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RL: Q1 Quick Take

 

RL posted blowout Q1 results of $1.90 vs. Street estimates of $1.44 with strong results across every segment. While we didn’t expect RL to come up short of expectations two quarters in a row, they came in significantly better than expected. RL’s visit to the ‘danger zone’ of our SIGMA was brief with both axis improving as inventories came in up 42% on 32% sales growth and operating margin expanded by 330bps. Given Q1 results, the company’s improved full-year outlook appears conservative, which is no surprise given last quarter’s miss. Estimates are headed higher and so too is the stock. We’ll have more detail on our adjusted numbers and view after the call.  

 

Here are a few key takeaways from the quarter:

 

1)      Wholesale Revs: Up 29% reflects a sharp reacceleration in sales on both a 1Yr and 2Yr basis even when backing out the $30mm shift of holiday sales into the quarter, which accounted for 6% growth. The company cited strength across all categories with domestic accessories the key highlight.

2)      Wholesale Profitability: Several factors severely impacted wholesale profitability last quarter including cost of goods inflation, lower Japanese wholesale shipments, and continued investment in new merchandise categories, but ongoing cost inflation and uncertainty over deferred pricing was mitigated by higher volumes. The company isn’t out of the clear yet with variability expected to continue depending on consumer reaction to new pricing in the fall, but certainly a solid indication that margins aren’t deteriorating further.

3)      SG&A Spending: Despite higher investment spending, the company levered SG&A by over 200bps suggesting some cushion in margins for the balance of the year.

4)      Guidance:

  1. Q2: No major surprises here. The company is coming in slightly more conservative on margin (down 300bps) vs. the Street down ~160bps, we are at -190bps, but the leverage in this model is clear and it looks like management is being conservative on the top-line.
  2. FY: Company took revs up in-line with beat, but the change in operating margin guidance (increased 50bps to down 50-100bps from down 150-100bps) was not commensurate with the Q1 beat which improved full year profitability by 75bps. While this implies the company is taking a more conservative stance on the back half, this too appears to be conservative. Management’s guidance implies EPS of $6.15-$6.85, the Street was at $6.32 – numbers are headed higher.

 RL: Q1 Quick Take - RL S 8 11

 

Casey Flavin

Director


Anniversary Day

This note was originally published at 8am on August 05, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“He who will not economize will have to agonize.”

-Confucius

 

I lost over three hundred dollars of my net wealth yesterday. Happy Anniversary Laura.

 

Actually, if you back into the valuation of my largest holding (Hedgeye)… assume a 3-month Treasury discount rate of 0.00% (this morning you almost have to pay the government to hold your money)… and infer that our team’s analytical competence added some value to our clients’ risk management process this week… I think I made back my three hundred bucks.

 

Like a lot of things manic media and the Wall Street/Washington they cover, their concept of CASH can be amusing. I personally invested approximately 1/3 of my CASH in this company during the thralls of 2008. I considered that a relatively “high conviction” idea.

 

But when Wall Street talks about CASH, bankers and brokers are usually talking about your money. There is a gargantuan marketing machine that stands behind this basic compensation mechanism – they need other people’s money to make money.

 

People are always asking me “what’s your best long term idea”? Away from Hedgeye, I think CASH is the best weapon for self defense in the modern Fiat Fool world in which we live. CASH saves you on a day like yesterday (worst day for US Equities since 2008). CASH also provides you the opportunity to make long (or short-term) investments when your competition is not allowed to make them.

 

Back to the Global Macro Grind

 

Before the price of Silver collapsed intraday, I raised another 12% CASH in the Hedgeye Asset Allocation Model. That takes my CASH position to 67%. I sold my 6% allocations to the US Dollar and Silver (total = 12%) at 10:27AM and 11:06AM, respectively. At the time, they were both up on the day. I was pleased.

