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Below is an excerpt from the Dunkin' Donuts Black Book that we published today.


With valuations for the DNKN peer group having increased 56% over the past 12-months, the aggregated market caps of the few largest publicly traded coffee-centric companies almost equals the entire US coffee market’s annual revenues.


According to the National Coffee Association, the US coffee market represented $34 billion in 2009; the specialty coffee category generated $15-17 billion in annual revenues and the traditional category brought in $17-19 billion.  It would be a conservative measure to assume the high end of these ranges to estimate the present size of the market, bringing the current size of the market to $36 billion.  The coffee space is partly comprised of some very sizable companies with significant capital reserves that compete fiercely with one another for market share.  A front-runner in the corporate coffee war thus far is Green Mountain.  The company’s domination of the “at-home” coffee industry through Keurig machines and K-Cups has generated handsome returns.   The growth prospects for GMCR remain vast, at least if you share the view of investors; the stock currently trades at 29x EV/EBITDA and has a market capitalization of approximately $14 billion.  Green Mountain’s market cap equals roughly 40% of the estimated $36 billion US coffee market’s revenues or 117% of the “at-home” US coffee market’s $12 billion in annual sales.  While GMCR has recently expanded into Canada, the company is close to a pure play on the US market.


Turning to Starbucks, if we apply a 7x multiple to the company’s US EBITDA, the business would be valued between $10-11 Billion.  This hypothetical value, added to the Green Mountain market cap, implies that the cumulative market caps of the two companies equals roughly 70% of the entire US coffee markets annual revenues.  Lastly, MCD on Friday became the first restaurant company to grow its market cap north of $100 billion largely due to strong 2Q earnings results that were driven by success in selling coffee and other beverages.  Could coffee stocks be in a bubble at the moment?  We certainly think so.







Howard Penney

Managing Director


Rory Green



One day before managements holds their earnings call, the NFL and the players have come to an agreement, thereby eliminating a whole host of questions.   The sales trends this quarter are supportive of an improvement in fundamentals.  Although, I thinking we are nearing the end of the run, but I don’t want to pull the plug just yet.  I think that BWLD can report a comp that is between 3-4%.


Below are some of the more important forward looking statement from the 1Q earnings call. 







“Our 2011 annual goal is to remain at 13% unit growth and over 18% net earnings growth. We anticipate opening 50 to 55 company-owned locations including several in Canada and expect that about 8 of our older locations will relocate or closed during the year. In addition, our franchisees should open about 60 new restaurants.”


“We're excited that our first international location will open next month in Oshawa, Ontario, a suburb of Toronto, and we've signed leases for three additional locations in the Greater Toronto Area. Our international team is also actively exploring other countries for future expansion.”


“Our second quarter is a 1.9% menu price increase. If we don't take any additional price increase, that will roll down to 1.3% in third quarter and for the fourth quarter as well. So we will be looking at that this summer and making a decidion on whether we take any menu price increase.”





“We expect a combined potential menu price benefit for the second quarter for food and alcohol price increases taken in prior quarters to be about 1.9% for the company-owned restaurants. We expect to open 16 company-owned restaurants in the second quarter with 6 opened to date and 4 older locations were closed.”


“And I would expect that throughout the second and third quarter, we'll see some of our franchisees adopt some of the sales building programs that we've put in place. In addition, it's very hard for us tell when they're taking pricing. They have certainly a bigger base. But we believe that our pricing is probably a little stronger, that we took more pricing recently then they have.”


“I believe we are finding pent up demand as we're entering new markets, particularly when I think of California and the high volumes that we've opened up out there.”


“We're coming into the summer months where we'll have our Unlimited Wing promotion going on during the lunch hour in company stores and in select franchise locations. So I don't think we're seeing a day part shift. Just continued focus, I think, on optimizing or taking advantage of some of our slower times.”


“Well, on happy hour is in most of the stores that are in it, it represents about 65% or 75% of our company stores, if we're legally allowed. And most of the promotions – we tested it and saw some very nice results. We tested it with advertising and without advertising. We're offering a certain dollar, the stores or the market can choose what dollar beer to offer as well as – not $1, but at what price level, and then pairing that with $3 appetizers during our happy hour in the – and during the 2:00 to 7:00 timeframe and I believe late night, that's only in the bar.”





“We will continue to focus on providing a great guest experience and deliver on our initiative of speed of services at lunch, which may cause hourly labor to be slightly higher in Q2. Our management labor should continue to leverage if our current same-store sales trends continue. Overall, labor costs as a percentage of sales are expected to be similar to second quarter last year.”


“Overall, labor costs as a percentage of sales are expected to be similar to second quarter last year”


"For cost of sales, the traditional wing market continues to be favorable and the price of chicken wings for the first two months of the second quarter is averaging about a $1.02 per pound, which is lower than any quarterly price since 2003.”  It compares to last year's average price for the second quarter of $1.51. Our Boneless Wings contract is extended through March of 2012 at flat pricing to 2010. And the remainder of our commodity basket is contracted at an increase of about 3% to prior year."


