As sequential inflation has slowed or, at least, become less broad-based in agricultural commodities, many of the key items we monitor seem to be at potential inflection points.  Grain prices declined week-over-week and, while corn will likely see year-over-year inflation for the entirety of 2011, it seems increasingly possible that wheat purchasers could benefit from easier compares in the fourth quarter.  This would obviously benefit PNRA and, to a lesser extent, the pizza concepts.  Chicken wing prices, empirically, trade relatively higher in the second half of the year as football season kicks off.  Clearly, this year, the NFL shutout is the $64,000 question for wing prices and, more importantly, BWLD sales.


The dollar remains the key driver and, any incremental bid that is placed under the value of the US currency will “deflate the inflation”, as Hedgeye CEO Keith McCullough, points out in his Macro notes.







Wheat may rise going forward, despite the 2.2% decline last week, due to speculation that wet weather in Canada may impair sowing.  This data point, in addition to concerns that dry weather hurt the winter crop in the U.S. and France, the world’s two largest exporters, could provide support for wheat prices from here.  In addition, the fact that corn inflation has outstripped inflation in wheat has caused a substitution effect as farmers turn to wheat, instead of corn, to feed their livestock.  Wheat prices are a key concern for PNRA and the pizza concepts.


Corn prices are also likely to increase from here, at least judging by the supply and demand dynamics.  While the dollar can absolutely trump these factors, in terms of what U.S. companies pay for input costs, corn demand is, according to Bloomberg, accelerating beyond farmers’ ability to boost yields.  This is causing stocks to become depleted as Chinese demand grows and demand from ethanol factories also continues to be a bullish factor.  Corn is really an important input cost for the broader restaurant industry because of its derivative impact on protein costs.  CMG is one company that does not hedge its commodity costs in general.  While Chipotle has corn locked for the year, any further impact on meat prices as a result of higher feed costs could impact margins.









Coffee prices gained 1.8% week-over-week as weather continues to impact coffee production in Latin America.  Demand remains strong for coffee and this has also helped keep prices high.  Following its 1Q earnings call, PEET highlighted the significant impact high coffee prices can have on its gross margin in the second quarter.  Coffee prices have come down since that earnings call took place but the absolute price remains extremely high.





Chicken Wings


Chicken wing prices gained last week.  This cost change is not a concern for BWLD given that, on a year-over-year basis, prices remain highly favorable. 


WEEKLY COMMODITY MONITOR: PNRA, CMG, DPZ, PZZA, BWLD - chicken wings price chart



Howard Penney

Managing Director

Taking up FL and FINL Estimates


After combining a) NPD Weekly data with b) Monthly channel breakout, c) SportscanINFO apparel POS and d) our SIGMA analysis,  we’re taking up our estimates for FL and FINL.  Here are some callouts…



For starters, the bifurcation between the athletic specialty channel and the shoe chain and natn’l/department store channels continues to be at least eight-point wide. This indicates that weekly trends (that people trade on) are significantly understating relative performance in the athletic specialty channel. Case in point, athletic specialty was up +6.4% for the month substantially outperforming the broader index up only +1.5%. We saw this trend begin in January – and have another 6 months before we have to think about ‘comping the comp.’


With sales coming in stronger than expected against considerably tougher compares in conjunction with company specific factors, we are taking our estimates up for both FL (comps up to 9% from 7% and EPS to $0.16 from $0.12 for Q2) and at FINL (comps up to 7.5% from 5% and EPS to $0.26 from $0.23). Our FL estimates remain well above the Street at $0.11 due to tight inventory management and clear progress underway with both merchandising and marketing initiatives in light of a strong first month of the quarter. It’s worth noting that despite taking up our FINL estimates for the quarter ended in May, we are below the Street ($0.29E) due to higher investment spending as the company completes several initiatives embarked on in 2010 and greater exposure to toning relative to FL that will weigh on results.  


