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TALES OF THE TAPE: SBUX, WEN, TAST, CMG, SONC, TXRH, RRGB

 

Notable news items and price action from the past twenty-fours along with our fundamental view on select names.
  • In the QSR space the notable call-outs were WEN, TAST and SBUX all down more than 1% on accelerating volume
  • In the FSR space the notable outperformers were RRGB, CPKI and TXRH; all up on accelerating volume
  • Sonic plans to simplify its crowded food-and-drink lineup when it introduces new menu boards on May 26. But gaining breathing room comes at the cost of removing 18 slower-selling items.  In the short run SSS will suffer.
  • Chipotle Mexican Grill Inc's (CMG.N) legal costs are starting to rise as the result of a federal probe into its hiring practices - CFO
  • MIDD, THI and COSI report EPS today


TALES OF THE TAPE: SBUX, WEN, TAST, CMG, SONC, TXRH, RRGB - qsrTALES OF THE TAPE: SBUX, WEN, TAST, CMG, SONC, TXRH, RRGB - fsr

 


Fear Mongering Meets Brinksmanship: A Comprehensive Guide to Navigating the Debt Ceiling Debate

Conclusion: We expect the current debt ceiling debate to heat up substantially in the coming weeks, resulting in a measured pickup in volatility across global financial markets, primarily as a result of increased  volatility in the US Dollar being driven by the whims of D.C. politicking. Further, we expect the debt limit to be increased prior to any sort of default on any of the federal government’s obligations. And within that legislation, we would expect to see the groundwork laid for potentially meaningful fiscal reform ahead of the FY12 budget debate – an event that is likely to prove dollar bullish when it’s all said and done.

 

Position: Short the US Dollar (UUP); Long Gold (GLD).

 

With the debt ceiling debacle looming over the horizon, we thought we’d use the opportunity to equip you with an in-depth guide for navigating the next 3-4 months of what is likely to be heightened volatility for global currency, bond, and equity markets. Even as QE2 expires in June, macro markets are likely to continue to gyrate on the whims and words of a few “inspired” politicians within our nation’s capitol.

 

Fear Mongering Meets Brinksmanship: A Comprehensive Guide to Navigating the Debt Ceiling Debate - 1

 

In short, while we accept the consensus belief that the debt ceiling will eventually be extended prior to any sort of default on the US government’s obligations, we do believe the events and rhetoric leading up to the passage of any deal will be anything but “smooth sailing”. As such, we are in the process of taking down our gross and net exposure within the Hedgeye Asset Allocation Model and Virtual Portfolio due to our expectation of heighted volatility in the months ahead. Below we explain the drivers of said volatility via an in-depth analysis of the current political situation and previous debt ceiling impasses.

 

Current Situation

 

Hitting the Ceiling: Congress created the statutory federal debt limit in the Second Liberty Bond Act of 1917 as a result of negotiations which resulted in securing financing for WWI and creating an additional check on the fiscal power of the executive branch/ruling party. While federal debt is appropriately divided between debt held by the public and intra-governmental debt, nearly all of it is subject to the limit. The powers that be at the time of creation appropriately intended the debt ceiling to be a reoccurring opportunity to reassess the direction of the US’s fiscal policy. It is, however, not without limitations, as the current consequences of not increasing the debt ceiling almost always outweigh the current consequences of extending it, making it quite toothless from a policy making point of view.

 

Creating Headroom: As indicated in Treasury Secretary Geithner’s most recent letter to Congress on May 2nd, we are scheduled to hit the current $14.294T debt limit on this upcoming Monday, May 16th. As such, Geithner & Co. must take “extraordinary measures” to ensure the US government has enough cash on hand to navigate the timing of cash flows in order to fulfill its existing obligations.

 

The first trick in his bag of is to declare a “debt issuance suspension period”. This allows him to suspend (until further notice) the issuance of State and Local Government Securities, prematurely redeem existing Treasury securities held by the Civil Service Retirement and Disability Fund, suspend the issuance to that fund as investments, and suspend the daily reinvestment of Treasury securities held by the Government Securities Investment Fund of the Federal Employees Retirement System Thrift Savings Plan. In addition, he may be forced to suspend the daily reinvestment of Treasury securities held as investments by the Exchange Stabilization Fund. For the sake of brevity, we’re not going to explore in this report the exact technical mechanisms by which these measures contribute to freeing up headroom under the debt ceiling, as the net result of each step is overwhelmingly benign as it relates to the economy and financial markets. For all those interested in digging into these processes a bit more, we are happy to follow up with you.