 

Now a lot of people (and I mean a lot) told me I “couldn’t” go to 96% CASH in Q3 of 2008. Less people will tell me I can’t go to 67% CASH in 2011. Why? Most likely because I just did.

 

The idea here this morning isn’t to take a victory lap (although these things do occur for winning teams). The idea is the same idea I have been pounding on since 2008. Our industry needs new ideas, new risk management processes, and new blood. Re-think. Re-work. Evolve. Old Wall Street knows that. They are Too Big To Change as fast as Hedgeye has changed – Old Wall Street knows that too.

 

Today’s Hedgeye Asset Allocation is as follows:

  1. CASH = 67%
  2. Fixed Income = 18% (Long-term Treasuries and US Treasury Flattener – TLT and FLAT)
  3. International Equities = 9% (China and S&P International Dividend ETF – CAF and DWX)
  4. International Currencies = 6% (Canadian Dollar – FXC)
  5. Commodities = 0%
  6. US Equities = 0%

Again, this is an asset allocation product, not a hedge fund or a book of long/short ideas (that’s the Hedgeye Portfolio – different product). When I think about this product, I think about Laura, Jack, and Callie. That’s who I work for when preserving our assets.

 

I also work for them to grow our assets. But another funny thing about Wall Street is that some people think you should be in “growth” mode every day.

 

In some asset classes, some of the time, sure – great idea. Most of the time, in most asset classes, that’s a really bad idea. Markets that are being manipulated by central planners do not owe us anything.

 

Globally interconnected markets care about a lot of things at the same time. Right now, they are anchoring on the #1 risk that no one was talking about in mainstream media yesterday: Fiat Fools trying to convince the Institutional Investing Community to chase yield.

 

Chasing yield is all good and fine until the music stops. Remember what the buy-side bus tour operator, Citigroup’s, retired storyteller (the artist formerly known as Chuck Prince) told the Financial Times on July 10, 2007:

 

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing…”

 

Today is August 5, 2011. It’s our 5thWedding Anniversary and I, for one, feel like the luckiest man in the world today. I married a beautiful, loving, and thoughtful woman. I have healthy children. I have a happy firm.

 

And I still have my cash.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1633-1671, $86.52-91.95, and 1165-1256, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Anniversary Day - Chart of the Day

 

Anniversary Day - Virtual Portfolio



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Market Memory

“Memory is a process, albeit a faulty one.”

-Jane Leavy

 

That quote comes from the Preface of Jane Leavy’s recent Bestseller “The Last Boy – Mickey Mantle and The End of America’s Childhood.” I just started reading it last night and it helped me reconcile some of the conflicting thoughts in my head.

 

If you open your mind, you can always learn something from someone. Even if that’s learning what not to do. Mr. Macro Market teaches us something each and every market day. Yesterday it taught me that career risk management is as relevant as risk management itself.

 

At 2:45PM yesterday, the SP500 was testing the 1101 level, making a credible threat to move into what we call the crash zone (down -20% from its YTD peak of 1364 on April 29, 2011). Seventy five minutes later, the SP500 closed the day at 1172 – up 6.4% in 75 minutes of trading! La Bernank calls this le “price stability.”

 

That wasn’t a bounce. That wasn’t an intraday rally. That was career risk management buttons being pushed (BUY), in size, at the 1100 line – at the intraday and YTD low. Remember, the art of money management is having money to manage.

 

Market bottoms are processes, not points. And the entire construct of American finance (a large construct) is finally engaging, emotionally, in the process of jogging their 2008 Market Memory.

 

Many a perma-bull would have you believe yesterday’s intraday rally was based on the “yield differential between stocks and bonds.” Others continue to tell you that stocks went up because they are “cheap.” Right.

 

To borrow a much more reasonable explanation of what the market does and when, here’s Jane Leavy’s (using America’s treasured pastime as a metaphor for how Americans remember things they are supposed to love): “…like the sweater in my office, Mickey Mantle is a blend of memory and distortion, fact and fiction, repetition and exaggeration.”

