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Notable news items and price action pertaining to the restaurant space. 






University of Michigan Consumer Confidence was a BOMB this morning, coming in at 54.9 versus 62 expectations and 63.7 prior.




According to the Bloomberg consumer confidence index, sentiment dropped 1.5 points, to -49.1 for the week ended August 7; dropping back near its mid-May low and only 5 points from its all-time low. 





Retail Sales


Retail sales rose 0.5% in July, the largest gain in four months; excluding autos core sales grew 0.3%, down from the upwardly revised 0.5 June figure.  In July, growth was led by miscellaneous retailers, gasoline stations and electronics and appliance retailers.   On the down side were Sporting goods and hobby stores, department stores, and building supply stores.




Thank in large part to GMCR, the QSR category has performed strongly relative to its peers.  What we would call out here is the improving performance in Food Processing, a space that has been heavily beaten down throughout the recent phase of high levels of inflation in agricultural commodities.






  • WEN discussed the new coffee program at breakfast and a new prototype to drive sales during its earnings call yesterday.  Other than that, it wa just an OK quarter!  SSS for Wendy’s company-operated stores were flat sequentially on a 2-yr basis at -0.3%.
  • BKC SSS grew by +6.8% in Latin America and +2.2% in Europe, Middle East, Africa and Africa and Asia Pacific (EMEA/APAC) and declined by 5.3% in the U.S. and Canada.  BK has been testing smoothies, salads, parfaits and oatmeal at 100 locations.
  • PNRA was upgraded to “Buy” from “Neutral” at Miller Tabak.
  • THI was upgraded to “Buy” from “Hold” at TD Newcrest.


  • DRI has entered into an agreement with CMR, a Mexican casual-dining restaurant operator, to develop and operate Red Lobster, Olive Garden and The Capital Grille brands in Mexico.
  • EAT was downgraded to “Neutral” from “Buy” at SunTrust Robinson Humphrey.
  • BWLD was upgraded to “Buy” from “Neutral” at Sterne, Agee.
  • RRGB has named Stuart Brown CFO of the company, according to reports out this morning.




Howard Penney

Managing Director


Rory Green




JCP: Woof, Woof


JCP reported adjusted earnings of $0.13 coming in well below its own guidance as expected, but it ‘managed’ to come in above both our $0.07 and the Street’s $0.10 estimate on lower quality earnings (i.e. further SG&A cuts). In addition, the company is guiding Q3 lower, but instead taking full-year guidance down as we expected they simply pulled it altogether. So much for transparency. JCP continues to be at the top of our short list. Here are a few other callouts:

  • Sales came in down -1% and e-commerce up only +2.8% well below prior full-year double-digit growth expectations as expected. The company’s inability to drive top-line growth persists.
  • Gross margins came in down -110bps compared to company guidance calling for flat to up slightly and even below our down -50bps expectations. Margin pressure is clearly underway. In addition, JWN just highlighted that they have yet to see a squeeze from inflationary pressure, which is right in-line with our call that JCP is the most exposed in this regard.
  • Managing SG&A expenses is how the company ultimately got to its number. Expenses coming in down -2.5% compared to company expectations to increase “slightly,” saved the quarter from being a complete disaster. For reference, if the company maintained its investment schedule and increased SG&A by +1.5% as we expected, earnings would have come in NEGATIVE with EPS of ($0.01). Had JCP kept SG&A flat, EPS would have come in at $0.04. As we highlighted in our recent Black Book, the company has already cut expenses down to the bone. There simply isn’t much left for JCP to keep pulling from in an attempt to juice earnings on a go forward basis.
  • The sales/inventory spread was about the only positive I could find in the quarter with the spread improving on the margin while still planted firmly in the 'danger zone.'
  • As for guidance, the company guided Q3 to $0.15-$0.20, well below the street at $0.27E & they pulled full-year guidance altogether. The table below captures what the implied earnings would have to be in Q4 given 1H results and the high-end of Q3 guidance in order to achieve prior guidance of $2.15-$2.25 as well as where the full-year could shake our based on out and the Street’s expectations. In short, it’s not happening.


