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The Macau Metro Monitor, April 15, 2011




In February, the total number of non-resident workers in Macau stood at 79,500, up 2% MoM.  In September 2008, Macau had a total of 104,000 imported workers, but since then the number had continually fallen MoM until it rose back again for the first time in June 2010.



SJM CEO Ambrose So says he is upbeat about the development of Macau's gaming industry this year. So said positive factors for the gaming sector include the US QE that ‘will not tighten shortly’, the ‘very ample’ global money supply and the positive economic expectations of Asia as a whole.  SJM plans to offer more non-gambling elements if the plan for its Cotai project is approved. 



After four months of declines, sales of private residential properties in Singapore increased in March by 25% MoM to 1,386.



S'pore retail sales dropped 3.6% MoM in February and 12.1% YoY.



China GDP in 1Q grew 9.7% YoY, while China CPI rose 5.4% YoY, beating expectations of 9.4% and 5.2%, respectively.  Industrial production climbed 15% YoY in March; retail sales jumped 17% YoY; and producer prices gained 7.3% YoY.


Meanwhile, Industrial & Commercial Bank of China Ltd., the world’s largest lender by market value, said its bad-loan ratio is dropping and ruled out a worsening of asset quality from property and local government lending.




TODAY’S S&P 500 SET-UP - April 15, 2011

Today at 11am we are hosting our 2Q11 Global MACRO Theme conference call (email if you’d like to participate). 

  1. American Sacrifice  - a scenario analysis and calendar of catalysts for the US Dollar
  2. Trashing Treasuries – long of The Bernank’s Inflation, short US Treasuries
  3. Housing Headwinds II – part deux in the Josh Steiner chronicles of the best Housing work on Wall Street

As we look at today’s set up for the S&P 500, the range is 19 points or -0.50% downside to 1308 and 0.95% upside to 1327.




We now have 5 of 9 sectors positive on TRADE and 8 of 9 sectors positive on TREND.    


THE HEDGEYE DAILY OUTLOOK - daily sector view








  • ADVANCE/DECLINE LINE: 227 (+126)  
  • VOLUME: NYSE 894.31 (-0.73%)
  • VIX:  16.27 -3.84% YTD PERFORMANCE: -8.34%
  • SPX PUT/CALL RATIO: 1.58 from 1.68 (-6.21%)



  • TED SPREAD: 20.96
  • 3-MONTH T-BILL YIELD: 0.07% +0.01%
  • 10-Year: 3.51 from 3.49
  • YIELD CURVE: 2.74 from 2.74 



  • 8:30 a.m.: Consumer Price Index, est. 0.5% M/m, prior 0.5%
  • 8:30 a.m.: Empire Manufacturing, est. 17.00, prior 17.50
  • 9 a.m.: Net long-term TIC flows, est. 40.0b, prior $51.5b
  • 9:15 a.m.: Industrial production, est. 0.6%
  • 9:15 a.m.: Capacity utilization, est. 77.4%
  • 9:55 a.m.: UMich Confidence, est. 69.0, prior 67.5
  • 10 a.m.: Fed’s Evans speaks in NYC
  • 11:15 a.m.: ECB’s Constancio speaks in New York
  • 1 p.m.: Baker Hughes Rig Count
  • 1:30 p.m.: Fed’s Hoenig to speak on economy at Purdue



  • Pressure for CVS Caremark to split up increasing - NYT
  • T. Rowe Price considers exiting UTI Asset Management - Economic Times
  • Fed reports balance sheet assets of $2.67T on Wednesday, +$16.8B w/w and +$326.8B y/y
  • Broadcasters ask CRTC to look at regulating Netflix - Globe & Mail
  • Dunkin' Brands planning a summer IPO, says CNBC's Kate Kelly
  • Treasuries rise as the Fed and President Barack Obama consider cutting stimulus measures for the U.S. - Bloomberg
  • Groupon may pick Goldman Sachs, Morgan Stanley as lead underwriters for planned IPO later this year, said to value company at $15b-$20b: WSJ
  • G-20 finance ministers, bankers meet this weekend in Washington.


THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Quest for ‘Holy Grail’ of Super Corn Intensifies on Fertilizer Price Surge
  • Oil Heads for First Weekly Loss in a Month Amid Inflation, Demand Concern
  • Wheat Declines, Erasing Advance, as Russia and Ukraine May Add to Supply
  • Copper May Fall for a Fifth Day as Record Chinese Output Increases Supply
  • U.S. Probably Won’t Repeat Last Summer’s Record Heat, Forecasters Predict
  • Sugar Falls on Brazil Production, Reduced Goldman Forecast; Coffee Rises
  • Gold Is Little Changed After Reaching Record on Global Inflation Concern
  • Copper Production in China Climbs to a Record on Higher Fees After Quake
  • Orphanides Says Not Clear Price Pressures From Commodities Will Fade Soon
  • K+S Bets on Higher Potash Prices on Demand as Investments Constrain Growth
  • Toyota’s Molten Aluminum Turned Into Lump Shows Post-Quake Power Challenge
  • Commodity Trading Rules Are a Target for Worldwide Securities Regulators
  • Oil May Rise Next Week on Mideast Unrest, Saudi Output Cuts, Survey Shows  




THE HEDGEYE DAILY OUTLOOK - daily currency view




  • Moody's downgraded Ireland to Baa3 from Baa1; outlook negative.
  • Greek government will decide today on additional measures to cut its deficit.
  • Eurozone March final CPI +2.7% y/y vs consensus +2.6% prior revised to +2.4% from +2.6%
  • Eurozone March final CPI +1.4% m/m vs consensus +1.3% and prior +0.4%







  • Asian stocks were mixed as inflation and growth accelerate more than estimated in China.
  • The Chinese central bank may boost reserve requirements for lenders as early as today - Bloomberg
  •  Inflation in India also exceeds estimates at 8.98%.
  • China Q1 GDP +9.7% y/y vs cons +9.5%; March CPI +5.4% y/y vs cons +5.2%; March PPI +7.3% y/y vs cons +7.2%.
  • Japan revised February industrial output +1.8% m/m vs initial +0.9%.













Howard Penney

Managing Director

Currency Crash

“It would be very advantageous to allow the currency to appreciate as a way of controlling inflation.”

-George Soros, April 10th, 2011


That’s a very simple but critical comment Soros made last week at the Bretton Woods meetings in New Hampshire. He wasn’t talking about the US. He was talking about China.


He or she – whoever the overlord of policy making may be – should be thinking long and hard about what a US Currency Crash not only means for The Inflation that’s priced in US Dollars, but what they can do to fight it for the sake of their starving citizenry.


US Currency Crash?


It’s in motion folks – and if it happens, I think it happens in the next 3 months.


That should read as a bold statement, because it is… And the best way to put a picture with that prose and turn up some volume will be to dial into our Q2 Global Macro Theme conference call today at 11AM EST (email if you’d like to participate).


As is customary, Big Alberta and his Hedgeye knights have prepared the anchor with a 50 slide presentation that will lock us into making the risk management calls that we don’t think you can afford miss.


As a reminder, with the intermediate-term TREND overlay of Growth Slowing As Inflation Accelerates, our Q1 Global Macro Themes were:


1.  American Sacrifice  - a scenario analysis and calendar of catalysts for the US Dollar

2.  Trashing Treasuries – long of The Bernank’s Inflation, short US Treasuries

3.  Housing Headwinds II – part deux in the Josh Steiner chronicles of the best Housing work on Wall Street


This morning’s call will focus on what an expedited US Currency Crash could look like and the following Q2 Global Macro Themes:


1.  Year of The Chinese Bull

2.  Deflating The Inflation

3.  Indefinitely Dovish


While we realize we have a target on our foreheads for calling out places like The Lehman Brother, The Bear Stearn, and The Banker of America, we have grown accustomed to it and we wear it with pride.


