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DPZ –The credit crunch hitting Franchisees

According to the Detroit News the global credit crunch is forcing some Domino's Pizza franchise owners out of business, as banks cut off loans even to long-standing customers with solid credit.

"The problem has gotten a lot worse," since the passage of the $700 billion bailout, said David Brandon, chairman and CEO of Domino's Pizza Inc. Brandon was in Detroit to speak to a group of entrepreneurs at Wayne State University Wednesday. But the bailout package has done nothing to ease the credit crisis that's slamming many Domino's pizza franchisees, just as it's hit owners of other chains. Tightened credit means it is much harder for franchise owners to borrow money for both short-term credit lines and longer term loans.

"It's a major crisis. We are talking about people who 20-year relationships with their banks and suddenly they are being turned away," Brandon said. "Many of our owners have three or four franchises. It's a very tough situation."

“Brandon wouldn't say how many stores Dominos has lost in the past few weeks, but acknowledged that the Ann Arbor-based pizza chain has lost stores at a far higher rate than in the recent past.”
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EAT – For what it’s worth….

Not that I matters, but I just need to go thru this exercise anyway.

Last night EAT announces that the company expects fiscal 2009 earnings per diluted share, before special items and excluding the results of Macaroni Grill, to decline between 15 -25%.

I now get EAT’s NTM EBITDA around $380 million. Using last night close of $13, that implies EAT EV/EBITDA at 5.7x. Normally, I could argue that the stock reflects the negative pre-announcement. I can’t say that today.

If the market takes EAT’s valuation down by 1 multiple point that would equals a decline of $3.75 or 25%. Unfortunately, that seems about right!


Firing The Tank

“If you can’t explain it simply, you don’t understand it well enough”
-Albert Einstein

The US Treasury, and most market strategists alike, were not explicitly calling for a market crash post the removal of their socialist supported and un-American “short selling ban.” Therefore it is very hard to rationalize why you should be looking to them this morning for solutions to this mess.

If your strategist, broker, or money manager is just coming to realize that managing risk in an interconnected global market of risk factors requires getting their feet on the floor before 5am, shame on them. They were not prepared to take advantage of this opportunity. Now they are reacting to it. If their “business model” is prefaced on getting rich by levering up your money, they should at least be at their desks when the game is on. Japan was down another -9.6% overnight, taking it down -24% for the week – that’s a crash that needed to be proactively managed towards and understood.

All of the losers in this industry will be pointing fingers this morning, tomorrow, and the next day. That’s what losers do. There are plenty of people who need to be held accountable. That will happen, trust me. If no one wants to call them out on to the mat, I will. Hank “The Market Tank” Paulson went out and hired an associate level banker from guess where, Goldman Sachs, to manage your government’s $700B bailout program. Hank hired another ‘Yes Man’ for the job. He should be embarrassed. Hank, it’s time for you to resign.

The US government’s resolve is to cut interest rates like Japan did, to negative, on a real basis. This is why the market goes down every day. People get it. Letting John Mack and his ‘Investment Banking Inc.’ cronies borrow free money at the Fed’s discount window at a record weekly pace does nothing but put more of your money into the hands of people have no proactive risk management process. Rather than American capitalism, this sadly reminds me of Denzel Washington’s recent movie “American Gangster”. Hank Paulson is playing Frank Lucas, and he is signing off on the issuance of “blue magic” bailout packages to the addicts. Morgan Stanley revealed yesterday that they are on the hook for a $2B casino in Atlantic City that they ingeniously committed capital to at the top of a global economic cycle! Maybe Mack, Lucas, and the Pandit Bandit can all head down to AC tonight and roll the bones with some of that tax payer money!

Never mind “understanding it well enough,” the said leaders of our financial system didn’t understand it at all. We need to get these people out of their reactive decision making seats immediately. On CNBC’s “Fast Money” last night, said trading “guru,” Joe Terranova, started the show off saying that Paulson should “step up and buy US stock market futures” this morning. C’mon Joe. That was beyond embarrassing. It also provides a metaphor for how ridiculous this global stock market mania became. We are speaking with our friends at InTrade about getting odds on the board for the date of “Fast Money” being taken off the air. These entertainers should not be able to broadcast their perpetually reckless bullish views to our children.

“Emotion has gripped this market”… “Fear and rumors are driving everything now”… “This market is no longer moving on fundamentals…”

Now that the S&P500 has dropped -42% since last year on this very same day, that’s what the revisionist historians are saying. Ignore these addicts, and find someone you can trust. We need transparency and accountability. We don’t need excuses and finger pointing. The market is moving on fundamentals. Those who do not have a fundamental and repeatable investment process are going to go away. It’s your money they are managing. You are their boss.

As I indicated on the Portal into the close yesterday, “I BUY.” I have moved our ‘Hedgeye Portfolio’ allocation from 96% Cash on 9/19 where we called this unfortunate crash (see “Beware October 3rd, 2008”, 9/19/08) to a 70% Cash and 30% Equities position. Let’s be clear, with 70% of my family’s hard earned money in cash, this doesn’t mean that I am bullish. This means I am less bearish.

