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Cheesecake Factory posted poor 3Q earnings as commodity costs hit the bottom line but – perhaps less transient – the top-line also missed.


CAKE posted a disappointing number after the market close, with EPS coming in at $0.36 versus expectations of $0.38.  Total same-store sales came in at 0.8% (including 40 basis points of negative impact from Hurricane Irene).  Cost of sales, restaurant margins, and operating margins were all the wrong side of expectations by 10 basis points in each case.  Dairy costs, which management claimed earlier in the year would be favorable in the fourth quarter, were a significant headwind in the third quarter and overall food costs are going to be more of a headwind than expected – by ~$1.00 – in the fourth quarter.


Here are our Top 10 Takeaways from the CAKE quarter:

  1. The concept’s top-line struggled through the quarter as price was taken and gas prices were elevated.  Consumer confidence is not, according to the company, improving quickly. 
  2. There was roughly 1.6% of pricing on the menu which implies, given the comp, -0.8% of negative mix shift in the quarter.  Management expects the mix drag on the top-line to continue until incidence of alcoholic and non-alcoholic beverages increase.
  3. On the brighter side, the company’s new units perform – from a sales perspective – above the average of the rest of the store base.  Additionally, the new store openings have been quite geographically diverse: California, Texas, Florida, and the Northeast.
  4. California, Texas, and Florida were highlighted for ongoing strength.  It came as a slight surprise to us given the decline in California Retail Sales and Use Tax Receipts in September. 
  5. Margins were a disappointment this quarter with commodity costs the most obvious culprit.  As management put it, “normalized for commodity cost, margins are healthy, as we effectively leverage costs across our P&L.
  6. Food costs remain a wild card for the fourth quarter.  Dairy prices have been extremely volatile and the company seems less confident on this line than they were prior.  Cheese prices will be worth watching in our weekly commodity monitor (chart below).
  7. From a top-line compare perspective, the fourth quarter is easy (versus a 0.9% rather than a 2.8% in 3Q). 
  8. The sentiment on the name is extremely bullish given the less-than-perfect fundaments and we believe that there is plenty of room – and reason – for downgrades to follow this poor quarter (second chart below).
  9. The company’s guidance won’t go far towards halting any downgrades in their tracks.  The company guided to $1.80-1.90 in EPS versus the Street at $1.87 and 1.5% to 2.5% comps versus the Street at 2.3%. 
  10. Strong Knapp figures didn’t seem to show in CAKE’s results.  While the stock has been beaten up recently, we remain negative on the name

CAKE: STILL A STRUGGLE - cake quadrant


CAKE: STILL A STRUGGLE - cake ss sentiment



Howard Penney

Managing Director


Rory Green





TODAY’S S&P 500 SET-UP - October 20, 2011


Exotic TAILS notwithstanding (18 tigers and 8 bears on the loose in Ohio yesterday), we know this market’s long-term TAIL is broken (1266) – so, all we have to do now is continue to manage risk around the immediate (TRADE) to intermediate-term (TREND) range.  As we look at today’s set up for the S&P 500, the range is 20 points or -0.73% downside to 1201 and 0.92% upside to 1221




From an immediate-term TRADE perspective, today’s selloff doesn’t change the fact that all 9 sectors (and the SP500 itself) remain bullish. This is healthy until it isn’t. A close below 1201 tomorrow would change this setup. Holding above it would be bullish.


Another improving TREND (intermediate-term) is that 4 of 9 Sectors are now bullish on that duration: Consumer Discretionary (XLY), Utilities (XLK), Tech (XLK), and Consumer Staples (XLP). We like those Sectors in that order. Consumer Discretionary will be the most direct beneficiary of a Strong Dollar as it will continue to “Deflate The Inflation.”









  • ADVANCE/DECLINE LINE: -1354 (-3428) 
  • VOLUME: NYSE 964.04 (-11.17%)
  • VIX:  34.44 +9.13% YTD PERFORMANCE: +94.03%
  • SPX PUT/CALL RATIO: 1.78 from 1.64 (+8.80%)




  • TED SPREAD: 39.13
  • 3-MONTH T-BILL YIELD: 0.03%
  • 10-Year: 2.18 from 2.19    
  • YIELD CURVE: 1.90 from 1.91