 Conference call at 9:30am


JCP: Woof, Woof - JCP Guid 8 11


JCP: Woof, Woof - Dept SIGMA 8 11


Casey Flavin





Last night RRGB reported 2Q GAAP diluted earnings per share of $0.44 versus $0.36 consensus.  On a non-GAAP adjusted EPS were $0.48, compared to adjusted EPS of $0.29 last year.  Importantly, Red Robin's company-owned comparable restaurant sales increased 3.1% driven by 4.5% increase in average check, which was partially offset by a 1.4% decrease in guest counts.


That was the good news.


On the conference call, management said “through August 7th, the first four weeks of 3Q11, same-store sales were up 0.5%; driven by a 5.8% increase in average check and 5.3% decrease in guest counts.  This compares to same-store sales being up 1.4% in the first four weeks of 3Q2010, which were driven by a 2.7% decrease in average check, more than offset by a 4.1% increase in guest counts.”


In my view, the biggest problem was that management used the macro environment as an excuse.  The roller coaster in US equities which has been down ~13% over 14 days of trading (over the last three weeks the VIX is up 44.1%, 26.7 and 36.3% (through Thursday), respectfully) as the reason for the decline in traffic.  The stock market is a discounting mechanism and is clearly, over the last two weeks, implying deep concerns about the future prospects of the U.S. economy.  For RRGB, though, the consumer has been impaired for some time and management’s clinging to the macro environment for an excuse is not convincing.


Declining traffic trends are always a concern and, while management is attributing this slowdown to the macroeconomic environment, we would contend that there is likely more to it than that.  It is unlikely that such a sequential deceleration in traffic can be entirely accounted for by soft macroeconomic trends.  The consumer environment has been challenging for some time.  The Bloomberg Weekly Confidence Index is only 5 points from its all time low.  On the other hand, gas prices have come down, albeit to still-elevated levels.  While the market plunge has definitely shook confidence, we do not believe it has caused the Red Robin consumer to stop bringing his/her children for a burger. 


The RRGB turnaround is progressing and management is forging ahead with acceleration in new unit development.   The decline in traffic trends overshadowed what was otherwise a strong quarter and this is a worry for investors going forward.







Howard Penney

Managing Director


Rory Green



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I guess we were right to worry about FY12 guidance but this is well below what we expected. Don’t expect our estimate to go there though.



Meet and lower is what we expected, but not this much lower.  Below is management’s guidance for FY2012:


BYI: BAGS OF SAND - sandbags


“At least” $2.15 for FY2012?  Thanks for those two words of comfort.  While sympathetic to current BYI shareholders, we really like the setup for would be investors.  This is a complete sandbag – nothing less.  We scrubbed and scrubbed and we can only get down to $2.40.  Our guess is that the real guidance should’ve been “at least $2.40”.  And to throw salt in the wound – or icing on the cake for new investors – JPM slapped a downgrade on the stock this morning cause it’s now a show-me stock.  This stock could trade with a 2 handle this morning implying a 12x forward 12 month P/E on what we see as a bad case estimate.  Ridiculous but opportune. 


Look, we are pretty certain the gaming supply business will exhibit very strong long-term growth.  What’s really attractive about BYI though, is they have a near term growth driver beginning in the back half of FY12 the other guys don’t have.  I’m talking systems and it is visible.  So even if replacement demand takes another year or two to materialize – mathematically it has to at some point – BYI begins its growth cycle much sooner.  Please see our 8/3/11 note “BYI 4Q POSTVIEW” where we laid out the back ended loaded FY2012 and the systems visibility.


