If you were short WEN going into yesterday’s earnings release purely based on the company missing the quarter, it proved to be a mistake.  For the most part, the market is shrugging off declining numbers due to commodity inflation.  What can’t be ignored is the trend in top line sales.  For now, WEN is given a pass on current sales trends because its core momentum should appear in 2H11. 


I’m not so sure that is the case with JACK.  Yes, management’s number one priority this year is to drive sales and traffic at Jack in the Box through investments to enhance food, service and facilities.  The current investments are depressing margins, so without a corresponding lift in sales the stock will be in the penalty box.  In 2Q11, same-store sales comparisons are easy; comps declined -8.6% in 2Q10.  However, the competition is strong, and gaining incremental share will be difficult for JACK.


For 2Q11, guidance is for same-store sales for Jack in the Box company restaurants to range from flat to down 2% and system-wide same-store sales for Qdoba to increase 3% to 5%.  Management guidance reflects sales trends early in the quarter, which has included some unfavorable weather in many markets, particularly Texas which represents 27% of Jack in the Box company restaurants.   









“In 1Q11 operating margin decreased 170 basis points to 12.6% of sales, driven by commodity inflation of approximately 2.3% compared to 7% deflation in last year's first quarter. Rising beef costs were the biggest contributor, up 10.6% versus our expectations of 9% inflation and compared to 19% deflation in last year's first quarter. We also saw significant increases for cheese, pork, dairy and shortening.”


“In November, we were forecasting commodity costs for the full year to increase by 1% to 2%. Based on the increases we've seen in most commodities since that time, we are now expecting full year commodity inflation to be 3% to 4%.”


“Specific to our major commodity purchases, produce is having the biggest single impact on our expectations. Beef accounts for more than 20% of spending. For the full year, we are now anticipating beef costs to be up nearly 9% versus our previous expectations of 6% to 7% inflation. We expect beef costs to be up approximately 10% in the second quarter compared to a decrease of 9% in the second quarter 2010.”


“We expect 50s to average in the $0.85 per pound range in Q2 versus $0.78 last year. Cheese also accounts for about 6% of our spend and is now expected to be up 13% for the year versus our forecast of 7% to 8% inflation due to higher butter prices, which are up 43% year-over-year and stronger cheddar prices overseas. Dairy costs, which are over 3% of our spend, are also being impacted by the higher butter prices and are now forecasted to be up 5% for the full year.”


“Overall commodity costs are now expected to increase 3% to 4% for the full year. Restaurant operating margin for the full year is expected to range from 13% to 14%, depending on same-store sales and commodity inflation. And while the closure of the 40 restaurants last year will have a positive impact on margins, we expect this to be more than offset by commodity inflation, improvements to our core products and guest service initiatives.”


"When looking at the guidance and how that relates to pricing, guidance implies a significant improvement in that year-over-year company restaurant margin trend from down 170 in first quarter to get to the - in the next three quarters in order to get to the midpoint of the margin guidance."



Howard Penney

Managing Director

M/GIL: Two Ways To Beat


Macy’s quarter was impressive in so many ways. But we wonder if doubling its dividend will be its ‘Jump the Shark’ moment given imminent industry margin pressures. GIL beat, and showed us how a big slowdown in the core can be masked by an acquisition.



Two events this morning that are notable.


1)      Macy’s blowing out the quarter. This has been a consensus long, but even the numbers put up today beat the high end of expectations. Take note of the SIGMA, specifically. The company ended its FY11 with the triangulation between sales, inventories and margins headed in a downward slope, and directed clearly towards the lower left quadrant – which is like death from a profitability standpoint. But instead, it acted like a well-run, mature business by matching sales and inventories very tightly, keeping gross margins in check and leveraging a lsd growth rate in SG&A. Financial management has always been strong at Macy’s. But this one really stands out.

So here’s the question. Due to its success, Macy’s doubled its dividend. Are we going to look back at this day in another six months (and thereafter) and view this as the watershed moment when a management team from a major company was so confident in the path that lies ahead that it committed to permanently deploy capital in a way that it COULD, rather than when it SHOULD?


M/GIL: Two Ways To Beat - M S 5 11


2)      Gildan printed $0.53 vs the Street at $0.49. Netting out a $0.05 tax benefit, and adding back about a $0.03 disposal charge for a corporate jet, they came in at $0.51.  The company guided up for the year due to amongst other things its recent acquisition of Gold Toe and lower tax rate, both of which are nice.  But three things on a collective basis were quite frightening: 1) socks were down 24% due to lower retailer replenishment – showing how volatile that category can be, 2) the screenprinting business softened in April. Broder indicated it on its call, and Gildan confirmed it today, 3) though GIL seems to have a better handle on cotton procurement, gross margin risk is still clearly present. GIL in aggregate had 29% inventory growth for the quarter, showing the worst spread relative to sales we’ve seen in years. And this comes in conjunction with distributor inventories up 52% and in a category where GIL has 63% market share.


