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Sonic reported earnings after the close yesterday and beat expectations for both revenues and earnings.  The focus of the call was on sales trends that slowed in May and June.  Is the slowdown temporary or will hot dogs save the day?


Management went through a very detailed explanation as to why sales trends slowed in May and June but stopped short of saying what the magnitude was.  All they said was that the slowdown was limited to guests coming in after 8pm.  In May and June 2011 the company is lapping a buy-one-get-one-free shake promotion, which generated significant traffic; expectations are for low single same-store sales for 4Q11. 


For the balance of the quarter the “hope and expectation” is that the BAJA hotdog (along with a new line of shakes) at $1.99 will bring back some incremental traffic.  The irony in all this is that despite the SONC customer having been so responsive to the company’s value initiatives, management apparently feel comfortable raising menu prices.  


Sonic reported EPS of $0.21 excluding extraordinary items on the back of strong same-store sales growth and improved margin that management attributed to labor efficiencies that were offset by increased commodity costs and investment in product quality.


Company-operated same-store sales came in at +6.5%, beating expectations of +6.1%, which implied a two year average trend of +0.1% or 650 basis points higher than the two-year average trend in 2QFY11.  Management stated that the premium six-inch hot dog promotion which is driving traffic across all day parts.  The company had an effective year-over-year price increase of +1.5% on the menu in April and May which was then increased at the beginning of this month as an additional 0.5% price increase was implemented with the new menu.  The 2% price currently on the menu is not expected to begin rolling off until April of next year.


SONC: SOLID BEAT, BUT... - sonc pod1


The improvement in the company’s performance is reflected by the marked improvement in customer satisfaction scores at company and franchise stores versus the satisfaction scores that the company was reporting in fall 2008.  Over that period, company and franchise customer satisfaction scores have improved from 59% to 78% and 69% to 77%, respectively. 


Restaurant level operating margins expanded for the first time since 2009.  The improved top-line performance helped margins as food and packaging costs were better than expected due to less discounting and more aggressive price increases than originally planned.  Other operating expenses were favorable reflecting leverage from the company-owned same-store sales trends.


SONC: SOLID BEAT, BUT... - sonc pod2



Sonic is launching a new Baja hotdog in July that it hopes will, in combination with the loaded burger promotion, drive traffic and check.  In addition a new line of Real Ice Cream Shakes will be released which, in conjunction with the other products and promotions on offer, management is expecting to drive positive sales in the fourth quarter. 


One area management is focusing on going forward is the after 8pm day part which was slower in the third quarter than one year prior and has been a primary contributor to the slowing of SONC’s business over the last few weeks.  With respect to margins, labor costs are expected to be favorable in the fourth quarter and the other operating expense line is expected to improve again.


Food cost inflation in the third quarter came in lower than expected, between 5 and 6%, and management expects fourth quarter food inflation to come in below that range.



Howard Penney

Managing Director

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Right Said Fed

“I’m a model. You know what I mean. I do my little turn on the catwalk.”

                -Right Said Fred, “I’m Too Sexy”


Conclusion: The Fed today provided further support to our Indefinitely Dovish thesis, which postulates that interest rate policy will stay at, or below, current levels well into 2012.  In addition, the door for QE3 was opened ever so slightly based on our read.


The FOMC statement today continued to verify our thesis of Indefinitely Dovish.   The interesting change in this statement versus the last statement is an acknowledgement of slower than expected economic growth and a jobs recovery that is more muted than versus the last FOMC statement in late April.  The outcome of these two changes is that the Fed has, tacitly, taken down its expectations for inflation based on this statement in the release today:


“Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee’s dual mandate as the effects of past energy other commodity price increases dissipate.”


He reiterated this in his press conference in which he said, “inflation remains well anchored.”


Our read through on this is that these statements are a shift and in contrast to Chairman Bernanke’s statement at the International Monetary Conference in early June when he said:


“That said, the stability of inflation expectations is ensured only as long as the commitment of the central bank to low and stable inflation remains credible. Thus, the Federal Reserve will continue to closely monitor the evolution of inflation and inflation expectations and will take whatever actions are necessary to keep inflation well controlled.”


Reading too much into snippets of Fed Speak is dangerous at best, but it does provide some insight into what could happen next.  The Bernank is now admitting both that the economy is getting worse and that he believes that the outlook for inflation is now likely to be at lower than normal levels going forward.  So, the door has now been cracked open for Quantitative Easing 3.


We continue to believe to actually implement QE3, the Fed will need sustained negative monthly payrolls.  Prior to QE1, this was 9 negative months, while prior to QE2 this was 3 negative months.  In May, non-farm payrolls came in at +54K, which was an eight month low.  The June nonfarm payrolls will be released on July 8th and will be the key measure as to the direction of monetary easing from here.  If we get a negative print, QE3 will be solidly on the table.