Living a risk management life of consensus and strong buy versus maybe buy it after we tell our super duper clients to sell into you isn’t a life to live. At Hedgeye, the name on the front of our jerseys mean more than the ones on our backs. We don’t make contrarian calls for the sake of being contrarian. We make these calls because we think they have the highest probabilities of being right.


Maybe we’re a little artsy with our Soho office. Maybe we’re a little jocky with our dressing room in New Haven. But when we make a call, there is no maybe – it’s long or short – and it’s on the tape.


On the Currency Crash call, I’ll save the juicy details for 11AM. We didn’t need to have a super secret one-on-one in Washington with a “consultant” to the professional politicians to make this call either. Over the last 3 years we’ve made 19 long and short calls on the US Dollar – and we’ve been right 19 times – so we’re going to stick with the process on that.


On The Chinese Bull


Oh what a sexy call this one is going to be. The Hedgeyes versus the former roommate of a Yale Hockey player – Jim Chanos. We were bullish on China in 2009, bearish on China in 2010, and now we’re going to ride shotgun on this red bull before consensus does.


Last night’s Chinese GDP growth report beat our already above consensus estimate, coming in at +9.7%. While that’s a sequential slowdown versus the Q4 2010 China GDP report of +9.8% - that’s a deceleration in the slowdown – and on the margin, which is what matters most in making Global Macro calls, that’s what we call better than bad.


When better than bad is cheap (which Chinese equities are on an absolute and relative basis to both themselves and Asian Equities overall), that’s when shorts have to start covering. When better than bad is cheap and price momentum turns positive – that’s when Wall Street has to chase the asset’s price performance.


More on that and why we think Chinese inflation is setting up to deflate from the Elm City during our conference call. If it’s the beginning of the quarter, it’s Global Macro Theme time at Hedgeye.


My immediate-term support and resistance lines for oil are now $105.41 and $109.24, respectively (we bought our oil back this week at $106). My immediate-term support and resistance lines for the SP500 are now 1308 and 1325, respectively (we’re short the SP500).


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Currency Crash - Chart of the Day


Currency Crash - Virtual Portfolio

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 80.51%
  • SHORT SIGNALS 78.32%

CBRL - demand demolition

Cracker Barrel is, in my view, the most susceptible of all restaurant concepts to the demand destruction that is caused by elevated gasoline prices.  We charted CBRL traffic trends versus miles driven in our post on 4/12.  Today, the Hedgeye Energy team produced a telling chart today showing that gasoline prices are looking a lot like 2008. 


If gasoline consumption trends are rolling over, the miles driven statistics will follow.   CBRL has struggled to generate significant traffic growth for some time now.  From the second quarter of this year, it should slow even further.   At the very least, it’s difficult to argue that CBRL will see the pick up in traffic that the concept needs.  A combination of inflation and slowing same-store sales is not what we are looking for in today’s environment.


The following come from the Hedgeye Energy team in today’s note titled, “GASOLINE CONSUMPTION SHOWING EARLY SIGNS OF A 2008 REPEAT”:


MasterCard Advisors reported this week that US retail gasoline stations sold 9.02MM b/d of gas in the week ending April 8th – a 3% drop year-over-year.  It was the six straight weekly year-on-year decline, indicating that demand destruction as a result of higher prices has set in, and it is eerily similar to 2008.


In early May of 2008, with the price of Brent crude oil near $110/bbl and the regular gasoline at $3.60, gasoline consumption went decidedly negative for 30 straight weeks.  During that time (May 2008 – Nov 2008) the price of Brent crude oil went from $108/bbl in May to its mid-July peak of $145/bbl before crashing to $60/bbl in December.  Prices did not find a bottom until February 2009, near $55/bbl.  


In fact, in 2008 it was not until gasoline consumption was negative year-on-year for 12 consecutive weeks that oil and gasoline prices peaked and subsequently began their rapid declines in mid-July.