"We expect operating expenses to leverage slightly compared to second quarter last year. We anticipate that our G&A expenses in the second quarter exclusive of stock-based compensation will be approximately $13.6 million. Second quarter stock-based compensation expense will fluctuate based on the level of net earnings achieved year-to-date and assumptions based on net earnings expectations in future years."


"Currently, the second quarter expense is estimated at $2.8 million to $3 million. In second quarter of 2010, stock-based compensation expense was $1.3 million. For the full year of 2011, we estimate stock-based compensation could increase from our previous estimate to approximately $10 million depending on the continued strength of same-store sales and low wing costs."


“With 16 company-owned openings scheduled for the second quarter and a preliminary estimate of 15 openings in the third quarter, our pre-opening expenses will be heavily weighted in the second and third quarters. Please remember that our net earnings growth goal is an annual goal and we would not expect that all quarters will individually achieve this goal.”



“For the year of 2011, we anticipate total capital expenditures to be between $120 million and $125 million, which include about $100 million for new company-owned restaurants, $17 million for our ongoing remodel and facility projects and technology improvements, and $6 million from maintenance capital expenditures.”




Howard Penney

Managing Director


Rory Green




We don’t like UA around tomorrow’s print – either into it or out of it. Let me be crystal clear on duration…

TAIL (3 years): Luv you long time, UA. These guys are pulling one right out of Nike’s playbook. The growth profile is unquestionable to us. Though they have yet to get any ancilarry categories right – such as Women, Footwear, and International – they will. Of that, I am near certain. But that is also one of the reasons why the team and I don’t like this name on a TREND (3-month) duration.


TREND: The fact of the matter is that even through all the ebbs and flows of revenue, UA has been printing an operating margin of 10-11%. It could have easily been printing something in the mid-high teens. But no, instead it opted to plow the capital into the model to stimulate top line growth. I like that. But’s a double edged sword…

  1. On one hand , I am extremely confident in the top line trajectory. When Plank stands up there and says that the company will double in sales over 3-years, I believe him (and I’m a natural cynic).
  2. But the reality is that there have been several initiatives that simply have not panned out yet. Footwear has been a zero. Granted, the original structure of the company was insufficient for anything but failure in this category), and the current team will tread slowly (no pun intended). They probably won’t mess it up, but we’re very very close to the point where people won’t simply give the Gene McCarthy organization the benefit of the doubt. If footwear does not work, this company won’t double.
  3. Charged cotton was a good launch. Definitely better than footwear. But it was a shadow of its core performance product. This is not a savior for UA.
  4. UA is spending like a drunken sailor. That’s probably a bit dramatic. But with growth in retail stores accelerating, endorsing Michael Phelps, Lindsay Vonn, Kemba Walker, Derrick Williams (#2 NBA draft – ahead of Kemba at #9) and some dude named Tom Brady, the reality is that UA is in investment mode. They’ll play this like Nike in that they will make it work – but will spend more along the way to ensure their success.

If you have a 3-year+investment time horizon, then you have nothing to worry about. They’re doing the right thing.

But we’re paid to point out the potential landmines along the way.


With the stock at $78, 40x+ earnings, 16x+ EBITDA and very little controversy on the name, we’re simply wary – if not flat-out negative given that cash flow is headed the wrong way.








Italy Cancels August Bond Auction Citing Fat Wallet

Position: Short Italy (EWI)

Both Italy and Austria today announced they were putting off plans to borrow cash in the coming month. Neither of them cited market conditions.


As picked up by the Dow Jones Newswires:


Italy will cancel its mid-month (August 12th) auction for medium and long-term bonds, known as BTPs, “considering the large cash availability and the limited borrowing requirement,” the Treasury said in a statement Monday.


This news is deeply concerning given the critical nature of the country’s funding needs. In the next months alone (see chart below) Italy will be burning through 134 Billion EUR in principal and interest payments coming due. This means that the country will have to rely even more on successful future bond auctions (ie sufficient demand at yields not significantly over previous auctions) to fund its costs. This is a risk set-up we don’t like considering that bond auctions across the periphery have trended higher throughout most of the year, and that both the ECB and China have been forced or cajoled into being “hidden” actors to ensure demand. 


Italy Cancels August Bond Auction Citing Fat Wallet - 1. H


The country’s funding issues come on the backdrop of PM Berlusconi’s government that is mired in scandal, including his finance minister Tremonti; an economy 3X the size of the combined economies of Greece, Portugal, and Ireland with some €1.9 Trillion of debt, or 120% of GDP (ranking Italy second behind Greece (144%) for the largest debt as a % of GDP in the Eurozone) that current bailout facilities are not prepared to handle; and a banking industry that was largely unscathed by the bank stress tests, but is highly levered to the rest of the periphery.


While yields on the 10YR Italian government bond have come down from the 6% level in recent days (historically an important breakout line for Greece, Ireland, and Portugal that necessitated bailouts) and Italian CDS took a massive dive (-55bps) on Friday following late Thursday’s announcement of a second Greece bailout, we by no means think Italy is out of the sovereign debt spotlight, and today’s signal from Italy’s Treasury does more harm than good to a very fragile investment community.  


We remain short Italy via the etf EWI in the Hedgeye Virtual Portfolio.


Matthew Hedrick



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