Just a little tidbit on ASCA. 



I was in Kansas City yesterday and visited ASCA KC.  It looks like the flow through has been very strong at the property so we should see sequential margin improvement.  KC is a major contributor for ASCA as its second largest property.  We think the read on ASCA KC provides further evidence that the company is on track to beat the consensus Q2 estimate of $0.45.  We are at $0.52.


We’ve been a little cautious about sequential VIP volume growth as Macau works its way through the summer.



While we clearly haven’t seen any evidence of a slowdown, our concern surrounds the historical 9 month lag between Mainland China tightening (higher discount rate and bank reserve requirement) and VIP volumes, which we’ve shown to be statistically significant (see our note: A VIP SLOWDOWN IN THE CARDS? (05/22/11).  Now the concern seems to be growing in the junket community as well.


While we need to do some more work in this area, it appears that some junkets fear that the significant underground banking industry in China is becoming a more attractive option for cash deposits than junket operators.  VIP liquidity is somewhat fueled by investors who get a fixed return on their money deposited with junkets.  That yield has been higher than the above board Chinese banks so there’s been no issue with keeping the junket liquidity engine pumping.  Now that government credit restrictions are tying the hands of the big banks, the underground banks have moved in to fill the significant credit demand.  With that kind of demand, these banks can afford to pay higher deposit rates than the big banks and even the junket operators.  Thus, money may start to move from the junkets to the underground banks.  Obviously, this could constrict junket liquidity, junket play, and ultimately VIP casino revenues.


While June has certainly been much slower than May, we cannot yet attribute the sequential slowdown to lower junket liquidity.  June is seasonally slower and May benefited from high hold.  We will be watching this closely and continuing to talk to market participants and will update you on any further findings.  In the meantime, we just wanted to point out the potential of this issue as it may be significant.

Athletic Specialty Apparel Performance Gap Widens


Athletic apparel sales slowed for the third consecutive week across the industry. Sales in the athletic specialty channel, however, diverged posting a significant sequential acceleration widening the recent performance gap between the two. ASPs in the specialty channel remain strong up MSD, but also turned sharply higher across the industry debunking concerns over potential inventory clearance activity – an incremental positive for margins early here in the 2Q.


Athletic Specialty Apparel Performance Gap Widens  - FW App App Table 1 6 15 11


Casey Flavin


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I continue to believe that the COSI turnaround story is on track, despite what the weakness in the stock, of late, might be suggesting.  In 1Q11 COSI reported a 3% in same-store sales, implying that 2-year trends declined from a -0.3% to -0.7%.  All of our visits and checks suggest that the company can post 3-4% same store sales in 2Q11. 


One of our recent checks was by Hedgeye intern, Yale football star, and restaurant channel-checker extraordinaire, Allen Davis.  The following is his account of his channel check of the Cosi restaurant on East 8th Street in NYC:  


In the third week of my internship, I discovered what will probably become the most important lesson of my summer: When working as a research analyst covering the restaurant space, always mention places you haven’t eaten. Who would have thought that a casual inquiry as to the food selection as Cosi would lead to my first due diligence trip?


The first thing I noticed when I walked in was how many people were in there. I’d make a rough estimate of 16. I walked up the counter, was asked what I wanted, then looked up for the menu. No menu at the counter!  Instead, it is posted in small framed sections along the wall as you walk in. I didn’t even notice it.  I just assumed it was art of some kind. I can certainly appreciate the effort to class up a fast casual place with innovative menu design; perhaps the behind the counter menu is too fast food-ish, but some warning would have been nice.


The menu itself was well organized.  Each framed piece was a different type of item. Options weren’t as wide as I expected. Other than pepperoni, the pizza just seemed like pizza versions of their sandwiches. I nearly got the half-sandwich plus soup deal, it seemed like a great value, but they didn’t have any hearty soups. I guess the margins on selling those aren’t as high. I ended up getting a strawberry-mango smoothie and a Bacon, Turkey &Cheddar Melt. The most important factor in my choice was that bacon was the first ingredient listed. That’ll get me every time.


When the cashier asked if it was ordering my food to stay or to go, I turned to look into the seating area and had two big realizations. Firstly, no one sitting down was actually eating anything. Not one person. There were a few half empty drinks, so I guessed they had been at one point, but for now they were just hanging out, typing away on laptops. I guess Cosi is the Starbucks of fast casual food: buy one thing and you can linger as long as you want. The second thing I noticed was that the seating was amazing. I know a lot of places have started upgrading the interior, but McD’s has nothing on this place. It felt like a living room, complete with big comfy armchairs, a few longer bench-like sofas. They weren’t messing around with leather seats and padded stools here. They meant business.  However, I needed to get back to my apartment to watch PTI before my workout, so I took my food to go.


While I waited, I watched a guy in a chef’s jacket make bread. I’ve never seen anyone other than my Mississippi grandmother make bread so, naturally, I stared at him.  I’m sure he felt like an animal on display at the zoo. There was a basket of sample slices by the station. I took a piece.  It was really good, so I took another. By the time I remembered my manners, I must have housed six or seven pieces.  I don’t know it they sell their bread, but they should.


Now, on to the food. The sandwich was good. Pretty standard-fare, but it didn’t give me anything to hold against it. I wasn’t a huge fan of the Dijon sauce on the melt; it was a bit spicy for my taste. They put a good amount of bacon on the sandwich though and it was cut thicker than I expected. A lot of places (McDonald’s I’m looking in your general direction) are really stingy with bacon. The best compliment I can give the melt is that It looked like the picture, something I don’t see too often. I didn’t like the smoothie. The mango part was good, but they put strawberry sauce in it. This sauce is a growing problem in fast casual/quick service beverages.  I don’t know who thought it was a good idea, but they were wrong. Pouring strawberry sauce into a mango smoothie doesn’t make a strawberry-mango smoothie. The strawberry sauce just sat at the bottom and since the straw wasn’t sturdy enough to support a stir, leaving me no option but to drink the sauce before I got to the mango smoothie, which was actually good.


Overall, my first Cosi meal was pretty good. When I go back, I won’t get the same drink, but I’m definitely going back.



Allen Davis



Howard Penney

Managing Director


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


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