

MACRO DATA POINTS

  • 9 a.m.: S&P/CaseShiller Home Price, est. M/m (-0.44%), prior (-0.41%)
  • 10 a.m.: Consumer Confidence, est. 65.0, prior 70.4
  • 11:30 a.m.: U.S. to sell $40b in 4-week bills, $35b in 5-yr notes
  • 4:30 p.m.: API inventories  

WHAT TO WATCH

  • Wal-Mart gender bias case arguments heard by the Supreme Court
  • News Corp. said to be in talks to hand over control of Myspace to Vevo.com
  • U.K. government hosts meeting of foreign ministers in London to resolve differences among coalition partners on Libya
  • U.S. district court hearing for GM vs Allied Systems. If Allied systems doesn’t attend may be ordered to release the 1,704 vehicles being held at its facilities

 

COMMODITY/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Rising Corn Acreage Seen Failing to Meet Increased U.S. Feed, Ethanol Use
  • Crude Oil Trades Near One-Week Low in New York as Libyan Rebels Make Gains
  • Copper Declines for Fourth Day on Concern About Weakening Chinese Demand
  • Gold Drops for Fourth Day on Signs U.S. Economic Recovery Is Strengthening
  • Corn, Wheat Climb on Speculation Japan May Sustain Imports Following Quake
  • Commodity Gains May Exceed Forecast on Japan, Middle East, Goldman Says
  • Japanese Rice Imports Are Unlikely to Rise After Quake, U.S. Group Says
  • Sugar Gains on Speculation About Curbed Supplies From Brazil; Cocoa Falls
  • Corn, Wheat Demand in Japan ‘Resilient’ After Quake, FCStone’s Clancy Says
  • Cosco Singapore Says Japan Not Major Destination for Its Dry-Bulk Carriers
  • N.Z. Vegetable Exports May Increase on Japan Radiation Concern, Groups Say
  • Delta Spars With Morgan Stanley on Proposal to Curb Commodity Speculation
  • Copper Will Lead Base-Metals Rally on Shortage, Brook Hunt's Kettle Says
  • Rio Tinto Is Said to Discuss Acquiring Riversdale Shares From Brazil's CSNws

CURRENCIES

 

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

EUROPEAN MARKETS

 

MACRO DATA POINTA:

  • Germany Apr GfK index 5.9 vs consensus 5.8
  • France Feb Consumer Spending +0.9% m/m vs consensus +0.4%
  • UK Q4 Final GDP +1.5% y/y vs preliminary +1.5%
  • UK Feb mortgage approvals 46.97k vs consensus 46.0k
  • European Automobile Manufacturers' Association (ACEA) Feb Commercial Vehicles Registrations in the EU +16.8% y/y

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING EURO

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING EURO

 

ASIAN PACIFIC MARKTES


Most Asian market traded lower; China was the worst performing market in the region. 

 

MACRO: Japan February retail sales +0.1% y/y vs consensus (0.5%). Jobless rate 4.6% vs consensus 4.9%. Household spending (0.2%) m/m, matching expectations.

 

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING ASIA

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING ASIA

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

HEDGEYE RISK MANAGEMENT KEY LEVELS

 

THE HEDGEYE DAILY OUTLOOK - setup

 

Howard Penney

Managing Director


CHART OF THE DAY: Inflation in the U.S. is Up and to the Right

 

 

CHART OF THE DAY: Inflation in the U.S. is Up and to the Right -  chart


Instinctive Effort

This note was originally published at 8am on March 24, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“It is no other than the instinctive effort of every people towards liberty.”

-Bastiat

 

It’s both sad and exciting to watch Portuguese politicians fall on their swords of Keynesian storytelling this morning. And oh the irony of Portugal’s PM bearing the name of the great Greek philosopher. Socrates’ decision certainly adds to the philosophical field of ethics. For the first time, he’s actually doing what he said he’d do – resigning.

 

There is, of course, no ethics in assuming that you can plunder your people with deficits and debts without the rest of the world eventually noticing. That’s why Portuguese bonds continue to crash this morning (2-year Pig Paper yields hitting new highs of 6.83%). That’s how the broken handshakes are going to be priced in this brave new transparent world of Fiat Fool Finance – with a trashing of promissory notes that were based on lies.