The fact that higher gasoline prices impair demand and economic activity is obvious.  What’s not so apparent is the threshold and timing at which it does so.  Recent history reminds us of the damage that high energy prices can have on asset prices.  With gasoline consumption negative for six straight weeks and the average price of a regular gallon of gas at $3.79, the spring of 2011 is beginning to look a lot like the summer of 2008…


CBRL - demand demolition - gasoline energy 



Howard Penney

Managing Director


A Tale of Two Asias

Conclusion: From a monetary and fiscal policy perspective, we continue to see a widening divergence between developing Asia vs. developed Asia, which is contributing heavily to the divergent paths of the real economies. Net-net, we remain favorably positioned to China and Singapore and bearish on Japan and Hong Kong.



Long Chinese equities (CAF);

Long Chinese yuan (CYB);

Bullish on the Singapore Dollar for the intermediate-term TREND and the long-term TAIL;

Getting constructive on Singaporean equities for the intermediate-term TREND and Bullish for the long-term TAIL;

Bearish on Japanese equities for the intermediate-term TREND and the long-term TAIL;

Bearish on Japanese yen for the intermediate-term TREND and the long-term TAIL;

Bearish on long-term JGBs for the intermediate-term TREND and the long-term TAIL; and

Bearish on Hong Kong dollar-based fixed income for the intermediate-term TREND and long-term TAIL.


Developing Asia: China & Singapore


Judging by our writing over the past three years, it’s no secret that China and Singapore continue to be our favorite investment destinations in Asia on the long side – be it equity, currency, or fixed income. That certainly doesn’t mean we’re married to these ideas, or perpetually bullish, and we have no problem managing risk around these long-term theses within narrower windows of duration. Key examples of this duration agnosticism include our decisions to put Chinese equities in the “penalty box” for the bulk of 2010 via our Chinese Ox in a Box theme and our decision to back off Singaporean equities alongside all other emerging market equities in early November.


As the positioning in our Virtual Portfolio would indicate, China is no longer in the penalty box, and we are getting incrementally warmer on Singaporean equities, as overly bearish consensus growth estimates are likely to be surpassed in the coming quarters.


From an absolute perspective, Singapore growth data lags China’s in our models by one quarter, meaning that we expect Singapore’s YoY GDP growth rate to bottom out in 2Q11 before reaccelerating in 3Q11. Tomorrow, China’s 1Q11 YoY GDP report should come in as both a sequential deceleration from 4Q10 and a cycle bottom, which sets the stage for a reacceleration over the next 3-6 months.


A Tale of Two Asias - 1


From a relative perspective, these rebounds in growth are likely to come at a time when global growth (particularly US and EU) is slowing sequentially – especially if crude oil prices stay elevated. That’s certainly not to say that China and Singapore are immune to this phenomenon and we expect high energy prices to impose a similar burden on these economies as well. That said, however, we do expect equity market investors to once again pay a premium for absolute, unlevered growth – particularly when it’s accelerating on a relative basis (i.e. we expect the “flows” to head toward China and Singapore in the coming months).


A Tale of Two Asias - 2


On a P/E basis, both China and Singapore are “cheap” relative to the last time their growth rates were accelerating on a relative basis to global growth.


A Tale of Two Asias - 3


Recapping recent economic data, we continue to see more signs of the resultant effects of sober and proactive fiscal and monetary policy in both countries. For instance, Singapore’s preliminary 1Q11 YoY GDP report showed a deceleration to +8.5% YoY vs. +12% YoY in 4Q10, largely due to a measured slowdown in manufacturing growth (+13.9% YoY vs. +25.5% YoY in 4Q).


This growth slowdown is a welcome event by Singaporean officials, as the county has been in a tightening cycle since mid-2010. Still, the robust QoQ SAAR growth rate (+23.5% vs. +3.9% in 4Q) was enough to strengthen their resolve to continue tightening, which they did by re-centering the currency’s trading band upwards (the Singapore central bank uses the Singapore dollar, rather than interest rates, to implement monetary policy). We welcome this proactive maneuver, as Singapore looks to continue warding off inflation, currently running at +5% YoY. This latest revaluation is a net positive for the Singapore consumer, given that we anticipate Singaporean CPI to accelerate into the early-to-mid summer months.


