Over the past three years CBOU has been the second best performing restaurant stock behind GMCR, up 270%.  The stock powered ahead 30% in 2010, but has languished 6.5% do far this year.  The underperformance can be attributed to the significant increase in coffee costs and the challenges it presents.  Absent a significant increase in same-store sales the company will be hard-pressed to report any meaningful upside to EPS given the 27% surge in coffee prices year-to-date.


CURRENT GUIDENCE: During the 4Q call management maintained guidance for 2011, despite the fact that commodity prices have gone up.  Those aspects are: consolidated sales growth of approximately 7% to 9%, driven by 3% to 5% comparable coffeehouse sales, approximately 10 new store openings coming in the latter half of the year, commercial sales growth in the mid-teens to 20%, capital expenditures of $13 million to $15 million, skewed more towards the back half of the year. EPS guidance is (untaxed and fully diluted) $0.58 to $0.62, or approximately 26% to 35% growth over 2010.  On a fully taxed basis, our EPS guidance translates to $0.35 to $0.37.



SALES TRENDS QUESTION: The Q4 comp of 3.5%, could you give some detail on how much of that was related to check versus traffic, and perhaps could you comment on whether you think the snowstorms in the Minneapolis area in December might have hurt that figure and by how much?


ANSWER:  Yeah, so for the year, clearly traffic and ticket have been driving our comp store sales. We've talked in the past that the launch of oatmeal has added 1%. We were expecting our sandwich platform to add 2% on an annualized basis. Specific to the fourth quarter, we launched it across half of the systems, so that certainly helped us. And a lot of the other activity that we've done around ticket has helped us drive – and yet the snowstorm had some impacts. 


And so as we look forward, we continue to expect our food platform roll-out will – in the first quarter, we launched another tranche of stores on our morning breakfast sandwiches. We're working on lunch. We have other initiatives being teed up, all of which we see as both ticket and traffic-driving initiatives.



COFFEE COSTS: coffee commodity costs are expected to increase approximately 25% on a full year basis with a higher proportion of the increase being realized from deliveries in the back half of the year.  (Coffee prices increased another 10.4% in 1Q11). 


PRICING: We anticipate covering this commodity cost to increase through a variety of pricing actions across our lines of business and markets in line with our industry peers, as well as other cost reduction efforts.



QUESTION: Could you give us a sense for how much pricing you need to take across the business to cover the type of inflation that you might see, and maybe talk a little bit about how you plan to approach that in the various segments?


ANSWER:  Well, the way we look at it is for every 10%, sorry, increases in the C market, we can offset that by roughly a 1% change in overall pricing across the system. So as we look at our different lines of business, obviously specific to commodity costs on the commercial side of the businesses, coffee is a bigger percentage of the overall COGS mix. So we're looking at pricing increases in line with some of the peers that have announced.  And on the retail, the coffeehouse side, coffee is not as big a part of the mix in the overall COGS.  So we did take some price in the end of last year. On the retail side, we're phasing in some pricing across some of the other lines of business within commercial, and we're taking a phased approach, effectively really following what the industry is doing.



Howard Penney

Managing Director


Here is a look at BAGL’s inflation outlook as of the company’s most recent earnings call on March 3rd. 


BAGL is not a name I follow closely but, having observed a trend so far this earnings season, of companies missing on margins while meeting or exceeding top-line expectations, I decided that it would be informative to take stock of the inflation guidance for names that are due to report soon.  In general, the trend so far this earnings season has been for companies to raise their prior inflation guidance. 


It will come as no surprise, wheat costs are important for BAGL and are locked for the first half of the year.  Wheat represents 10% of the total commodity basket.  The trajectory of wheat prices as we head towards the second half will largely dictate the inflation that the company faces and the commissary margins at BAGL in 2H11.  Coffee costs are also significant for the company, comprising of 8% of the mix.  Coffee is 100% locked for the year. 


I believe that 2-3% overall commodity inflation guidance is more than likely conservative and will likely be revised higher.





Below, I have included some dialogue from the earnings call from March 3rd:


“And as I said, it's all about transaction growth and that's what we concern ourselves most about day-in and day-out, is ensuring that we continue to get that turnaround in transactions, clearly as we take pricing to hold margins in a time where commodity inflation's going up”



Question:  In terms of the commodities for next year, have you locked in any of the second half 2011 wheat contracts? And if so, do you have any commentary on that? And then in terms of other commodities, you mentioned wheat and coffee, but do you have any updates on maybe some of the other commodities, where they're trending, and what you're expecting for the year?


