Following management’s recent visit to NYC, I spent some quality time with the CAKE model and here are some of my initial thoughts.


Keith covered CAKE in the Hedgeye Virtual Portfolio today.  I remain bearish on the fundamental side of the stock.  Below are some key details to my perspective:

  1. I am coming in a little higher than guidance for Q2 and then closer to the low end of guidance for the FY.
  2. I think they can probably do more than their guidance of "at least $100M in share repurchase” given that high ending cash balances.
  3. Relative to recent trends, CAKE's comparable restaurant sales guidance seems reasonable.
  4. The bakery sales line slowed significantly in 1Q (on a 2-year average basis); the economy is keeping this business at bay. 


Here a few other important things to remember: 

  1. CAKE has an extra week in Q4
  2. They are doubling openings in FY11, which will impact preopening expense and capex; two important items that are hardly ever factored in correctly by consensus.


I still favor cake on the short side, particularly on any strength.





Howard Penney

Managing Director


Everyone has to eat.  The question is, do they eat at home or eat out?


On today’s Kroger conference call they stated the obvious; “[during the first quarter] the higher income customers are spending more”.  This should come as a surprise to no one.  The stock-market recovery over the past two years has seen a pronounced divergence emerge between the consumer confidence indices for higher and lower income households. 


KR management went on to say, “just the last few weeks, we are starting to see some behavior changes even in the higher income customers, our data is showing that people are eating out less. Obviously when people eat out less, that's a benefit for us because, you know, they are going to get their meals from us, versus going out to a restaurant.”  CPI data shows that, as inflation has ramped up from the trough in 2009, inflation in “Food at Home” has outstripped inflation in “Food Away From Home”.


The Kroger management team – like any other management team speaking on an earnings call – is always going to frame their situation in the best light possible and stated that KR’s price checks “show that most competitors are passing higher costs on to customers”.  However, as the charts below indicates, restaurants may have seen a benefit from – on a relative basis – raising prices less than their “Food at Home” competitors, if the BLS data is anything to go by.







What the data suggests is that supermarkets and other retailers whose prices are represented by the “Food at Home” Consumer Price Index are increasing prices at a faster rate than core CPI is climbing.  The “Food Away from Home” Consumer Price Index, on the other hand, is increasing at a slower rate than core CPI.  This could be aiding traffic trends in the restaurant industry, which, have generally been robust over recent quarters.  Additionally, the price action in the space – on a relative basis – has been particularly strong of late.


With KR comps this quarter at 4.6%, clearly the business is healthy whereas overall, restaurant industry is seeing comparable store sales running at around 2%.  Within the restaurant space, the chains focused on the higher end are running same-store sales that are above KR.


The CPI data published by the BLS would suggest that the restaurant industry has been more cautious about taking price, as it should be.  At this point, the main question in this area of the consumer space is, “when might the supermarkets’ aggressive stance with regard to pricing backfire?”  As yet, it seems that customers are still being cautious about spending and perhaps manage their own food consumption more closely by eating at home.  However, to the degree that price increases begin to turn away traffic from the grocers, restaurants would be the primary beneficiaries.  As things stand, the restaurant industry is poised to transition into a more competitive position.



Howard Penney

Managing Director

Greek Hysteria

Positions in Europe: Long Germany (EWG); We covered Spain (EWP) in the Hedgeye Virtual Portfolio today


Uncertainty reins in Greece—at least Greek government bond yields and cds spreads are indicating this as they make higher highs today.


Uncertainty has compounded along the lines of another temporary fix for Greece’s debt problems. The downturn in European equity markets, especially from the PIIGS, and the rise in bond yields over the last two days, alongside the -2% plunge in the EUR-USD yesterday (currently at $1.4143) reflect rising indecision on the fate of Greece following the inability of the Eurozone’s 17 Finance Ministers’ meeting to come to consensus on a solution; the downgrade of Greece’s credit rating to CCC by S&P; Greek protests against austerity yesterday; and calls from PM Papandreou late yesterday that he may step down, reshuffle his cabinet, or both, in the next day (or perhaps as soon as later today) as a handful of members from his slim majority ruling PASOK party have resigned over the last days (see chart below).


Greek Hysteria - meeeee1


Greek Hysteria - meee2


If confusion breeds contempt, market participants want clarity over the near term on 1.) an agreement for a bailout package for Greece, and 2.) a restructuring of the PASOK party with the minority conservative party.


