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HIBB: Quick Hit

Overall, a good quarter for Hibbett, no major surprises here but unfortunately they picked a bad day to report with Foot Locker blowing out numbers. Comparatively speaking, it won't look as good though it was better than what we saw out of DKS earlier in the week.

 

Here are the updated financial metrics heading into the 10:00 am call.

 

HIBB: Quick Hit - hibb top

HIBB: Quick Hit - hibb bottomn

 

HIBB: Quick Hit - HIBB SIGMA

 

HIBB: Quick Hit - HIBB sentiment


FULL SERVICE VALUATION

The Full Service Restaurant sector is down -25.2% over the past month, as compared to the QSR sector down -14.0%. Over the same time frame, only one stock in the FSR sector has outperformed the S&P 500 (EAT), as compared to 11 names in the QSR space (DNKN, CBOU, MCD, DPZ, THI, GMCR, YUM, PZZA, WEN, PEET, BAGL and SBUX).

 

The themes that are leading to the relative outperformance in the restaurant space are:

  • Coffee stocks
  • Pizza stocks
  • Turnaround stories
  • Exposure to China

Looking at recent history, the FSR space looks to be cheap, trading at 6.0X EV/EBITDA (NTM).  The group is right in the midpoint of the trailing-three-year range with 30% upside to the last peak in March of 2010 and 33% downside to 4.2X set back in November of 2008. 

 

We are certainly not making the call that we are headed back to the multiples we saw in 2008, but we also don’t know what the “demand destruction” is going to look like from the current market turmoil and the consumer confidence numbers hitting economic climate and the ugly consumer confidence numbers.

 

Last week, the University of Michigan index confidence fell 8.8 points to 54.9 versus 63.7 in July.  The index has fallen 19.4 since May 2011 and the magnitude of the decline has been exceeded only twice in the history of the index - fall of 1990 and 2005.

 

As I wrote last week, the potential for Recession 2.0 now looms large, but we are not seeing any damage to the trend line sales numbers – yet.  The official Malcolm Knapp data will be out this weekend, but the number (labeled as Knapp Track Casual Dining Index for July) in the BOBE press release this week implied a stable-to-slightly higher two-year average trend last month.

 

The prominent issue the industry is facing today is top-line demand destruction, right at the time we are seeing inflation in the P&L start to peak.  As we saw in yesterdays CPI data, the industry is very cautious about raising prices especially relative to supermarkets.  I would bet that it’s going to be even harder now to push through incremental pricing.

 

As we like to say, valuation is not a catalyst, but using the metric simply as a reference point would suggest that valuation is getting closer to suggesting that some opportunities may be brewing on the long side.  For now, though, we are waiting and watching.  That said, I still favor EAT, BWLD, and KONA right here and now.

 

FULL SERVICE VALUATION - casual dining multiples

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 

   

 

 

 

 


FL: Quick Hit

Anyone want to guess how long it’s been since FL printed top line growth over 15%?

 

As we’ve been saying, a story that has been perennially and justifiably hated for so long will take much longer than a few simple quarters to show upside. While not our favorite name, we stil think this story will work.

 

FL: Quick Hit - FL top

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FL: Quick Hit - FL SIGMA

 

FL: Quick Hit - FL Sentiment


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THE HBM: TXRH, SBUX, BKC, CMG

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

 

THE HEDGEYE BREAKFAST MENU

 

Consumer

 

The increase in gas prices seen in July has been arrested by global economic growth concerns.  Despite weakness in the dollar of late, gasoline prices have still been trending down so far this month.

 

THE HBM: TXRH, SBUX, BKC, CMG - gasoline chart

 

 

Subsector

 

Casual dining continues to underperform peer groups in the food, beverage and restaurant spaces.  EAT is the only name in casual dining to have outperformed the SPX over the past month.

 

THE HBM: TXRH, SBUX, BKC, CMG - subsectors fbr

 

 

QUICK SERVICE

  • CMG was raised to Outperform from Market Perform at Morgan Keegan.  The 12-month price target is $330.
  • CMG was moved to reveal that bacon is an ingredient in its pinto beans by the tweeting of journalist Seth Porges, who was surprised to learn – as a non-pork eater – that the pinto beans he had been eating for 10 years contained bacon.
  • BKC has ousted its King character as the first of many steps towards reinventing itself over the next year.  A new ad campaign is set to air this weekend rolling out the California Whopper.
  •  SBUX has agreed to pay £45,000 to settle a disability discrimination case brought on behalf of a Texan barista who claimed she was fired because she has dwarfism.

 

CASUAL DINING

  • TXRH CEO G.J. Hart is leaving the company to assume the role of Chairman and CEO of CPKI.

THE HBM: TXRH, SBUX, BKC, CMG - stocks 819

 

 

Howard Penney

Managing Director

            

 

Rory Green

Analyst


THE M3: PANSY HO; 2Q VISITOR EXPENDITURE SURVEY

The Macau Metro Monitor, August 19, 2011

 

 

PANSY HO 'CONFIDENT' IN MACAU'S FUTURE Macau Daily Times

Pansy Ho said MGM has applied to the government for a development project on the Cotai Strip and that the preliminary design of the project was completed.

 

Ho also said the plan to acquire New World First Ferry would benefit the management of Shun Tak's cost structure.  Although the Maritime Administration of Macau said it had not yet received the application from New World First Holdings for the transfer of shares, Ho said it was only a "fault in the procedure", stressing that the application was submitted at the same time the deal was announced.

