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WEEKLY COMMODITY MONITOR: WEN, AFCE, CMG, MCD, JACK, TSN, BWLD

Commodities rolled off sharply week-over-week but, given the magnitude of the year-over-year gains most foodstuffs have registered, there is still significant cost pressure for food and restaurant companies.

 

Following the spate of 1Q11 earnings over the past few weeks, the overarching message is that commodity inflation is going to meaningfully impact the bottom line in 2011.  It is interesting to note that corn posted another gain last week in the face of a broad-based drop off in commodity prices.  This is a bullish sign for protein prices given that feed costs can be expected to rise as grain costs go higher.

 

WEEKLY COMMODITY MONITOR: WEN, AFCE, CMG, MCD, JACK, TSN, BWLD - commod 517

 

Corn

 

Corn prices outperformed last week.  Five consecutive days of price gains made the longest streak since December.  Adverse weather is delaying sowing from North Dakota to Ohio as approximately 63% of the U.S. corn crop was sown as of May 15th, below the five-year average of 75%.  AFCE, CMG, MCD, JACK and TSN are just a few companies that have highlighted corn prices, and the impact of higher corn prices on protein costs, as being bullish for food costs and negative for margins.

 

 

 

WEEKLY COMMODITY MONITOR: WEN, AFCE, CMG, MCD, JACK, TSN, BWLD - corn 517

 

 

Beef

 

Beef prices are a concern for many restaurant companies, particularly in QSR.  WEN increased its commodity guidance for

2011 to 5% to 6% from 2% to 3% largely due to higher beef prices.  While prices fell off 1.3% over the past week, corn prices moving higher supports beef prices over the longer term.  However, TSN reported recently that meat demand has been "much improved" but prices may have climbed to a level at which consumers are no longer willing to buy.

 

WEEKLY COMMODITY MONITOR: WEN, AFCE, CMG, MCD, JACK, TSN, BWLD - live cattle 517

 

 

Chicken Wings

 

Chicken wing prices seem to go down every day that ends with a “y”.  The chart below says all that needs to be said; year-over-year, wing prices are down -37% versus the other foodstuffs we follow (excluding chicken) being up an average of +39%.  BWLD continues to benefit from this.  Of course, all good things must come to an end; SAFM expects stubbornly high chicken supplies to come down this summer.  Sanderson Farms Chief Executive Joe Sanderson said recently that the number of eggs set in incubators, an indication of future supplies, are so far not mimicking increases in recent years that occurred in May.  The likely result, according to Sanderson, is fewer chickens in July, August, and September. 

 

WEEKLY COMMODITY MONITOR: WEN, AFCE, CMG, MCD, JACK, TSN, BWLD - chicken wings 517

 

 

Howard Penney

Managing Director


TGT: Aweful Quality Beat

 

We’ve been bears on TGT for most of this year under the premise that the financial engineering over the past two years left the company without the resources to achieve its aggressive top line growth goals while improving margin – and that’s regardless of any erosion in the Macro climate. You simply can’t stave off Ackmanism by way of cutting costs and expect that to be a good platform for growth. This quarter was another piece of evidence in that chain.  Operating EPS was weak by most measures, with the entire beat – and then some – coming from better results out of the credit portfolio. ‘And then some’ is probably an understatement. We’re talking $83mm year on year – that’s about $0.08 per share, or 8% yy EPS growth. We don’t want to take this away from TGT by any means, as this is a real earnings contributor. But in 1Q of next year, we have to ask ourselves if there’s any mathematical way to get another $83mm in upside in the credit portfolio without pinching retail? Again, one of our macro concerns in retail is that our bearish outlook in 2H proves false as the consumer takes down the current 5% personal savings rate in order to fuel its spending addiction. That’s worked in the past when interest rates were heading South. But if we’re sitting here later in the year with the personal savings rate and interest rates BOTH near zero, AND with TGT having made its quarters by way of lowering its bad debt expense, it simply does not give us that warm and fuzzy feeling in our gut.

 

TGT: Aweful Quality Beat                     - TGT S 5 18 11

 

 


Athletic Apparel Positive Diversion

 

Athletic apparel sales posted a sequential acceleration in the athletic specialty channel; a slight positive in advance of the FL quarter. Total industry sales ticked slightly lower, however, showing a continuation of the volatility that we started to see several weeks back. One factor that keeps us from ringing any alarm bells given volatility in other channels is the sheer strength in ASPs across the board. That continued in the recent week.  

 

Lastly, on a regional basis New England was a clear negative standout as the only region to report a sales decline last week down -12% reflecting a saturated weekend with the Mid-Atlantic and South Central outperforming up +16% and +14% respectively – not good for DKS despite commentary yesterday that they “have seen a return to expected sales performance” and better on the margin for HIBB.