Answer:  Yeah.  Manny did mention that we did lock-in wheat only for the first half, and the reason for that is we – because in our work with our external team that helps us with our wheat buy – they're really indicating and we really feel that, that in the back half of the year that there's some opportunity I guess, in wheat prices weakening, if you will. So, it's the only reason we haven't locked deeper into the year than we have right now, but we do have the opportunity. So, we're covered on the upside and have the opportunity to lock-in at any time assuming that we feel that current estimates aren't where they – where we're expecting them to go.


The second piece – keeping in mind that wheat still only represents 10% of our total commodity purchase and that's an important piece for everyone to keep in mind as they think about our business trends. Overall, we're saying that our commodities will be in the – still in that kind of 2% to 3% range and that's an important element to know. And while there's been some short-term pressure on produce, as you all know, even that is in items that we think will work through quite quickly. Things like tomatoes and lettuce and some other items, because it's such a short growing season that we'll be back into the new fresh produce very quickly. So, we're working through that side of it. So, overall, as I said, 2% to 3% range and on a national basis, and we continue to monitor it very closely.



Question:  I was curious in terms of on the commissary side, last time wheat prices went up, commissary margins came under some pressure. Just curious what sort of guidance you might be able to provide us on how to think about that?


Answer:  Well, it's a really good question. It's one of the things I hadn't mentioned, and I meant to bring up. As we look at this cost team that we've pulled together, in addition to the packaging and inventory management and truckload, commissary is also another area, Bart, that we have – are really focusing on. So, well, last time, it did do that. We're, I would say, on top of the game, and we think that there's some efficiencies there, some good learnings that we've had. And I feel that that's an area that we can tighten up this year, and it might be another area for upside opportunity for us on a cost side as we sort of go through the year.



Question: And do you expect that 2% to 3% to be higher in the first half of '11 or the second half, or spread evenly throughout?


Answer:  We have it spread evenly through the year. Although on the second half, we do have – expect dairy to be a little bit better than in the first half. So, but for all intents and purposes, it's mostly even throughout the whole year.



Howard Penney

Managing Director


In preparation for MGM’s Q1 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from MGM’s Q4 earnings call.




  • “2010 for the city, visitor growth was about 3% and for this year, the LVCVA is predicting another 3% increase. We think there is upside to those numbers based on increased scheduled flights into Las Vegas, a stronger convention calendar, and the early booking pace that we are seeing already this year, particularly in the year for the year.”
  • "We saw increased spending across all of our Strip properties in January with a 17% tick-up in net non-casino revenues. Looking at it for the full year, we have approximately 1.6 million convention room nights on the books, which is a double-digit increase from the same time leading into last year."
  • "In January, for example, we were up 33% in inquiries and 150% in bookings in our incentive business, as compared to the prior year. So we’re on a good pace for 2011, and we expect to see our overall casino mix to be about 14%."
  • "And we have good experience as to what happens when our convention business grows. We saw that in last October. We’re seeing it right now and the convention mix helps us drive much better revenue, and reason why we believe REVPAR will be up all year in 2011 for our company."
  • “On the casino side, we continue to see strength in the international play. In fact, we had another all-time record in the city and for our Strip properties in 2010, including Aria, in terms of international volume…. We’re in the tail end of Chinese New Year’s, and we’ve seen very strong volumes here in Las Vegas… We flew about 15% more customers into Las Vegas this year than last. All of our suite product has been fully occupied through the whole period, with high-volume and high-value guests.”
  • “In January… we were able to improve our convention mix by four percentage points, and that all came out of the leisure segment…. convention segment has an average $50 to $70 ADR premium over our leisure segment.”
  • “We saw increased spending across all of our Strip properties in January with a 17% tick-up in net non-casino revenues.”
  • “We’re up in the teens in REVPAR in January, largely due to a very good convention calendar.”
  • “January was a great month for CityCenter, all around the campus with strong profitability in every element of the business.”
  • “Aria continues to experience exceptionally strong rate of play in baccarat. Year-to-date, through December, Aria has captured 23% of the Las Vegas Strip’s baccarat market share.”
  • “January 2011 REVPAR at Aria was the highest since opening, and exceeded expectations.”
  • “In conjunction with the opening of Cosmopolitan, and the adjacent pedestrian bridge just off the CityCenter’s footprint, we’ve seen a noticeable increase in foot traffic.”
  • Guidance for 1Q2011:
    • “Stock compensation expense… is estimated to be …$9 million to $10 million.”
    • “Depreciation expense… is estimated to be in a range of $160 million to $165 million.”
  • “We still believe… we’ll be able to have good pricing strength going into the second quarter as well.”
  • [Strip RevPAR] “We’ll be up, as Dan said, double-digit in the quarter.”
  • Q:  “Dan, you had mentioned that you’re expecting first quarter 2011 REVPAR to be up 10% or so, including the resort fees. If we were to exclude resort fees, could you help us out with that year-over-year change would be?”
    • A: “Excluding resort fees, we would expect it to be up at least in the high single-digits as a percentage.”
    • A: “At least. Like 7% or 8% or something”
  • "Convention forecast for Aria is about 14.5% for convention."