 

VISITOR EXPENDITURE SURVEY FOR THE 2ND QUARTER 2011 DSEC

Total spending (excluding gaming expenses) of visitors reached MOP 10.1 BN in 2Q, up 15% YoY.  Per-capita spending of visitors amounted to MOP 1,482, an increase of 3% YoY.  The average length of stay of visitors was similar to the second quarter of 2010, at 0.9 day.

 



Misery's Mistake

This note was originally published at 8am on August 16, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“They get to see all of my mistakes.”

-Ray Dalio (The New Yorker, July 25th, 2011)

 

Recent history is marked-to-market. That’s a good thing because it helps us rethink, rework, and learn faster. Modern day multi-media tools from YouTube to Twitter have revolutionized and expedited our quest to find the right sources of alpha. Old Wall Street’s “sources” are either wearing orange jump suits or dying on opacity’s vine.

 

Per the same New Yorker article that I cited yesterday (“The Machine – How Ray Dalio built the world’s richest and strangest hedge fund”, by John Cassidy at The New Yorker), Ray Dalio has a “rule of radical transparency” that has ultimately shaped the risk management culture at Bridgewater Associates.

 

Transparency: I like that word; particularly when someone is practicing it out loud.

 

As a practical matter, I do find it very interesting (but not ironic) to note that two of the most successful Global Macro Risk Managers of our generation  (George Soros and Ray Dalio) both started their firms during the mid-1970s. Soros and Dalio hung up their own shingles in 1973 and 1974, respectfully.

 

What was very unique about the 1970s was that there was this economic reality called The Stagflation. It was man-made by central planners and, ultimately, it ran all of the Keynesians right over. Big Government Interventions that were focused on devaluing the US Dollar perpetuated rising inflation and slowing growth (stagflation).

 

I’m not sure how either Soros or Dalio’s macro models scored The Stagflation then, but this is how Hedgeye scores it now:

  1. Growth Slowing At An Accelerating Rate
  2. Inflation Rising (and remaining) Above The Real Growth Rate
  3. Monetary and Fiscal Policy that perpetuates 1 and 2

The Stagflation: In the US and across most of Western Europe, that’s basically what you have right here and now. In fact, if you take the US Government’s word for it and use the Q1 2011 US GDP number (revised down by 81% to 0.36%), and then “trust” that headline Consumer Price Inflation was 3.3% in Q1 - that’s a ratio of 10:1 of inflation over growth. That’s nasty.

 

Causality? What drives The Stagflation? That’s easy. Keynesian Politicians.

 

This is what Nixon, Carter, Bush II, and Obama all had/have in common. They and their economic “advisors” were/are all Keynesians. And all 4 of their Administrations oversaw horrible employment decades combined with horrifically low Presidential approval ratings.

 

Today, this country doesn’t like The Stagflation any more than it didn’t in the 1970s. Back then, they called it the Misery Index (unemployment + inflation). On this very common sense calculation, the Obama Administration ranks 3rd worst in American history to Nixon and Carter. Not surprisingly, Reagan, Clinton, and Kennedy are the Top 3.

 

Back to the Global Macro Grind

 

Let’s take a ride around the world and take a gander at some stagflation callouts from this week’s Global Macro Economic Data:

  1. JAPAN – reports a down -1.3% GDP number for Q2 2011. Keynesians celebrated that as “better than expected due to the tsunami effects.” Non-Keynesians remind realists that Japan’s GDP was negative for the 6 months before the tsunami!
  2. UNITED KINGDOM – reports an awfully high Consumer Price Inflation (CPI) print for July of +4.4% (versus +4.2% in June); the British (homeland of the Keynesians) are now running 10:1 inflation over GDP growth like the Americans are.
  3. GERMANY – reports a huge sequential slowdown in economic growth for Q2 2011 of +2.8% (cut in half versus Q1 GDP growth of +5.2%). If you didn’t know why German stocks have crashed since May 2011 (down -22%), now you know.

Elsewhere in Global Macro, commodities, currencies, and bond markets continue to signal that Global Growth Slowing remains reality:

  1. CRB COMMODITIES INDEX – closed at 330 yesterday and remains well below Hedgeye’s intermediate-term TREND line of 348
  2. WTIC OIL – trading $86 this morning continues to be broken across all 3 of our risk management durations (TRADE/TREND/TAIL)
  3. DR. COPPER – leads to the downside this morning (down -1.3%) and has now broken its long-term TAIL line of support ($4.10/lb)
  4. EUR/USD – continues to hope and pray to hold above its intermediate-term TREND line of resistance = $1.44
  5. UST YIELDS – 10-year yields remain broken across all 3 of our risk management durations (downside support = 2.06%!)
  6. UST YIELD SPREAD – continues to compress (10s minus 2s = +209 basis points) and is down -25% since Q1 Growth Slowed

But, but…

 

There are no buts. Stocks aren’t “cheap” either. Our 2011 call on US Equities has not been that stocks will get as cheap as they did during The Stagflation of 1974 (7x earnings). But it has been that buying Equities as Growth Slows And Inflation Accelerates is Misery’s Mistake.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1725-1827, $79.10-91.79, and 1098-1256, respectively. Yesterday I bought Silver (SLV) and sold half of our long China (CAF) position in the Hedgeye Asset Allocation Model, taking my allocation to International Equities down to 6% and keeping my allocation to US and European Equities at 0%.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Misery's Mistake - Chart of the Day

 

Misery's Mistake - Virtual Portfolio


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