prev

CBRL - A CONCEPT IN DECLINE

Cracker Barrel reported 3QFY11 (April) EPS of $0.58 (excluding a $0.06 gain from the sale of property) that was significantly below consensus of $0.66 and that same-store sales were down -0.3% for the restaurants and up 0.1% for retail, again, missing consensus expectations. 

 

Yes, it’s true that two-year trends improved sequentially on a monthly basis, as the quarter progressed, but the company raised prices aggressively in April.  While the desire to protect margins is understandable to a point, traffic has been the Achilles Heel of this company for some time. 

 

We’ve seen CBRL raise prices before in this situation and the outcome seems inevitable: traffic will suffer.  As the saying goes, the definition of insanity is doing the same thing over and over and expecting different results.  The chart below shows the sequential deterioration in comparable restaurant sales at CBRL.

 

CBRL - A CONCEPT IN DECLINE - cbrl pod 1

 

 

The excuse given by the company and the forever-faithful bulls is to attribute the disappointing results to the economic environment.  While that may be true to some extent - CBRL traffic does track Vehicle Miles Driven quite closely - the company is clearly failing to increase usage.  As you can seen in the chart below, CBRL has only generated positive traffic in 3 of the last 19 quarters. 

 

Versus comparisons easy and difficult, traffic continues to decline.  Yet management continues to raise menu prices every quarter.  While CBRL core users generate 80% of their revenues, it’s imperative to keep giving them a reason to come back more often.  Unfortunately, raising prices on you core customer is not a long term strategy that will drive increased customer visits.  The data bears this out; two-year traffic trends continue to show no indication of an inflection in traffic trends.  Two-year average traffic trends declined 80 basis points to -2.1% in the third fiscal quarter versus -1.9% in 2QFY11.  This trend has been negative as far back as the eye can see.

 

CBRL - A CONCEPT IN DECLINE - cbrl traffic versus miles drive

 

 

We will see what management has to say on the call later today, but I would be surprised if there are any plans being implemented to increase customer visits that have not already been discussed.  The pressing question of the day is why management believes they can raise prices 3% on a low income customer that is seeing its disposable income decline.

 

 

Howard Penney

Managing Director


TALES OF THE TAPE: CBRL, RRGB, PEET and GMCR

TALES OF THE TAPE

 

  • CBRL - Q3 EPS of 58c misses by 8c. Revenue of $582.5m misses.
  • BEEF PRICES - Cash cattle have fallen 13 percent since the spring highs, and the decline represents $150 reduced value in the total price of a market-ready steer.  Demand for both pork and beef was called gloomy last week and lower fed cattle prices helped packers regain some margins on slaughtering and processing. The seasonal expected boost in demand has failed to materialize for beef - CattleNetwork
  • Sandwich giant Subway is testing a more upscale format called Subway Café, which the company hopes will address the needs of franchisees looking to open in office buildings and other more high-end venues - NRN
  • The National Restaurant Association Restaurant, Hotel-Motel Show kicks off Saturday at Chicago's McCormick Place. 
  • RRGB - Strong follow thru from last week performance on accelerating volume
  • GMCR and PEET continue to trade higher on strong volume
  • JACK - continues to struggle to gain traction
  • CHUX - Strong follow thru following a better that expected quarter

 

 

TALES OF THE TAPE: CBRL, RRGB, PEET and GMCR - qsr

TALES OF THE TAPE: CBRL, RRGB, PEET and GMCR - fsr

 

Howard Penney

Managing Director



investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

The Last Stand of the Equity Bulls

“There are not enough Indians in the world to beat the 7th Cavalry.”

-George Armstrong Custer

 

I’m in the middle reading Nathaniel Philbrick’s book, “The Last Stand”, which is an account of General George Custer’s infamous defeat at the Battle of the Little Bighorn.   Even a novice in American history knows the outcome of June 25th, 1876, a day in which the 7th Cavalry Regiment was soundly defeated by the combined forces of the Lakota, Northern Cheyenne, and Araphao people on the Montana plains.

 

In total, according to archeologist reports, the 7th Cavalry suffered a 52% casualty rate.  The five companies that were directly under the control of General Custer fared much worse.  Near the end of the battle, Custer, and the troops directly under his control, found themselves in a weak strategic position on a hilltop, which would become known as Last Stand Hill.  According to almost all accounts, the Lakota completely annihilated 100% of Custer’s troops within an hour of initial engagement.   

 

Ironically, despite the inauspicious ending to his military career, George Armstrong Custer was probably one of America’s most celebrated cavalry commanders of his era.  While he finished last in his class at West Point, Custer had a meteoric rise in the Union army and at the age of 23, three days prior to the Battle of Gettysburg, was promoted to Brigadier General. 

 

At Gettysburg, Custer was credited with leading a mounted charge of the 1st Michigan Cavalry.  This charge halted the Confederate momentum at the Battle of Gettysburg, which would become known as the turning point of the entire Civil War.  Not only was Custer present at General Robert Lee’s surrender at Appomattox Court House, but the table on which the surrender was signed was given to Custer as a gift for his wife with a note from General Sherdian praising Custer’s bravery and his key role in the Union victory.

