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WEEKLY COMMODITY MONITOR: RRGB, JACK, WEN, MRT, EAT, MCD, PNRA, DPZ, CAKE, BWLD

Price instability continues in commodity markets with large gains and declines seen in many commodities over the past week.

 

OVERVIEW

Coffee, wheat and corn prices came down considerably week-over-week while meat prices soared.  Earnings kick off, in earnest, in mid-July and it will be fascinating to hear what management teams have to say about cost of sales.  Cheese, in particular, is one that catches the eye.  The price of cheese conveniently declined into last quarter’s earnings calls but has now shot back past the March high to a YTD high (see detail below).  The USDA estimates that overall that U.S. food costs may rise 4% this year, the most since 2008.

 

WEEKLY COMMODITY MONITOR: RRGB, JACK, WEN, MRT, EAT, MCD, PNRA, DPZ, CAKE, BWLD - commod 622

 

 

LIVE CATTLE (RRGB, JACK, WEN, MRT, EAT, MCD)

Beef prices have risen sharply over the past week to boost the YTD figure back into positive territory after a drought in Texas, and subsequent slaughtering of livestock, has provided some relief in beef prices.  Recent supply and demand metrics suggest that the elevated prices of beef may continue for some time, perhaps exceeding the expectations of some management teams. 

 

Live cattle prices were supported by tighter supply pulling demand forward.  Overseas demand for U.S. beef as also pushed prices higher. 

 

Below are some comments from management teams on recent earnings calls regarding beef costs that we feel are important to keep in mind heading into the upcoming earnings season:

 

  • RRGB (5/20/11): Ground beef could be higher by as much as 20% year-over-year, which has a meaningful negative impact to our margins.  Hedgeye: live cattle prices are up +25% y/y
  • JACK (5/19/11): Beef accounts for more than 20% of our spend and is the biggest factor driving the change in our guidance. For the full year, we are now anticipating beef cost to be up nearly 14% versus our previous expectation of 9% inflation. We expect beef cost to be up approximately 14% to 15% in the third quarter. Hedgeye: beef costs are likely going to exceed JACK’s prior guidance.
  • WEN (5/10/11): We communicated to you back in March that we expected beef cost to rise approximately 10% to 15% and that we expected our total commodity costs to rise 2% to 3% in 2011. We are now forecasting that our beef cost will rise 20%. Hedgeye: there is moderate upside risk to beef price guidance for WEN.
  • MRT (5/4/11):

Q: I wanted to re-visit the overall expectations for your commodities basket, and I missed the part about beef, just wanted to verify that it was up in the 20% range.

A: No. No, no. I said the low double-digits.

  • EAT (4/27/11):  Well, consistent with what we've talked about in the last month or so as we visited many of you, beef continues to present the most significant inflationary pressure in our commodity basket.
  • MCD (4/21/11): And so if the commodity markets move significantly from here and the main ones obviously looking at beef, looking at corn, wheat, coffee, et cetera, our guidance reflects where the markets are today. If they stay around these levels, the 4% to 4.5% [commodity guidance for 2011] should be locked in. If they move dramatically up or down, then we'll have to reflect that as we move forward. Hedgeye: inflation guidance may have to be adjusted higher.

WEEKLY COMMODITY MONITOR: RRGB, JACK, WEN, MRT, EAT, MCD, PNRA, DPZ, CAKE, BWLD - live cattle 622

 

 

WHEAT (MCD, PNRA, DPZ)

Wheat costs declined -5.8% over the past week as temperatures, variable rainfall, and adequate soil-moisture reserves in the U.S. Midwest will promote plant growth, according to Don Roose, the president of U.S. Commodities Inc. in West Des Moines, Iowa.  Ukraine’s exports of wheat will probably decline to 3.7 million metric tons for the year ended June 30 from 9.2 million tons the year prior (a 60% decline).  Prices have gained over the past couple of days on speculation that the lower prices will bring in buyers.

 

Below are some comments from management teams on recent earnings calls regarding wheat costs that we feel are important to keep in mind heading into the upcoming earnings season:

  • MCD (4/21/11): And so if the commodity markets move significantly from here and the main ones obviously looking at beef, looking at corn, wheat, coffee, et cetera, our guidance reflects where the markets are today. If they stay around these levels, the 4% to 4.5% [commodity guidance for 2011] should be locked in. If they move dramatically up or down, then we'll have to reflect that as we move forward. Hedgeye: inflation guidance may have to be adjusted higher.
  • PNRA (4/27/11): In this expense line, we expect margin unfavorability to continue to grow on increased all-in cost inflation throughout the year -- and because we haven't taken and we don't currently plan to take pricing in our dough sales for franchisees this year.  Hedgeye: wheat inflation could possibly subside in the back half of the year as comparisons become less unfavorable for buyers.  This will be more likely, of course, if the dollar strengthens.
  • DPZ (3/1/11): We’ve got wheat locked down for the year.