 

Back to this morning’s Global Macro Grind

 

As levered long hedge funds deal with their 2011 performance problems in America (they’re down more than mutual funds who don’t use leverage), the rest of the world, shockingly, didn’t cease to exist yesterday.

 

Across countries, currencies, and commodities, there’s a lot going on this morning:

 

1.   ASIA – China’s most trusted economic advisor (Singapore) CUT its export forecast for 2011 last night. That’s a big deal as it’s a pseudo honest representation about what Asia really should be thinking when considering all of the money printing by Fiat Fools. Deficits, Debt, and Zero Percent Interest Rate Policies STRUCTURALLY DEPRESS ECONOMIC GROWTH (Princeton Economics Department, take notes).

 

Singapore’s stock market sold off on that “news” closing down a full -1.9% overnight and really put a large wet Kleenex on what the buy-and-hope crowd in America was looking for this morning - a follow through on yesterday’s bull charge, with a big overnight session in Asia, and big UP futures to story-tell about. Didn’t happen.

 

2.   EUROPE – Evidently, arresting a US stock market crash into yesterday’s close didn’t stop gravity. Economic growth in Europe continues to slow and that’s why German stocks have crashed alongside all of the Europig nations. In bear markets (all of European Equities are in one, fyi), I learn a lot more from the complexion of the bounces than I do the selloffs.

 

Anyone with a calculator knows that Greece, Italy, and Spain have crashed. But do people realize that German stocks are crashing? Inclusive of this morning’s low-volume +1.6% “bounce” in Germany’s DAX Index, the market is still down -20% from its May 2011 peak. That’s a problem. Germany’s TAIL is broken.

 

3.   USA – Our cerebral Director of Research, Daryl Jones, wrote an outstanding note yesterday titled “Is There Cheap Valuation Blood In The Water” (if you’d like the note email ) and without recapping the entire historical data series, here’s the bottom line on US stocks: they aren’t expensive anymore; they aren’t cheap either – they are perfectly priced for storytelling.

 

For the sake of a bear’s storytelling purposes, let’s assume the duration of the countless marketing machines out there who are still pitching Jeremy Siegel’s “Stocks For The Long Run” – and let’s use the longest of long-runs. At a closing price of 1172, the SP500 continues to make LOWER long-term LOWS, down -25.1% versus their long-term peak (2007) and down -14.0% from their LOWER-HIGHS established in April of 2011.

 

Now if we want to throw away our Market Memory for another second and assume the Keynesian Textbook position that ‘low bond yields means buy stocks’, we humbly submit that you still need to get the timing right.

 

With 2-year US Treasury Yields hitting all-time lows today at 0.17% (all-time is still a very long time) and 10-year yields collapsing toward their all-time lows established in 2008, again, we humbly submit that buying a stock because “it’s cheap” in 2008 should inspire bad memories about what’s left of your 401k. Fictionally “cheap” can get cheaper and repeating the same mistakes gets people run over.

 

My immediate-term ranges of support and resistance for Gold (bullish), Oil (bearish), and the SP500 (bearish) are now $1, $78.58-89.97, and 1114-1231, respectively. Our Global Macro team will host a conference call at 11AM EST to go through what to do next.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Market Memory - Chart of the Day

 

Market Memory - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - August 10, 2011

 

USA stocks aren’t expensive; they aren’t cheap - they are perfectly priced for storytelling.  We are hosting a conference call at 11AM today key topics we will be addressing: 

  • Does the S&P500 off over 15% from its YTD highs present a short covering opportunity?
  • Given our outlook for the global economy, what are the key drivers over the intermediate term?
  • Sovereign debt issues and the likelihood of resolution, both in the United States and Europe.
  • Update of Hedgeye's quantitative and fundamental view of key assets classes - e.g. U.S. dollar, oil, gold, treasuries and copper.
  • Hedgeye's top macro and asset allocation ideas. 