 

Perhaps, though, some of Custer’s early successes gave him some false confidence as it related to future military engagements.   According to reports from The Battle of the Little Bighorn, General Custer reportedly said the following shortly before his death:

 

“Hurrah boys, we’ve got them! We’ll finish them up and then go home to our station.”

 

With the history lesson complete, reading the story of Custer and the Battle of the Little Bighorn made me think contextually about the stock market.  In essence, I can’t help but wonder after a +95% move in the SP500 from the lows of March 2009, whether this is The Last Stand of the Equity Bulls.  Certainly, both price action and recent data suggests we are at a critical juncture.  As well, and not dissimilar to Custer, there is likely an over confidence bias pervading the stock market due to the expedited two year move off the bottom. (LinkedIn anyone?)

 

Just like the cavalry, we’ve been sounding the warning trumpets of our key 2011 investment theme that Accelerating Inflation will lead to Slowing Growth.  No doubt, we’ve been early sounding the trumpet, but the view is now playing out in spades.

 

A key tell for this theme has been the price of copper, which is down just over -10% on the year.  Dr. Copper is perhaps one of the most predictive markets for gauging future economic growth, especially from China, a nation that consumers 40% of the world’s copper.  In the most recent data from China, refined copper imports into China were down in April by -48% year-over-year and -17% sequentially from March.  On the LME, copper inventories are up +34% from their December 2010 lows.

 

In other industrial metals, similar trends are in place.  Lead inventories are up +53% this year to the highest level since February 1995, aluminum stocks are at near record highs and up +11% for the year, and zinc inventories are up +21% in 2011 and reached a 16-year high on May 18th.   Other commodities are signaling the same via price action with lumber down -28% in price in the year-to-date, rubber down -7%, and coal down -6%.  In aggregate, the commodity complex is clearly telling us that global growth is slowing.

 

While the most recent quarter of corporate earnings in the United States was decent, results, broadly, were characterized by margin compression.   This was a call our Retail team, led by Sector Head Brian McGough, was early and right in calling.  The bell weather indicator of cost inflation this quarter was Gap Stores, who cut their full year earnings estimates from a range of $1.88 to $1.93 per share, to a range of $1.40 to $1.50 per share due to “heavy cost pressure”.  Collectively, the “cost issue” was reflected in the number of quarters that “beat” earnings this quarter.  Incidentally, beats were down to the lowest level since Q4 2008 at 59.5%.  

 

With a couple more quarters of FIFO accounting and tough commodity input compares ahead for the stock market, the valuation / earnings growth story becomes less compelling for equities, especially in the context of a slowing top line.  Globally, slowing growth is being driven by the emerging world fighting inflation, with the most recent evidence being Chinese PMI coming in at a 10-month low.  In Europe, slowing growth is and will continue to come from massive austerity measures that are being implemented to, hopefully, head off massive debt restructuring.  While in the U.S., the consumer is facing a serious retrenching with U.S. average weekly earnings on a negative trend, unemployment numbers breaking out to the upside, and home prices continuing to be in free fall.

 

Despite the likelihood that corporate margins continue to compress in the coming quarters, which will continue the trends of slowing earnings momentum, those bullish of U.S. equities argue that yields on fixed income are so low that equities still offer a compelling risk / reward.  On some level we agree, as we’ve already made the case for the Fed to remain Indefinitely Dovish and James Bullard, the President of the St. Louis Fed, signaled as much when he said in a speech last night, “past behavior of the FOMC indicates that the Committee sometimes puts policy on hold.”

 

Being on hold is of course one thing, but not extending Quantitative Easing is quite another.  It is the later point that we believe the The Last Stand of the Equity Bulls is predicated upon.  Unfortunately, given the fact that reported inflation in the U.S. is actually set to accelerate, it seems unlikely that the Fed will re-up on Quantitative Easing in the short term.

 

Hurrah, equity bulls! Hurrah!

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Managing Director

 

The Last Stand of the Equity Bulls - Chart of the Day

 

The Last Stand of the Equity Bulls - Virtual Portfolio


THE M3: APRIL CHANGI DATA; LVS LOAN

The Macau Metro Monitor, May 24, 2011

 

 

MONTHLY BREAKDOWN OF PASSENGER MOVEMENTS Changi Airport Group

Changi Airport handled 3.73MM passengers in April, a 13.7% increase compared to the same month in 2010. 


LAS VEGAS SANDS UNIT SAID TO SEEK $3.525 BILLION LOAN FOR MACAU Bloomberg

According to a person familiar with the matter, LVS approached banks for a $3.525 BN loan for its assets in Macau.  The five-year facility will pay interest and fees of 253bps+ LIBOR at the all-in level.  Proceeds will be used for refinancing.  VML U.S. Finance, a unit of the company, will borrow the funds while Venetian Macau Ltd. will guarantee the facility.