Here are some of the additional highlights:

  • ASPs turned lower in May across all three channels. Two important factors to keep in mind here are 1) as we highlighted in our post “Athletic Apparel Remains Strong – FW Choppy” on 5/30, the decline of the toning category is having a profound effect on ASP trends to the tune of 3%-5%, and 2) ASPs grew mid-single-digits in the first week of June the strongest increase since March implying a positive incremental move for margins.
  • Sales in the athletic specialty channel increased +6.4% outperforming both shoe chain (-2.1%) and dept./natn’l chain store channels  (-8.5%). Despite a also sequential deceleration across all three channels, the positive spread between athletic specialty and the other two channels remains at least eight-points wide.
  • In the athletic specialty channel, running continues to be not only the largest, but also fastest growing primary category for the fifth month in a row.
  • Growth in running has been fueled largely by new Reebok (RealFlex and Zig Pulse) and Adidas (Climacool) introductions as well as the latest generation of Nike AirMax and Free styles. Share gains by Reebok and Adidas continues to come primarily at the expense of Puma and New Balance. However, in an uncharacteristic shift Nike conceded -173bps of share in the running category as well. Adidas/Reebok is clearly raising the competitive bar in this category, a development we’ll be watching closely in a category that Nike dominates with nearly 50% share. By comparison, Adi/Reebok has only 15% share.
  • Share gains by both Nike and Adidas in aggregate are among the key brand callouts due in part to contraction in the toning category. Interestingly, while Adidas has gained its share almost entirely in the athletic specialty channel, Nike has gained most of its share in the shoe chain and natn’l/department store channels over the last four months. It’s worth noting that Nike is not losing share in the key athletic specialty channel, but it’s not gaining it either. On the other hand, Adidas/Reebok appears to be taking greater share from the smaller fragmented brand set.
  • Converse posted its second month of positive sales growth in a year last month and its second consecutive month of share gain, which starts a stretch of considerably easier compares for the brand.
  • Reebok trends reflect the most dynamic shift in portfolio mix of any footwear brand over the last few years. What jumps off the page in looking at the brand’s trends is the volatility between sales, units, and ASPs. The resurgence of sales in 2010 was entirely driven by toning, which also took ASPs higher. However, since year-end ASPs have come down while sales have remained relatively stable on higher unit growth. Contrary to its toning counterpart that has been losing ~300bps of share on a monthly basis, Reebok as maintained positive share gains driven by a shift to new lower cost running product, which continues to drive recent brand momentum.

Taking up FL and FINL Estimates  - FW Mo Table 1 6 11


Taking up FL and FINL Estimates  - FW Mo MktShr Table 6 11


Taking up FL and FINL Estimates  - FW Mo by Cat 6 11


Taking up FL and FINL Estimates  - FW Mo Cat Athl 6 11


Taking up FL and FINL Estimates  - FW Mo Running 6 11


Taking up FL and FINL Estimates  - FW Mo ASPs 6 11


Taking up FL and FINL Estimates  - FW Mo MktSh 6 11


Taking up FL and FINL Estimates  - FW Mo MktShr Agg NKE 6 11


Taking up FL and FINL Estimates  - FW Mo MktShr NKE 6 11


Taking up FL and FINL Estimates  - FW Mo MktShr ADI 6 11


Taking up FL and FINL Estimates  - FW Mo Reeb 6 11


Taking up FL and FINL Estimates  - FW Mo MktShr SKX 6 11


Taking up FL and FINL Estimates  - FW Mo MktShr Puma 6 11


Casey Flavin



This note was originally published June 15, 2011 at 07:55am ET.


“True, atomic bombs have made nuclear war so catastrophic that I am convinced no country wishes to resort to it.  But I am equally convinced that we are at the mercy of an error of judgment or a technical breakdown, the source of which no man may ever know.”

-Jean Monnet


Jean Monnet is regarded by many as the chief architect of European integration.  Following the World Wars, there was much support for political movement that would lessen the probability of the horrors and injustices that ravaged Europe for so much of the first half of the Twentieth Century being repeated.  Indeed, a plaque in Washington D.C. on the front of the Willard Hotel memorializes Monnet as a man that died as a “proud citizen of the Europe he inspired and helped to create”.