 

All told, in conjunction with “higher than expected tax receipts”, the aforementioned measures are expected to extend the Treasury’s borrowing authority until “roughly” August 2nd under current projections for financing needs ($738B through the September 30th end of FY11 as of April 27th). The Treasury has asked for a $2 trillion hike in the debt limit to accommodate financing through FY12 under current budget projections.

 

After the ceiling is hit on or around that date, the US government will begin to default on its obligations absent an increase in the debt ceiling or some form of temporary legislation exempting new issuance from being counted towards the statuary debt limit. What is being made clear by Geithner’s letters to Congress is that he considers any failure to pay any of the US government’s obligations (not just interest payments and principal redemptions on Treasury securities) as a detriment to the full faith and credit backing America’s hand shake. While we don’t often agree with the man, we do find common ground on this principle and we believe the vast majority of Americans would agree. Below is a list of federal government liabilities that would be directly impacted should the debt ceiling not get raised in time: 

  • US military salaries and retirement benefits;
  • Social Security and Medicare benefits;
  • Veteran’s benefits;
  • Federal civil service salaries and retirement benefits;
  • Individual and corporate tax refunds;
  • Unemployment benefits to States;
  • Defense vendor payments;
  • Student loan payments;
  • Medicaid payments to States; and
  • General operational expenses for federal government facilities. 

Net-net, the sheer breadth of this list alone gives us conviction that Congress will ultimately enact a permanent increase in the debt ceiling or at least kick the can down the road by temporarily upping the limit to accommodate borrowing needs through the either the remainder of FY11 or CY11. Of course, as with all of life’s many destinations, it’s the journey there that matters most. Given that, we offer the next section as a guide for the road ahead.

 

Political Stakes: Since 1960, Congress has passed legislation which increased (permanently or temporarily) or revised the definition of the debt ceiling 78 times – 49 times under Republican presidents and 29 times under Democratic presidents. So while it may seem like reaching the debt ceiling is a big deal at face value, in reality, increasing the debt limit is quite a common occurrence.

 

Judging by the political posturing and partisan rhetoric being thrown around Capitol Hill currently, however, we expect this round of Piling Debt Upon Debt to be anything but commonplace – especially with characters like Boehner and Reid leading the charge. The next few months will be full of enough headline-worthy news quotes, political posturing, brinksmanship, and enough fear mongering to rattle global financial markets. As we outlined at the beginning of the year, the 112th Congress is among the greatest risks to global financial stability. This summer we expect them to prove us right in spades.

 

As such, we’ve compiled recent quotes from politicians on either side of the aisle in an effort to outline the strategies and goals of each party in the upcoming negotiations. While paraphrasing would indeed save time and space, we find their messages better delivered by actually “YouTubing” these bureaucrats at face value.  Also, if we’ve learned anything from the near government shut down we’ve recently experienced several weeks back (over just $38.5B in “reported” budget cuts), it’s that neither side is afraid to send us to the edge of chaos in order to advance their political agenda.

 

Democrats

  • 5/9: Charles Schumer, Chairman of the Senate Rules Committee, NY: “Mr. Boehner needs to have an adult moment here and now… This next speech by the Speaker will be a litmus test on whether House Republicans plan to finally approach the debt ceiling as adults. So far many of them have not been responsible about this issue at all.”
  • 5/9: Roger Altman, Chairman of Evercore Partners, former Treasury Secretary under Clinton, and consultant of Sen. Schumer: “Markets could crash if it begins to look like Congress will allow a default.”
  • 5/10: Kent Conrad, Senate Budget Committee Chairman, ND: Unveiled a budget proposal which called for a 50-50 split between spending cuts and tax increases. The plan was immediately rejected by Republicans.
  • 5/10: Jay Carey, White House Press Secretary: “It is folly to hold hostage the vote to raise the debt ceiling to prevent the United States of America from defaulting on its obligations to any other piece of legislation… Maximalist positions do not produce compromise.” 
  • 5/10: Chris Van Hollen, MD: “We have identified some areas of common ground [in today’s bipartisan meeting]. The major areas of disagreement have not yet been engaged.” 