As we look at today’s set up for the S&P 500, the range is 117 points or -4.99% downside to 1114 and 4.99% upside to 1231.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 810

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: +2651 (+5719)  
  • VOLUME: NYSE 2409.64 (-5.28%)
  • VIX:  35.06 -26.96% YTD PERFORMANCE: +97.52%
  • SPX PUT/CALL RATIO: 2.64 from 2.04 (+28.96%)

CREDIT/ECONOMIC MARKET LOOK:

 

TREASURY YIELDS – obviously some big league career risk management buttons were pushed (BUY) at S&P500’s 1,100 intraday test yesterday (a sub 1,100 move puts S&P500 in crash mode), and immediately after the rally you had everyone and their brother say “because Bernanke wants you to chase yield.” The 10yr yields heading toward 2008 all-time lows are NOT a bullish economic signal!

  • TED SPREAD: 25.30
  • 3-MONTH T-BILL YIELD: 0.03% -0.02%
  • 10-Year: 2.20 from 2.40    
  • YIELD CURVE: 2.01 from 2.13

MACRO DATA POINTS:

  • 7 a.m.: MBA Mortgage Applications, prior 7.1%
  • 10 a.m.: JOLTs Job openings, prior 2974
  • 10 a.m.: Wholesale Inventories, est. 1.0%, prior 1.8%
  • 10:30 a.m.: DoE inventories
  • 1 p.m.: U.S. to sell $24b 10-yr notes
  • 2 p.m.: Monthly budget statement, est. (-$135b, prior $165b)

WHAT TO WATCH:

  • BofA CEO speaks on conference call hosted by Fairholme Capital. Moynihan said yesterday he has no plans to step down.
  • China’s stocks rebounded from a more than one-year low on speculation the government may delay interest-rate increases
  • Goldman sued by U.S. over credit-union losses: WSJ
  • FCC to tie review of AT&T bids for T-Mobile, Qualcomm assets
  • Walgreen to sell health insurance: CNN

COMMODITY/GROWTH EXPECTATION

 

COMMODITIES – not crashing on the 19 component CRB Index, yet (CRB down -15% since May). But this one is in motion. Oil has crashed and that’s not an inconsequential global demand signal. As a reminder, both Copper and Oil have snapped my TAIL lines of $92 and 4.10, respectively. When my TAILs snap; tail risk becomes probable.

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Being Like Soros in Buying Farm Land Reaps Annual Gains of 16%
  • Brent Drop Below $100 Risks OPEC Cuts on Price: Energy Markets
  • Oil Rises From 10-Month Low on Fed Comments; IEA Sees 2012 Risks
  • Bets on Iron-Ore Swaps Show Vale, Rio ‘Cheap’: Chart of the Day
  • Gold Advances After Federal Reserve Pledges to Keep Rates Low
  • China Copper Imports Rise to Six-Month High on Restocking
  • Commodities Rebound From Eight-Month Low on Fed’s Rate Pledge
  • South Africa Drives Trade Away With Port Costs: Freight Markets
  • Copper Climbs for First Day in Six After Fed’s Low-Rates Pledge
  • Palm Oil Stockpiles in Malaysia Decline on Record Exports
  • Gold Surges to Record for Second Day as Fed to Keep Rates Low
  • U.S. Mint’s Gold Coin Sales Up to 39,000 Ounces So Far in August
  • China’s Soy Imports at Highest This Year as Hog Herds Expand
  • Gold Futures Advance 0.9% in New York; Silver Reverses Decline
  • Palm Oil Gains as Commodities Rally on Fed’s Pledge to Low Rates
  • China Won’t Sell Pork Reserves to Push Down Prices, Radio Says
  • Oil Falls to 10-Month Low as Fed Rules Out Immediate Stimulus

CURRENCIES

 

 THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • EUROPE: nasty wet Kleenex market remains; Italy follows up on USAs ragger with a down day! (crash continues); Russia was the leader, today lags

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

  • ASIA – really disappointing level of “follow through” across Asian Equities last night after Singapore CUT their export growth forecast to 6-7% vs. 8-10% prior (Singapore closed down -1.9% and this matters as they are China’s trusted economic advisor – sorry Timmy G.)