 

Athletic Apparel Positive Diversion - App Table 5 18 11

 

Athletic Apparel Positive Diversion - FW App Reg 5 18 11

 

Casey Flavin

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 80.64%
  • SHORT SIGNALS 78.61%

MPEL YOUTUBE

Due to the magnified impact on MPEL's bottom line of low hold given its junket mix, MPEL may disppoint whisper EBITDA expectations of $145 million. However, volumes were strong. Here is what they said last Q.

 

 

YOUTUBE FROM Q4 EARNINGS RELEASE AND CALL

  • “We will have some incremental expense associated with new amenities such as Cubic...and the full impact of our labor rate increase, which took place in the middle of the fourth quarter. But net-net, we think we can keep a very tight lid on expenses and FTE increase in 2011.”
  • “We also opened two new junket rooms at City of Dreams.”
  • 1Q11 guidance:
    • “Depreciation and amortization costs is expected to be approximately US$85 million...
    • Corporate expense is expected to come in at US$17 million to US$18 million...
    • Net interest expense is expected to be approximately US$28 million...
    • We do not expect any meaningful pre-opening or capitalized interest in the first quarter of 2011.”
  • “Our first quarter results are off to a good start. We experienced a strong Chinese New Year holiday period, with visitation and gaming volumes well in excess of last year’s results.” 
  • “Our marketing grip has generated significant results through its destinational sales strategy, building relationships with travel trade operators throughout China, and the APAC region, as they continue their 20-city roadshow tour in the first half of 2011.”
  • “We believe the introduction of another integrated resort on Cotai will benefit City of Dreams.”
  • “We expect to continue to reduce our debt balance in 2011 through scheduled amortization payments and cash flow from operations.”
  •  “I think usually after Chinese New Year, which is 15 days after the first day of Chinese New Year, we tend to expect much slower volumes in Macau.”
  • “For the full year of calendar 2011, we’re expecting about US$60 million of total CapEx, the vast majority of that will be growth rather than maintenance.”
  • “In terms of the overall representation from the premium direct, the business represents about 15% to 20% during fourth quarter. And basically, Altira is a junket play.”
  • “I think in the last quarter (3Q), and currently, we stick with the commission cap low 1.25% to the junkets and also we count religiously a significant type idea whereby our revenue share more though in junket and COD stick with the same level of our neighbors. So we didn’t see any changes in terms of rebate to the market in the last couple of months.”
  • “We haven’t seen any need to change our overall provisioning policy and we’ll continue to follow our existing policy. At this point, we think we’re in good shape as far as our reserve and adequately reserved in light of our business volumes.”
  • “It is very clear that tourism promotion and also the fact that China is trying to move into a consumption spending economy is definitely the case, and therefore that benefits Macau and tourism sectors in general. So all in all, we are not concerned about these tightening measures. But with regard to the banking system, I think it provides a solid platform for the Chinese economy to continue to grow at a steady pace for years to come.”
  • [Altira growth] I think it is a combination of both visitation numbers as well as our growing number of membership, and the reason is quite mixed in terms of the growth story. But we did a lot of looking to the opportunity in a lot of direct marketing and also in different tier of the alignment with the customer with the different tiers of customer, including premium mass and mass. I would think that that our premium mass is doing a little bit better than the mass, purely because we put a lot of effort in looking to opportunity going forward to in terms of direct marketing.”
  • “That additional hotel tower together with the podium is a 1.5 million square feet development. So, when we do build it, it’s going to be a significant addition to City of Dreams, not just on the hotel inventory side, but also in addition on the overall proposition being subject to regular government’s approval on additional gaming space or retail restaurant proposition.”
  • “We still have a management contract for Macau Studio City, and we continue to have discussions with the partners of Macau Studio City to hopefully have that project start in one way or the other.”
  • [Cubic opening] “I think we are looking at a end of first quarter, early second quarter date."
  •  “Hard Rock Cafe is certainly a lease that we have with a licensee from Hard Rock International. They plan to start construction within the next month or so and are currently planning a September or Q4 opening for the cafe.”

TALES OF THE TAPE: MCD, CMG, PNRA, CBOU, CHUX, KONA

Notable news items and price action from the past 24 hours as well as our fundamental view on select names.

  • MCD’s $400 million 3.625% 10-year senior unsecured debt has been rated “A” by Fitch Ratings. 
  • CMG’s Jack Hartung and Steve Ells bought 5,000 and 10,000 shares, respectively, on 5/13.
  • PNRA’s “pay-what-you-want” restaurant in Clayton, Mo., is promoting the brand and, surprisingly, making a small profit, according to media reports.
  • CBOU and DPZ gained 2.1% and 1.2%, respectively, on accelerating volume yesterday.
  • CHUX gained 17% on accelerating volume following stronger-than-expected earnings.
  • KONA declined -1.8% on accelerating volume.

 

TALES OF THE TAPE: MCD, CMG, PNRA, CBOU, CHUX, KONA - STOCKS 518

 

 

Howard Penney

Managing Director



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