Regarding point 1.), we think it’s highly probable that troika (ECB, EU, and IMF) steps in once again to fund Greece’s short term debt issues. Despite the higher highs in yields and CDS in Greece, which among “normal” conditions would clearly indicate default, the backing of Eurocrats to prevent a country from defaulting (here the ECB has the loudest voice), a currency crash, or a country exiting the Eurozone, should not be overlooked. We think this is why we’re seeing a floor in the EUR-USD around $1.40, and not freak-out levels to $1.20 or lower.


The debate now centers on a second bailout package for Greece to the tune of ~ 90 B EUR, complicit with the Greeks selling off state assets worth ~ 30-50 B EUR and more strict enforcement of austerity measures.  The Germans, under the voice of Finance Minister Wolfgang Schaueble, have proposed for investors to exchange all the Greek bonds currently in their portfolios for new ones with maturities extended by seven years. This presumes lower interest rates, with the original principal paid in full at the new maturity. The extent of this haircut, however, is not known, and obviously a very substantial risk. The ECB, on the other hand, is vehemently against investors (namely private) taking on any losses, which would imply under technical definitions (from the rating agencies) default/restructuring. The ECB advocates a straight bailout for Greece.


Regarding point 2, in the larger context we don’t think a reshuffling of the ruling party is material in terms of overall market direction. The opposition conservatives’ position against austerity (~6.5 Billion EUR in tax hikes and spending cuts) doesn’t address the country’s current outside funding needs to pay off maturing debt, nor are there white horse candidates to fix years of fiscal imbalances in Greece.


In our minds, Troika holds the reins in keeping Greece half-way “solvent” as it pushes the can of debt further down the road. As we’ve stated numerous times, Greece (and some of its peripheral peers) should be allowed to default and leave the union, for under the current structure there is no way for countries like Greece to use monetary policy to maneuver around weak growth and rising debt. Further there’s no mandate from the ECB on fiscal policy for the individual members to discourage fiscal excesses. This has created relative winners and losers under one currency, a paradigm that isn’t going to change, and is most clearly evident when regions (or the globe) enter a downturn in growth. 


Below is a calendar of critical meetings to address Greece’s debt issues, any of which may be a catalyst for an announcement of a new bailout package and/or a reshuffled Greek government. Among all this confusion, we remain grounded in the opinion that big brother (Troika) will once again fund Greece’s fiscal excesses. While this is no long-term solution, it should serve to cool near term market fears, support the common currency and reduce risk metrics from their highest highs to the more elevated levels we’ve seen year-to-date.  


New Greek cabinet – could hear of a reshuffling as soon as later today

Greek confidence vote – could occur soon after a new cabinet is named


Sun June 19 – a pre “emergency” Finance Ministers’ meeting will be held to discuss Greece

Mon June 20 – official Eurozone Finance Ministers’ meeting in Luxembourg

Thurs June 23-Fri June 24 - summit of EU leaders to assess the 18-month-long debt crisis



Matthew Hedrick

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Price seems reasonable. Given low borrowing rate, deal should be very accretive, particularly with synergies included.




  • Property generated $41 EBITDA as of May 11 2011; in addition, at least $5 MM in purchasing synergies (e.g. insurance) is expected, which can improve margins.
  • $1BN market; market grew 2% in 1Q 2011.
    • #2 property in the market; similar customer type to Beau Rivage
  • 13 acres of undeveloped land on the property - can be used for additional hotels/retail facilities
  • Priced at 7.2x multiple including synergies and $44m in incremental capital
  • Net debt will increase by 150-200MM to fund purchase net of jai lai sale in FL 
    • 560MM in RC availablity: 64% of commitments related to extended portion 
    • Plans to use extending portion of debt to fund purchase; non-extending portion of credit facility (330MM) will mature in May 2012.
  • Completely unrelated to whether or not they buy Borgata
  • 2,500 lot parking garage
  • B Connected program will be deployed immediately after the acquisition is approved.
  • Other BYD properties impact:
    • Treasure Chest will benefit the most from this acquisition since it's pretty close and IP can give the local New Orleans customers a more destination-type experience.
  • Shreveport property (Sam's Town) under pressure from Native American gaming in Oklahoma.
  • Insurance market: stable to slightly decreasing
  • $20MM D&A run rate; should use Blue Chip as a proxy
  • $44MM Capex used:
    • Will be spent across 10-12 months
    • Slot product--pretty up-to-date; don't see much need for replacements
  • De-leverages balance sheet by 50 bps
  • Property Maintenance capex: 5-8MM
  • Covenant risk not an issue