Shifting gears to Chinese economic data, we see that the main event is scheduled for later tonight (GDP, CPI, Manufacturing, and Retail Sales). This morning, however, we continued to get positive signs that the Chinese economy is responding well to the recent tightening measures. While both Money Supply (M2) and Credit growth accelerated sequentially in March (+16.6% YoY and +679.4B yuan, respectively), Total National Financing growth came in at 4.19T yuan in 1Q11 – down (-7.1%) YoY.


This new, encompassing metric includes bank lending, trust loans, corporate bond issuance, equity fundraising by non-financial companies, and other sources of capital accumulation, and it shows that recent PBOC efforts to combat inflation are having the desired impact. M2 and Credit growth rhymed with this reading when analyzed with a wider lens: M2 growth remains (-1,310bps) below its Nov ’09 peak growth rate and aggregate Credit growth fell (-13.3%) on a YoY basis in 1Q11. All told, we expect the Chinese equity market to welcome these depressed growth rates because they: a) give the PBOC headroom to slow the pace of tightening; and b) they provide stability for China’s long-term economic growth.


Developed Asia: Japan & Hong Kong


Insomuch as we love China and Singapore for the long term, we have an equal disdain for the Japanese economy due to its inability to grow organically – which is made worse by its massive sovereign debt load (north of one QUADRILLION yen) and the Japanese government’s heavy hand in its economy and financial markets. Hong Kong also remains in our penalty box, but for different reasons (reactive, rather than proactive monetary and fiscal policy) and to a lesser extent.


Take Japan for instance. In the wake of this recent string of unprecedented natural disasters, the BOJ did what it always does every time the Japanese equity market loses any meaningful amount of value – PRINT LOTS OF MONEY. Unfortunately for Paul Krugman, who advised them to do so in the late 90’s, the tactic has yet to create positive effects for Japan’s real economy. The effects of massive stimulus still remain muted in Japanese financial markets as well, with the Nikkei 225 still trading (-11.1%) below its Feb. 21 peak.


To their credit, however, Japanese officials (with the help of their G7 counterparts) did manage to successfully weaken the yen over the near term, as it trades (-5.4%) below its March 17th peak closing price. We continue to echo the sentiment put forth in our recent work, which effectively warns Japan’s bureaucrats to lay off attempts to weaken the yen due to the likelihood it causes a significant uptick in inflation and bond yields in Japan:


“History shows us that G7 intervention to weaken the yen has resulted in a significant uptick in inflation within Japan. In fact, if the G7’s plan to weaken the yen is “successful”, we expect the inflationary impact to be even greater this time around, particularly given Japan’s current staggering sovereign debt load and easy monetary policy.”

-Japanese Yen: Be Careful What You Wish For, Consensus… 3/18/11


In fact, we’re already seeing signs of the weak yen perpetuating inflation, as well as stirring up inflation expectations in Japan. Yesterday, Japan’s Corporate Goods Price Index accelerated for the fourth straight month, coming in at +2% YoY. Import prices accelerated to +9.4% on a YoY basis and we expect this trend to continue in the coming quarters as Japan accelerates purchases of raw materials and energy products in its rebuilding efforts.


A Tale of Two Asias - 4


A weak yen is definitely not beneficial for Japan’s rebuilding cause.  A (-29%) slide in the yen after the G7 intervened in the wake of the Kobe earthquake caused Japanese Import Price growth to peak at +15.1% a year later. This surge in raw materials costs was eventually passed through to end consumers as Japanese CPI accelerated from marginal deflation to +2.5% YoY in the ensuing months. Unlike then, however, we contend that the Japanese consumer is unable to absorb rising prices this time around – particularly after a near-decade long trend of wage deflation.


A Tale of Two Asias - 5


From an expectations perspective, we see that Japan’s short-to-intermediate-term inflation swaps are on the uptrend. In addition, expectations for a major uptick in future JGB issuance is putting a great deal of political pressure on the BOJ to fund the debt via monetization. If Shirakawa elects to go the route of former Japanese Finance Minister Korekiyo Takahashi, “look out above” is the only advice we’d offer to Japanese inflation and inflation expectations. For more details on how this is likely to end up over the long-term TAIL, please refer to our March 25 post titled “Japan: A Fiat Fool’s Game”.


