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FINL: Sales Strength Intact


FINL reported its Q2 numbers of $0.39 after the close coming in a penny above consensus and our estimate of $0.38E. Despite considerably higher than expected sales on comps of +11% vs. 8.5%E, earnings upside was muted by increased SG&A spend. While this report is likely to be overshadowed by yesterday’s significant market decline and Nike’s blowout earnings, here are a few key takeaways from the quarter ahead of this mornings’ call: 

  • Despite concerns that FINL sales caught the July/August malaise in its entirety based on the timing of its quarter compared to FL (quarter ended in July), comps came in well above expectations. Yes, FINL is still a small fish compared to FL (a name we like better), but this is an unquestionably positive read-through as it relates to continued strength in the athletic specialty channel.
  • In addition, inventories came in up +6% on 10% growth in sales and appear relatively clean. The strength in comps plus lean inventory levels are particularly bullish as it relates to the sustainability of Nike’s US futures, which came in +15% last night. It’s also worth noting that the company has kept the sales/inventory spread consistently positive and stable at +MSD since its ‘little hiccup’ this time last year.
  • Gross margins up +195bps was solid but not surprising given the leverage in the model with higher merchandise margins likely augmenting occupancy leverage.
  • FINL’s use of its balance sheet to drive shareholder value is another callout.
    1. The company acquired an 18 store specialty running chain (for $8.5mm) to grow the business – a move we think also bolsters FINL’s credibility as a leader in running.
    2. It also repurchased 2.1mm shares (~4% of total) while maintaining $5.40/share in cash and another ~4mm left on its authorization that the company can utilize to accelerate earnings growth.
  • Lastly, the latest read on initial September month-to-date comps are bullish up +9%. While notably higher than +4% expectations in Q3, it’s important to keep in mind that October and November comps get a bit tougher (see chart below).

The call is @ 8:30am .



FINL: Sales Strength Intact - FINL S and Mo Comps 9 11



Casey Flavin





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




Growing concern over a Greek debt default combined with signs of weakness in China and further erosion in the U.S. economy triggered steep declines in worldwide stocks and commodities (ranging from oil to gold to grains).  I know its 2011 and not 2008, but the chart on gas prices is haunting me; gasoline prices continue to shadow the trend of 2008.






Yesterday, food stocks were the safe-haven of choice and QSR underperformed.  As of the close yesterday, Utilities (XLU) and Consumer Staples (XLP) were the only two S&P sectors that were still showing positive performance year-to-date.  The XLU is positive on both TADE and TREND. 








DPZ - announced that after just three months since its launch, the new Domino's App for iPhone and iPod touch has achieved $1 million in sales over a single week.  The Domino's App also speedily achieved $1 million in total sales – just 28 days after launch. With the app initially available on June 8 and announced to the public one week later, Domino's met both milestones much quicker than it expected.


YUM - agreed to sell Long John Silver's Inc. and A&W Restaurants Inc - "As we continue to sharpen our long-term growth focus on international expansion and improving our U.S. brand positions in KFC, Pizza Hut and Taco Bell, Long John Silver's and A&W no longer fit our long-term growth strategy," said David Novak, Yum chairman and chief executive, in a statement. LJS Partners LLC will buy Long John Silver's and A Great American Brand LLC will buy A&W Restaurants for undisclosed sums.


ARCO - The following is from Hedgeye’s Moshe Silver daily BRAZIL NOTES - In Brazil worker wages highest since 2002 – government statistical office IBGE reports 6% unemployment in August in the six major metropolitan areas surveyed, the same level as in July, and the lowest August reading since the series was initiated in 2002.  Actual wages in August were R$ 1,629.40, the highest level in the history of the survey.  August’s reading was up 0.5% from July and up 3.2% YoY.  The survey also found an increase in documented workers and a decline in the informal sector.  The director of the IBGE labor and wage section said the increase in documented workers contributes directly to a higher level of wages overall.


