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BJ’s posted in line results but, at this multiple, the BJRI growth model is priced to perfection.


BJRI comps beat consensus at +6.9% versus +5.3%.  In our preview note we had highlighted the sequential strength of California Sales Tax Receipts and strong intra-quarter to date Knapp Track trends as supportive of BJRI posting a strong comp this quarter.  Costs were effectively managed during the quarter thanks largely to strong same-store sales growth.


In terms of outlook, the company is lapping more difficult compares in the back half of the year from a comp perspective.  In addition, the amount of price that the company is currently planning on taking through the third and fourth quarters is 2% versus the 3% plus during the first half of the year.  Importantly, 80% of the company’s food costs are locked and COGS as a percentage of sales are expected to be 25%, roughly, for the remainder of 2011.


In terms of new unit openings, the company is opening as many as four new restaurants in Q3, one of which is open already in Texas.  Additionally three to four openings are anticipated in Q4.   Restaurant opening costs are expected to be $500k per unit.  The company remains focused on growth, rather than dividends or any other use of cash.


The company faces a much tougher compare in the third quarter from both a same-restaurant sales and margin perspective.  At 17x EV/EBITDA, expectations are high.







Howard Penney

Managing Director



Rory Green



I am using the metaphor of stale bread in honor of the new bread program that the company rolled early last year, which is also part of the current financial stress on the company.  It’s also a way of saying that this stock is done for a while. 


In not going to rehash the whole quarter, but instead highlight the issues that need to be fixed before the financial performance can be turned around.

  • Management is in denial that Chili’s and Applebee’s are hurting Ruby’s, but I agree it’s not all the economy.  I will concede that consumer confidence is down and middle income consumer is hurting.
  • Big picture strategy is confusing.
  • On one hand they are diversifying away from Ruby’s and yet they are buying over leveraged Ruby’s franchisees.
  • Because of the acquisition binge, leverage is a problem again.  There is now only a 70bps cushion on the debt covenants.  Didn’t management learn anything from when the stock was trading at $1 in 2008 and 2009?
  • Limited operational flexibility due to increased leverage.
  • Increased leverage at a time when the company’s capital needs are growing (i.e. debt pay down/incremental growth capital is needed).
  • Share repurchase? Given the leverage and the fact that they want to convert Ruby Tuesdays into other concepts, how are they going to buy back stock?
  • The Ruby’s Tuesday brand is a regional competitor competing against two strong national brands that have sales momentum.
  • The wild card going into this quarter was the potential for more shareholder activism.  I’m sure the new board members were not happy to see the newly leverage balance sheet!
  • My advice is to stay far away from this one for the time being.


Howard Penney

Managing Director


Rory Green


Framework of Greek Bailout Part II: Skepticism Abounds

Below we provide the main notes from tonight’s press release of EU Heads of State or Governments of the Eurozone and EU Institutions, including a Q&A, on the terms of Greece’s second bailout package.  To say the least, we’re extremely skeptical of the program providing anything more than another near term band-aid to European sovereign debt contagion. Perhaps the group’s insistence that Greece (and not the other PIIGS) requires an “exceptional and unique solution” was most concerning of all.



  • €109 billion of financing for Greece from the EU and IMF and an estimated €37 Billion contribution through VOLUNTARY Private Sector Involvement (PSI) of banks to reduce Greece’s debt through exchanging existing bonds for new bonds with lower interest rates and longer maturities. (unique terms to be drafted)
  • The European Financial Stability Facility (EFSF) is the vehicle for the disbursement of the new €109 billion package
  • On future EFSF loans to Greece, the maturities of the loans will be extended from the current 7.5 years (to date Ireland and Portugal are the only countries using the facility w/ these terms) to a minimum of 15 years, and maximum of 30 years with a 10 year “grace” period. [IMF also said Portugal and Ireland will be extended these terms]
  • EFSF interest rate terms will be reduced to 3.5% from 5-6% level, extended to existing and future loans to Greece, Ireland, and Portugal
  • The EFSF can intervene in secondary markets to buy up sovereign bonds (officially), whenever deemed necessary 

Other Remarks:

  • Public deficits in all EU countries will be brought below 3% (of GDP) by 2013 at the latest
  • Extension of a “European Marshall Plan” in which countries can give money (no explicit terms provided) to Greece to drive economic growth
  • Reliance on credit rating agencies should be reduced
  • Q&A Call-Out: Trichet insisted that Greece is not in selective default. When again questioned that the PSI is tantamount to a default through restructuring, as technically defined by the credit agencies, Trichet replied that today’s package shouldn’t trigger a credit event (default) with credit agencies (Throat clear).

