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


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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



Will Obama Cede On Duration?

Conclusion:  Despite fear mongering from the political class about adverse reactions from global markets to a lack of agreement on the debt ceiling in Washington, the U.S. Treasury market is largely shrugging off the drama in Washington.  A true default on U.S. debt is highly unlikely in almost any scenario.  Further, we believe that a deal will be reached on the debt ceiling and that it will be some derivative of Speaker Boehner’s two-step process.


On Friday, Speaker of the House John Boehner walked away from discussions with the White House over the so called “Grand Bargain” on the deficit.  The rationale given by Boehner for walking away from talks with the White House was that President Obama was attempting a last minute tax increase, an issue that Boehner had considered stare decisis.  By walking away from discussion with the White House, Boehner has relegated Obama to the sidelines, at least for now. 


Following this action by Boehner, the Sunday morning political talk shows were replete with a fear mongering rebuke from administration officials.  White House Chief of Staff William Daley called into question the very faith of global investors in the credit of the United States with the following statement on Meet the Press:


“I don’t think there’s any question there’s been enormous damage done to our creditworthiness around the world.”


Daley was only to be one-upped by Treasury Secretary Geithner who said the following on Fox News Sunday:


“We do not have the ability to protect the American people from the consequences of not raising the debt limit.  We write 80 million checks a month.  There are millions and millions of Americans who depend on those checks coming on time.”


Boehner and the Republicans did not cede ground despite the strong language from administration officials on Sunday morning.  As of midday, most global markets are effectively ignoring the political theater in Washington as well.  Treasury markets are basically flat today despite the weekend’s collapse in discussions.  In the credit default market, swaps are up slightly from Friday’s close, but, as noted in the chart below, still within a normal range.


Will Obama Cede On Duration? - 1


Will Obama Cede On Duration? - 2


The market obviously understands, despite attempts at fear mongering by the political set in Washington, that a default on U.S. government debt is unlikely.  We could certainly debate whether the U.S. should be rated AAA, or whether ratings agencies should be relevant for that matter, but the actual coverage ratio, as calculated by revenue divided by interest rate, is a very healthy 8.5x for the federal government fiscal year-to-date.    The interest payments of the United States have ample coverage.


Will Obama Cede On Duration? - 3


As the August 2nddate looms, the key outstanding point in the debate appears to be related to duration.  The Republicans, led by Speaker Boehner, have proposed a two-step process.  Under this process, the debt ceiling would be extended by $2.5 trillion, but in two tranches.  The first tranche would be $900 billion and would fund the federal government into early 2012.  This tranche would be paired with $1.2 trillion in deficit cuts over ten years, which would be comprised largely of discretionary spending cuts.


The next tranche of $1.6 trillion in debt ceiling extension would be tied to another stage of deficit cuts.  These cuts would attack the more difficult entitlement programs like social security, Medicare, and Medicaid.  Under Boehner’s plan, a bi-partisan committee of elected representatives would be tasked with finding another $3 trillion in deficit reduction over 10 years (with presumably some credit for a wind down of the wars in Iraq and Afghanistan) and in reporting back by November 1st2011.  The next extension of the debt ceiling would be tied to the second round of deficit reduction being passed.


Taken in good faith, Boehner’s proposal is reasonable in that the natural two-part process of cutting spending largely matches his proposal.  The first part is comprised of more identifiable discretionary spending cuts, while the second part involves longer term entitlement spending cuts and tax code restructuring.  The Gang of Six plan had its day in the proverbial sun last week as a perceived “Grand Bargain”, but the plan’s lack of detail related to entitlement cuts and core tax assumptions made it short lived.  The two-part process proposed by Boehner should enable greater detail to be put around the proposed deficit reduction.


The Democrat leadership of President Obama, Senator Reid, and Congresswoman Pelosi are currently united against Boehner’s proposed two-part process.   Obama has indicated that he would veto such a proposal.  From the Democrat’s perspective, the two-part process extends the debate into 2012, a Presidential election year.  In addition, according to Democrat leadership, the extension of the debate would create incremental risk to the U.S. economy and global markets.  The chart below of Michigan Consumer Confidence provides some credence to this view as this proxy for broad consumer confidence has declined meaningfully alongside a heightening of the debt ceiling debate.


Will Obama Cede On Duration? - 4


Given it is just over a week before the August 2nddebt ceiling deadline, it seems unlikely that any unique solutions will be introduced in the coming days.  The Democrats in Congress have largely ceded to Republican demands to match debt ceiling increases to spending cuts and to not raise taxes in the traditional sense.  As evidenced  by the Senate’s 51 – 46 vote against Cut, Cap and Balance late last week, the Democrats have also shown that while they will cede much of this debate to Republicans, much to the chagrin of leftist groups like, a balanced budget amendment to the Constitution is a non-starter. 


Conversely, the McConnell-Reid plan with a lower level of spending cuts and a proposal to shift the power to raise the debt ceiling up to $2.5 trillion to the President appears to be a non-starter for most Republicans.  The McConnell-Reid would limit tax increases, but does not incorporate matching deficit cuts with a commensurate increase in the debt ceiling.  The plan does provide Republicans the ability to vote three times on a motion of disapproval related to the $2.5 trillion debt ceiling increase.   Not surprisingly, for the Tea Party caucus, a motion of disapproval is clearly unsatisfactory due to its lack of materiality.


It is somewhat ironic that the debt ceiling debate is coming down to a debate over duration given that in almost all proposed plans there is a duration mismatch between increasing the debt ceiling (short term) and implementing spending cuts (long term).  Short term fixes for long term issues are typically not sustainable.  Europe has provided ample evidence of this on the fiscal front over the last year.


In conclusion, we would expect Boehner and the House to push through a two-part process this week. Interestingly, Senator Thomas Carper (Democrat from Delaware) on CNBC this morning ceded to the idea of a short-term bump up in the debt ceiling and implied that some of his Democrat colleagues would support it.  This suggests that a two-part Boehner type process could pass the Senate, even though Cut, Cap and Balance could not garner a majority in the Senate.  At that point it would then be up to President Obama to decide whether he would truly veto a bill that has been passed by both Houses.  In our view, an Obama veto after a bill passed both Houses is unlikely.  


Daryl G. Jones

Director of Research

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