Domino’s reported 3Q earnings this morning and confirmed what we already knew: its focus on technology and the consumer experience has helped the company take share from competitors.


DPZ reported 3Q11 earnings this morning that beat expectations on the top and bottom line. EPS came in at $0.35 vs expectations of $0.33.  Same-store sales came in at 3.0%, 4.2%, 2.6% and 8.1% for Domestic, Company, Franchise, and International restaurants, respectively.  Each print was ahead of expectations.  


Technology was a key theme of the call.  The increased consumer “mobility” is changing how consumers connect with restaurants.  A key difference is emerging between companies that can put technology to work and drive incremental transactions and those that can’t.   SBUX is another example of a company successfully leveraging technology to drive sales.


Below are our Top Ten Takeaways from the quarter and management’s commentary during the earnings call:

  1. Domino’s is changing the business. Digital sales – mobile and online ordering – are now approaching 30% of total sales.  This number grabbed our attention and, we believe, lies at the core of DPZ’s market-share story.  The ordering experience being that much better than before, together with the improved pizza launched in ’10, is helping the company “comp the comps” despite extremely difficult double-digit compares.  In Asia, in particular Japan and Korea, the percentage of digital orders is pushing 50%.  Within the US, 1.5% of sales in the quarter came off the iPhone app alone.
  2. The company’s top-line is as healthy as any in the industry; the top-line compares on a year-over-year basis were extremely difficult and the company posted strong a strong acceleration in company same-store sales two-year average trends (first chart below).
  3. The comp growth and margin expansion bodes well for the stock (second chart below).
  4. The company’s margin expansion in the face of elevated cheese costs was impressive; the company’s price of cheese per pound in the quarter was $2.08, up 36% year-over-year and 24% quarter-over-quarter.   By the end of the third quarter, the price had come down to $1.79 and the company expects similar levels for the remainder of the year.  The company reiterated its expectation that its overall market basket for 2011 will be between 4.5% and 6% above 2010 levels.
  5. Refranchising has helped the company avoid margin headwinds from increased costs.  Consolidated operating margin actually expanded by 36 basis points year-over-year to 27.5% as a result of a change in the mix of revenues due to fewer company-owned stores and increased franchise revenues and also an increase in company-owned store operating margin.
  6. Company-owned operating margin increased 2.6% year-over-year because of labor efficiencies and lower insurance expenses offset by cheese and meat inflation (third chart below).
  7. The company intends for the “$7.99 for two” price point to become a permanent addition to the menu.  Even at that low price, management says that the company and franchisees are happy with the impact on the bottom line.
  8. The company is going to continue to buy back shares as a means to return value to shareholders.
  9. While the international business is now approximately equal to the domestic business in size, the population of the US versus the countries that constitute the international markets is only 5%.  Management maintains that there is huge runway for growth in international markets.
  10. Sell-side sentiment on the name is not bullish.  There is room for upgrades and, as is typical, when bullishness reaches peak levels it will be a signal to consider becoming cautious (fourth chart below).






DPZ: CONTINUING TO TAKE SHARE - DPZ domestic co marg vs cheese





Howard Penney

Managing Director


Rory Green


Bullish TRADE: SP500 Levels, Refreshed

POSITIONS: Long Utilities (XLU), Long Consumer Discretionary (XLY)


Yesterday I wrote a note titled “Bearish TREND.” Today its Bullish TRADE – 2 different durations, 2 different risk management views. Less and less people I talk to can afford not to be Duration Agnostic.


Here are the lines that matter: 

  1. TAIL = 1266
  2. TREND = 1235
  3. TRADE = 1194 

So this morning’s test of 1194 holding (on very ratty pre-market news) is bullish in the immediate-term. And if that’s too immediate-term for some, I guess that’s too bad. With the VIX having a 3-handle, volatility requires us to tighten up our durations and risk management callouts.


Another bullish rotational factor I see today is the US Dollar holding its bid as US Equities rally. Strong Dollar = Strong America. If we Deflate The Inflation, the biggest factor in US GDP growth (consumption) can recover.


That’s why I bought Consumer Discretionary (XLY) this morning when it was red. Our analysts like TGT, EAT, and MAR as ways to play this theme.



Keith R. McCullough
Chief Executive Officer


Bullish TRADE: SP500 Levels, Refreshed - SPX







GMCR’s valuation bubble has been deflating since we made the “coffee bubble” call in our DNKN Black Book in July.  Is DNKN next?  We estimate that the company needs to sell just under two boxes of K-Cups per day per store (point of distribution) to add 1% to the comp.  We stopped by a store on 6thavenue yesterday and were disappointed to see no K-Cups on sale!  CMG is the other obvious candidate for correction from a valuation perspective.  The company’s unit economics have remained strong with unit and comp growth offsetting commodity and labor headwinds.  The new concept, as it grows, could become a distraction, however.