MCD Japan - is looking to close hundreds of “small” restaurants next year in an on going effort to boost profitability.  SSS have started to increase in September following the end of limits on electric power usage set by utilities after the March 11 earthquake and tsunami crippled some power plants.


MCD - boosts dividend by 15% - Yield now 3.2%


MCD/YUM rated new outperform at Raymond James






DRI - annual meeting was very bullish from a Hedgeye TAIL perspective.  In the short run, the Olive Garden/Red Lobster is still the perceived as the choice of an aging demographic.  Could be the reason why the company is so keen on making an acquisition.   


KONA - has closed its underperforming restaurant in Sugar Land, Texas.


CBRL - adopts shareholder rights plan with qualifying offer exception; rights plan will have three-year term subject to shareholder approval at 2011 annual meeting and does not apply to all-cash, fully-financed tender offers open for 60 business days






Howard Penney

Managing Director



Rory Green



The Macau Metro Monitor, September 23, 2011




Caesars Global Life, the non-casino division owned by Caesars, plans to build a $470MM, 1,000 room non-gambling luxury resort--Caesars Palace Longmu Bay--on the southern Chinese island of Hainan.  Caesars Palace Longmu Bay is designed by Australia-based PTW Architects.  It is a partnership between Caesars and with Guoxin Longmu Bay Investment Holding Co. Ltd., a subsidiary of the Chinese investment and development company Jiangsu Guoxin Investment Group Limited.


The resort is scheduled to open in 2014 with two entertainment venues offering high-profile shows, a 36-hole championship golf course, a marina, spa, shopping and restaurants.  CEO Gary Loveman said his goal is to develop 25 hotels and resorts in China over the next five years.  There are other hotels on the island, but Loveman said he saw demand for a number of competing brands. MGM plans to open a resort dubbed MGM Grand Sanya on Hainan Island later this year.



Visitor arrivals for August 2011 marked a new record of 2,698,003, up 14.4% YoY.  Visitors from Mainland China surged by 24.3% YoY to 1,571,015 (58.2% of total), mostly coming from Guangdong Province (820,743), Fujian Province (92,976) and Zhejiang Province (61,218); while those traveling to Macau under the Individual Visit Scheme totaled 698,625, up by 18.4% YoY.  Visitors from Taiwan (116,152); the Republic of Korea (45,132) and Japan (38,853) increased by 0.3%, 25.1% and 4.4% respectively.  However, those from Hong Kong (754,636) decreased slightly by 0.5%.





S'pore CPI rose 5.7% YoY in August, an acceleration from July's growth of 5.4%. Compared with July's, August CPI was 0.7% higher.  The Monetary Authority of Singapore core inflation measure (which excludes the costs of accommodation and private road transport) was up 0.4% in August MoM and 2.2% YoY.



Macau CEO Chui said his government would continue to adopt measures to control the inflation rate in Macau.  “It is close to October. We hope the inflation will become stable or drop,” Chui added.  Macau government has been trying to open new sources of food supply in the Mainland to stabilize prices, while also subsidizing public utilities.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Angry Shorts

This note was originally published at 8am on September 20, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Habit will be your champion.”



I covered some shorts and got longer again yesterday (14 LONGS, 8 SHORTS in the Hedgeye Portfolio) because that’s what my process was telling me to do. Coming into the day we were long the US Dollar and effectively long the American Consumption that’s associated with a strong US Dollar.


Strong Dollar Deflates The Inflation. Period.


Habit, discipline, process – these things matter. Since I am a hockey head, our competition likes to think that they can work less hard than us because they are smarter. Smart is as smart does. And as the great Spartan officer Dienekes went on to say in Gates of Fire, “habit is a mighty ally.”


The habit of fear and anger, or the habit of self-composure and courage” (Gates of Fire, page 139). As a professional Risk Manager, what are your habits?