WEEKLY COMMODITY MONITOR: RRGB, JACK, WEN, MRT, EAT, MCD, PNRA, DPZ, CAKE, BWLD - wheat 622

 

 

CHEESE (CAKE)

Dairy costs were relatively flat week-over-week but, pertaining to our short thesis on CAKE, the chart below tells you all you need to know about their inflation guidance for 2011 (+4.5% in 1H, +2.5% in 2H).  Barring a significant drop in dairy prices, it is likely that inflation guidance for 2H will have to be raised.

 

WEEKLY COMMODITY MONITOR: RRGB, JACK, WEN, MRT, EAT, MCD, PNRA, DPZ, CAKE, BWLD - cheese 622

 

 

CHICKEN WINGS (BWLD)

Chicken wing prices seem to be turning higher as we head into the second half of the year.  This is not unusual, as the chart below shows, but on a global basis it seems that chicken prices may see more support going forward.  Inflation is clearly not likely for the remainder of 2011 but, as this is almost certainly baked into the price of BWLD, the outlook into 2012 is important to monitor. 

 

WEEKLY COMMODITY MONITOR: RRGB, JACK, WEN, MRT, EAT, MCD, PNRA, DPZ, CAKE, BWLD - chicken wings 622

 

 

Howard Penney

Managing Director


Athletic Apparel Industry Sales Rebound

 

Athletic apparel industry sales rebounded sharply this week after three consecutive weeks of sequential declines. Sales in the athletic specialty channel ticked slightly lower though continue to outpace the industry and remain robust up +10% against the toughest compares over the next two months. The most notable callout this week is the strength in ASPs across the board and continued growth in the specialty athletic channel suggesting further evidence that inventory levels in the channel remain in check.

 

Athletic Apparel Industry Sales Rebound - FW App App Table 6 22 11

 

Casey Flavin

Director


Downward Facing Dog

This note was originally published June 22, 2011 at 08:30am ET.

 

“It ain’t over ‘til it’s over.”

-Yogi Berra

 

My name is Daryl Jones.  I’m a former hockey player from Alberta.  I practice yoga (sometimes even Bikram yoga).

 

Last night I was thinking what it must be like for the Greek Socialists to have to fully embrace the concept of dramatically cutting government spending.  From a personal perspective, I think it is a little like me admitting that I practice Yoga.  In my heart, I’m still a hockey player, but deep down I also know that practicing yoga is much better for my aging, thirty-something body.  Nonetheless, it remains embarrassing to admit. (No offense to any of our Yogi readers.)

 

Yesterday, Greek Prime Minister George Papandreou won a confidence vote to sustain his leadership of the Greek government.  The next major date for the Greek government is June 30th when the Greek parliament votes on austerity measures of EUR28 billion.  Assuming these measures are passed, then the EU and IMF will extend a EUR12 billion lifeline to Greece.

 

Obviously, it is unlikely that these austerity measures do not pass, given the new cabinet has passed the confidence test.  The reaction from the markets to the likelihood of austerity and additional bailout monies for Greece was, well, muted at best.  In fact, Greek 10-year yields declined a measly 30 basis points from yesterday to 16.97%, while the periphery yields moved even less with both Spain and Italy 10-year yields effectively flat from yesterday.  The markets are calling the impending extend and pretend from the EU and IMF for what it is – a short term solution to a long term issue.  As we all know, being on the wrong side of a duration mismatch is never a good thing.

 

The other day I had an exchange with a friend that started with her asking me generally about the economy (for purposes of privacy we will call her The Diplomat).  Our discussion quickly evolved into a broad discussion of economic policy.  To be fair to The Diplomat, while she has a BA from Yale and law degree from Harvard, she has a limited economic background.  She also willfully admitted that she gets most of her info from The New Yorker and New York Times.  After I went on a bit of rant about the low return of government spending, she responded, “I thought Keynesian economics was sound.”

 

This, ironically, is the one key positive from the sovereign debt issues in Europe.  These issues are quickening the pace towards the demise of Keynesian economics.  The simple fact that a Greek Socialist had to fight to retain his government in order to have the ability to pass massive government spending cuts is about as representative of the end of Keynesian economics as it gets. In the long run, this will be a positive.  In the short run, we will see more pain.