Coffee is falling for the second straight day in New York after the top cooperative in Brazil predicted a “great” crop quality in the country.  Brazil is the world’s largest coffee grower. 












GMCR: Green Mountain Coffee Roasters traded down yesterday after Greenlight Capital’s David Einhorn made negative comments about the business at a conference.  Einhorn took issue with the “looming” patent issue on K-Cups (expiration of the patent) and the resulting loss of the “monopoly price”.  All in all, we saw nothing new in Einhorn’s comments but the impact on the stock was obviously severe.


DPZ: Domino’s Pizza reported 3Q Adjusted EPS of $0.35 versus the street at $0.33.  Domestic same-store sales were +3% versus StreetAccount consensus of +2.7%.  Company same-store sales were 4.2% versus 2.2% expectations.





PFCB: P.F. Chang’s Bistro was downgraded to “Underweight” from “Neutral” at Piper Jaffray.


PFCB: P.F. Chang’s Bistro announced that it has signed an exclusive development and licensing agreement with Alsea, S.A.B de C.V., the leading quick service restaurant restaurant, coffee shop and casual dining operator in Latin America, to develop Pei Wei Asian Diner throughout Mexico.


CAKE: Cheesecake Factory was upgraded to “Overweight” from “Neutral” at Piper Jaffray.





Howard Penney

Managing Director


Rory Green


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FW: Growth in Tact

Trends remain positive in the Athletic Footwear space. Sequentially better price points in all channels driving growth. UA share hits the 1% mark – a psychologically important mark – as opposed to a financial one. ADIbok breaches 10% share. Hi-end shoes are still where it’s at.


Here is some additional color on FW trends:


  • All three channels’ sales growth improved over August trends with positive growth in ASPs across the board. The department & National Chain store channel’s ASP growth accelerated above the pricing growth in the shoe chain channel which last occurred in January (which was the last time the dept. store channel posted positive growth in pricing).
  • The gap between market share by channel continued to tighten further in September on both an absolute and a trailing 3 month basis. The spread between Athletic Specialty and department store tightened from ~3 full points to ~2.3%.  This is potentially meaningful.
  • Sales in ASPs greater than $130 remain positive in every channel except shoe chain where growth is driven by footwear priced at $70 or less (which accounts for 91% of the shoe chain channel’s sales). At an industry level, despite the fact that sales in ASPs greater than $130 only account for 9% of sales, had this price band run flat in September, the top line run rate would have been down slightly; the 17% growth in the more expensive footwear was a positive contributor on the month and continues to fuel the Athletic Specialty/SG & Department store channels as well.
  • Under Armour’s newest running shoes layered on 22% of growth in September and were a key drivers in the 11 bps share gain. While the new UA Reign, Stealth & Split are certainly gaining momentum in the early stages of the product launch, UA is going to need A LOT more of this to prove that it’s on its way to a $500mm business, but positive progress nonetheless that we’ll be watching closely. As sales volumes increase in FW, so will the category’s margin profile, but for now a product with margins close to 30% growing as a % of sales will add further pressure to aggregate margins. Moreover, with 74% of inventory growth at the end of Q2, UA will be pressed to clear inventories whether or not it comes at the expense of full priced sell through.
  •  After posting several months of meaningful sales growth, Reebok’s sales decelerated dramatically on a yy decline in pricing; Adidas growth accelerated on the month. We’ll keep our eyes out for the Reebok trends next month. But netting them both out, we’re still looking at better than 10% share.


FW: Growth in Tact - monthly FW chart 1


FW: Growth in Tact - monthly FW chart 2


FW: Growth in Tact - monthly fw chart 3


FW: Growth in Tact - monthly fw chart 4


FW: Growth in Tact - monthly fw chart 5


FW: Growth in Tact - monthly fw chart 6


FW: Growth in Tact - monthly fw chart 7


FW: Growth in Tact - UA new running MONTHLY



The Macau Metro Monitor, October 18, 2011




Kenny Leong, CEO of AERL, dismissed concerns of Chinese entrepreneurs going into hiding to avoid repaying loans.  Leong said large junkets mainly dealt with super-rich clients with sound creditworthiness.  "Right now big firms do not have such problems. This may be related to the smaller operations," Leong said, adding that smaller junkets were affected because of their more informal funding channels and less rigorous checks on customers.  Leong remarked that AERL extended HK $5BN in credit to VIPs in the first five days of October alone.  "People are saying Macau suffers from trouble in China, this is not the case," he said.


Meanwhile, Galaxy's CFO Robert Drake said, "This year's Golden Week has again proven to be a huge boost to business. The growth of revenue in Macau -- both VIP and mass market -- has been strong and we have seen no signs of any recent slowdown."




