Keith added Tar-gey, one of our highest conviction TAIL ideas, into the Hedgeye Virtual Portfolio. Good numbers this morning show that the company continues to execute around the Street's immediate-term concerns.
This morning’s sales reports were choppy as was expected with the concoction of BTS, Irene, and the start of more challenging 2H compares all taking hold. Not surprisingly, with only one month of Q3 now in the books there was little color on any change to internal full-year outlooks, or margins, but the same number of companies beat on the sales line as missed and sales decelerated on both a 1yr and 2yr basis for the second consecutive month. This is not good for one of retail’s most crucial selling seasons and suggests early confirmation of our view that Q3 earnings season is setting up to be the worst in two-years.
On the whole, BTS commentary was unremarkable (TGT good, JCP poor) while surprisingly few retailers highlighted Irene among the key reasons for lighter sales (JCP was one of them). That said, most retailers noted anywhere from a 0.5%-3% impact to comps from the storm. Interestingly, TGT noted a positive +0.5% benefit from the storm adding that the shift is likely to impact September by a like amount.
Our sense is that many retailers - especially on the discretionary side - are underestimating the percent of sales that are lost forever vs. pushed into September.
A few additional callouts in August:
Shorts: JCP, JCP, and JCP. HBI, GIL, UA and COH
Longs: WMT, TGT, NKE, LIZ
Wendy’s announced this morning that Roland Smith will be retiring and making way, effective September 12th, for Emil Brolick, COO at Yum Brands.
This morning’s announcement has a number of implications for Wendy’s that range from positive to negative with, we believe, more of the former than the latter.
Emil Brolick is joining a company with which he is very familiar; from 1988 to 2000, he held a variety of marketing positions at Wendy’s and worked closely with founder Dave Thomas. He was viewed favorably by the investor community during his time at Wendy’s. At the time of his departure, the company was performing very well. From there he joined Taco Bell, where he helped improve sales and profits through new products and remodeling restaurants.
Roland Smith retiring is certainly not a good concurrent indicator of the performance of the company. The recent news that WEN is suing significant franchisees Lewis Topper and Jeffrey Coughlan and their WendPartners Franchise Group is concerning. The disagreement seems to be anchored on the purchasing of new equipment key to the rollout of the new burgers (WEN – A SMOOTH TRANSITION FOR THE NEW BURGER, 8/1/2011). As we wrote on August 1st, the rollout of the new product is crucial to the Wendy’s turnaround story. Roland Smith leaving does not convince us that Wendy’s is on the precipice of a turnaround, nor does it convince us that the relationship with the franchise-base is as good as it needs to be during this phase.
A month ago, our takeaway was that we view the stock favorably over the longer term but see the turnaround taking longer than expected, leading us to take a negative view over the near term. While the company’s most formidable competitor, MCD, marches on with its own remodel program, a change in CEO is only going to further push out the timetable for the WEN turnaround. While the transition should be smooth, given Mr. Brolick’s familiarity with the company, he will likely examine the initiatives that are being pushed through and make adjustments where necessary. In our view, he is likely to let some initiatives, like the new food items, proceed as planned but may cast a more critical eye on other plans that have been more cumbersome, like the remodel program.
Over the longer term, we believe that Mr. Brolick joining Wendy’s will be a positive for the company given his proven track record at the company, his understanding of the company’s core principles, and the probability that his tenure will likely serve as an opportunity for the relationship with franchisees to be improved.
The stock faces several headwinds at present, such as high beef prices, and we believe that near-term guidance could come down. Ultimately, Roland Smith’s departure signals that business at Wendy’s has not been strong but perhaps the most expedient path to achieving the turnaround is via new leadership.
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Initial Claims Drop 8k (9k after revision)
Initial jobless claims fell 8k (9k net of last week's revision) to 409k. Last week, the Department of Labor noted that at least 8,500 claims were due to the Verizon strike, so this week's claims are flat WoW excluding the VZ contribution. Our analysis has shown that a level of 375-400k is necessary to move unemployment lower, so today's print represents yet another week of the labor market treading water.
We have been noting for several weeks that jobless claims and the S&P - which usually track closely together - have diverged recently. If all the mean reversion comes from claims moving higher, that implies a coming claims level of 450-475.
