Keith shorted DNKN this morning in the Hedgeye Virtual Portfolio.


Paying a higher multiple for DNKN than SBUX does not make sense to us.  We published our Black Book one week ago outlining our longer term fundamental view of the stock and our view that the coffee space is currently in a bubble.  Valuations have sky-rocketed over the past year.  As we have written and communicated to clients ad nauseam over the past week, DNKN is a domestic regional brand with a plan to grow domestically into new markets within the U.S.  We find the practicalities of that plan less-than-certain and would absolutely not support a higher valuation for DNKN versus SBUX which has more convincing growth prospects via international markets, K-Cups, and other brands like Tazo Tea.  Additionally, given the fact that broader economic growth in the U.S. is and will likely continue to be below that of international markets where Starbucks is focusing its growth, we are only further convinced that the DNKN-SBUX premium is unsustainable.  We continue to see the advertisement, below, posted on industry websites; the company needs to provide "special incentives" in select markets to attract franchisees.  If the story is that good, why the incentives?


DNKN: TRADE UPDATE - SHORTING - dnkn incentives


For a copy of our Black Book on DNKN, please email


In terms of catalysts, the company is reporting 2Q earnings on Wednesday, August the 8th before the market open.   The first question to focus on is whether or not the company can deliver on exceedingly high expectations.  Dunkin’ Donuts has had mediocre top-line growth over the past couple of years and, we believe, investors need to take quite a leap of faith, by our reckoning, to pay the multiple the stock price is currently demanding for the as yet uncertain growth plans.   



Howard Penney

Managing Director


Rory Green



Macau blew the doors out in the last week of July. 



Average daily revenue increased 19% from the prior week and was 9% above the average for the first half of the month.  In total, gross gaming revenue grew 48% YoY to HK$23.5 billion, above our estimate of HK$22.5-23.0 billion.  At this point, we don’t know how much of a factor hold played but we surmise that it was high given the huge surge in revenues the past week.


In terms of market share, MPEL and Wynn were again the standouts with market share of both equal to their pre-Galaxy Macau opening levels.  LVS and MGM continued to lag in July which we think were both related to volumes and hold.  Galaxy Macau appears to have reached its stride, jumping to 19.1% from 17.7% post the opening of its flagship property.  Similar to Q2, we think MPEL should have the most upside relative to current EBITDA expectations for Q3.



Breakdown: SP500 Levels, Refreshed

POSITION: No position SPY


I sold all of my US Equity exposure in the Hedgeye Asset Allocation Model when I sold our Healthcare (XLV) position into opening market strength. With 7 of 9 S&P Sectors bearish TRADE and TREND, the read-through to the overall market’s risk is crystal clear.


Across my 3 core durations, here are the lines that matter: 

  1. TAIL (bearish) = 1377 resistance (remains the level we have used since Q1 when we were most bearish on US Growth)
  2. TREND (bearish) = 1319 resistance (was support) and is now asserting itself with confirming volume and volatility studies
  3. TRADE (bearish) = 1275 is immediate-term TRADE oversold, but the new range draws down now to 1 

This morning’s ISM number amplifies the point I have been trying to make for the last few days – what US Equities are selling off on are Growth and Earnings Expectations, not a debt default.



Keith R. McCullough
Chief Executive Officer


Breakdown: SP500 Levels, Refreshed - SPX

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


With WMS trading near its 52 week low, we don’t think it's a stretch to say that investor expectations for FQ4 (June) are pretty low. 



Last quarter’s results and 2012 guidance weren’t exactly inspiring which begged the question of what additional shoes would drop.  Speculation regarding product and production issues and concern surrounding the sustainability of WMS’s market share in the face of heightened competition have emerged.  


We were early to voice concerns over WMS’s unsustainable market share [see our notes: “4Q SLOT SHIP SHARE UPDATE” (2/25/11) and “WMS: ADDRESSING THE ISSUES” (11/3/10)] but that was when the stock was trading with a $40 handle.  Sure wish we had made an aggressive short call then.  But at today’s levels a lot of the bad news is already priced in.  In fact, we think 25% market share is sustainable and its participation share should actually increase consistently over time. 


Regarding the quarter, If WMS can meet just the low end of their guidance we think that the stock can begin to work again as shorts will likely cover and the long-term is very compelling.  That doesn’t mean you have to buy it ahead of the quarter.  That would be for the brass ball crowd.


We estimate that WMS will report $209MM of revenues and $0.53 cents/share next week – slightly below consensus on the top line but in-line with EPS.  No doubt the $8MM (or roughly 500 units) that were delayed in shipping out last quarter will help WMS make its numbers.  Fiscal year end quarters also tend to be strong as companies will often offer their customers promotions to incentivize the placement of orders [see “SLOTS: MAKING THEIR QUOTA" published on 7/20/11].