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China’s Bottom Is Showing

Conclusion: We don’t think it pays to freak out about China’s manufacturing data just yet. The Chinese economy is progressing right along and we think broad-based concerns ranging from a sharp downturn in growth to a potential banking crisis are overblown. Moreover, a holding above our key risk management level would lead us to believe such consensus apprehension is close to being priced in.


Position: Long Chinese equities (CAF).


Overnight, a sub-50 reading (48.9) in HSBC’s preliminary July Purchasing Manager Index helped send Chinese equities down a full percent. Make no mistake; this was a very negative data point indeed. While it would be easy for us interpret today’s one-off data point in conjunction with today’s bearish WSJ article highlighting the “trouble” ahead for Chinese small-cap banks as a reason for us to book the gain on our long position in Chinese equities within our Virtual Portfolio, we prefer to apply a more rigorous process to risk management.


The quantitative setup for China remains favorable and we would expect Chinese equities to hold their TRADE line of support at 2,727. Should that line break and confirm itself, our models aren’t signaling any meaningful support below.


China’s Bottom Is Showing - 1


Regarding the economic data, we’ve been clear and consistent with our call for Chinese growth to “slow at a slower pace”. We continue to think Chinese growth continues to decelerate over the intermediate-term TREND. Both the market and the Chinese officials in charge of making up the data have been telling us that for over 18 months. The Shanghai Composite Index is down -14.2% since we introduced our bearish Chinese Ox in a Box thesis on January 15th of last year. Moreover, at 8% and 7% respectively, both the NDRC and the Politburo via its latest 5yr plan agree with our view of slowing Chinese economic growth – at least directionally (we don’t think China grows anywhere in the area code of 7-8% in 2011; we’re closer to 9-9.3%).


Of course, picking stocks (or in this case, markets) isn’t all about internalizing one’s own research. A great risk manger must also understand the other side of the trade – perhaps more so than their own. We get that the Chinese banking system could indeed face substantial headwinds over the long-term TAIL from a credit quality perspective. Though we do not agree with the prevailing belief, we fully understand the risks associated with a potential Chinese property market bubble.


According to Reuters calculations from official data, Chinese property price growth accelerated to +4.2% YoY in June, though down substantially from their peak growth rate of +12.8% in April ’10. We welcome the significantly less inflationary effects of mid-to-low single digits growth in Chinese property prices and do not think Chinese officials will tolerate a sustained breakdown below current growth rates over the intermediate-term TREND. This view is supported by the recent uptick in pro-growth commentary out of various Chinese officials. Rebalancing the world’s second-largest economy doesn’t happen overnight.


China’s Bottom Is Showing - 2


To the earlier point about a potential Chinese banking crisis, we are quick to point out that the loudest source making noise about China’s local government financing vehicle paper is noise in and of itself (Moody's). Ratings agencies are rarely leading indicators for anything of consequence. In fact, their poor track records and oft-late conclusions afford us much conviction that the risks associated with 10.7 trillion yuan of LGFV debt aren’t nearly as bad as Moody’s thinks they are. We would be remiss to pretend there aren’t any skeletons in the closet, but it seems rather aggressive to suggest that NPLs could grow to as much as 12% of total credit in the Chinese banking system.


China’s Bottom Is Showing - 3


China’s Bottom Is Showing - 4


Taking the other side of our bullish Chinese Cowboys thesis for a moment, we think the chart of China’s 5yr CDS is quite alarming and, given that 70% of LGFV debt matures within the next five years, we think this is a key duration to pay attention to. Still, there are a bevy of reasons we feel China’s pending “banking crisis” is likely to pass without any material damage – not the least of which is the likelihood that the central government relaxes its controls on LGFV bond issuance. Granting any ailing local government the ability to issue long-term paper will help the Chinese economy at large by smoothing out any potential asset/liability mismatch.


China’s Bottom Is Showing - 5


Elsewhere, we see that China’s money market rates are indeed breaking out to the upside. Both three-month shibor and one-year swaps rates are making higher all-time highs of late. Whether this is a leading indicator for another Chinese rate hike or just indicative of the general tightness we’ve been seeing throughout the Chinese banking system remains to be seen. On one hand, our models suggest that Chinese YoY CPI has one more month of sequential acceleration left and that should get the market right freaked out about another - and most likely the final - rate hike. On the other hand, only 963 billion yuan of central bank bills and repurchase agreements mature in 3Q (vs. 2.1 trillion in 2Q), which means that in the third quarter the Chinese banking system will be as tight as it has been since 2008 from an incremental liquidity perspective (per China Merchants Bank Co.). Regardless, both outcomes are supportive of our call for Chinese inflation to decelerate on a sustainable basis in 2H.


