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RRGB – Clarifying Conference call rhetoric

The impact of advertising;

Optimistic outlook from the conference call - “While the last of our 24 weeks of national advertising ends this--next week, we are very pleased with how guests have responded to our cable advertising this year. The economy may be tough right now, but the guests are telling us more than ever how much they love Red Robin, so we believe that our brand building efforts overall are working.”

In the 10Q things are less clear – “While we believe our brand health and sales are being positively impacted by this media, it is increasingly difficult to judge the effectiveness of advertising in an environment where consumers are pulling back on retail and restaurant spending.”

Looking at Cost of Sales;

On the conference call the company said “Our cost of sales increased by 80 basis points in the third quarter compared to last year. The increase was primarily due to higher raw materials costs in almost every category, somewhat offset by menu price increases, favorable produce and beverage costs, and some mix shift to higher margin menu items.”

In the 10Q the explanation for the increase in COGS was a little different; “cost of sales increased as a percentage of restaurant revenues over prior year due to higher raw material costs in almost every category and a slight shift in the mix of food versus beverage sales, with a decline in the sales of higher priced menu items and beverages, partially offset by menu price increases.”

I see things a little differently; RRGB reported that in 3Q08 same-store sales decreased 2.2% with traffic declining over 6%. Relative to the comment s in the 10Q, the same-store sales decline was also driven by people trading down to lower priced items. On the conference call, management indicated that consumers had shifted to higher margin menu items. For reference, the highest margin items on the menu are in the specialty beverage section so I find these two comments to be somewhat contradictory. How are consumer purchases shifting toward higher margin items, but also shifting away from higher priced menu items, including the high margin beverages?

Increasing rents;

Lastly, the 10Q mentioned that “many of the restaurants acquired from franchisees are ‘build to suit’ locations that typically bear a higher occupancy cost as a percentage of restaurant revenue.” As you can see from the chart, higher rents are going to be an issue for the company in a declining sales environment!

SP500 Levels Into the Close...

This market is hardly for the faint of heart. As we head lower, I'll be positioning to proactively prepare for the SP500 to make a lower high than that of October 27th (848). See chart and levels below:

BUY “Trade” = 888
BUY “Trade” breakout line (dotted green) = 951
SELL “Trade” line = 1007


Hats off to Kovner and Paulson!

John Paulson, that is...

According to the Bloomberg hedge fund performance article this morning, both Paulson's Advantage Plus Fund and Bruce Kovner's Caxton Global Fund are having fantastic years.

When we talk about "hedgies", we are not referring to the PM's out there who know how to manage risk. Paulson and Kovner are amongst those who are profiting from the "hedgies" groupthink.

Well done gentlemen, well done!

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Deflating the Chinese Inflation Chart...

Today's Chinese producer price inflation report was somewhat lost in the shuffle of the media's daily dance on the data point coals... but it shouldn't have been. On the margin, this was a material release.

China's PPI came in at +6.6% y/y (see chart). This is down materially from the +9.1% reported in September, and what now looks like it was a 12 year peak in August at +10.1% year over year.

If you are going to invest in equities, we suggest you do so globally. Combined with the $586B stimulus plan that the Chinese instituted this morning, decelerating inflation is a positive macro factor. This puts owning the Chinese etf (FXI) at the top of our global macro country investment list.

TSN – Implications for the Chicken industry

TSN’s chicken segment reported operating losses of $91 million and $118 million for 4Q and FY08, respectively. These results were hurt primarily by higher grain costs, which increased $231 million in the fourth quarter and $593 million for the full year. Chicken prices moved in the right direction in Q4, up 5.5% YOY, but not enough to offset the magnitude of cost increases. And, the outlook for the first half of 2009 does not look much better.
Management has limited visibility on input costs going forward and supply issues remain a concern, but given current leg quarter and breast prices 6 weeks into the quarter, TSN expects to lose significant dollars in Q1 and could potentially lose money again in Q2. Egg sets have come down 10%, which is an indicator of future supply levels, but given the current pressures on demand, TSN does not think this reduction will be enough to return to profitability. Management stated that a lot depends on demand. Given the strength of the U.S. dollar, there will be increased pressure on export demand and there continues to be weakened demand from casual dining companies within the food service segment. Not surprising relative to the recent October same-store sales numbers we have been seeing from casual dining operators, TSN said casual dining demand has gotten significantly more discouraging in the October/November timeframe relative even to what it was seeing in August and September. All of these issues are industry issues so the challenges TSN is facing will also impact its chicken competitors.

TSN said it may take a quarter or two before the supply/price relationship comes into balance, but relative to its current environment, “ultimately this will not go on. It cannot go on forever. So there will be a time when these prices will materially rise, and that time frame is not years away. It's months away. Whether it's this quarter or next quarter or whether it has to wait till April or May, it is going to happen.” However, due to the volume of questions/concerns around the chicken segment, investors did not seem comforted by this statement. Management alluded to these concerns at the close of its earnings call when it said, “Let me just conclude by saying it's evident that on the chicken side, you all think we should be cutting production. I will tell you we will continue to monitor that, but I still believe that the improvements that we've put in place and what we are doing to match demand with supply is the right thing for Tyson Foods.”

Currency Market Stabilization: "Trade" or "Trend"?

One of the emerging bullish factors in our macro strategy model is the stabilization that we are finally starting to see in the foreign currency market. After a September to remember, followed by an October to forget, the November thaw in daily currency volatility has been a welcomed change.

Below we show this via 3 currency lines: the US, Canadian, and Australian dollars. Last night, Asia currencies continued to stabilize alongside Asian equity markets, which are now all being buoyed by a proactive Chinese government stimulus package.

Bottoms in markets are processes, not points. This is one more macro factor to add to the bullish side of the ledger.

Daily Trading Ranges

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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.