The period immediately following World War II was clearly anomalous in many respects.  For one, there was broad consensus on the need for closer European integration which, it was claimed, was the only way to defeat the ugly beast of Nationalism that had marred so much of the continent’s past.  Every viewpoint must be understood in the context of the environment in which it is adopted.  Winston Churchill, possibly the most proud of all Englishmen, was firmly in favor of European integration.  In a speech at Zurich University, that came to be known as “The Tragedy of Europe”, Churchill stated plainly, “We must build a kind of United States of Europe”.  His conviction in this matter was clearly derived from his experiences of war-time Europe, speaking as he was in September of 1946.  Interestingly, while his use of “we” implies British participation in the process, he excluded Britain from his description of the proposed “United States of Europe”. 


Given that a key initial component of the European project, as proposed by the Schuman Declaration, was to be the pooling of coal and steel production, it is astonishing to think just how economically and financially integrated the present day European Union is.  Merely fifty-five years later, the labyrinthine European financial system has become so complex and interconnected that understanding the implications of policy changes or – indeed – the limits of national autonomy within Europe, has become exceedingly difficult.


Indeed, Matt Hedrick, Hedgeye’s cerebral Europe Strategist, has recently been analyzing the nuances of the European banking system of late.  The guidelines by which European money is created is quite opaque, with many standards relating to banking practices within the European Monetary Union seemingly in a constant state of flux.  For example, Matt has pointed out recently, in dialogue about Greece with a Hedgeye client, that National Central Banks can decide what collateral to accept from commercial banks based on ECB guidelines.  However, recent concessions mean that government debt and bank assets rated near or at junk are acceptable in some cases.  In addition, the recent downgrading of Greece to a credit rating of CCC from B by Standard & Poor’s is drawing attention to the country’s ability, or lack thereof, to meet future obligations.  There are innumerous potentially unexpected consequences that could arise from the current system.  


It has been astonishing to hear market commentators dismiss the risk Greece poses to the broader European and global financial markets.  Some television pundits have asserted that “Greece doesn’t matter”.  Clearly, given the interconnected nature of risk within the European financial system and the fact that the Bundesbank has the most exposure of any European bank to the peripheral countries, Greece absolutely matters.  The determination of European leaders such as Jean-Claude Trichet to assuage any and all fears of contagion within Europe – be they emanating from Greece, Ireland or elsewhere – speaks to this fact. 


Of course, European leaders have been forced to choose their words increasingly carefully since, essentially, the outset of the European sovereign debt crisis began attracting attention in 2010.  For instance, the viability of the single European currency has been called into question for some time.  As Hyman Minksy writes in “Stabilizing an Unstable Economy”, “Money arises not only in the process of financing, but an economy has a number of different types of money: everyone can create money; the problem is to get it accepted”.  This point highlights a crucial role that the European Union is assuming on a broader sense: assuming that the currency – and means by which it is created – continues to be accepted.  This logic can be extended to other facets of the European Union.  It is not only crucial that the common currency continues to be accepted by the people, but also that the common monetary policy, laws, policies and frameworks continue to be accepted also.  As social unrest intensifies in Europe, it becomes more and more challenging to bind a continent together which, for so much of its history, has been defined by factionalism.


The “Greece doesn’t matter” attitude is typical of U.S. centric investors that, time and again, commit the sin of neglecting to realize the interconnected nature of global macroeconomic risk.  It is acutely ironic that it may just be the highly integrated nature of Europe that breeds disagreement in the 21st Century after Monnet, Schuman, and so many others saw integration as key to securing the future prosperity of Europe’s people.  As recently as 2005, this view was held firmly.  Whether in Celtic Tiger Ireland or the booming Costa del Sol in Spain, European integration was credited as a key driver of prosperity.  Many in the peripheral countries now blame a lack of monetary autonomy for sluggish growth.


