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WEN – LOOKING INTO WENDY’S CURRENT SALES AND PROFITABILITY TRENDS

We have collected some trench data from the current the promotion of the Jr. Bacon Cheeseburger, Crispy Chicken sandwich and the Doublestack, all for $.99. Operators were asked to comment on the impacted to their restaurant. A complete assessment from on sales, food cost, labor, service, etc and what has changed, if anything, since the end of the promotion.

Two key themes emerge from the survey……..



  • It helped drive same-store sales........



  • But not profitability…..

The value trio promotion had the following effect on my overall sales:
The value trio promotion improved the profitability of my restaurant:

Eye On Pragmatism: China (FXI) and Taiwan (EWT)

Political relations between the two nations are still frozen, but could thaw. Meanwhile trade is red hot!

Agreements signed in Taiwan by representatives of the Chinese Government controlled Association for Relations Across the Taiwan Straits (ARATS) and the Taiwan-based Straits Exchange Foundation (SEF) have been greeted in the press as a historic breakthrough between the two nations. This comes after 60 years of hostility and a decade after the last attempted trade talks were abandoned.

The Chinese government still officially regards Taiwan as its sovereign territory and the specter of escalating hostilities between the mainland and the island republic have remain a continuing threat to Asian security.

The new agreements open the door for more efficient trade through direct shipping and postal service as well as increased cooperation on tourism. These are regarded as first step towards closer economic ties.

A simple run through the math suggests that this economic summit is a recognition of a “New Reality” (our 2009 Investment Theme) that has emerged over the past decade. Data released by the Taiwanese government shows that the mainland market already accounted for over 25% of total exports prior to the slowdown despite the lack of direct shipping routes. As Taiwan becomes increasingly dependent on Chinese demand, and as China becomes increasingly pragmatic in its embrace of free trade, this type of corporation is, in the near term, in interest of each.

There is no suggestion that this meeting necessarily heralds a diplomatic breakthrough. During the visit Chinese representatives are expected to not only refer to the Taiwanese president as only “Mr.”, but to avoid even mentioning the name of the country itself. The Taiwanese government is still spending billions on US missiles and fighter planes and the Chinese government is still committed to securing the submission of its rogue province –they have merely made the pragmatic decision to seek mutually beneficial economic policies in the meantime.

What could be more capitalistic than that?

Andrew Barber
Director

October Sales Preview - Updating the Macro View of the Consumer

Retailers are scheduled to report their October comparable sales numbers on Thursday. As we are anticipating less than pretty results from most retailers, we thought this would be a good time to take another look at the state of the consumer over the last 2 years. In early October, we analyzed the changing state of the consumer over the last 40-plus years (please refer to Brian McGough’s two posts dated October 12 for more details). Specifically, we wanted to see how consumers were faring in the year-ago period to gauge what type of consumer environment retailers are comparing against in their upcoming reported October results.

Since January 2007, personal consumption expenditures hit their YOY peak in growth in November 2007 and have since grown at a moderated to declining rate. Nondurable goods spending has helped to support total PCE growth as gasoline, fuel oil and other energy spending picked up in September 2007 and began to really accelerate in October followed by four months of 30%-plus YOY increases. Energy spending continued to grow at double-digit rates since that period through July as gasoline prices hit historical highs.

At the same time energy costs took a larger share of wallet, consumers were hit with overall inflationary pressures as CPI reflected these higher energy costs and began its steady YOY increase in August 2007. The unemployment rate, which has been on an upward trend since January 2007, also began to increase at a more significant pace during this October to November 2007 timeframe. Not surprising, disposable personal income growth decelerated in October as well as it coincided with the uptick in unemployment rates. Since then, disposable income growth has continued to moderate until it turned relatively flat in March 2008. The government’s rebate checks helped to boost numbers in May (also provided a lift to May, June, July retail sales numbers), but this government intervention only provided a short-term fix and disposable income growth has since abated. So needless to say, consumers were already under pressure in the year-ago October period. These pressures, however, were only beginning to emerge, albeit at a fairly rapid pace, so it is safe to assume that consumers had not fully realized the severity of the issues.