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

 

Howard Penney

Managing Director


RRGB: UPSIDE SURPRISE

Red Robin is setting up to beat consensus on the top and bottom line in our model.

 

Red Robin appointed a new Chief Executive Officer in Steve Carley in late 2010 and, since his arrival, we have become incrementally move constructive on the name.  Management recently unveiled a new strategy, called Project RED, which focuses on Revenue Growth, Expense Management and Deployment of Capital.   While revenue growth is a constant goal of all restaurant teams and a sound bite in every earnings call, the extent of the expense cuts management is proposing is impressive.  Below I discuss the revenue and expenses outlook in more detail.

 

 

REVENUE

 

Same-restaurant sales are trending more positively over the last few quarters and, we believe, the company’s Project RED will enable it to take share going forward.  Our estimate for same-restaurant sales is 2% for the second quarter.  This implies an acceleration in two-year average trends of 60 basis points from the first quarter. 

 

RRGB: UPSIDE SURPRISE - rrgb sss

 

 

The company’s growth profile is also attractive from an investment standpoint.  New unit growth is accelerating by 25% to 10 new openings in 2011 and average weekly sales for the non-comparable store base continually exceeds those of the comparable store base.  The company opened only two stores in the first half of 2011.

 

During the last earnings call, management highlighted the new loyalty program, Red Loyalty, as a key component of the top-line strategy going forward.  The loyalty card program not only allows the company to retain customers but also enables management to learn more about the customer base and target future sales strategies more effectively.

 

The company took a 1.5% price increase in April which will help margins as beef costs remain elevated. 

 

 

EXPENSES

 

Management is targeting 200 different cost savings through the end of 2012 which, it is hoped, will yield $16-18 million in annualized cost savings.  We find the meticulous manner in which management is pursuing savings, big and small, to be encouraging given our preference for expense-cutting (EAT) turnarounds rather than spending to turn around a company (PFCB).  Everything from lowering food waste to renegotiating trash contracts is being focused on.

 

Commodity costs remain a concern for the company given its exposure to beef.  In May management said, “Ground beef could be higher by as much as 20% year-over-year, which has a meaningful negative impact to our margins”.  Looking at the price of beef since that earnings call on May 19th, it is up 4% but prices have been volatile as weather impacts, changing global consumption patterns and slower economic growth impact commodity prices.  Commodity guidance given in May was for 5-6% inflation over the remainder of the year and we believe that it’s unlikely any downside revision will be made to that range.

 

In terms of expectations going forward, management is guiding to 80-100 basis points of margin expansion due to labor efficiencies. 

 

As the quadrant chart below illustrates, RRGB’s operating performance has improved markedly over the past couple of quarters and, given easy compares for the next few quarters and the company’s focus on costs savings, we expect the next quarter to be strong.

 

RRGB: UPSIDE SURPRISE - rrgb quadrant

 

 

SENTIMENT

 

Sentiment has improved in this name and estimates have risen but we still think that the 2Q11 consensus EPS number of $0.36 is $0.05 or $0.06 too low.  Given that 17% of ratings on the stock are “Sell”, there could be still additional sentiment shifts to the positive side coming soon.

 

Short interest, at 15.7%, is a bullish data point in that any upside surprise in EPS could prompt short covering and a nice pop in the stock price.  With the Knapp Track casual dining sales index having trended positively through the quarter and the company doing all it can to target controllable costs, we see a strong quarter from RRGB as a distinct possibility.

 

RRGB: UPSIDE SURPRISE - rrgb sell side rating

 

RRGB: UPSIDE SURPRISE - rrgb short interest

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 


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