 

Just over a year ago, on May 18th, 2010, we gave a presentation to our subscribers entitled, “Bearish Enough on Spain?”.  The presentation is posted here:

 

http://docs.hedgeye.com/Hedgeye%20Q2%20Themes%20and%20SPAIN%20May%2018%202010.pdf

 

Last May, while the Greek issues were widely known, we contended that investors were not bearish enough on the peripheries, in particular Spain.  Spanish CDS literally bottomed the day we gave our presentation and has been trending upwards steadily ever since.  Specifically, 5-year CDS closed at 177bps on May 18th, 2010 and last traded at 279bps, which is a 56.8% return from our call.

 

The primary takeaway from Greece’s actions yesterday and the market’s reaction today is that sovereign debt issues are far from over and, we would submit, our call that investors are still not bearish enough on the peripheries remains intact.  If Greece can rattle the world’s markets, the reaction will be amplified as fiscal and debt issues accelerate in Spain and Italy.  For reference, Spain is the 8th largest economy in the world and 5th largest in Europe, or 5x the size of Greece.  Spain ain’t Kansas, and I ain’t Toto.

 

With the excitement in Greece behind us, the focus returns to the United States today and the FOMC statement and the Bernanke presser thereafter.  Our view on U.S. interest rate policy is that the Fed will remain Indefinitely Dovish.  To be specific, we believe this means an interest rate increase will not occur before well into 2012.  As for Quantitative Easing, recent rhetoric suggests that the Fed is done with this policy.   History, on the other hand, suggests that if we get three or so months of negative payrolls, the policy will be revisited, even though Chairman Bernanke clearly appears frustrated by the limited impact of QE1 and QE2. 

 

The reality is, though, that the ineffectiveness of QE1 didn’t stop the Fed from implementing QE2.  Personally, I don’t believe I’ve seen a more apropos manifestation of Albert Einstein’s definition of insanity than Quantitative Easing. As Einstein said:

 

“Insanity: doing the same thing over and over again and expecting different results.”

 

Namaste,

 

Daryl G. Jones

Managing Director

 

Downward Facing Dog - Chart of the Day

 

Downward Facing Dog - Virtual Portfolio


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TALES OF THE TAPE: SBUX, KKD, YUM, WEN, SONC, DRI

Notable news items and price action from the restaurant space as well as our fundamental view on select names.

 

 

MACRO

 

It seems that inflation is continuing to subside as the stronger dollar impacts market prices of commodities today.  Supply and demand dynamics, however, continue to point higher for agricultural commodities; speculation mounted yesterday that hot weather in the growing areas of the U.S. may limit corn and soybean crop prospects this year. 

 

Yesterday, the ICSC cut its forecast for June comps, now sees up 2%-3% ex-fuel, had seen 3%-4%.  We are short CBRL in the Hedgeye virtual portfolio and very cautious on CAKE.

 

 

QUICK SERVICE

  • SBUX is a Buy, according to UBS with upside to Fiscal 2012 consensus EPS in what the bank describes as “one of the best large capitalization growth stories” in consumer.

Hedgeye: While we are long SBUX in the Hedgeye Virtual Portfolio and believe that the CPG business offers SBUX room to continue its growth trajectory, from a quantitative perspective the stock is immediate-term TRADE overbought.

 

  • KKD is going healthy, selling fruit juice, yoghurt, and oatmeal.

 

  • YUM Director of IR Timothy Jerzyk spoke at the Jeffries conference yesterday and highlighted his company’s belief that YUM can have 20,000 restaurants in China, with profit in the country growing by 15%.  East Dawning, according to YUM, is a “great opportunity” for China growth.

Hedgeye: YUM is leveraging its superior position in China and emerging markets to gain an advantage over its competition.  While the U.S. business is performing poorly, China is now so important for the company that, in order to be negative on YUM, one must be negative on China.

 

  • WEN upgraded to hold from sell at Argus Research.

Hedgeye: We still think there are two negative data points not in the stock (remodels being rethought and breakfast not working).

 

  • SONC to report EPS today - Comps System +4.9%; Franchise +4.7%; Company +6.1%

Hedgeye - expectation are now elevated to the point that it’s going to be hard to beat.  The turnaround is well established.  Valuation is rich at 9.1x EV/EBITDA.  Without big upward revisions, the upside from here is about $1.10.

 

FULL SERVICE

  • DRI is one of the cheapest shares out there, according to Morgan Stanley, with limited downside and a dividend hike in its “back pocket”.  DRI reports 4QFY11 earnings on June 30.

Hedgeye: As I said yesterday, the SSS have accelerated, but the question remains about consumer preference for the promotion, especially given the double digit inflation the company is experiencing in seafood.