The quarter was actually decent and we didn’t see much in there that was disconcerting – one reason why we don’t buy into the $2.15 number.  Here are some observations from the quarter:


FQ4 Takeaways

  • Despite dire outlooks for the coming fiscal year, it appears that replacements were over 13k units this quarter – up about 20% YoY.  For the first half of the 2011 we estimate NA replacement units were 28.4k, up about 12% YoY while new and expansion units were down 31% to just over 5k units.
  • The only real disappointment this quarter was the low game sales margin for BYI and higher than expected SG&A.
  • For gaming operations at least, we know that licensed titles have about a 10% lower margin than in house themes, so the explanation of lower margins on game sales isn’t complete BS. Nonetheless, we have taken down our margin assumption for game sales in FY12
  • It looks like BYI garnered NA market share of about 18% - although we won’t know for sure until ALL reports – but 18% is a lot better than 14% the last few quarters, and that’s before a full game library is available for Alpha 2
  • Other quarterly observations:
    • Game sales :  North American units were a little better, international a little worse, pricing much better
    • Game Ops was spot in line with our estimate
    • Systems was above our estimate


“Discovery consists in seeing what everyone else has seen and thinking what no one else has thought.”

-  Albert Szent-Gyorgyi, Hungarian Physiologist, Nobel Prize Winner


There are tipping points in time when suspicions become reality, hunches become facts, and theories become laws.  The umbrella, having being raised sufficiently, clicks.  Greek mathematician, physicist, and astronomer Archimedes was once asked, according to the Roman writer Vitruvius, to determine whether or not a crown made for King Hiero II was made entirely from gold or whether silver, or another cheaper alloy, had been furtively mixed in. 


An important caveat; the crown was not to be damaged in the process.  Soon thereafter, upon observing the rising water level in the baths as people entered the water, Archimedes realized a method by which he could measure the volume of the crown, or any irregular shape.  Knowing the volume and weight of the crown, he could easily determine the density and thereby verify the soundness of the ornament.  


Archimedes ran through the streets shouting “Eureka!”, or so the story goes.  These “Eureka” moments happen to all of us and are generally preceded by a period of reflection, or obliviousness, which makes the discovery all the more jarring. 


The stock market has certainly been jarred by the recent events in global macro.  Of course, some investors were ahead of the game.  George Soros had moved heavily to cash, for instance.  For the overall market, simply looking at a chart of the S&P 500 shows quite clearly that a sudden realization came upon investors that stocks were greatly overvalued.  For a proxy of the stress/fear levels on Wall Street upon this Eureka moment, and others in the past, simply take a glance at the chart at the bottom of this note. 


It has long been Hedgeye’s contention, and Keith’s task on a daily basis, to highlight that big government intervention shortens economic cycles and amplifies market volatility.  Uncertainty dissuades investors from allocating capital and governments tend to create uncertainty – in the long-run – via bailouts, short-selling bans, and the implementation of other interventionist policies.  The volatility in the markets these past few days is testament to that fact.


To that end, today France, Italy, Spain and Belgium plan to enact bans on short selling or on short positions, which are only temporary and will do little to pacify the investment community or solve the structural problems that are impairing confidence.  Josh Steiner weighed in this morning, writing a note to his clients titled, “BANNING SHORT SELLING HELPS FOR ABOUT 5 HOURS”.  Steiner cites the short-lived bounce that occurred in US equity market, all of which was given back over the next seven trading days, when US authorities enacted a short selling ban in September of 2008.


As steep as the roller coaster in US equities has been (down ~13% over 14 days of trading), the government’s revisions of 1Q11 GDP has also been violent enough to cause whiplash; over thirty-five days, GDP for the first quarter was revised down 81%! 


Many investors today seem to be seeking a parallel to previous periods of market volatility.  Is this 1987 again or 2008 again? But how is it different?  One similarity between today and 2008 is that a major banking system is hanging by a thread.  Slowly, it is becoming evident that platitudes and assurances from Trichet and other banking officials in Europe are losing traction with global investors as the extent of the Old World’s problems become more apparent. 


One difference is that Europe is a far less united entity than the USA.  That’s not bluster, that’s a fact.  As mentioned in previous Early Look editions, conflict – not unity – has been a defining characteristic of the continent.  If the similarities between 2011 and 2008 are bad, the differences are almost worse!


Over the last three weeks the VIX is up 44.1%, 26.7% and 36.3% (through Thursday), respectfully.  As in 2008, the XLF has led the way in this downturn.  Brian Moynihan, CEO of Bank of America, is doing his best impression of Dick Fuld circa 2008, stating – in that wooden way that only corporate CEO’s can pull off – that “everything is fine”. 