Self-composure in a down market is as critical as not getting angry about getting squeezed on the short side in an up one. This morning’s headline “news” is that Italy is being “downgraded” by one of the most lagging of lagging indicators – a ratings agency. Italian stocks are down -39% since February. S&P’s view is not new “news.” Stocks rallying on the “news” is…


Courage is building a team and a risk management process that includes people other than yourself. In a globally interconnected marketplace, you have to be able to trust and depend on both your teammates and sources – or just get new teammates and new sources. Collaboration of experience is the only path to victory. Individualism dies young in this market’s battlefield.


Back to the Global Macro Grind


Let’s start with what we’ve called The Correlation Risk. That’s the risk that QE2 would inflate asset prices and that a policy to inflate would perpetuate Growth Slowing. Check, check, check. That’s your 2011 Global Growth Slowdown. It’s old news.


What happens if we reverse the causal mechanism in inflating commodity prices? What happens if we strengthen the US Dollar? Bottoms are processes, not points, but yesterday was a very good day not only for American Consumers but for Global ones: 

  1. US Dollar Index held its long-term TAIL of support = $76.45
  2. CRB Commodities Index (asset inflation) got blasted for a -1.8% drop on the day
  3. WTI Crude Oil prices broke my immediate-term TRADE line of support ($86.96) and moved back into a Bearish Formation 

Despite the SP500 being down -1% yesterday, the Consumer Discretionary Sector (XLY) closed up +0.24% on the day (the Energy Sector was down -0.88%). That, and Chinese/Indian equities rallying on the Italy “news”, made perfect sense to me. New “news” to the 95% of this world that couldn’t care less about Ben Bernanke is that prices at the pump are going down.


Is that good for Energy, Financials, or Basic Materials stocks? No. Is it good for Consumer and Healthcare stocks? Yes. What’s best for Americans, Indians, and Chinese? Policies to inflate? Or a strong US Dollar that Deflates The Inflation?


Don’t ask your local Washington/Wall Street revisionist “economist” about that. Ask The People.


From a sentiment perspective, and I highlighted this in last week’s Early Look, the other people (Wall Street consensus) are getting really bearish after global market prices have melted down. This shouldn’t be a surprise. This is the habit of fear and anger that you want to avoid in both your professional and family life.


Last week’s Institutional Investor Sentiment Survey showed the nastiest bear growl that we have seen in 2011. For the first time this year, the Bears outnumbered the Bulls. And not by a little – by a lot: 

  1. Bulls dropped from 39% in the week prior to a fresh YTD low of 35.5%
  2. Bears ramped from 38% in the week prior to 41%
  3. The Bull/Bear Spread flashed a Buy Fear signal at -550 basis points wide (Bulls minus Bears) 

At the same time, both the Volatility Index for US stocks (VIX) broke its TRADE line of support (34.67) and the SP500 rallied above its TRADE line of resistance (1180).  On the margin, that’s more bullish than it is bearish. It would take a 2011 Bear to know.


To be clear, these are immediate-term TRADE signals (3 weeks or less in duration). But every risk management point should have a but, and every TREND is born out of a TRADE. If the US Dollar Index continues to hold TREND line support ($74.62), I’ll continue to have the courage to buy and cover on red days. Selling on green is the easy part.


My immediate-term support and resistance ranges for Gold, Oil, Germany’s DAX, and the SP500 are now $1769-1819 (Gold’s immediate-term TRADE line of $1819 is broken), $86.03-86.98, 5029-5527, and 1187-11228, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Angry Shorts - Chart of the Day


Angry Shorts - Virtual Portfolio

The Price of Winning

“Nothing good in life comes but at a price.”



In the darkest hours before his death at The Battle of Thermopylae, King Leonidas of Sparta provided a light that would last forever. It wasn’t about him or his valor – it was about leadership  - and the ultimate price leaders have to pay to prove they are selfless.


Whether you are American, Canadian, or Polish, the ultimate price your parents and grand-parents have paid for you is that which we all cherish, but sometimes forget to take the time to respect. Liberty.


“Sweetest of all is liberty. This we have chosen and this we pay for.”