As we think about October 2008 retail sales, consumer confidence has waned on a YOY basis, unemployment rates have worsened and disposable personal incomes have deteriorated further. The consumer has gotten some relief in recent months as it relates to gasoline prices and overall inflationary pressures, but as I said earlier, we are anticipating another month of toxic results and as Brian McGough stated on October 12, discretionary spending could finally turn negative in 1Q09 and be down about $170 billion in FY09.

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MANAGEMENT CHANGES AT CROWN?

I believe Ted Chan will be named the new Chief Executive of Crown Macau, replacing Keith Heise who may have been fired. This appointment would make sense as Amax Entertainment announced on Monday that Mr. Chan resigned to pursue another Macau opportunity.

Amax owns 80% of AMA, which is currently the sole junket aggregator for Crown Macau. The arrival of Mr. Chan would appear to be fairly seamless and confirm Crown’s position as primarily a VIP property. I’m not sure what this means for the AMA/Crown relationship. We had been hearing that it was somewhat strained already.

The management change was probably driven by what we expect was an awful Q3 at Crown, both on the volume and hold side. MPEL will announce Q3 earnings later this month and investors shouldn’t be surprised when it is not pretty.

RL: Quick Take

Execution, execution, execution… Numbers are heading higher – as is the stock. Still one of my favorites.

Clean beat. $1.58 vs. my $1.36 and the Street at $1.24. If there’s one thing I need to see, it is that sales were +10% and inventories were -3%. Cash flow algorithm looks solid: sales +10%, gross profit +13%, EBIT +26%, capex was down 40%, and stock repo accelerated by 3x sequentially.

In typical RL fashion, the company threw out a cautionary flag to keep estimates in check. I’d be intellectually dishonest if I called it a complete sandbag. The fact is that things simply are not good out there. But as I’ve noted over the past few days, and months, this company has more levers to pull than any other in the space. It probably does itself no justice by taking up numbers right now. I’m inclined to go towards $4.35 for the year unless I hear compelling evidence on the call to suggest otherwise.

Check out our margin walk from 2 days ago showing the detailed puts and takes in this model.

The New Reality

“A man may die, nations may rise and fall, but an idea lives forever.”
-John F. Kennedy

America has voted. Obama wins. Today is another great day for the “New American Capitalist” who is on board with our 2009 Investment Theme – “The New Reality.”

Long gone are the days of the levered long investor. Bah bye to the days of low-cost long term debt. Today, not unlike yesterday, and all of the days between this one and that (I think that sounds like Braveheart!), is a great day to be taking advantage of market opportunities. Being liquid long cash will allow you to prosper in “The New Reality.” The yield curve continues to steepen. Borrow short, lend long, and get out there and prioritize getting your client paid before you pay yourself.

I, for one, haven’t paid myself this year, so I am in the comfortable position of not giving you lip service or a “World Wise” token advertisement. Transparency, Accountability, and Trust may be a simpleton’s set of principles, but they are our promise here at Research Edge. If we do not over deliver on those expectations, please ‘You Tube’ us.

Building back the confidence of Americans is going to be a steeper climb than the recent one in the US yield curve. That said, the darkness of the deepest black hole of US market pessimism looks like it may very well be in our rear view mirror now. The US Consumer’s confidence is responsible for over 70% of this economy’s GDP, and perhaps more importantly, almost 20% of Global GDP. It is “global this time”, and American confidence matters. Don’t forget that.

Don’t forget to quantify things either. Math trumps political rhetoric. Those who doubted Obama’s math in the polls have been run over by the S&P500 train in the last week of trading. As a reminder to the bears, you have missed a +18.5% rally in the S&P500 in the last week alone! We’re still bullish because the math is. Being on the other side of our “Macro” call in 2008 will likely put the onus on you to explain why you deserve to be paid 2 and 20. I wouldn’t want to be that guy.