Republicans

  • 1/7: Mike Huckabee, former Governor of AR: “One of the things that gives a little bit of juice for the Republicans is that Senator Barack Obama in 2006 stood on the Senate floor with an impassioned speech, saying that we should not raise the debt limit, that it was the lack of leadership, and that George Bush was just completely derelict in duty by asking Congress to raise the debt limit… Mr. President, we certainly don’t think you’ve made this radical change in just a few years, so we’re going to take you up on it.”
  • 5/5: John Boehner, Speaker of the House, OH: “Instead of talking about billions [of budget cuts], I think it’s time to start talking about trillions. They should be actual cuts and program reforms, not broad deficit or debt targets that punt the tough questions into the future... Nothing is off the table except raising taxes.”
  • 5/5: Mitch McConnell, KY: “We face a crisis that makes the panic of 2008 look like a slow day on Wall Street.” Still, McConnell suggested to the Senate floor that he would only vote for an increase in the debt limit in exchange for “deep and permanent” cuts in federal spending.
  • 5/5: Steve King, IA: “I’d put the cutting off of all funds to ObamaCare on that debt ceiling bill and say, there’s going be no raising of the debt ceiling here by the House of Representatives unless we shut off all funding that is going to implement or enforce ObamaCare.”
  • 5/5: Paul Ryan, WI: “[Spending] caps in and of themselves, alone I don’t think our conference would accept that. The GOP wants a down payment of spending cuts… Knowing that we are very far apart between the president, the Senate and where we are, we are not under any illusion that we’re going to get some grand- slam agreement… getting a single or double instead of a home run is the goal of the talks… Tax increases are off the table and triggers for automatic tax increases are a cop-out for those who cannot cut spending.”
  • 5/9: John Boehner, Speaker of the House, OH: “To increase the debt limit without simultaneously addressing the drivers of our debt – in defiance with the will of our people – would be monumentally arrogant and massively irresponsible. It would send a signal to investors and entrepreneurs everywhere that America still is not serious about dealing with our spending addiction... It’s true that allowing America to default would be irresponsible, but it would be more irresponsible to raise the debt ceiling without simultaneously taking dramatic steps to reduce spending and reform the budget in the process.”
  • 5/9: Michael Steel, Spokesman for Boehner: “The American people flatly reject Senator Schumer’s call for a blank check for the Democrats who run Washington to keep their spending spree going. There’s no way an increase in the debt limit will pass without real spending cuts and reforms.”
  • 5/11: Eric Cantor, House Majority Leader, VA: “The substance of [Tuesday’s] discussions was trying to focus in on areas where we can cut spending and cut it big.” He affirmed house support for Boehner’s recent demands for trillions of dollars in budget cuts, saying “Anything less is not serious”

Tea Party

  • 4/10: Sarah Palin, former VP nominee and Governor of AK: “There needs to be an understanding in the GOP leadership that we cannot provide another tool for the liberals to just incur more debt, and that’s what raising the debt ceiling is going to allow again.”
  • 5/9: Michele Bachmann, MN: Recently stated that any vote to raise the debt ceiling must be attached to a bill fully de-funding ObamaCare. She also criticized Boehner for “squandering” an opportunity to cut spending in the latest continuing resolution.
  • 5/9: William Temple, Head of this fall’s Tea Party National Convention: “We’re telling Boehner and all of the House Republicans they came into office with Tea Party help. We now expect them to keep their promises and hold the ceiling on the national debt.” He added that the party would support a small increase if it were to be accompanied by a major policy win such as the repeal of ObamaCare. 

All in all, the gaping divide between the two ideologies on what it would take to collectively lift the debt ceiling by early August is omnipresent in their recent commentary. While it’s clear that some fiscal reform will be included in any legislation towards increasing the debt ceiling (US dollar bullish), it’s almost equally as clear that: a) it will fall short of current Republican demands (US dollar bearish) because the Democrats are, on the margin, willing to stand their ground and engage in this game of political brinksmanship (evidenced by GOP leaders backing away from their recent support of Paul Ryan’s Medicare reform plan); and b) as political brinksmanship inches us closer to the deadline, we are likely to see a measured increase in fear-mongering quotes that are likely to be the source of much consternation for global financial markets.