A Tale of Two Asias - 6


Shifting gears to Hong Kong, we continue to see signs that inflation is a real problem in the former British colony. Hong Kong Property Prices have recently exceeded their all-time highs last seen in 1997 – shortly after the Asian Financial Crisis began. On a YTD basis (through Feb.), property prices have increased +7.2% YoY; this is on the heels of a +24% increase in 2010 and a +30% increase in 2009.


In waking up to this gravely concerning property bubble, Financial Secretary John Tsang had this to say:


“I am deeply concerned that overall property prices in February have surpassed the peak in 1997. I shall pay close attention to developments in the property market… The current abundant liquidity and low interest rates will not last forever. Neither will rising property prices.”


This rhymes with Bernank-style reactionary central banking strategy, whereby officials finally start to “pay close attention” to inflation when inflationary headwinds are beyond obvious and hint at tightening only after the bubble peaks. With GDP growth well above its historical average on just about any duration, it’s no secret that Hong Kong’s Monetary Authority should have tightened interest rates several quarters ago, as both Hong Kong’s main policy rate and real interest rate remain at all-time lows.


A Tale of Two Asias - 7


A Tale of Two Asias - 8


When Hong Kong’s property bubble pops (and it will), Indefinitely Dovish central bank policy should receive the bulk of the blame for any ensuing economic hardship. Princeton-trained economists will blame supply and demand imbalances, all the while ignoring the impact of incredibly dovish monetary policy on aggregate demand. We find this ironic, given that at the heart of Keynesian economics is a belief that monetary and fiscal policy can be used to increase or decrease said aggregate demand.


In Hong Kong currently, accelerating inflation (be it in housing, goods, or services) is depressing aggregate demand and causing citizens to take to the streets in protest with increasing frequency and severity. A growing imbalance in per capita income between Hong Kong’s elite and middle class is forcing the government to react to these violent demands, with the latest budget calling for the government to literally give away money to disgruntled citizens, many of whom will likely want more than the $770 handout that’s currently on the table when it’s all said and done.


All told, both Hong Kong and Japan show us just what happens to an economy when fiscal and monetary policy remains Indefinitely Dovish; structurally depressed growth rates (Japan), runaway inflation (Hong Kong), and civil discontent (both) are just some of the more pronounced ill-effects. Needless to say, our outlook for both Japan and Hong Kong is not positive on a long-term basis. On the flip side, however, we continue to like the proactive and sober monetary policy of China and Singapore and, thus, we remain favorability positioned to their financial markets.


Darius Dale



The last time I visited the KONA story, management was involved in a proxy fight with one of their largest shareholders, creating a big distraction for the entire enterprise.  While the shareholder is still one of the top holders of the stock, the dispute has, by and large, dissipated and management is now freed up to dedicate 100% of its attention on executing its business plan and generating shareholder value.  With the stock having treaded water for much of the past twelve months and the future looking brighter, I decided it is time to revisit this name once again.


Our bullish thesis on the KONA is rests on four pillars:


  1. KONA is relatively well-positioned at this juncture because, as a higher-end concept, its core customer is demonstrating a propensity to spend over the past few quarters as our High-Low society sustains itself.
  2. We estimate that comparable restaurant sales are trending at approximately 4% in 1Q11, bringing the two-year average trend to 0.8% for the quarter.  We expect acceleration in two-year average trends for the balance of 2011.
  3. Operational improvements, coupled with improving top-line trends, will allow for significant margin improvements over the next two years.
  4. In 2011, KONA will print its first profitable quarter since it became a public company.


I expect operational improvements implemented in 2010 to begin to flow through in 2011, along with the benefit of additional efficiency-orientated measures taken during the year.   These initiatives include phase four of the menu evolution and the benefit of five new remodels.  In addition, reduced litigation expenses will provide a $0.04-$0.05 tailwind for the company in 2011.