The math on the sentiment front supports more of the same. This morning’s II Bullish to Bearish survey is flashing a meaningful pop. The delta between bulls/bears has moved from -32 to -18 in the last 2 weeks. Additionally, the weekly ABC Washington Post confidence reading came in last night with its 3rd consecutive weekly improvement. Boxer Jimmy Braddock (played by Russell Crowe in Cinderella Man), used to hear his corner of the ring whisper “Pop, pop… bang”, then he’d come back from being down and out and crush his doubters. American short sellers of consensus, do you hear me now? Pop, pop…

Today is not a day to doubt “The New Reality.” Volatility (VIX) has dropped -40% since some of the masters of the “hedgie” universe capitulated and proclaimed to their faithful book pushers that “we are going to cash!” That was really embarrassing. Market breadth continues to expand not only domestically, but internationally. Breadth on the NYSE expanded for the 6th consecutive day yesterday, after European stock markets punched clock on their 6th consecutive positive day of closing prices. Since October 27th, stocks in Hong Kong have ripped the shorts for a +35% move; even lowly Japan has rallied +33% off the bottom. Thank God, we are long China and that we covered our EWJ (Japanese short)!

Russian stocks opened higher this morning and are flashing another positive divergence versus European equities, trading up another +4%. This is new; don’t ignore it. The Russian Trading System Index (RTSI) has melted the short sellers since October 24th, rallying stiffly for a +52% move. Brazil closed up another +5.2% yesterday. Mexico was squeezed for a +4.5% move, and the Canadians tacked on a +4.1% day on the Toronto Stock Exchange, after their currency appreciated +10% in less than a week! If someone is whining to you about how “impossible” it is to make money in this interconnected global market of asset classes, send them my morning notes. Math doesn’t lie, people do.

Predictably, with the futures down early this morning, the manic media will be talking about “profit taking” and whatever narrative fallacy they can dig up from the talking heads. Don’t listen to them. They are entertainers. They have no proactive process that allows them to predict Macro market moves. Instead, we suggest you enjoy your coffee and sit back and read. This is how new ideas are formed. This is the self directed confidence of the new American capitalist has. This is “The New Reality.”

Our S&P500 line in the sand is now 982. As long as we hold that line, like Braveheart, we are going to stand our ground, continuing to be the new bulls. William Wallace is metaphorically on the advisory board of our 2009 Investment Themes, and he reminds us all on this day of new beginnings that “your heart is free… have the courage to follow it.” An idea like that lives forever.

Best of luck out there today,
KM Your heart is free, have the courage to follow it.

Long ETFs

JO – iPath Coffee – Reuters reports that an unidentified bank seized more than 10,000 tons of beans from an exporter in Sumatra, Indonesia, who missed interest payments. More concern over credit conditions and weather in Vietnam drove Robusta prices higher in London.

EWG – iShares Germany –Chancellor Merkel's Cabinet agreed on a ``bold'' 50bn EUR stimulus package including tax incentives for car buyers to energy efficiency programs. According to Merkel the plan is ``completely different from an artificial, state-sponsored program to stimulate demand that costs billions. We emphatically want to avoid this.''

FXI – iShares China – CSI 300 index gained almost 4% today on announcements of increasing economic cooperation with Taiwan, including direct cargo shipping, and the US election. The finance ministry asked state agencies to keep 2009 budgets frozen at 2008 levels.

VYM – Vanguard High Dividend Yield ETF – Ambac posted a third-quarter loss as it set aside at least $3 billion to pay additional anticipated claims.

Short ETFs

UUP – U.S. Dollar Index – The Euro declined against the dollar on the US election results.

EWU – iShares United Kingdom – Office of National Statistics data released today show that Industrial Production declined 2.2% y-o-y in August BRC Nielsen Shop Index showed a sharp decline in food inflation for October, falling to 3% from 3.6% in September.

IFN – The India Fund – SENSEX and the Rupee rose on second straight day of reported increased foreign equity investments.


Keith R. McCullough
CEO & Chief Investment Officer



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