China’s Bottom Is Showing - 6


All told, we don’t think it pays to freak out about China’s manufacturing data just yet. The Chinese economy is progressing right along and we think broad-based concerns ranging from a sharp downturn in growth to a potential banking crisis are overblown. Moreover, a holding above our key risk management level would lead us to believe such consensus apprehension is close to being priced in.


Darius Dale


SP500 Levels Refreshed: Risk Ranger Getting Extended

One of our three Q3 2011 themes is Risk Ranger.  The premise being that many asset classes will be range bound over the intermediate term as we get continued Policy Pong between the United States and Europe.  With the dramatic rally since the Gang of Six proposal three days ago, we can safely assume that an extension of the debt ceiling is now getting fully baked in to market prices.  


The SP500 is flirting with our TRADE resistance line of 1,344.  A close above that level would put our TAIL line in play at 1,377, but our view remains that the top end of the Risk Ranger range will hold.  An astute client asked us today if we believed in today’s move in the SP500.  The simple answer is that until fundamentals change in conjunction with a validation by price, our thesis remains intact.  As a result, we made the following moves in the Virtual Portfolio today: 

  1. Bought Silver (SLV)
  2. Sold Covance (CVD)
  3. Shorted Financials (XLF)
  4. Shorted the Euro (FXE)
  5. Shorted Spain (EWP)
  6. Shorted Italy (EWI)
  7. Bought Icon (ICLR)
  8. Sold Carnival Cruise Lines (CCL)
  9. Covered Grains (JJG)

In aggregate, we took advantage of an opportunity to lay back out some of our bearish bets on Europe, and take down exposure in the Virtual Portfolio by adding a net three new short positions.


While CNBC is trotting out the equity bulls today, the data and news flow with continues to urge caution and tight exposures.  The key points to highlight in that regard are as follows: 

  1. Unemployment claims remain above 400K, which means we will continue to see little to no improvement in the unemployment rate;
  2. Existing home sales fell and inventory grew to 9.5 months, the highest level since November 2010; and
  3. The Intrade contract on a debt ceiling increase by August 31st hit a new low at 72%.

Trade the Risk Range.


Daryl G. Jones

Director of Research


SP500 Levels Refreshed: Risk Ranger Getting Extended - SP500


We’re above the Street but so is the whisper.



We’re projecting IGT to come in 2 cents ahead of the $0.22 consensus EPS estimate for the quarter when they report next Tuesday.  We also think they could raise FY11 guidance by 5 cents or more with better international product sale revenues, revenue growth from growth in the global interactive division, growth in systems, and interest expense savings, offsetting weakness in the NA product sale market.


IGT management will likely spend a good portion of the call discussing their international business and Global Interactive Division.  Since April 27th, IGT has announced 8 deals – all of which are international, and 6 of which are related to IGT’s Global Interactive Division.  We expect that these deals will become meaningful starting in FY12 and that IGT may start putting more meat on the bone to outline the opportunity if not on this call then on its YE call next quarter. 


FQ3 Detail:


$219MM of product revenues at a 53% gross margin


“On the margins and Product Sales, I think you’re probably safe if you assume a run rate domestically of say 52%."

  • NA sales of $128MM
    • $64MM of box sales ($14k ASP, 4,550 new & replacement units)
      • “For the remainder of fiscal year 2011, we see very limited opportunities for new and expansion shipments in the for sale business."
      • “Given the current selling environment and volume levels, we expect average selling prices to rebound modestly from this quarter’s levels, mainly due to mix, but margins to be under pressure for the remainder of the year.”
    • $64MM of non-box sales
  • International sales of $92.5MM which includes the last quarter of Barcrest results (~$6MM of revenue and $2MM of gross margin)
    • $62MM of box sales (ASP’s of $12k, 5,200 units)
      • “We expect our International unit sales to keep pace with our North American sales for the remainder of the fiscal year, which is another testament to the strength of our global reach.”
    • $30MM of non-box sales

$273MM of gaming operations revenue at a 62% margin

  • EOP install base of 57,150 games
    • "For the remainder of the year, we expect our Gaming Operations’ installed base to continue its moderate growth.”
  • Average win per day of $52.50
    • “Our [Gaming Operations] yields should continue their modest sequential improvement, assuming normal seasonal trends continue.”


Other stuff:

  • $88MM of SG&A, net of $1.8MM provision for bad debt
    • “We expect a modest, upward trend in SG&A for the remainder of this year as we invest in people and processes necessary to take advantage of new business opportunities.”
    • $17.5MM of D&A
    • $52MM of R&D
      • “As far as R&D spend, I think we’re working hard to try and keep that relatively flat.”
    • $17MM of net interest expense
    • 36% tax rate

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