Longer-term , over the next two years, KONA will see a significant step up in profitability and also be re-accelerating unit growth, leading to improved shareholder confidence and a higher valuation.  Based on our 2011 EBITDA estimate of $7.2 million, KONA is trading at 6.0x EV/EBITDA, as compared to the average casual dining company trading at 7.0x.  Over the next two years, we estimate that KONA will grow EBITDA over 100% and potentially earn as much as $0.25 in 2012.  Based on the price of the stock today, assuming a 7x multiple on our 2012 EBITDA estimate, KONA is worth between $7.50 and $8.00, up over 55% from current levels.




KONA entered 2011 with some strong top-line momentum; posting a 6.4% increase in same-store sales in 4Q10, up 6.4% sequentially (4Q was the fourth consecutive quarter of positive traffic trends).   The top-line story for KONA has breadth and depth.  While the company does not report monthly comparable restaurant sales comps for all three months of the quarter, management stated in the transcript that approximately 75% of the comparable base of restaurants is expected to report positive comparable restaurant sales growth this quarter, with many reporting double-digit growth.


The increased momentum toward the end of 2010 was driven by menu improvement and new marketing initiatives driving awareness, increasing guest frequency and marginally boosting average check.  Currently, they are running 1.7% menu pricing, and will see an uptick in menu prices when the new sushi menu is rolled out in 2Q11.  We expect that KONA can maintain 4% same-store sales in 1Q11 and produce mid-single digit same-store sales for the balance of 2011.




As with most restaurant companies today, food inflation is the most concerning issue.  In 4Q11, cost of sales increased to 28.4% (up from 26.2% last year) and will be at that same level for 1Q11, according to current guidance.  KONA is experiencing significant year-over-year increases for beef, chicken and seafood.  Half of the 220 basis point increase was due to higher commodity prices and the other half was driven by upgrading the quality of ingredients.  In early January, KONA began to contract for certain commodities for 2011, but no contracts are available for certain seafood products. 

Off-setting the some of the food inflation in 4Q10 was lower labor costs.  In 4Q10, labor expenses decreased to 34.8%, as a percentage of sales, from 36.9% last year.  The lower labor cost is attributable to the leveraging of fixed management wages, hourly labor and benefit costs from the 6.4% increase in comp sales.   Going forward, labor costs should continue to improve incrementally as the company gains leverage from improving comparable-restaurant sales.


Restaurant operating expenses decreased to 16.7%, as a percentage of sales, in 4Q11 from 17.9% last year; lower operating expense is primarily due to lower repair and maintenance expenses and leverage over higher volumes. Looking out to 2011, KONA will see restaurant operating expenses around 15% of sales, down from 16% in 2010.  Occupancy expenses decreased to 8.0%, as a percentage of sales, during the fourth quarter from 8.7% last year.  KONA continues to try to squeeze landlords for abatements and rent reductions at certain lower volume restaurants.  All in, restaurant operating profit margin was 12.0% in 4Q10 compared to 10.3% last and for the full year.


The G&A line is an area KONA can continue to target for improvements in 2011.  In 4Q10, G&A declined $446,000 year-over-year, primarily due to a reduction in severance and legal fees partially offset by an increase in bonuses.  As a percentage of sales, G&A decreased 300 basis points to 7.3% of sales versus 10.3% last year.   In 2011 G&A should be roughly $7-$8m, or around 7% of sales.


KONA’s balance sheet is in great condition and the company around $2.0 million in free cash flow in 2011.  Unhampered by shareholder issues or balance sheet concerns, the focus is now on store-level execution and returning to profitability.  On this count, the company has initiated a plan of action that will allow for a significant improvement in profitability.  A theme that runs through all of the stocks we like on the long side is the active engagement, by management, in margin enhancement efforts despite the difficult commodity environment.  KONA is a good example of this and, we believe, represents an opportunity on the long side for investors.







KONA - GAIN ALPHA ON THE KONAVORE DIET - kona food vs alcohol


Howard Penney

Managing Director

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