 

TALES OF THE TAPE: SBUX, KKD, YUM, WEN, SONC, DRI - stocks 622

 

 

Howard Penney

Managing Director



Downward Facing Dog

“It ain’t over ‘til it’s over.”

-Yogi Berra

 

My name is Daryl Jones.  I’m a former hockey player from Alberta.  I practice yoga (sometimes even Bikram yoga).

 

Last night I was thinking what it must be like for the Greek Socialists to have to fully embrace the concept of dramatically cutting government spending.  From a personal perspective, I think it is a little like me admitting that I practice Yoga.  In my heart, I’m still a hockey player, but deep down I also know that practicing yoga is much better for my aging, thirty-something body.  Nonetheless, it remains embarrassing to admit. (No offense to any of our Yogi readers.)

 

Yesterday, Greek Prime Minister George Papandreou won a confidence vote to sustain his leadership of the Greek government.  The next major date for the Greek government is June 30th when the Greek parliament votes on austerity measures of EUR28 billion.  Assuming these measures are passed, then the EU and IMF will extend a EUR12 billion lifeline to Greece.

 

Obviously, it is unlikely that these austerity measures do not pass, given the new cabinet has passed the confidence test.  The reaction from the markets to the likelihood of austerity and additional bailout monies for Greece was, well, muted at best.  In fact, Greek 10-year yields declined a measly 30 basis points from yesterday to 16.97%, while the periphery yields moved even less with both Spain and Italy 10-year yields effectively flat from yesterday.  The markets are calling the impending extend and pretend from the EU and IMF for what it is – a short term solution to a long term issue.  As we all know, being on the wrong side of a duration mismatch is never a good thing.

 

The other day I had an exchange with a friend that started with her asking me generally about the economy (for purposes of privacy we will call her The Diplomat).  Our discussion quickly evolved into a broad discussion of economic policy.  To be fair to The Diplomat, while she has a BA from Yale and law degree from Harvard, she has a limited economic background.  She also willfully admitted that she gets most of her info from The New Yorker and New York Times.  After I went on a bit of rant about the low return of government spending, she responded, “I thought Keynesian economics was sound.”

 

This, ironically, is the one key positive from the sovereign debt issues in Europe.  These issues are quickening the pace towards the demise of Keynesian economics.  The simple fact that a Greek Socialist had to fight to retain his government in order to have the ability to pass massive government spending cuts is about as representative of the end of Keynesian economics as it gets. In the long run, this will be a positive.  In the short run, we will see more pain.

 

Just over a year ago, on May 18th, 2010, we gave a presentation to our subscribers entitled, “Bearish Enough on Spain?”.  The presentation is posted here:

 

http://docs.hedgeye.com/Hedgeye%20Q2%20Themes%20and%20SPAIN%20May%2018%202010.pdf

 

Last May, while the Greek issues were widely known, we contended that investors were not bearish enough on the peripheries, in particular Spain.  Spanish CDS literally bottomed the day we gave our presentation and has been trending upwards steadily ever since.  Specifically, 5-year CDS closed at 177bps on May 18th, 2010 and last traded at 279bps, which is a 56.8% return from our call.

 

The primary takeaway from Greece’s actions yesterday and the market’s reaction today is that sovereign debt issues are far from over and, we would submit, our call that investors are still not bearish enough on the peripheries remains intact.  If Greece can rattle the world’s markets, the reaction will be amplified as fiscal and debt issues accelerate in Spain and Italy.  For reference, Spain is the 8th largest economy in the world and 5th largest in Europe, or 5x the size of Greece.  Spain ain’t Kansas, and I ain’t Toto.

 

With the excitement in Greece behind us, the focus returns to the United States today and the FOMC statement and the Bernanke presser thereafter.  Our view on U.S. interest rate policy is that the Fed will remain Indefinitely Dovish.  To be specific, we believe this means an interest rate increase will not occur before well into 2012.  As for Quantitative Easing, recent rhetoric suggests that the Fed is done with this policy.   History, on the other hand, suggests that if we get three or so months of negative payrolls, the policy will be revisited, even though Chairman Bernanke clearly appears frustrated by the limited impact of QE1 and QE2. 

 

The reality is, though, that the ineffectiveness of QE1 didn’t stop the Fed from implementing QE2.  Personally, I don’t believe I’ve seen a more apropos manifestation of Albert Einstein’s definition of insanity than Quantitative Easing. As Einstein said:

 

“Insanity: doing the same thing over and over again and expecting different results.”

 

Namaste,

 

Daryl G. Jones

Managing Director

 

Downward Facing Dog - Chart of the Day

 

Downward Facing Dog - Virtual Portfolio


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