-Leonidas, Gates of Fire (page 212)


If what you have seen unfold in the last 3-5 years in our said “free markets” makes you proud, confident, or trustworthy of our said liberties and freedoms, I will call you the contrarian this morning.


It’s one thing to have the courage to stand up to ideological tyrants. It’s entirely another thing to seize the moment when they’ve been revealed for who they really are. Losers. And there has never been a more pressing time in modern American history where this country needs winners to start leading them into daily battle again.


Being called a loser is hard. In our profession it’s actually harder to read than it is to accept. Most people aren’t forced to accept responsibility in recommendation. That’s because we have created a culture in Washington and on Wall Street where losers don’t lose.


They win.


All the while, we sweat equity capitalists who are winning have to keep putting up with their losing ideas. This devastates confidence. That’s the bad and old news.


The good and new news is that the US Dollar strengthening. I think the market is sending us a tremendous opportunity to be the change we all want to see in our markets.


We don’t need policy. We need to pay the price to get rid of its broken promise.


Back to the Global Macro Grind


I’m just going to give you what you need this morning. My positioning and the risk management levels that matter across this Globally Interconnect battlefield of risk.


Hedgeye Asset Allocation Model: 

  1. CASH = I raised our Cash position from 64% to 70% yesterday by selling my long-term US Treasuries. I have zero appetite for Ben Bernanke’s last asset bubble.
  2. INTERNATIONAL FX = 9% and next to Cash, being long the US Dollar Index outright is my highest conviction Global Macro position. Get the US Dollar right (we’ve made 24 calls on the USD since 2008 and been right 23 times), you’ll get a lot of other things right.
  3. INTERNATIONAL EQUITIES = 9% (long China and the Philippines) and this has been dead wrong not only this week, but for all of September. I am not a buyer of more of this mistake on weakness. I am a seller on strength.
  4. FIXED INCOME = 6% (US Treasury Flattener) and I sold 3% of that FLAT long position yesterday on strength alongside selling the rest of our exposure to long-term Treasuries (TLT). Everything has a price, and I’ve been making the Growth Slowing call since February (when we bought FLAT) – so, to a degree, we need to be booking the Growth Slowing trade gains up here.
  5. US EQUITIES = 6% (long Utilities) and this continues to be the only place I would commit capital from a S&P Sector perspective. Utilities (XLU) is the only Sector ETF in our model that is bullish on both the TRADE and TREND durations. The other 8 of 9 Sector ETF’s in our model are in what we call a Bearish Formation (bearish on all 3 durations – TRADE, TREND, and TAIL).
  6. COMMODITIES = 0%. 

That’s not a typo. ZERO percent means 0%. I’ve made my fair share of mistakes this year, but one of them has not been telling you to get out of asset classes (we went to 0% US and European Equities in June; we went to 0% International FX in July). One of the critical things about winning in this business is that it’s a lot easier to do when you remove your potential losers, entirely, from the field. Cash is king.


Dollar UP is pulverizing International FX and Commodity markets again this morning. Here are some critical Global Macro factors to consider that remind me that “valuation” is not a catalyst: 

  1. South Korea’s KOSPI Index and the Hang Sang in Hong Kong continued to crash overnight (down -5.7% and -1.4%, respectively).
  2. Germany, France, and Greece all reversed, hard, from their “bounce” and are continuing to crash on the downside.
  3. Russia, Oil, Copper didn’t have a bounce at all – this is called the Deflating The Inflation (our call since April) with USD strength. 

Here’s what the US stock market has done across our 3 core risk management durations: down 4 consecutive days; down 7 of the last 9 weeks; and down -27.8% since 2007’s free money leverage-cycle peak. Do we need more Big Government Intervention in our markets?


We are entering the darkest hours of American leadership. Let winners win. Let losers lose. And give me my liberty to lead from the front in these markets, or give my firm’s vision death.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $81.09-86.90, and 1119-1166, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Price of Winning - Chart of the Day


The Price of Winning - Virtual Portfolio

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