Wendy’s is a name that has divided the street of late.  A recent upgrade has put some support under the stock but, overall, the intermediate term carries a fair degree of uncertainty for the concept.  Longer-term, a more focused management team thanks to the long-overdue sale of Arby’s.  Below, I go through some key initiatives being enacted by management and give my take on whether or not the initiative is progressing well or has positive implications for future earnings power.


Improvements completed to the core menu:

  • Value, with the introduction of the My 99 Value Menu
  • Salads, with the introduction of four premium entrée salads
  • Fries, with the introduction of natural-cut fries with sea salt

HEDGEYE VIEW - A much needed upgrade that will benefit the perception of the Wendy’s brand!


Improvements in the pipeline to be done by year-end:

  • Working to improve the core hamburgers line - Dave's Hot 'n’ Juicy cheeseburgers will be introduced 2H11. 
  • Working to improve chicken sandwiches; In 4Q11 will see the introduction an entirely new line of chicken sandwiches known as the Gold Chicken line, including new flavors and toppings, such as bruschetta with diced tomatoes, chopped basil and balsamic glaze. These sandwiches will also feature a new butter-toasted bun. 

HEDGEY VIEW - This will be critical in developing incremental customer visits in 2H11.  This should be a positive for comps as it is rolled out across the system. 


Current sales trends as of the end of 1Q11:  North America company-owned same-store sales turned positive in April, up 0.5%.  Furthermore, the U.S. was stronger at up 1.1%.  In the current quarter, Wendy’s restaurants are promoting the Bacon Mushroom Melt Hamburger or Flavored-Dipped Chicken Sandwiches.  In June, Wendy’s introduced the new Berry Almond Chicken Salad and Wild Berry Tea.


HEDGEYE VIEW - I continue to believe that current trends remain in the 2-3% for WEN USA.  Using a strategic pricing model initially implemented in 2010, WEN plans to raise prices in 2011.


REMODELS - An important part in pulling all the initiatives together will be upgrading the asset base of the concept.  Management has been working on several new restaurant designs, with the intention of beginning the remodel process in 3Q11.  They are currently testing four new restaurant designs and expected to have at least one of each open by late September, with expectations for an aggressive rollout program to begin in 2012.


HEDGEYE VIEW - I believe that the customer feedback is not working and that management is going back to the drawing board.  I also believe that the success of the MCD units in Tampa, Florida has had an impact on what features management is ultimately seeking to implement at the remodels.



BREAKFAST - Wendy’s is trying very to participate in the fastest growing day-part of the QSR segment.  Management has last communicated that they are making excellent progress on Wendy's breakfast program, and they are very encouraged with both sales and customer reaction to our new breakfast products.”  Currently, the company is testing its products in six markets and has recently reduced couponing. 


The breakfast expansion timeline:

  • In 2H10 management launched the new breakfast menu in four test markets: Kansas City, Phoenix, Pittsburgh and Shreveport.
  • In the first half of 2011, expanded breakfast into two additional markets: Louisville and San Antonio. 
  • Over the balance of 2011, the intention is to have more breakfast markets added. 
  • By the end of 2011, the intention is to have the breakfast menu in about 1,000 restaurants including approximately 600 franchise restaurants.

HEDGEYE VIEW - Longer term, we believe breakfast represents an opportunity to grow incremental system wide sales.  In the short run, while customer awareness, trial and repeat purchase rates are all improving, the current level of sales are not supportive of a major roll-out, which could cause the company to fall short of the 1,000 unit goal. 



SUMMARY - I like the long term potential for the Wendy’s as a standalone concept.  While 2011 is a transition year, a short fall in a couple of the growth initiatives could lead to a short fall for the company being able to hit the double-digit EBITDA growth in 2012.  At the very least it puts incremental pressure on core menu initiatives to incrementally more successful to make up for the short fall in the other initiatives.





Howard Penney

Managing Director

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