 

As such, we anticipate a broad-based pickup in volatility, given the heighted Correlation Risk we’ve seen across all asset classes to date. This tug-of-war on the US dollar is an acute risk that needs to be managed around, particularly from a timing perspective. In short, the playbook is as follows: Republican compromise = dollar DOWN; Democrat compromise = Dollar UP. Gaming Policy is about to get a little more challenging in the coming months.

 

Historic Impasses

 

Below we briefly touch upon prior debt limit impasses and how key financial markets fared in the months leading up to and just beyond the eventual increases.  Keep in mind that the charts below are not at all an attempt to forecast what might happen in the coming months; like history itself, no two debt ceiling periods are alike. Rather, the illustrations below are merely points of reference for pondering how the markets will react this time around.

 

1985: In September of 1985, the Treasury Department became unable to issue new securities as a result of the statutory limit on federal debt being reached. As such, it was forced to take “extraordinary measures” consisting of and similar to the maneuvers listed in the section above. The debt limit was temporarily increased on November 14, 1985 and permanently increased on December 12,1985 from $1.82T to $2.08T. In addition, the accompanying legislation granted the Treasury Department authority to declare a “debt issuance suspension period” in future debt limit impasses.

 

Fear Mongering Meets Brinksmanship: A Comprehensive Guide to Navigating the Debt Ceiling Debate - 2

 

1995-96: On November 15, 1995, the Treasury Department declared the first ever “debt issuance suspension period” and used “extraordinary measures” to finagle its way through the beginning of the next year. It subsequently notified Congress that it did not have enough cash on hand to pay the March 1996 Social Security benefits, at which point Congress responded by temporarily increasing the debt limit in an amount commensurate to the upcoming benefit distribution ($29B).  Just one day before the March 15th deadline, Congress acted to extend the temporary increase by two weeks until March 30th. And just one day before that deadline, Congress passed legislation permanently increasing the debt limit to $5.5T from $4.9T.

 

Fear Mongering Meets Brinksmanship: A Comprehensive Guide to Navigating the Debt Ceiling Debate - 3

 

2002-03: At several instances during this two year period, the Treasury Department had to declare “debt issuance suspension periods” (April 4, 2002-April 16, 2002; May 16, 2002-June 28, 2002; and February 20, 2003-May 27, 2003) and take “extraordinary measures” to smooth the timing of cash flows in order to meet the federal government’s obligations. The debt limit was permanently increased twice during this legislative impasse; first on June 28, 2002 to $6.4T from $5.95T and subsequently on  May 27, 2003 to $7.38T.

 

Fear Mongering Meets Brinksmanship: A Comprehensive Guide to Navigating the Debt Ceiling Debate - 4

 

Summary

 

While we expect the US dollar to find a bid at some point in the coming months due to the market eventually looking through this impasse to the increased likelihood of meaningful fiscal reform in the intermediate term, we do think the weeks leading up this occurrence will provide another opportunity for the global currency market to vote against the short-term political compromises we continue to see out of Washington D.C. If anything, this exercise will continue to expose to the world just how far away both sides are from agreeing on a credible solution to the #1 issue driving the US’s long-term fiscal and balance sheet deterioration – entitlement spending. Over the near term, we expect the tough choices to continue to get punted to future sessions; as such, we remain short the US dollar and long Gold in the Virtual Portfolio – for now. That will most likely change in the coming months.

 

Darius Dale

Analyst

 

Fear Mongering Meets Brinksmanship: A Comprehensive Guide to Navigating the Debt Ceiling Debate - 5

 

Sources: US Department of the Treasury, CBO, Government Accountability Office, The Hill.com, Fox News, Congressional Research Service, and National Association of State Budget Officers.


The Oil Market Has Gotten Ugly in a Hurry

Conclusion:  A myriad of bad news today has taken the price of oil out to the woodshed, though it still has not violated our key support lines.

 

Position:  Sold OIL yesterday.