Early Look

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In preparation for the ASCA Q1 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from ASCA’s Q4 earnings call and refi/stock repurchase release.




  • Repurchased 26,150,000 shares of its common stock from the Estate of Craig H. Neilsen at a price of $17.50 per share, for a total price of $457,625,000.
    • "Excluding certain one-time costs, we expect the repurchase to be immediately accretive to Ameristar's earnings per share. The refinancing also reduces the weighted-average interest rate on the Company's outstanding debt from approximately 6.7% to approximately 5.4% based on current LIBOR rates and provides flexibility in the near term to retire significant amounts of debt, while preserving Ameristar's ability to take advantage of appropriate growth opportunities that may arise in the future."
  • Cash tender of $649.533MM of 9 1/4% Senior Notes due 2014 was validly tendered on April 26, 2011



  • "Accordingly, the margin declined by 2.2 percentage points, but remain very strong at 32.8%, it’s not strong enough from our perspective and we’re focusing very carefully on improving the margins at Black Hawk."
  • [St. Charles] "Our market share at about 26% and admissions have been pretty consistent for the last three quarters. There’s been a lot more movement back and forth over the last several month between the other competitors in the market and the new competitor seems to be taking more of a bite out of each of them than it does out of us."
  • [East Chicago] "We’re continuing our attempts to strengthen the property by proceeding with the renovation of the hotel rooms and working with the state and city on various road improvements that should enhance access to our property."
  • "We expect further narrowing of the year-over-year quarterly variances for St. Charles with the lapping of the entry of the new competitor in that market toward the end of the first quarter of this year and the lapping obviously has occurred with the East Chicago bridge closure, but also with – we will experience a change in a lapping of our direction and promotional spend in that market early in this year, also. We’re optimistic for continued year-over-year growth, as Gordy indicated, from our properties in our more stable competitive markets which are Kansas City, Council Bluffs and Vicksburg at the present times."
  • "Our Q1 2011 estimate for non-cash stock-based compensation expense will be approximately $3 million to $3.5 million. For the year, we anticipate it to be $13.5 million to $14.5 million, approximately approaching $15 million. That number will increase during the second half of the year. Our blended federal and state tax rate is projected to be between 42% and 43% for the first quarter and for the year. Capital spending for Q1 is expected to be in the range of $10 million to $15 million, which we anticipate will be predominately KC hotel expansion and maintenance CapEx. Total capital spending for 2011 is anticipated to be $65 million to $70 million."
  • "Net interest expense in Q1 is expected to be near $25 million. Non-cash interest expense is expected to be between $2 million and $2.5 million in the first quarter. Assuming LIBOR rates stay relatively stable, interest expense should decrease year-over-year in Q1 by approximately $9 million, due to the swap agreements expiring in July of last year and an overall decrease in our debt levels. We expect to generate significant cash flow that will allow us the flexibility to pay down $20 million to $25 million in Q1, and possibly $120 million to $130 million for the entire year. On the dividend front, assuming board approval, we will currently expect a first quarter dividend to be paid."
  • [Black Hawk] "And if we get the topline growth from the economy side, then there’s the potential for some margin improvement.
  • "We hope there’s margin improvement opportunities at other properties as well. It’s not just limited to Black Hawk. But Black Hawk’s hotel is still relatively new, and we think we can operate a little more efficiently there as we continue to build out the property’s performance. But with the flow-through and the efficiency of our operations we should be able to push some margin growth on a consolidated basis as well through the other properties."
  • [East Chicago] "There is work going on in terms of improving the local road access. That’s going a little slower than we had anticipated, but it’s gearing up."