Mr. Moynihan has assured interviewers that CDS spreads will go back down and instructed listeners of the company’s conference call to “trust” the management team.  The stock price has long been underperforming the market and the bank’s 5-year CDS spreads are currently 317 bps wide.  That’s 42% higher than the 2008 peak of 226 bps on 9/18/08 and 20% below the 3/30/09 peak of 402 bps.  These metrics are certainly not echoing Mr. Moynihan’s sentiments.  As Main Street America sees it, CEO’s and politicians are part of a separate group which they do not understand, do not trust, yet the actions undertaken by that group greatly influences the fortunes of the rest of the country.


Hedgeye’s Healthcare guru and general thought leader, Tom Tobin, wrote this week in his team’s morning “Healthcaster” note, “We made the point on the Debt Ceiling compromise that we would look back fondly on a process that has been roundly criticized and routinely blamed for recent stock volatility.”  Tom’s macro view has been on point lately and, rather than buying into the trap of seeing the passing of the debt ceiling resolution as cathartic, Tom was cognizant of the repercussions of the lack of transparency in CBO and ratings agency processes and heightening public emotions.  Observing this play out, Tom wrote, is “like watching two blind umpires argue a blown call.” 


Perhaps most disturbing is that “to construct its forecasts, the CBO reviews major econometric models and information from “commercial forecasting services” and also consults with and relies on the advice of its expert panel of economic advisers”, including academics and Goldman Sachs.


That’s right; the CBO bases its forecasts on the advice of Academia and Wall Street!  You couldn’t make this stuff up if you tried.  The logic is enough to make your head spin. 


The CBO uses street forecasts to peg their GDP forecasts which lead debt and deficit projections.  The Street uses federal spending to calculate its GDP forecasts.  Congress cutting spending leads to falling GDP, which leads to the Street cutting forecasts, which increases debt and deficit forecasts and increases the pressure to cut spending.  In the middle of this whirlwind is the consumer, who bears the brunt of the spending cuts and lack of jobs. Ultimately, the consumer is the linchpin holding the economy together.  70% of US GDP is consumption.  The very nature of the negative feedback loop I describe above is impairing a massive portion of our nation’s GDP from growing.


If you believe that our current political process is “broken”, as I do, the next step in the debt ceiling  debate will be no better than a made-for-TV reality show starring partisan politicians sitting on “The Super Committee” putting together back-door deals (based on flawed data) that will take us further down a path of financial morass. 


In the short run, we may get a reprieve from some of the Washington madness as Congress is on vacation for the balance of the month and the Obama family is going on vacation from the 18-28th.  The markets, like time, wait for nobody.  Not even the President.  Given the interconnected nature of global markets, with Europe facing a 2008 style financial meltdown - who is watching the store?


Again, some of the differences between 2008 and today seem worse than the similarities: joblessness is higher, more people are reliant on food stamps for sustenance, and the financial crisis threatening to wreak havoc on our economy is not here in the USA and therefore less within our government’s control.  The similarities, given that we are comparing the present situation to 2008, are inherently negative.  Gas prices are elevated, the VIX is spiking, stocks have fallen off a cliff, and consumer confidence is depressed. 


Collective Eureka moments dictate the larger trends in the market and Hedgeye has done a better-than-bad job of being ahead of the moves we have seen since our firm’s inception.  In 2008, we moved to cash (as high as 96%); in March and early April of 2009, we made some strong calls to buy US equities (buying SBUX in April).  Both of the market moves that ensued were long, pronounced, and driven not by any change in what market participants were seeing, but rather a change in how they were perceiving those factors and what they were thinking. 


We have observed a sea-change in how investors are thinking about this market, politics, the role of government, and earnings expectations in the past couple of weeks.  The Eureka moment is here.  Big government has brought around another crisis faster than almost anyone could have thought possible. 

How time flies.


Function in disaster; finish in style,


Howard Penney




THE EUREKA MOMENT - Virtual Portfolio