When the Gold Toe acquisition was announced, we raised questions about the base business, and whether this deal was made to mask a slowdown in its core. We now think the answer is ‘Yes.’  It’s still a good deal, but the timing still smells punk to us. Management is still aggressively looking for more deals. The big question from here is if the market will pay for these new brands to come in and, in part, cannibalize and upgrade existing product.  We’re not sure. The beauty of this model in the past has been one of executing a commodity business. They’ve done it masterfully, but are now headed into uncharted waters. We’re taking up our risk premium in this model.


M/GIL: Two Ways To Beat - GIL S 5 11





Should be another monthly record



Table revenues for the first 10 days of May are in and they look good - maybe not to those expecting Chinese New Year’s (CNY) type numbers.  Daily table revenues averaged HK$899 million during the Holiday, the second best week only to the HK$998 million generated during CNY in early February but only slightly higher than that during the October Holidays.


It is very difficult to accurately project out full month revenues at this stage considering we only have 10 days and it was a holiday, and Galaxy Macau is opening mid-month which will likely stimulate incremental visitation.  However, we will take a shot.  Taking into account the number of weekend days remaining, a significant post holiday slowdown, and the opening of Galaxy, we think an estimate of HK$22-24 billion, up 33-45% is reasonable.


We have heard anecdotally that MPEL and Galaxy held below normal on VIP while Wynn and LVS were above.  The only major market share shifts from recent trends was from MPEL to SJM.  MPEL appears to be coming back to Earth following a big jump in market share to 17.2% in April, way back down to 12.7% here in May.  Here are the details.



Daily Trading Ranges

20 Proprietary Risk Ranges

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Profanity's Wings

This note was originally published May 11, 2011 at 08:01am ET for subscribers.

“All hockey players are bilingual. They know English and profanity.”
-Gordie Howe


If you want to get bullish, let’s get bullish!


This morning I am going to shift my focus from Hayek to Hockey Town. Fans in Detroit, Michigan were rocking it out at the Joe Louis Arena last night as their Red Wings staved off elimination in the playoffs for Lord Stanley’s Cup.


While Mr. Hockey himself may have had a little Canadian storytelling in the aforementioned quote, I think we can give the man a break. He probably said it with a metal plate in his head. Gordie Howe played a world record 2,421 games of professional hockey at one speed – all out.


For those of you who don’t like hockey’s profanity and fighting, that’s ok – even if you preferred watching grown men tip toe on Dancing With The Stars last night, I guess I still have your attention. There’s this thing in hockey that the boys call a “Gordie Howe Hat Trick” – one goal, one assist, and one fight – and once in a while that’s what it takes to ride Profanity’s Wings to the promise land of victory.


If you’re bullish this morning, congrats. Virtually all of our longs are going up too. They tend to do that when the US Dollar goes down (our batting average on the long side of the Hedgeye Portfolio is probably unsustainable at +85.1%).


I can curse them. I can yell at them. I can call them names – no matter where I go this morning, there they are. America’s Central Planners are right back at it looking to solidify short-term political security by eroding America’s long-term credibility in financial markets.


After finally catching a short-lived short-covering bid last week, the US Dollar is down, again, every day this week.


If you’re keeping score where it matters, the market price doesn’t lie; politicians do:

  1. Week-to-date: US Dollar is down -0.5% and down for the 15th week out of the last 20.
  2. Year-to-date:  US Dollar is down -5.6% and down -8.1% since its YTD high.
  3. Obama/Geithner-to-date: US Dollar is down -15.3% (since they took office in February 2009)

This isn’t something anyone in this country should be proud of. This isn’t what I saw in the Boston Garden last week or in Detroit last night. This is a loser’s game – and it has been since Fiat Fools from France in the 1950s (Charles de Gaulle and the French Franc) to Nixon/Carter in the 1970s decided that The Inflation (via currency devaluation) was the best path to their short-term political prosperity.


But don’t worry about that. Everyone is a “long-term investor” all of a sudden, not a risk manager of long-term fiat policy cycles. Most Asian, European, and US stocks are up this morning – so are most of the inflation components embedded in them (yes, it does take the Energy sector to be up +12% for 2011 YTD to keep the SP500 up).


If you want to get bullish, let’s get bullish!