Challenger announced job cuts for August were released yesterday. The level fell to 51k from 66k in July. On a YoY basis, August is 47% higher than last year, compared to +60% YoY in July.
2-10 Spread Remains Under Pressure
The 2-10 spread hit a level of 2.02 yesterday and is currently running at an average level of 2.30 for the quarter. This is dramatically tighter than 2Q, which saw an average level of 2.64.
The chart below shows the performance of financial stocks by subsector.
Joshua Steiner, CFA
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Notable macro data points, news items, and price action pertaining to the restaurant space.
Initial jobless claims came in at 409,000 for the week ended 8/27, a decrease of 12,000 from the week prior at 421,000 (revised). The four-week rolling average ticked up by 1,750 to 410,250, as the chart below illustrates.
Farm product prices received by farmers rose 1.1% in August. The increase in the overall index is driven by strength in crop and livestock prices; the overall index is 29% higher than a year ago. The recent flood/drought inflicted damages to domestic crop ensure food price inflation will continue well into 2012.
Food retailers have taken the lantern of performance. Food processors continue to perform sluggishly.
COSI CEO James Hyatt is leaving “for personal reasons”.
WEN CEO Roland Smith is stepping down from his role as President and CEO but will serve as a Senior Advisor to the Company during a transition period with newly announced President and CEO Emil Brolick (effective 9/12).
WEN’s new burgers are being rolled out. A post on grubgrade.com describes two new choices of the D.T. Double. In addition to “The Original”, the newcomers are the “Spicy Chipotle” and the “Garlic Steakhouse”. The Original D.T Double has American cheese and a “signature sauce”. The Spicy Chipotle D.T. Double includes pepper jack cheese and fiery chipotle sauce. The Garlic Steakhouse D.T. Double has Monterey Jack cheese and garlic aioli sauce. These double cheeseburgers are all priced at $2.99.
SONC continues to underperform on multiple durations and did so yesterday on higher volume studies. I’m not a believer that hot dogs are going to keep momentum going for ever - but the company continues to introduce new products. Sonic is adding on to its 100% all-beef hot dog line again this fall, introducing two new hot dogs in the form of the Bacon & Blue Dog and the Kickin’ Coney. Here’s a little more information: Bacon and Blue Dog: It’s a hot dog made with 100% pure beef, covered in crisp bacon, fresh lettuce, ripe tomato and blue cheese dressing on a poppy seed bun (450 Calories, 27 grams fat, 9 grams sat. fat, 17 grams protein.) Kickin’ Coney: A hot dog made with 100% pure beef and topped with chili, cheddar cheese, crispy onions and chipotle BBQ sauce (480 calories, 27 grams fat, 11 grams sat fat, 19 grams protein)
BKC has brought to the U.S. the multi-person meal platform it has been offering in Australia. Coupons distributed nationally this week include one for a $6.99 Meal for Two combo and another for a $9.99 Family Bundlecombo.
New Bennigan’s Franchising Co. chief executive Paul Mangiamele says he’s upbeat on the 80-unit chain’s performance after a successful reboot this summer at Bennigan’s corporate restaurant in Chicago. Same-store sales increases at the flagship unit are running in the low double digits, said Mangiamele, who took over as chief executive in May. Same-store sales for the rest of the system are in the low single digits. – NRN
The Macau Metro Monitor, September 1, 2011
MONTHLY GROSS REVENUE FROM GAMES OF FORTUNE DICJ
A new monthly Macau GGR record. August GGR came in at 24.769 MOP BN (24.048 HKD BN, 3.084 USD BN), up 57% YoY. This is also the highest YoY growth rate to date in 2011.
WEN JIABAO: CURBING INFLATION IS PRIORITY Macau Daily Times
According to China National Radio, Chinese Premier Wen Jiabao said, "Currently, our country’s economic development is still facing a very complicated domestic and external environment that is unstable and fraught with many uncertain elements... but stabilizing overall price levels remains the priority task of our macroeconomic controls [and] will not change." Wen remarked that while policymakers have admitted that the official annual inflation target of 4% is unlikely to be met in 2011, China’s economic fundamentals remained strong and could continue to grow at a fast pace.
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