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Global growth is slowing, commodity prices are coming down, and this should bring some relief to restaurant margins, all else held equal.




The dollar gained, week-over-week, and commodities generally declined over the same period.  Beef prices gained 1.3% week-over-week as demand, globally, continues to be strong.  The United Nations’ meat price index has gained 18% in the past year, according to a Food and Agriculture Organization report in July.  Increasing demand in China and other emerging markets is constraining supply and supporting global beef prices.  Coffee, Corn, Cheese, Chicken, Soybeans, and Hogs all declined meaningfully week-over-week.  Importantly for U.S.-centric restaurant companies, gas prices came down -1.8% in the last week which is a positive for consumers.







Live Cattle


Beef prices were up 1.3% over the last week as most other commodities declined.  Demand for beef, within the US and in international markets is strong; consumption of hamburgers in the U.S., for instance, is significantly higher in 2011 than in 2009.  48% of consumers surveyed by Technomic say they eat a burger at least once per week versus 38% in 2009.  In terms of international demand, we expect inflation in China and concerns about radioactivity in Japan to keep meat exports from the US strong. 





Below is a selection of comments from management teams pertaining to coffee prices from recent earnings calls.


RRGB (5/20/11): “Ground beef could be higher by as much as 20% year-over-year, which has a meaningful negative impact to our margins.”


HEDGEYE: Live cattle prices are up +22.7% y/y.  See the price chart above.



JACK (5/19/11): Beef accounts for more than 20% of our spend and is the biggest factor driving the change in our guidance. For the full year, we are now anticipating beef cost to be up nearly 14% versus our previous expectation of 9% inflation. We expect beef cost to be up approximately 14% to 15% in the third quarter.


HEDGEYE: Live cattle prices are up +22.7% y/y.  See the price chart above.



WEN (5/10/11): We communicated to you back in March that we expected beef cost to rise approximately 10% to 15% and that we expected our total commodity costs to rise 2% to 3% in 2011. We are now forecasting that our beef cost will rise 20%.


HEDGEYE: There is moderate upside risk to beef price guidance for WEN.



EAT (4/27/11):  Well, consistent with what we've talked about in the last month or so as we visited many of you, beef continues to present the most significant inflationary pressure in our commodity basket.



MRT (5/4/11): Q: I wanted to revisit the overall expectations for your commodities basket, and I missed the part about beef, just wanted to verify that it was up in the 20% range.  A: no, no, no.  I said in the low double-digits.


HEDGEYE: This is possible, even probable, for the year looking at average 2010 versus average YTD 2011 prices, and given the easier compares in the fourth quarter, but will require no sustained upturns from here.





Corn declined week-over-week as concern about the weakening of the U.S. recovery eroding demand impacted demand.  Nevertheless, conditions in the U.S., the world’s largest producer of corn, continue to deteriorate and food processor companies are concerned.  The possibility of crop yield estimates coming down due to continuing hot and dry conditions throughout much of the corn-growing regions of North America is driving prices higher over the past couple of days.  We see the tightening supply of corn as bullish for protein prices and negative for food processor margins.





Below is a comment from AFCE pertaining to corn prices from a recent earnings call.


AFCE (5/26/11):  On a full year basis, we now expect the Popeye’s system will experience an increase of 4% to 5% in food costs. This is up from our previous guidance of a 2% to 3% increase, primarily due to higher commodity costs in corn and soy, which impacts our bone-in chicken, as well as increases in the cost of flour and cooking oil.


HEDGEYE: Corn costs going higher are going to squeeze margins for food processors and, in turn, their clients.





Coffee prices have been trending lower since early in the second quarter as supply concerns have eased and global growth slowing crept into consensus expectations.  Concerns about weather conditions in Brazil have boosted prices today but, overall, the trend has been lower as the chart below illustrates.





Below is a selection of comments from management teams pertaining to coffee prices from recent earnings calls.



PEET (8/2/11): “As we indicated, in our first quarter call, we had to buy a small amount of our calendar 2011 coffee beans at significantly higher prices and this coffee will roll into our P&L during the third and fourth quarter.”