  • $132MM of product sales at a 52% margin
    • 4,100 NA units – bolstered by the units that were supposed to ship last quarter
      • “The $8 million of orders were not canceled but they shipped in early April rather than by March 31st. Our production and distribution teams were simply unable to fulfill these orders in time as they were received after our normal cut-off dates which created challenges and stresses related to logistics of an already compressed order fulfillment period.”
    • ASP’s of $16.3k
      • “I don’t think pricing really entered into our issues in Q3. Pricing comes up every now and again. It didn’t use to come up hardly at all. It comes up a little bit more frequently now but we still believe that we have pricing leverage and if our content continues to perform at the levels of the G+ Deluxe and the Real Boost product, we’re not going to continue to see pricing as an issue.”
    • 2.6k international units
    • $23MM of used machine, parts, and conversion kit revenue
  • $76MM of gaming operations revenue at a 80% gross margin
    • Over the last 5 years, the average increase from the March to June quarter in gaming operations has been a $5MM sequential lift – largely due to seasonality
    • New releases should also help the quarter as well as recent approvals
      • “Battle Stations, we got the Pirate Battle and we have Leprechaun’s Gold that have essentially moved from Q2 and Q3 in our original fiscal ‘11 planning into Q4, Q1 and Q2. So, you’re going to see the games that we launched in Q3 are going to help suffice through Q4 and the games we’re launching in Q4 are going to help build our footprints slightly and our average win per day should see a nice up tick over the next couple of quarters. So, you are going to see some accretion in the footprint and the rate over the next call it two quarters.”
  • Other stuff:
    • Until revenue growth picks up, we expect that WMS will keep a lid on costs
    • We expect R&D to remain flat sequentially at $28MM, D&A to decline to $18MM, and SG&A to tick up sequentially to $39MM but be down YoY




Notable news items, macro data points, and price action pertaining to the restaurant space.






On Friday, ISM-Chicago employment index was a big disappointment, falling from 58.7 to 51.5. The decline put the index at its lowest since December 2009 and provides further confirmation that the labor market failed to improve from June to July.  Also on Friday, despite the headline ISM-NY showing business conditions improved in July, layoffs in New York City's financial services picked up in July; conditions are still notably weaker than they were a few months ago, and the employment data show that large-scale layoffs have resumed in the city's important financial services industry.





The University Of Michigan Survey Of Consumer Confidence Index collapsed in July.  Looking at the components of the Index, it was telling that expectations came down so sharply, from 64.8 in June to 56 in July.  This is the lowest level since November 2009.  The overall Sentiment Index declined 7.8 points to 63.7 in July.  This month brought the largest decline since March and the lowest level for the Index since March 2009.   Current Attitudes declined by 6.2 points to 75.8, the lowest level since November 2009.





Full service restaurants continue to trade poorly, underperforming other food, beverage, and restaurant categories over the past month.


THE HBM: DPZ, CBRL, KONA, BWLD - subsectors fbr




  • DPZ is starting a new campaign continuing its focus on accountability and consumer feedback by posting recent direct customer feedback from its online ordering Domino’s Tracker – good and bad – on a 4,360-square-foot billboard in Times Square.



  • CBRL has named Sandra B. Cochran as President and Chief Executive Officer.  Currently she is President and Chief Operating Officer.  She will assume her new role on September 12th.  Michael Woodhouse, currently Chairman and Chief Executive Officer, will become Executive Chairman upon Cochran assuming her new role.  James Bradford has been appointed to the Board of Directors, effective immediately.  Robert Hilton and Jimmie While have informed the company that they do not intend to stand for re-election at the 2011 AGM.
  • KONA has closed a restaurant in West Palm Beach that had been underperforming.  Interim President and Chief Executive Officer Mike Nahkunst said that the company believes that the closure will ultimately improve further profitability.  As a result of the closure, KONA lowered its sales guidance by $400,000.
  • BWLD may rise to $74 as the NFL labor dispute ends and a full schedule of games begins, according the Barron’s “The Trader”, citing Deutsche Bank.

THE HBM: DPZ, CBRL, KONA, BWLD - stocks 81



Howard Penney

Managing Director


Rory Green



In preparation for the Hyatt's Q2 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from Hyatt’s Q1 earnings call and subsequent conferences/releases.