What’s voted by the market as “good” today can be “bad” tomorrow.  That can be correlation risk, interest rate risk, geopolitical risk or any other condition or accepted truism.  Investors that dismiss this reality are repeating the mistakes of the recent past, just as we believe that policy makers in Washington are repeating mistakes made in the 1970’s that led to Jobless Stagflation.  If an unfortunate turn of events did take place in Europe – George Soros recently stated his belief that the risk of this is mounting – the traditional response will take over the airwaves: “it was unforeseeable”.  What is foreseeable about markets is that they are unpredictable, especially in Europe which has seen so much turmoil and conflict throughout its modern history.  From a shorter-term perspective, price is telling us all we need to know as equity markets slump and CDS spreads continue to widen.  While the U.S. has no shortage of its own internal problems, we know from very recent history that the global markets are closely interconnected.


Indeed, as Churchill said in “The Tragedy of Europe”, “Is it the only lesson of history that mankind is unteachable?”


Rory Green






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.


The Macau Metro Monitor, June 15, 2011




The new facilities will consist of a US$3.0 BN five-year Term Loan A and an undrawn US$500 MM five-year Revolver, maturing in 2016.  Sands will have the option to raise an incremental $1.0BN of new senior secured credit facilities.  After a 6-month introductory period, borrowing rate will be priced at LIBOR +2%.  Proceeds will be used to help pay down Sands' $2.7BN Venetian Macau Credit Facility, $1.75BN Venetian Orient Limited Credit Facility, and for construction of Sites 5 & 6.  The refi is subject to certain Macau Government approvals.


Singapore's Casino Regulatory Authority (CRA) says it is reviewing "more than a handful'' of junket operators to see if they can be given licences to work at the two integrated resorts.  CRA refused to say if any licences would be given out by the end of this year.  



The Director of the Hong Kong and Macau Affairs Office of the State Council, Wang Guangya, paid visits to Grand Lisboa and Galaxy Macau yesterday.  This was an unusual move as usually Beijing officials opt to stay away from casinos during their official trips to Macau.



Permira Advisers LLC may be looking to sell its US$1.7 billion (MOP13.6 billion) stake in Galaxy Entertainment Group.  The deliberations are still at an early stage and no timing or size of the sale has been decided yet.  Permira bought its 20%  stake in Galaxy in October 2007.


Cambodian casino operator NagaCorp, which operates Phnom Penh's only full-scale casino, announced it will acquire two development projects in a US$369 million deal to expand its presence in Phnom Penh.  The projects would expand the existing NagaWorld and double the company's developed floor space, and create a two-level pedestrian shopping arcade called NagaCity Walk.


Nagacorp’s CEO and majority shareholder, Chen Lip Keong, is privately funding the new projects, which are expected to be completed in 2016.


Singapore's Urban Redevelopment Authority (URA) reported a 12.75% MoM drop in private homes sold in May, from 1,805 to 1,575 units.


Singapore's overall unemployment rate fell to a three-year low of 1.9% in March amid healthy economic growth and a tight labor market.

American Optimism

This note was originally published at 8am on June 10, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“He had shown himself to be … a young man who took great pride in his perseverance and steadiness of purpose.”

-Stephen Ambrose


A month or so ago I referenced researching more about the roots of Jeffersonian thought (an alternative to British Keynesianism). Being a Canadian who is constantly thirsting to be educated in American history, I often lean on my American-born colleagues for reading recommendations.


One of our analysts, Allison Kaptur, pointed me towards Stephen Ambrose’s “Undaunted Courage” – the story of Meriwether Lewis, Thomas Jefferson, and the Opening of the American West. It was easily one of the most gripping and inspirational stories I have ever read.


The way the best storytelling is told is when the author personalizes the experience and reaches in and grabs you. Many of you will be familiar with the late Stephen Ambrose for his work in “Band of Brothers.” Many of you may not be familiar with the passion Ambrose had for backpacking every step of the Lewis & Clark Trail with his family.