Being Early

This note was originally published at 8am on May 19, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“As always, if you listen to my advice, be prepared to be early!”

-Jeremy Grantham, May 2011

 

If you have not yet read Jeremy Grantham’s most recent GMO Quarterly Letter titled “Time To Be Serious (and probably too early) Once Again”, I highly recommend it. He’s been managing Global Macro risk for a long enough time to know that the best lessons in this business are learned the hard way.

 

Managing interconnected Global Macro risk is hard. So is keeping up with the required risk management reading that’s readily available to you. If you read too much groupthink, you’ll miss the deep simplicity of Mr. Macro Market’s signals. If you read too little history, you’ll miss the context by which the patterns of human behavior rhyme. Your reading needs to be focused and timely.

 

For me, it’s taken almost 13 years to realize that I read too much garbage and too little history. So, in the last 3 years I’ve worked on changing that. The plan on this front is always that the plan is going to change, but currently my reading process falls into two buckets:

  1. My pile
  2. My books

My pile, as my teammate of many years Tanya Waite can attest, is perpetually mounting. From my desk, to my bag, to airplane pockets around the world, my pile is my Princeton hockey player. I will fight it until I knock it down. My pile is a series of print outs (Grantham, Gross, etc.), white papers, and whatever else my team sends me that refutes or augments my current thinking.

 

My books, like my emotional baggage, are always with me – that’s why you’ll see me cite books in the sequence that I am reading them. I just finished reviewing “The Road To Serfdom” and “Undaunted Courage.” My challenge is to read at least 1 book every 10 days. On the plane to Denver last night, I was reading “The World In 2050” – more on that book and being long Northern Rim Countries (NORCs) in the coming weeks.

 

Back to Grantham’s problem of Being Early

  1. Being Early to work isn’t a problem – it’s cool
  2. Being Early to mentally prepare for a game is better than being late
  3. Being Early in our institutionalized world of chasing short-term performance is also called being wrong

That’s Wall Street. In evaluating our professional competence, our process and principles can always be trumped by our short-term P&L. Are you wrong today because you are about to be right? Or are you right today because you are about to blow up?

 

These are fair questions. Clients shouldn’t have to pay for my pile or performance problems. We are overpaid to over-deliver over long periods of time. As Risk Managers, we are tasked with explaining to our clients what it is that we are doing and why.

 

As Grantham points out in his Quarterly letter, “we often arrive at the winning post with good long-term results and less absolute volatility than most, but not necessarily with the same clients that we started out with.” Isn’t that the truth? Your clients need to know your duration too.

 

Back to the Global Macro Morning Grind…

 

No matter where you go this morning, there it is – The Correlation Risk to the US Dollar Index. For the week-to-date, the US Dollar Index is down a measly -0.65%, but look at the pop you are getting in the big stuff that’s priced in those Burning Bucks:

  1. CRB Commodities Index = +1.7% week-to-date
  2. WTI Crude Oil = +1.3% week-to-date
  3. SP500 = +0.22% week-to-date

Ok, maybe a 22 basis point move in US Equities isn’t the kind of pop that would get you all fired up, but maybe that’s the point. Maybe people are starting to get the math. Since the immediate-term inverse correlation between the SP500 and the USD is -0.84% (extremely high), maybe people are starting to consider the other side of the immediate-term TRADE.

 

What if the US Dollar stops going down from here?

 

The answer to that question is a trivial one. US stocks and commodities corrected -3% and -9%, respectively, in the last 2 weeks of a USD rally. While a strong dollar is great for this country, it’s awful for stock and commodity markets in the immediate-term. Yes, Mr. Bernanke, the country and the markets are 2 very different things.

 

This is where all of my reading runs parallel with my risk management signals – and yes, there is also a huge difference between the research embedded in your reading and how you manage risk in your portfolio. Every once in a while a risk management signal jumps out at me that’s impossible to ignore. Currently that signal is an immediate-term TRADE breakout in the US Dollar Index.

 

If you were only to allow me one live market quote to manage all Global Macro risk on for the next 3 weeks, I’d take the USD Index. The line in the sand is currently $74.41. That’s my TRADE line – and my risk management process is to respect it until correlation scores tell me not too.

 

If $74.41 holds support, I sell stocks and commodities (that’s why I have sold all my Oil and Gold in the last 2 weeks). If $74.41 breaks, I’ll be forced to go back to speculating on what The Inflation trade can do.

 

Being forced to do things isn’t cool. But, like Grantham, I have learned to take a measurable level of risk to speculate in these correlation trades. On page 2 of his Quarterly Letter, Part 2 – “Time To Be Serious” – May 2011, this is how the self-effacing Grantham summed up the same:

 

“As readers know, driven by my increasing dislike for being early by such substantial margins, I have been experimenting recently with going with the flow. In defense of this improper behavior, rest assured that it was motivated not by chasing momentum, but by my growing recognition of the immense power – sometimes the thoroughly dangerous power – of the Fed.”

 

Being Early doesn’t work until it does.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Being Early - Chart of the Day

 

Being Early - Virtual Portfolio


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

next