Time to Fail

This note was originally published at 8am on October 13, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

"The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again, because there is no effort without error or shortcoming …”

-Theodore Roosevelt


I’ll admit that my peak athletic days are behind me.  At my best, I was a middling college hockey defenseman with a propensity for extended stays in the penalty box.  My worst probably came last night in a beer league hockey game in Hamden, CT.  Nonetheless, my hometown of Bassano, Alberta has invited me back to speak at the annual Sportsmen of the Year Dinner, so my athleticism is, apparently, still appreciated somewhere.


In a shift of athletic gears, this summer I joined the New Haven Lawn Club and officially began my tennis career.  Certainly I’ve played tennis before, but not on clay courts attired completely in whites.  As many of you know, tennis clubs are typically populated by people that have spent a good chunk of their lives, well, populating tennis clubs.  Needless to say, this Alberta farm boy was a little overmatched this summer.   In fact, my summer was spent failing and, often, miserably so.


Personally, I’ve never believed failure to be a bad thing.  Now sure, losing or failing doesn’t give you the warm fuzzies inside, but failing and adapting ultimately sets you up for greater success.  In a 2008 commencement address to Harvard, author J.K. Rowling, who made a billion dollars for her Harry Potter series, adroitly summed up the benefits of failing when she said:


“So why do I talk about the benefits of failure? Simply because failure meant a stripping away of the inessential. I stopped pretending to myself that I was anything other than what I was, and began to direct all my energy into finishing the only work that mattered to me.”


As it relates to Europe sovereign debt, the one solution that has not been seriously considered is failure.   Instead, the key solution from almost every Eurocrat and talking head, is to continue to support and promote a broken banking system and failed monetary union.  There are other possibilities: let Greece fail, let other sovereigns fail if they can’t get their house in order, and let heavily exposed banks fail. 


The validation of the failure strategy at least partially comes in comparing the credit default swaps of Italy, Portugal and Ireland from July 1st, 2011 to today.  Respectively, Italian swaps are up 140%, Portuguese up 38.2%, and Irish down -3.2%.  Now to be fair, Ireland hasn’t failed, but three of largest banks, Allied Irish, Irish Life & Permanent, and Bank of Ireland have experienced “credit events” and, as a result, Ireland’s credit worthiness has improved, on the margin.


A more pressing question facing stock market operators is: will this current stock market rally fail?  In the near term, the key driver of the stock market will likely be corporate earnings reports.  To sustain positive price momentum, companies will need to both hit their estimates and also maintain future guidance.  Currently, according to Bloomberg consensus estimates, 2012 consensus expectations for EPS for the SP500 is $106.15, which implies 16% year-over-year growth in earnings.


Certainly, that type of earnings growth is possible for the SP500, but it is highly contingent on underlying economic growth.  Currently, our view is the economic growth will be in the sub-1.0% range in 2012.  In the last thirty years, there have been five years of 1%, or less, GDP growth in the U.S.  On average, in those years, SP500 earnings declined -18.3% y-o-y.  Thus, unless economic activity accelerates in the U.S., it is highly unlikely that 16% y-o-y growth in earnings is met.  Assuming the Hedgeye view of economic growth is correct, there is substantial downside to current 2012 consensus earnings estimates.  History would suggest, as outlined above, that 2012 earnings could be too high by at least one-third.


Alongside earnings growth, there is of course the quality of earnings.  J.P. Morgan kicked off the earnings debate this morning with an EPS number of $1.02 that, at first blush, seems solidly above consensus of $0.92.  The questions as always, though, relates to the quality of earnings, and $0.29 of EPS was a “benefit from debit valuation adjustment (“DVA”) gains in the Investment Bank, resulting from widening of the Firm’s credit spreads.”  So, if we back out the benefit to JPM’s earnings from widening of their credit spreads, EPS declined -27% year-over-year.  Yikes !


The more pressing failure in global macro land this morning is the failure of the Chinese to maintain high exports to Europe. To be fair, in aggregate Chinese exports overall were up 17.1% in September, which is a formidable number.  Unfortunately, exports to Europe, Chinese largest trading partner, declined substantially, sequentially from 22% year-over-year in August to 9.8% in September.  As the Chart of the Day below shows, this is the second slowest year-over-year growth rate of Chinese exports to Europe in 18+ months.


Chinese economic activity is clearly slowing, but in our purview it is still too early to call for massive Chinese easing.  As my colleague Darius Dale wrote yesterday:


“All things considered, it could be a while before China pulls the trigger on the monetary easing front. Merely using 2008 as a semi-comparable reference, we saw that China waited a full six months for confirmation of flat-to-down sequential CPI growth and a -380bps reduction in YoY CPI before cutting interest rates in early September of that year.”


Certainly though, growth doesn’t slow forever and whether by monetary stimulus or organic means, the positive catalyst we will be looking for is growth accelerating, on the margin.  So far though, it is too early to bet on that. 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Time to Fail - DJ time to fail


Time to Fail - VVP dj

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