“Higher priced coffee resulted in gross margins this quarter being 290 basis points below prior year. In our first quarter conference call, we indicated that in addition to the overall higher price coffee market, we had to buy a small amount of coffee this year at significantly higher prices. And as a result, we expected our coffee cost to be 40% higher in fiscal 2011.”


HEDGEYE:  Peet’s is a company with a very competent management team that manages coffee costs extremely well.  Its higher-end, loyal customer base makes the price elasticity of demand more inelastic than for other coffee concepts’ products.



SBUX (7/28/11):  “As I mentioned earlier, are absolutely a headwind for us in the full business and that's most acutely impactful on margins in CPG as it's a much more coffee intensive cost structure, as you know. I can tell you that the decline as I spoke about it earlier from about 30% operating margin in CPG this year down to the target 25% next year is really all explained by commodities. Absent commodity inflation we'd be at or improving our margin in the coming year.”


“As we had anticipated, in recent weeks, coffee prices have retreated significantly from a high of more than $3 per pound just a couple of months ago to levels now near $2.40 per pound. As prices have been falling we continue locking up our needs for fiscal '12 and now have virtually the full year price protected.”


HEDGEYE: Starbucks is aligning itself with the right partners to gain more control of its coffee costs to provide investors with more certainty going forward and to protect its margins as global coffee demand continues to rise.



GMCR (7/27/2011): “However, what we've said is that should coffee prices or other material costs spike, we will certainly consider price increases as necessary. We certainly hope that we do not have to cover one again next year. But our objective long-term is attempting to maintain our gross margin as we would see input costs come along.”


HEDGEYE:  GMCR hedges out 6-9 months in advance.  Without a rising dollar and some stronger supply growth to counteract growing global demand, we expect sustained elevated prices.




Howard Penney

Managing Director


Rory Green






TODAY, AUGUST 10, 2011, 11AM EDT


Valued Client,
5-10 minutes prior to the 11 AM EDT start time please dial:

(Toll Free) or (Direct)
Conference Code: 733479#


To submit questions for the Q&A, please email .





 Key topics we will be addressing: 

  • Does the SP500 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. 

Please contact if you have any questions.  



The Hedgeye Macro Team






National Restaurant Count


NPD found U.S. restaurant unit counts declined by 2% between April 1, 2010, and March 31, 2011.  Independent restaurants comprised most of the decline; with 8,650 closures as “chains” restaurant unit counts remained relatively stable.  According to NPD “The decline in independent units is the steepest we’ve seen since NPD began conducting the ‘Spring ReCount’ census in 2001,”


THE HBM: MCD, YUM, DPZ, RRGB, EAT - national restaurant count





Restaurant stocks surges yesterday after underperforming the couple of days prior. Quick service restaurants outperformed the other food, beverage and restaurant categories.


THE HBM: MCD, YUM, DPZ, RRGB, EAT - subsector fbr




  • MCD, YUM, four other companies accepted invitations to take part in discussions with unions on wages for their employees in southern China’s Guangzhou, the city’s Federation of Trade Unions said - Bloomberg
  • MCD Japan plans to accelerate the opening of new stores in response to societal changes, Chairman and President Eikoh Harada said.  Japan’s March 11 earthquake had a significant impact on people’s lifestyles, Harada told reporters today.
  • DPZ Australia, Domino’s Pizza Enterprises LTD, saw its shares gain more than seven per cent after the fast food chain said it expected a 15% profit increase this year.
  • Subway Restaurants was one of the first companies to participate in Google Inc.'s mobile payment platform, Google Wallet. The open-source payment platform, which uses near field communication (NFC) technologies embedded in smartphones, was launched in May.  Subway's mobile marketing campaign is in the process of rolling out to the more than 24,000 stores in the U.S., with the global adoption planned through 2012.



  • EAT and RRGB are releasing earnings tomorrow after the close and we believe both companies will report strong quarters.

THE HBM: MCD, YUM, DPZ, RRGB, EAT - stocks 810



Howard Penney

Managing Director


Rory Green



real-time alerts

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

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


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.”



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,



Keith R. McCullough
Chief Executive Officer


Anniversary Day - Chart of the Day


Anniversary Day - Virtual Portfolio

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 80.51%
  • SHORT SIGNALS 78.32%