That said, the Fed will likely not implement additional easing while inflation, as measured by CPI is accelerating. While we have been of the view that reported inflation will continue to accelerate or be heightened during the summer and into the early fall, by early Q1 2012 this should reverse. Thus, heading into 2012 tougher comps on commodity inflation will potentially lead to deflationary type concerns, or at least give the Fed complete cover for incremental easing, especially as the labor market is likely to remain challenged.


As part of today’s Federal Reserve events, the Fed released their update economic projections based on the “models” of the Board Members.  For 2012, they are taking down growth expectations, taking up unemployment expectations, and increasing inflation expectations.  At Hedgeye, we actually call slowing growth, increasing unemployment, and increases inflation, Jobless Stagflation.


In the press conference, Chairman Bernanke also indicated that keeping the federal funds rate at 0 to 0.25% for an extended period means for at least 2 – 3 FOMC meetings.  This of course continues to extend Bernanke’s tenure as the most accommodative Chairman in, well, the history of the Federal Reserve.  This is outlined in the table below.


Right Said Fed - DJ


If there is anything we can take away from the Fed’s projections, it is that they are based on lagging indicators and are seemingly inaccurate as it relates to actual economic outcomes.  Collectively, this is a little disconcerting since monetary policy is set and based on these “projections”.


You know what I mean?


Daryl G. Jones

Director of Research


Given the 5% increase in May passenger volume, total Strip gaming revenue growth could have reached double digits.



Following a disappointing April, May appears to have been a much better month on the Las Vegas Strip.  McCarran Airport just released May data that showed the number of enplaned/deplaned passengers grew 5.1% YoY, against a -1.6% comp.  In April, passenger volume increased 2.3% (-5.0% comp).  Despite the positive growth, April gaming revenues actually decreased 2.3% on the Strip despite a modest comp of down 0.9% in April of 2010.


Using our predictive model, we estimate that May Strip gaming revenues will increase 8-12% assuming positive auto traffic, normal hold percentages, negative slot handle per visitor, and positive table drop per visitor.  Last year, May gaming revenue fell 6.4% so the comp is easy, due in part to below normal table hold percentage.  Here are our estimates for May:



R3: DECK, Groupon, Carrefour, BOGO



June 22, 2011





  • After highlighting a streak of 29 weeks since their last BOGO, management of BWS noted that they will hold their first BOGO event in late July. Because of a reduction in activity with BOGOs down 44% in 2010 and another 29% reduction expected this year, management expects this year’s BTS event to ‘really engage the customer.’ For what it’s worth, we’ve never heard a management team say ‘our product looks like death, and we really think we’re going to turn off the consumer.’
  • Confirming a recent theme in retail, HBI noted that they too are seeing higher gas prices result in a consolidation in the number of shopping trips as noted by their customers. The offset has been an increase in average ticket, which has trended up driven in equal parts if not more so by the increase in units relative to pricing.




Deckers Shutters Simple Shoes - Simple is saying farewell. Goleta, Calif.-based Deckers Outdoor Corp. announced on Tuesday it would cease distribution of its Simple Shoes brand, effective Dec. 31. While Chairman, President and CEO Angel Martinez said in a statement he was proud of the brand’s efforts in producing eco-conscious footwear, the company chose to focus its efforts on its recently acquired Sanuk brand.  “Given that there is some degree of overlap between Simple and Sanuk consumers, and Sanuk’s positive outlook and global appeal, we make this difficult decision knowing it is in the best interests of the brands, the company and its shareholders,” Martinez said.  <WWD>

Hedgeye Retail’s Take:  The simple reality here is that DECK has followed suit with a growing theme in retail to ‘buy vs. build’ with its acquisition of Sanuk. The only problem is that the company had an existing brand that just couldn’t get off the ground. After coming to the realization that a focus on sustainability didn’t trump style, it was easier for the company refocus on a brand with over 1,700 points of distribution and positive revenue growth trajectory. Admitting defeat is never pleasant or easy to do, but you got to tip your hat to the DECK team here – putting Simple to bed is the right call.


Demographics of Groupon and LivingSocial Diverge - Daily deal sites Groupon and LivingSocial saw their audiences approximately triple in the year to April 2011, with gains of 250% and 182%, respectively, according to comScore’s “State of the US Online Retail Economy in Q1 2011” report. But while both play in the same space, differences have emerged in the geographies and demographics of their users, as well as their deployment of display and paid search advertising. The comScore analysis found that LivingSocial had an edge among East Coast-based users, while Groupon had more of a foothold among Midwest and West Coast-based consumers. This may not be all that surprising as LivingSocial is headquartered in Washington, D.C., and Groupon is based in Chicago. Beyond the geographic divergence, each provider appears to attract different types of users. comScore found that internet users under 45 leaned toward Groupon, while those ages 45 and older skewed more in favor of LivingSocial. Those ages 12 to 25 underindexed on usage of daily deal sites in general, but underindexed less strongly on Groupon. <emarketer>

Hedgeye Retail’s Take:  What’s interesting here is that according to results out of a Nielsen study back in March, LivingSocial’s demographic was younger than Groupon contrary to the results above. We appreciate the dynamic nature each sites respective demographic, but results would suggest that Groupon is making headway in the key demographic. LivingSocial’s churn rate according to comScore was also higher at 22% compared to 18% for Groupon in Q1 suggesting another metric whereby Groupon is edging out the competition.