There are 3 positions we take on stocks and markets alike here at Research Edge: Bullish, Bearish, and Not Enough of one or the other. For the better part of the last 12 months, I have been of the “Not Bearish Enough” camp. Now I am Bearish, but moving toward Bullish, for an immediate term “Trade”. I wrote to one of our smartest clients last night that my max downside level in the S&P 500 is 821.56. That’s another -9.6% lower than last night’s close. On the way down, our equity allocation will be moving up.

Have a process. Be patient. If you can’t explain your investment style simply, “you don’t understand it well enough.”

Have a great weekend,
KM



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Morgan Stanley (MS): Are the Evil Doers Back?

So now that the short sellers are back, I am sure the finger pointing will find its ground. Losers point fingers. Winners understand the concept of accountability. Morgan Stanley is on the tape at the close here "reclassifying $3.9B in debt to level 3 from level 2"... Huh?... We held a dinner the other night with Yale students who had free reign in the Q&A. One of the questions was un-answerable - "what exactly is a level 3 asset worth?"
  • I have a $9.03/share immediate term target on MS.
    KM
chart courtesy of stockcharts.com

I’m Finally Liking ANF

For the first time in years, I’m turning positive on ANF. The bear case here is so obvious that it completely hides an emerging bull story. Under $30, you can’t not look at this stock. Here’s why…

ANF’s business trends stink something fierce, as core concepts and growth engines alike have stalled (and crashed). Furthermore, margins are at peak, inventories are at trough levels, and demographic trends remain abysmal in a category that will lose share of wallet in an environment where real consumer spending is likely to go negative for the first time in 64 quarters. That mattered to me six months ago. But after losing 74% of its enterprise value ($5bn flat) over the past year, I’m officially at a point where the stock has overshot the brand value, as well as the strategic and financial call options available to the company. Consider the following…

1) Let’s assume that the consensus EBITDA estimate is 20% too high next year. A $28 stock is getting me to about 2.8x EBITDA.

2) ANF’s brands actually have tremendous value – not unlike Ralph Lauren, Nike and Coach. Kids/young adults wear the apparel bc they want to show off the brand – while a customer at American Eagle, Aeropostale, Gap, etc… could care less if the logo is visible (and in instances, they want to hide it). That customer just wants to wear the look – not the emblem. As a retailer, when you don’t own the customer relationship, you have big fashion risk. But when you are an aspirational destination (like ANF) then fashion risk and gross margin volatility both diminish materially. ANF is one of the few brand families that the consumer will pay up to wear. I think gross margins still come down over time, but they won’t collapse. Similarly, these are the ONLY brands that will maintain some level of ‘take-out’ value. The $7.5EV from a year-ago was glaringly high at the time. But $1.9bn today? This is getting tough to ignore.

3) I think that we’ll see several of these mid-tier brands and retailers go flat-out bankrupt over the next 2 years. ANF will gain share in the mall. Of that, I am near certain.

4) Did you check out General Growth’s stock (GGP)? From $41 to $4 in six months. Yes, this is one of the key mall owners that need companies like Abercrombie to drive traffic. Clearly, as evidenced by ANF’s abysmal comp numbers, it is clear that they are not pulling their weight. But as bankruptcies pick up in the mall, the lease terms will become more flexible for ANF as it gains leverage. I’ve been concerned for a while about the aggressive terms associated with ANF’s leases. The impending turn of events is likely to alleviate my concern to a degree.

5) ANF is yielding a 2.5% dividend – one of the highest in retail. The risk of cutting this is exceptionally low in my opinion. Healthy dividend yield is an important theme right now at Research Edge. ANF fits fight in.

6) CEO Mike Jeffries is a 63 year old control-freak who is involved with virtually decision at the company – to a frightening degree. That’s why he can’t hang on to a CFO. I can’t say with any degree of confidence that sound financial management is a key focus at this company. What I can say is that this team can trade its stock better than just about anyone out there. Check out the sheer volume of shares sold during 1Q and 2Q of this year – almost 1.5mm shares (1.6% of the float) over 3,000 transactions. 10b5-1 sales or not – tough to ignore that the selling pressure stopped when ANF cracked $50 (from $82). At $28, ANF has $600mm in cash to gobble up the stock. My bet is that the management team starts buying first. Either way, I’ll take it.

SP500 Levels: Hedgeye's Strategy Into this meltdown close...

Since we had the call that eliminating the short selling ban would create a stock market crash (the SP500 is down -24% from our call on 9/19/08), we think it’s fair game for us to own the debate as to the levels where we mop this mess up. It is time to buy stocks, patiently, as the levered longs get hammered with redemptions and sell low. They weren’t proactively prepared. Now you’re seeing them manage their books reactively.

I see 3% downside right now, and 16% immediate term upside. Here are our levels for the SP500:

BUY STOCKS = 922.53
Sell the “Trade” = 1070.33

With the SP500 at 948 at the time of this note, we’re going to be deploying more of our 79% cash position. I have never understood why people love buying everything on sale, other than stocks… but I guess that’s their problem here, not ours. Crisis creates opportunity.
KM

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