 

While we didn’t have an expert network to advise us, we sold OIL in the Virtual Portfolio yesterday and it was obviously a fortuitous call given today’s action.   Front month oil futures for WTI are down almost 5% currently and trading was halted earlier due to the volatility in trading.  As Keith wrote yesterday when selling the position:

 

“I have no idea what centrally planned idea is coming down the pike next, so I'll sell here.”

 

Today, it seems, we know exactly what has come down the pike, which is that the CME, who owns the NYMEX, is increasing margin requirements by 25% at the close today.  Obviously, as we are seeing today, this is not good for the price of oil.  As investors, hedgers, and speculators are forced to either fund margin accounts, or reduce their positions, this obviously creates selling pressure.

 

To add to the adjustment of margin requirements, inventory levels released from the Department of Energy today were very bearish for the second week in a row. Specifically, crude inventories rose by 3.8 million barrels week-over-week, which is 2.2% above year ago levels. In addition, gasoline stocks were up 1.3 million barrels week-over-week.  This broad increase of inventory was underscored by clear demand destruction as consumption of motor dropped 1.3% last week, which is the lowest level since the week ended February 11th.   In the charts below, we show an increasing trend of oil inventory building in the United States.

 

The Oil Market Has Gotten Ugly in a Hurry - cushing

 

The Oil Market Has Gotten Ugly in a Hurry - oil

 

The Oil Market Has Gotten Ugly in a Hurry - gasoline

 

Additionally, while emerging market demand still seems solid, Chinese growth of oil imports did show more tepid year-over-year growth with the April import data.   Over the course of the past year, the average monthly year-over-year growth for Chinese oil imports is 10.7%.  In April, and admittedly this is only one month, imports were up only 1.7% year-over-year, which is a deceleration from the prior three months and certainly a cautious flag.

 

The other important factor to consider today is the relative strength of the U.S. dollar, especially versus the Euro.  Currently, the Euro is down roughly -1.5% in today’s trading versus the U.S. dollar and the U.S. dollar Index is up nearly a full percent.  The value of the U.S. dollar continues to be the key driver of the commodity complex, in particular oil.  In fact, as of last night’s close the correlation between the U.S. dollar and front month crude futures was -0.86 on a six-month basis.

 

In the chart below, we’ve highlighted our quantitative levels for oil.  The TREND line is $98.63, which is an important support level.  The next level is longer term TAIL line, which is $86.79.  Based on our quantitative models, a sustained violation of the TREND line, typically three days, would put the TAIL line in play, which is more than 12% downside from here.

 

Daryl G. Jones

Managing Director

 

The Oil Market Has Gotten Ugly in a Hurry - wti price


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Retail Sentiment Check

 

Our Hedgeye Retail Sentiment Scorecard flagged some interesting changes on the margin. Those with a rapid rise in sentiment -- TGT, GIL, HBI, COH, KSS, FL, HD, LOW are paired against those with sequential erosion, like URBN – or no sentiment at all. Yes, that’s LIZ.

 

 

Today we are publishing our Hedgeye Sentiment Scoreboard in conjunction with the release of short interest data last night. Our Scoreboard combines buyside and sell-side sentiment measures. It standardizes those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. It’s probably no surprise that once sentiment reaches these extreme levels, it becomes a very asymmetrical setup wherein expectations become sky high or rock bottom and failure to meet those expectations is more probable than not. They’re not perfect, but they definitely give us a better sense to “fish where the fish are” across the retail landscape. Thanks to Josh Steiner and Allison Kaptur who created this system for the Financials group.

 

Here are some important notables:

 

TGT: The street continues to cling on to hope here. With a sentiment score of 90, TGT pierced the 9-barrier.

URBN: You can drive a truck through the bull vs bear case on this one. With a 10 point decline in sentiment over the past 2 weeks, the ‘expectations pendulum’ is starting to swing into favor for a potential bull case.

LIZ: This thing has a score of 5. No kidding. Hardly anyone comes close. Even after the company’s earnings release and analyst meeting – people still won’t give it a second look. Still one of our favorites.

GIL/HBI: As evidence that the market is looking right through raw materials as ‘yesterday’s news’ HBI and GIL are sitting there with sentiment scores of around 70.

