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THE CONSUMER'S WAR OF ATTRITION

The Sisyphean fight that is Bernanke’s refusal to acknowledge reality is becoming more and more apparent to the consumer.

 

The other day, Darden reported softer than expected top line numbers, especially at the Olive Garden.  While management noted some issues with promotional offerings that did not resonate with the consumer, the underlying trends for the consumer are not as healthy as they were in 4Q10.  Clarence Otis, CEO of Darden restaurant said that higher gas prices “serve as a tax” on the consumer and that it had a “dampening effect on sales trends in February.”   Is does not look like the policies in Washington are going to change and the war of attrition consumers are facing looks to be continuing for some time to come..

 

The strong earnings season, positive conflicted government data, and it’s looking more and more like a Bernanke recovery and not a consumer recovery.  The fourth quarter of 2010, many have said, confirmed that a consumer recovery was in the bank.  Consumer data emerging in 1Q11 is now calling that view into question.

 

The expectation that the consumer will lead this recovery from start to finish is unreasonable.  the support mechanism are not there.  Yesterday the government reported that excluding the effects of changes in tax payments and Social Security contributions, disposable income would have risen 0.3% in February and 0.2% in January rather than the 0.3% and 0.8% reported.  Consumer prices, as measured by the consumer spending deflator, rose 0.4%, the fastest growth since June 2009.  Inflation rising, house price depreciating, and the looming prospect of interest rates increasing are factors that do not point to the consumer staying rock-solid throughout this process.

 

The consumer has no purchasing power on an inflation-adjusted basis and, when excluding transfer payments, the outlook is very negative.  At best, we can expect consumer spending to remain at its current level, but that would imply no meaningful increase in the savings rate or balance sheet repair.  Regulators are also proposing a draft definition of a “qualified residential mortgage” that could, when finalized, preclude all but the most conservative mortgages from being defined as “qualified residential mortgages”.  Under the proposed rule, among other stringent conditions, buyers seeking a mortgage to buy a home will be required to put down at least 20%.  As our Financials Team wrote this morning, the current version of the definition is expected to be a headwind to the housing market.  The current downward slide in home prices and the prospect of a new era of sky-high down payments is disconcerting to say the least. 

 

Not surprisingly, the Conference Board reported today that consumer confidence fell significantly in March; reaching a three year high in February.  As we have been highlighting in the past few consumer posts, the expectations component is largely driving the overall index and was again instrumental in March as it fell to 81.1 from 97.5 (previously 95.1); the present situation component rose to 36.9 from 33.8 (previously 33.4).  Overall, confidence fell to 63.4 from 72 (revised from 70.4).

 

As Keith alluded to in this morning’s Early Look, inflation is not a positive sign for a market experiencing 30-year highs in corporate margins.  The consumer’s margins certainly aren’t at peak levels and the pain is coming through in the numbers.

 

THE CONSUMER'S WAR OF ATTRITION   - conconfmarch11

 

THE CONSUMER'S WAR OF ATTRITION   - conconfexpmarch11

 

THE CONSUMER'S WAR OF ATTRITION   - conconfpresmarch11

 

Howard Penney

Managing Director

 


BERNANKE – PEEING INTO THE WIND

The Sisyphean fight that is Bernanke’s refusal to acknowledge reality is becoming more and more apparent to the consumer.

 

The strong earnings season, positive conflicted government data, and it’s looking more and more like a Bernanke recovery and not a consumer recovery. The fourth quarter of 2010, many have said, confirmed that a consumer recovery was in the bank.  Consumer data emerging in 1Q11 is now calling that view into question.

 

The expectation that the consumer will lead this recovery from start to finish is unreasonable.  the support mechanism are not there.  Yesterday the government reported that excluding the effects of changes in tax payments and Social Security contributions, disposable income would have risen 0.3% in February and 0.2% in January rather than the 0.3% and 0.8% reported.  Consumer prices, as measured by the consumer spending deflator, rose 0.4%, the fastest growth since June 2009.  Inflation rising, house price depreciating, and the looming prospect of interest rates increasing are factors that do not point to the consumer staying rock-solid throughout this process.

 

The consumer has no purchasing power on an inflation-adjusted basis and, when excluding transfer payments, the outlook is very negative.  At best, we can expect consumer spending to remain at its current level, but that would imply no meaningful increase in the savings rate or balance sheet repair.

 

Regulators are also proposing a draft definition of a “qualified residential mortgage” that could, when finalized, preclude all but the most conservative mortgages from being defined as “qualified residential mortgages”.  Under the proposed rule, among other stringent conditions, buyers seeking a mortgage to buy a home will be required to put down at least 20%.  As our Financials Team wrote this morning, the current version of the definition is expected to be a headwind to the housing market.  The current downward slide in home prices and the prospect of a new era of sky-high down payments is disconcerting to say the least. 

 

Not surprisingly, the Conference Board reported today that consumer confidence fell significantly in March; reaching a three year high in February.  As we have been highlighting in the past few consumer posts, the expectations component is largely driving the overall index and was again instrumental in March as it fell to 81.1 from 97.5 (previously 95.1); the present situation component rose to 36.9 from 33.8 (previously 33.4).  Overall, confidence fell to 63.4 from 72 (revised from 70.4).

 

As Keith alluded to in this morning’s Early Look, inflation is not a positive sign for a market experiencing 30-year highs in corporate margins.  The consumer’s margins certainly aren’t at peak levels and the pain is coming through in the numbers.

 

Howard Penney

Managing Director

 

BERNANKE – PEEING INTO THE WIND - conconfmarch11

 

BERNANKE – PEEING INTO THE WIND - conconfexpmarch11

 

BERNANKE – PEEING INTO THE WIND - conconfpresmarch11


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


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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


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


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.63%
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