Last week after Big Alberta and I watched the Bruins pulverize the Flyers in Boston, I wrote a note titled “Ragingly Bullish Bears”, where I called out an important contrarian indicator in the weekly Investor Intelligence Bullish/Bearish Survey where the spread between Bulls and Bears widened to +36 points wide (Bulls minus Bears).


Here’s what that weekly sentiment survey did this week (on the margin, this is bullish):

  1. Bulls drop like stocks and commodities did last week (people get bearish after things go down) from 55% to 51%
  2. Bears rise up from hibernation from 16.5% (close to as asleep as they can be) to 18.5% this week
  3. Bull/Bear Spread tightens from +3600 basis points wide to +3250 basis points wide this week

So there you go. A Bernank Hat Trick of sorts for the Keynesian Kingdom – one more bullish data point to convince bulls to buy de-damn-dip again; one more reason for hedge funds to cover their shorts again; and one more step towards perpetuating more of The Price Volatility. Again!


All the while, Growth Is Slowing As Inflation Accelerates. Whether it’s measured from a Chinese, Indian, or Brazilian demand perspective or in supplies of copper, cotton, and Coyote fans – it’s all pretty obvious at this point. Big Government Interventions in policy structurally impair growth and confidence.


Oh, sorry – I meant to end on a bullish note.


All bulls are bilingual anyway. They know The Bernank and The Inflation.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1491-$1571, $100.26-$106.99, and 1136-1371, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Profanity's Wings - Chart of the Day


Profanity's Wings - Virtual Portfolio


Notable news items and price action from the past twenty-fours along with our fundamental view on select names.

  • WEN closed up 4.1% on accelerating volume despite weaker-than-expected earnings yesterday.  The sale of Arby’s, which management is working toward, is a significant positive catalyst.  Management stated on its calls that it has “quality bidders” for Arby’s.
  • SBUX CEO Howard Schultz has called for more transparency in the coffee market to stop speculators from driving up prices.
  • Brazil’s coffee harvest may rebound 12% next season as producers take advantage of a doubling of prices in the last year, according to the International Coffee Organization.
  • PEET would like to be in the single-serve category, according to comments from CFO Tom Crawley at the Baird Conference yesterday.  The company expects to add 5 retail stores this year and said that the grocery business is increasing 20% on an “ongoing basis”.
  • DPZ closed up 3.9% on accelerating volume.
  • CPKI gained 2% on accelerating volume.



Howard Penney

Managing Director



Commodities are taking center-stage this earnings season with many companies raising commodity inflation targets for the year.


Specifically this earnings season, we have seen the vast majority of companies increase guidance for 2011 commodity inflation.  This past week saw a downturn in many commodities as precious metals led the way with a violent snap back.  From Friday, however, commodities have bounced back and for agricultural commodities at least, the preponderance of the fundamentals point to the upside. 


WEN increased the mid-point of its inflation target for 2011 by 250 basis points to 5-6% on the back of beef cost concerns.  With grains moving higher, the outlook for beef is not favorable and many companies may have guided conservatively in this regard.  Of course, the direction of the US Dollar is critical in this discussion and – for now – our Macro Team’s view is that the policy, rhetoric, and calendar all point to further weakening of the buck over the intermediate term TREND.

The table below details the commodities we track, ordered by magnitude of the most recent weekly price move:





Below I detail three significant commodities that have made significant moves week-over-week.





Coffee prices abated somewhat over the last week, declining by 7.7% as numbers from Brazil suggest that production during the 2011/2012 Arabica Season may exceed expectations.  However, near-term catalysts may still cause additional volatility such as mudslides in Venezuela and other weather-related events.  In general, consensus is suggesting that the upcoming crop will be far better than last year’s.  However, as the chart below shows, there is a severe level of inflation in the price of coffee and any near-term shocks could further squeeze the coffee concepts and bring about further price increases.







Wheat prices gained on what was a soft week, overall for commodities.  A severe drought in Russia had a severe impact on wheat prices in 2010 and now, it seems, adverse weather conditions from Asia to Europe to North America is impacting global wheat crop yields.  Due to excess rain, corn planting in the U.S. is advancing at half of last year’s pace because of excess rains, according to government data.  PNRA has its wheat costs locked for 2011 but, to the extent that prices continue to gain, the laddering mechanism by which they purchase their wheat could bring pressure to the cost of sales line. 





Chicken wings


Chicken wings continue to March lower week-over-week.  Wings are down 37% year-over-year.  Excluding chicken wings and broilers, the commodities in our commodity monitor table are up an average of 39% year-over-year.





Howard Penney

Managing Director

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