R3: DECK, Groupon, Carrefour, BOGO - R3 6 22 11


Joe’s Jeans opens store in Dubai - Apparel maker Joe’s Jeans Inc. has opened a retail store in Dubai, United Arab Emirates, the first of at least seven stores it plans to open in the Middle East. The store at the Mirdif City Centre is part of an agreement with MultiTrend International to open stores in conjunction with exclusive rights to operate retail locations and market the Joe’s brand in Bahrain, Egypt, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia and United Arab Emirates. MultiTrend, a member of the Al-Homaizi Group, is a franchisee or licensee in the Middle East for brands such as Destination Maternity; Spanish clothing brand Custo Barcelona; Go Sport, a French sporting goods retailer; and Cath Kidston, a British home accessories brand. The Al-Homaizi Group also has franchisee operations in casual and fine dining, including Burger King, Pizza Hut and Applebee’s franchises, food and beverages, including Al Rifai, Scoop a Cone and Boost Juice franchises, and home and office furnishings through IKEA franchises. <BizJournals>

Hedgeye Retail’s Take:  Joe’s has struggled to operating retail store profitably domestically in the U.S. so outsourcing to a partner with considerably more retail experience sounds like a prudent step. Additionally, without material operations outside the U.S., this deal is an important step to diversifying the company’s exposure. But really… the big issue for any brand always comes back to content, not distribution. The company should get the product right first.


Carrefour Shareholders Green-Light Dia Spin-off - French retailer Carrefour SA got the go-ahead from its shareholders Tuesday to spin off if its hard discount chain Dia, at the end of a stormy annual general meeting where minority shareholders and union representatives voiced their anger over the group’s disappointing performances. The resolution was approved by 77 percent of shareholders, clearing the way for Dia to be listed on the Madrid stock exchange on July 5. Carrefour, the world’s second largest retailer behind Wal-Mart Stores Inc., first put forward the spinoff in March as part of a controversial plan to sell some assets, after it rattled markets last year by issuing a profit warning and restating one-off charges in Brazil resulting from an audit. Carrefour chief executive officer Lars Olofsson had argued that the move would boost the company’s valuation and allow it to focus on turning around its key market, France, following its warning last week that current operating income in its domestic market was down 35 percent in the first half. <WWD>

Hedgeye Retail’s Take:  While some may argue the financial merits of divesting Dia, the reality is that the business has been a drag on management’s time and clearly disruptive – something investors typically underestimate given management’s perspective. Score one for shareholders making a difference.


BCBG Max Azria in $230 Million Refinancing - BCBG Max Azria Group Inc. has refinanced and is now slimming down with the closure of a major mass market business, although it is still not clear when vendors who have been awaiting payment in recent months will receive their money. Moody’s Investors Service offered some details of the $230 million refinancing as it upgraded the firm’s corporate family credit rating to “B3” from “Caa1,” indicating that while the company is on steadier ground it is still subject to “high credit risk.” “Given the potential for a double-digit consolidated revenue decline in 2011 due to the wind-down of a large mass market contract, a ratings upgrade is unlikely in the near term,” the rating agency said. That likely spells the end for the Miley Cyrus & Max Azria brand sold exclusively at Wal-Mart, although BCBG did not elaborate on the Moody’s report by press time. The Miley Cyrus line launched with much fanfare in August 2009, but has been said to be floundering. The Tex by Max Azria line, a collaboration with Carrefour, was closed in 2009. <WWD>

Hedgeye Retail’s Take:  Without added clarity for vendors, BCBG is still subject to restricted product flow and the competitive disadvantage that comes with it. Coupled with added pressure from increasing interest for exclusive deals it looks like BCBG is going to be a share loser for the foreseeable future.


New Textile and Apparel Standards Announced in China - China’s General Administration of Quality Supervision, Inspection and Quarantine, Standardization Administration has recently approved 192 national standards, among which eight standards relating to textile products. Products fall into the textile category include knitted wadded garments, knitting patchwork clothing, woolen fabrics, woodpulp spunlaced non-woven textiles, silk textiles, synthetic filament weaved gray fabrics, worsted fabrics and worsted fabrics with radioresistance. It is imperative that manufacturers and importers of items that are covered by these new standards take the necessary action to ensure that their goods meet these new requirements. The execution date of the new standards will be September 15th, 2011. <FashionNetAsia>

Hedgeye Retail’s Take:  With the gap between the cost of labor in China and its competitors compressing, quality becomes more important; however, establishing standards is one thing enforcing them is another altogether – an area where China has not had the best track record. The reality is that this simply gives Big Brother a stronger hand in being able to stop product that it deems unworthy of a ‘made in China’ tag. A very smart move, actually…whether it uses it or not.


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