 

Instinctively, whether you are watching American Idol or a piggy politician, you know when someone doesn’t pass the smell test. While fibbing is part of any political process, flat out lying is punished with much more asymmetric outcomes. There is an Instinctive Effort of every person in this world to find the truth.

 

The truth about sovereign debt is that more of it is not good. At least not when your country has crossed what we have called The Rubicon of deficit and debt ratios (as a percentage of GDP). As a reminder, those 2 critical risk management levels are as follows:

  1. Deficit/GDP greater than 9%
  2. Debt/GDP greater than 90%

If you are reading this note in America this morning, this should remind you that we will not be immune to crossing the proverbial Rubicon of Fiat Fool Finance.

 

Timing unknown. Fundamentals known.

 

As the Japanese press toward 210% Debt/GDP, if you didn’t know the Japanese Bureaucrats have already handcuffed their citizenry’s long-term liberty with these liabilities, now you know…

 

Socrates (the 399 BC one) was penning his thoughts about ethics 3 centuries before Julius Caesar finally crossed The Rubicon. For Caesar, that meant passing the point of no return. That was the beginning of the end for the professional politicians of the Roman Empire. On that historical score, today is a very good day for Portugal’s version of Socrates. The People refuse to be plundered.

 

As Bastiat predicted in 1850, in plundering The People, “in this you will not succeed… so long as the legal plunder is the basis of legislation within” (“The Law”, page 15). And behold that Instinctive Effort of The People of Portugal this morning – they refuse to let Big Government Interventionists plug them with austerity measures any longer. They’d rather see the aristocracy, who gets paid by the bond market, fail.

 

Back to the grind…

 

Not surprisingly, the immediate-term reaction in both US and European stock market futures to this “news” is that if the market isn’t going down immediately on this, well we better suit up in our BTD Gear and chase these suckers higher…

 

To a degree, this illustrates the continued short-term performance pressures building within the temples of the hedge fund community. For 2011 YTD, how else would you explain a stock market like Greece’s being the world’s best performer?

 

Drum-roll… it’s called short covering in consensus short ideas…

 

Been there, done that – and I’m actually still trying to do it every day. How does a “fundamental” long/short Risk Manager make money shorting Fiat Fool countries who think “This Time Is Different” (Reinhart & Rogoff, 2009) when anyone who hasn’t been living under a rock for the last 18 months knows how this movie will ultimately end? Evidently, you wait, patiently, on price.

 

As a refresher, there is this thing in risk management called mean-reversion. Those who subscribe to it know that what crashes, eventually bounces – and what bubbles, eventually pops…

 

For the year ended 2010, the 3 worst performing stock markets in the world were:

  1. Greece = DOWN -35.6%
  2. Spain = DOWN -17.4%%
  3. China = DOWN -14.3%

In 2011, for the YTD, the tables have turned:

  1. Greece = UP +13.9%
  2. Spain = UP +8.0%
  3. China = UP +4.9%

So, I guess it’s a good thing we’re long China after being bearish on Chinese stocks for the last year…

 

Ultimately, whatever crack-pot “strategist” tells you this all means Greece, Spain, and Portugal are all systems go now probably missed proactively making the call 2 years ago that these stock and bond markets would selectively self-destruct on multiple durations.

 

Net net net, our long-term call on this gigantic Keynesian experiment going very bad remains as follows:

 

1.   Crossing The Rubicon of deficits and debt ratios will ultimately result in governments and their promissory notes self destructing

2.   Debauching the value of fiat moneys will result in both Price Volatility and The Inflation

3.   Fiat Fools and their policies to inflate will ultimately go away

 

They won’t go away forever. That’s Wall Street. You always bring in a new cattle class to bank and broker commissions. But Roman history and 1970s Style Stagflation fans alike remember Caesar as well as they remember Nixon – with an Instinctively Effortless smell.

 

My immediate-term support and resistance lines for WTI Crude Oil are $101.78 and $106.98, respectively. My immediate-term support and resistance lines for the SP500 are 1280 and 1309, respectively. Manage your risk around these ranges.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Instinctive Effort - Chart of the Day

 

Instinctive Effort - Virtual Portfolio


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