“Of courage undaunted” was the opening description of Thomas Jefferson’s praise for Meriwether Lewis. It’s where Ambrose’s wife, Alice, came up with the idea for the title of the book. As Ambrose acknowledges best in answering the question, “what is the secret to being a successful author?” – “Marry an English major.”


Lewis never married. He died, tragically, at the very young age of 35 years old in Hohenwald, Tennessee, shortly after being appointed by Jefferson as the Governor of Louisiana in 1806. While it would be easy to tell stories about how messed up Meriwether’s mind became in his final years, I think it’s best for Americans to celebrate the confidence and courage it took for him to change the world.


“At eighteen years old, he was on his own. He had travelled extensively across the southern part of the Unites States. He had shown himself to be a self-reliant, self contained, self confident teenager…” (Ambrose, “Undaunted Courage”, page 29)


After 6 consecutive down weeks for US stocks, I’m calling attention to this story after being inspired by a great American Olympian who I have the pleasure and privilege of working alongside at Hedgeye – Bob Brooke.


On Wednesday night, Bob, Big Alberta, Darius Dale, Kevin Kaiser, and I were having a few beverages watching Game 4 of the Stanley Cup Playoffs with our summer interns. After proudly attending his son’s graduation at a very patriotic ceremony at Notre Dame, Bob told me it was a good time to think about a way to communicate to our clients how optimistic we are about the future.


You see, Wall Street and Washington like to put people like us in boxes. When you’re always thinking inside of the box – I guess that makes sense. You’re either a Bull or a Bear, a Democrat or a Republican – and it’s easier for these group-thinkers to generalize and not take the time to understand what something new could mean.


Just because I am bearish on US Equities, old Wall Street, and Keynesian Central Planning in Washington, doesn’t mean I don’t have the confidence and courage to put my own capital at risk to build a great team in this great country.


In fact, it’s quite the opposite – everything I am pessimistic about, gives birth to my optimism.


At the Hedgeye Holiday Party this past December, I cited a very popular American country song titled “Bless the Broken Road” (recent rendition by Rascal Flatts) to better explain why it’s our industry itself that gives me reason for optimism:


Every long lost dream led me to where you are
Others who broke my heart they were like Northern stars
Pointing me on my way into your loving arms
This much I know is true
That God blessed the broken road
That led me straight to you


Without giving away Hedgeye’s strategy to continue to be the change we want to see in this profession, that’s all I have to say about that. If Wall Street and Washington don’t realize that the most simple solution to all of this is to stop what they are doing, then the rest of us will just have to keep plugging away until we’ve reached the new open frontier of American Optimism that’s as old as America itself.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1531-1548, $98.46-102.91, and 1261-1304, respectively.


God Bless America,



Keith R. McCullough
Chief Executive Officer


American Optimism - Chart of the Day


American Optimism - Virtual Portfolio


Yesterday’s May retail sales data was bullish for the restaurant industry.  Food Service and Drinking Places posted healthy sales growth M/M of 0.6% versus the -0.8% decline in April.  Overall, sales in May fell (ex-auto sales were up) with weakness was broad based.


The National Restaurant Association projects that 50 million adults will dine at a restaurant to celebrate Father’s Day this Sunday, June 19. 



  • KKD, SONC, COSI and WEN all up on accelerating volume; all of the QSR stocks we monitor were up on the day
  • PNRA is investing $40 million in its first major television campaign that is deliberately understated in the way it portrays the fast-growing bakery-café brand.
  • DPZ announced its Domino’s App for iPhone and iPod touch is now available on the App Store. The app gives users the ability to order from Domino’s with just a few taps of the screen.


  • CBRL, RT and CHUX up on accelerating volume!  CBRL and RT are both being pursued by activist investors
  • KONA and RUTH down on accelerating volume




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 80.52%
  • SHORT SIGNALS 78.68%