Correlation Risk: SP500 Levels, Refreshed



There’s obviously a big difference between calling for a correction and a crash – and the best risk management position we can take right now is calling for both!


A crash in the US Currency that is, and a May-June correction in US stocks of -2.3-4.1%.


The USD and the SP500 currently have an inverse correlation of -0.82, so anything that resembles a bid in the US Dollar Index is going to have a big impact on this market’s beta.


Chasing beta? Join the club. If you are performing YTD, you’re definitely long some form of The Inflation (long Oil, US Energy Stocks, Russia, Gold, Silver, etc) – so just know the exposure you own; it’s probably not unique. Thank God I sold Suncor yesterday – now I can buy it back (praying when long correlation risk can be effective). In terms of Energy Stock exposure, we’re long Petrobras and short BP.


Across our 3 core risk management durations (TRADE, TREND and TAIL), here’s what I am currently seeing: 

  1. Long-term TAIL resistance = 1 range (don’t forget that for the long-term, all we are debating here is: "where do we stop making lower-highs?")
  2. Intermediate-term TREND support = 1310 (we V-bottomed in/out of that level when we wrote “Short Covering Opportunity” in mid-March)
  3. Immediate-term TRADE = 1349 support seems to be holding here intraday; a close below it puts 1310 in play (a -4.1% drawdown risk from recent peak) 

What’s fascinating here isn’t The Price Volatility (VIX up +15.2% this week on an SP500 drop of 60 beeps), but the storytelling of the Fiat Fools about “price stability.” Like the “shock & awe” begging of The Bernank (begging for rate cuts to zero in 2008, remember that?), sometimes we should be careful what we beg for…


It’s called Correlation Risk.



Keith R. McCullough
Chief Executive Officer


Correlation Risk: SP500 Levels, Refreshed - 1


I find this hard to believe, but the word inflation did not even come up on the CPKI 1Q11 earnings call.  This alone is an indication that the company may be underestimating the impact of inflation on the P&L, at least publicly. 


More importantly, the most recent guidance from the company, of 2.5% inflation for the year, was not even in the ballpark of reality, putting CPKI at risk of having to guide down.  CPKI is scheduled to report earnings on May 5th, after the market close.


It also should be noted that the Board authorized management to consider a wide range of financial and strategic alternatives to enhance shareholder value.  I believe that the chance of anything happening in terms of an acquisition of the firm is very slim.


MANAGEMENT COGS GUIDANCE: With respect to the full year, I have some concluding comments that might be helpful. Starting with commodities, we expect to see an increase of approximately 2.5%, which will impact our cost of goods by 50 basis points compared to last year. We also expect labor expense to decline by 80 basis points, due to our menu optimization initiative which was rolled out nationwide across all stores on February 1.


QUESTION ON MENU PRICING: When we think about your 2011 outlook and the new menu, can you give us a sense if you plan to take any pricing?


ANSWER: But we think that with the type of changes that we're making, it's going to address the value proposition significantly, and we will be looking to defend margins. And so we do intend to take price at that time.  In Q3 and Q4, you'll see us build on this success by reenergizing the brand, and although we can't discuss everything for competitive reasons, we do plan to launch a new menu design that Rick mentioned and several other compelling new products. Our research confirms that these improvements will resonate with our guests, drive traffic, and importantly, drive value and lay the foundation for future price increases to help protect margins.


COMMENTS ON SALES TRENDS: Seasonally 1Q is our lowest quarter in terms of weekly sales average and therefore represents our weakest leverage point within the year.  Additionally, the month of January resulted in a significant number of store closure days, which equated to over $1 million in lost revenue, and this in turn significantly deleveraged our labor line for the month.


ON CHEESE PRICE GUIDANCE: Did you say that cheese is locked in for the year at $1.63? I'm sorry, did you say?

Answer:  No, no. That's our average estimate as we think about the basket of 2.5%. We haven't taken out any forward contracts.



Howard Penney

Managing Director

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