Post Call Commentary / Material news


July 14: Acquisition of Lodgeworks

  • “Signed an agreement to purchase a portfolio of assets from Lodgeworks, LP, a private hotel development, ownership and management company, and its private equity partners. The acquisition includes 24 hotels and related assets, including management, franchise and intellectual property rights for an aggregate purchase price of approximately $802 million in cash. Key members of the LodgeWorks management and development team are expected to join Hyatt as part of the transaction.”
  • “The acquisition will enable the company to introduce Hyatt-branded hotels in nine markets where it currently is not represented at all and to establish its extended stay presence in 16 new markets.”
  • “Following the transaction, 16 Hotel Sierra hotels will be branded as Hyatt Summerfield Suites, increasing the number of hotels in that portfolio from 38 to 54. Five properties, including the AVIA Hotels, are expected to be converted to full service Hyatt brands. The brand affiliations of Hyatt Summerfield Suites and Hyatt Place properties in the LodgeWorks portfolio will remain unchanged”
  • “Hyatt does not expect a significant benefit to 2011 full-year Adjusted EBITDA as result of this purchase, due to the expected timing of the closings, transaction costs, and the fact that several of the assets are continuing to ramp up post-opening. However, Hyatt expects this purchase to generate approximately $50 million of Adjusted EBITDA during 2012.”
  • Upon expected closing in 3Q11, hotels will be managed by Hyatt

May 18: Purchase of 3 California Woodfin Suites Properties

  • “Hyatt … purchased three Woodfin Suites hotels in California for $76.5 million from the beneficial owner O-B Holdings.  Today Hyatt affiliates began managing the three properties, which are being rebranded as Hyatt Summerfield Suites hotels… Future property renovations totalling approximately $15 million are planned.”
  • The 3 hotels will add 570 select service rooms to Hyatt’s portfolio.

May 16: Repurchase 8,987,695 Shares of Class B Common Stock

  • “Hyatt has agreed to repurchase 8,987,695 shares of Class B common stock for $44.03 per share… on May 13, 2011, for an aggregate purchase price of $395,728,211… thereby reducing the total number of shares of common stock outstanding to 165,017,711 and reducing the number of shares of Class B common stock outstanding to 120,478,305.”

June 1: Sanford C. Bernstein & Co. Strategic Decisions Conference

  • “We’re really focused on expanding our presence in gateway cities around the world. That’s our number one area of focus”
  • “Our group business in North America represents somewhere between 45% and 50% of our revenue base among our North American full-service hotels. We participated in the recapitalization and redevelopment of the Hyatt Regency New Orleans, a very large convention hotel, that remained sort of a lasting impression of Katrina, the hurricane”
  • The other major area of focus for us…would be select service properties…We recently purchased another brand; Woodfin”.


Youtube from Q1 Conference Call

  • Adjusting for the renovations this year, and the settlement amount from last year, we estimate that adjusted EBITDA would have grown by approximately 14%.”
  • “RevPAR results were negatively impacted by the displacement of revenue of approximately 400 basis points due to renovations. Margins were negatively impacted by approximately 190 basis points due to renovation activity at owned hotels. As a result, margins would actually have grown about 60 basis points adjusting for the estimated impact of the renovations. The renovations adversely impacted owned and leased adjusted EBITDA by about $10 million in the quarter”
  • Group revenue, booked in the quarter for the quarter, was up 15%...Group revenue, booked in the quarter for the year, was up over 10%...Most of this 10% increase is as a result of higher rates.”
  • “As for transient business in the quarter, revenues increased 6%...mainly due to rates, which increased almost 5% versus last year. Shifts in mix of business continue to drive rate increases. Corporate rates from top accounts were up in the mid-single-digit percentage range consistent with our expectations following corporate rate negotiations that wrapped up in the first quarter.”
  • “Overall, international fees increased 12.9% in the first quarter of 2010, excluding the impact of currency. About a third of this increase was due to a termination fee received in the first quarter, and the remaining increase a result of higher revenues, and the continued ramp up of hotels added in prior periods…The termination fee was in the incentive fee line in the P&L.  It was largely a hotel outside North America that we terminated, and the impact of that is under $2 million.”
  • “We have eight hotels in Japan and two hotels in Egypt…Based on our current estimates, we expect fees from these two areas to decline approximately 30% or less than $5 million for full-year 2011, compared to last year”
  • “Our adjusted SG&A expenses increased 1.5% in the first quarter. Our comparison was relatively easy as we incurred higher bad debt expense in 2010. Without this favorable comparison, adjusted SG&A would have increased approximately 9%. This increase mostly reflects higher compensation costs.”
  • “As the level of disruption will be slightly higher in the second quarter than it was in the first, specifically we expect the renovations to have an approximate 500 basis point impact to RevPAR. And between $11 million to $13 million impact to our overall adjusted EBITDA in the second quarter. In the third quarter, we expect the renovations to have an approximate 100 basis point impact to RevPAR and an impact to adjusted EBITDA of less than $5 million. Thus in total, our expectation for renovation disruption is slightly higher than what we had discussed on the last earnings call, or approximately 400 basis points to owned and leased RevPAR and slightly over $25 million of adjusted EBITDA over the first three quarters of 2011.”
  • “We have contributed the Minneapolis property to a joint venture, but the impact on EBITDA is expected to be approximately $3 million on an annualized basis.”

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%