COH: The only company to have a higher score than TGT with a 91 ranking.

KSS: Score of 89, and recently headed higher. Recent trend mirrors Macy’s, actually, but 20 points higher. KSS is a great retailer, but it is very close to a sentiment level that our model suggests is ‘extremely positive.’

FL: At its highest level in recent history – though still at just 67. If the story works like we think it will, then more people will climb aboard. This does, however, put pressure on Foot Locker next week to put up something better than the Street’s 5% comp expectation.

Home: While not a massive divergence, it’s interesting to see that HD and LOW have turned in sequentially higher sentiment scores, while BBBY, WSM and even BBY all turned down.

 

Retail Sentiment Check - Discount Stores Sentiment Chart 5 11

 

Retail Sentiment Check - Apparel Retail Sentiment Chart 5 11

 

Retail Sentiment Check - Apparel Brands Low Mid Tier  Sentiment Scores 5 11

 

Retail Sentiment Check - Apparel Brands Upper Tier  Sentiment Scores 5 11

 

Retail Sentiment Check - Department Stores Sentiment Chart 5 11

Retail Sentiment Check - Footwear Sentiment Scores 5 11

 

Retail Sentiment Check - Sporting Goods Sentiment Scores 5 11

 

Retail Sentiment Check - Other Sentiment Scores 5 11

 

 


Draghi in Driver’s Seat as Next ECB President

Positions in Europe: Long Germany (EWG); Sold the British Pound (FXB) yesterday

 

Today German Chancellor Angela Merkel expressed her support for Mario Draghi as the next president of the ECB – pushing Draghi from frontrunner to near foregone conclusion to take over from Jean-Claude Trichet in October.

 

We’ve spent time this year discussing the seat change of the ECB Presidency. After our initial favor for former Bundesbank President Axel Weber was dashed when he withdrew his candidacy in early February, Draghi rose to the rung of “best of the rest” in our book.  Today’s backing by Merkel completes the four biggest Eurozone countries (France, Italy, and Spain) to endorse Draghi.  A formal push of endorsement from the union may come as soon as May 16th when the Eurozone finance ministers meet in Brussels. In any case, the region will push to name Trichet’s successor many months before October to ease the impact of the transition.

 

While Draghi brings impressive international credentials, including as Executive Director of the World Bank, chairman on the Financial Stability Board, and as current Governor of the Bank of Italy, we continue to have our reservations. As we’ve highlighted before, his hang-ups include:

  • From a PR perspective (whether you want to believe it or not) Draghi as an Italian citizen is symbolic of southern Europe’s governmental fiscal irresponsibility. Italy has the 4th highest public debt across the globe, at 118% of GDP (behind Japan, Greece, and Iceland) as persistent sovereign debt contagion threats, primarily from the periphery, continue to dampen growth prospects and incite volatility in the EUR.
  • Draghi has the backing of Italian Prime Minister Silvio Berlusconi – his praise and approval is tainted by concurrent trials addressing his numerous political and sexual scandals.  
  • Draghi worked a 3-year stint as a vice chairman of Goldman Sachs in which his duties included arranging currency swaps that helped Greece hide the extent of its budget deficit.  This reflects poorly against a European populous that blames investment bankers for the region’s credit crisis and resists country bailouts.

Monitoring the market implications of sovereign debt contagion in Europe, uneven fundamentals across the region and movements in the EUR versus major currency remains a daily process. On the long side we continue to like Germany (via the etf EWG), and expect underperformance from the region’s peripheral countries.

 

We’re seeing significant weakness in the EUR-USD intraday (blowing through our immediate term TRADE line of support of $1.44) as tens of thousands protest austerity measures in Greece and S&P said Portuguese banks might possibly require more significant government support. Stay tuned.

 

Matthew Hedrick

Analyst


JACK - 1Q11 EARNINGS COMMENTARY

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.   

 

JACK - 1Q11 EARNINGS COMMENTARY - jack pod 1

 

JACK - 1Q11 EARNINGS COMMENTARY - jack pod2

 

 

RELAVANT EARNINGS CALL COMMENTARY

 

“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


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 80.28%
  • SHORT SIGNALS 78.51%
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