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30 a.m.: Jobless claims, est. 400k, prior 404k
  • 9:45 a.m.: Bloomberg Consumer Comfort, prior (-50.8)
  • 10 a.m.: Leading indicators, est. 0.2%, prior (-17.5)
  • 10 a.m.: Existing home sales, est. 4.91m, down 2.5%
  • 10 a.m.: Freddie Mac mortgage rates
  • 10:15 a.m.: Fed’s Bullard speaks in St. Louis
  • 10:30 a.m.: EIA Natural Gas storage
  • Noon: Fed’s Lockhart moderates panel on economy in Atlanta
  • 12:50 p.m.: Fed’s Pianalto speaks in Toledo, Ohio
  • 1 p.m.: U.S. to sell $7b 30-yr TIPS (reopen)
  • 2 p.m.: Treasury’s Brainard testifies to U.S. Senate committee
  • 6 p.m.: Fed’s Tarullo speaks at Columbia in NYC
  • 7:45 p.m.: Fed’s Kocherlakota speaks on economic education in Minneapolis


  • Yahoo! isn’t necessarily up for sale, co-founder Jerry Yang said; Alibaba CEO reiterates he’s interested in buying the company
  • Groupon said to be in talks to sell shares in IPO valuing co. at ~$12b
  • Sales of existing U.S. homes probably declined 2.5% to 4.91m annual rate in Sept., economists’ forecast ahead of today’s report
  • SEC said to be trying to determine if SAC Capital used insider information to profit from J&J’s 2009 takeover of Cougar Biotechnology, WSJ says

COMMODITY/GROWTH EXPECTATION                                             


COMMODITIES – we’ve called for the Correlation Crash to continue and that’s plainly obvious now with Gold chasing Copper (albeit with a lower beta); both remain broken; Copper down -2.9% this morning is immediate-term TRADE oversold, but has moved back into the down -30% since July zone; not good – neither is Gold’s TREND resistance ($1685) fortifying itself





  • Pamela Anderson Champions Palladium as Gold Prices Soar: Retail
  • Iron’s Worst Rout in 15 Months May Deepen as China Slows
  • Silver Bear Market Seen Ending on Europe Crisis: Commodities
  • China Love of U.S. Cherries Fuels Cool-Cargo Boom: Freight
  • Gold Falls to Two-Week Low as Gains in the Dollar Curb Demand
  • EU Targets Commodities, High-Frequency Trading in Market Law
  • Coal Gridlock Heralds Two-Year High Asia Premium: Energy Markets
  • Zambia Investors Say Copper Boom to Extend as Sata No Castro
  • Copper Drops for a Fourth Day on European Debt-Crisis Concern
  • Chinese Aluminum Supply Jump 30% in 3 Weeks, Signaling Slump
  • Oil Drops a Second Day on Europe Outlook; Brent Premium Widens
  • Rio Tinto Makes $567 Million Offer for Hathor to Trump Cameco
  • Gold Prices May Extend Losses on Bear Flag: Technical Analysis
  • EU Seeks Curbs on Commodity Derivatives, High-Frequency Trading
  • Freeport Says Grasberg Mine Operating at Two-Thirds Capacity
  • Agnico Plunges After Halting Canadian Gold Mine on Flooding
  • Commodities trading suffers as French banks curb credit
  • Thailand, Indonesia ‘Closely Monitoring’ Rubber Decline
  • Oil Rebounds on Speculation EU Agreement Will Help Fight Crisis








RUSSIA – consistently flashing negative divergences vs the focus European markets (DAX, CAC, Greece, etc) this week; this tells me that A) I’m right on the USD TREND and B) right on Oil remaining a bearish TAIL/TREND; Petrodollars drive the RTSI and its crashing – down -34% since May.






ASIA – the Hang Seng was down -1.8% again last night (China down -1.9% testing new lows) and the move was consequential as the only remaining line of support (18215) was snapped again on the downside.  As the world focuses on 1 thing (Europe) you tend to get paid to focus on everything else that doesn’t cease to exist – Asian Growth Slowing is a big one.








The Hedgeye Macro Team

Howard Penney

Managing Director


In September, YoY CPI growth for Food at Home increased by 30 basis points versus August to 6.3%.  CPI for Food Away from Home fell to 2.6% in September from 2.7% the month prior.


Food costs are now the key line item in Americans’ P&L’s according to WMT’s commentary during its earnings call two months ago.  BLS data released this morning detailing the Consumer Price Index in September suggests that the spread between food at home inflation and food away from home inflation grew wider for a tenth consecutive month. 


As we have written before, as long as grocery inflation continues to outstrip price increases in restaurants, it should be a positive for comparable sales trends at restaurant chains.  Whether or not restaurant margins can withstand the pressure or not, however, remains to be seen. 


The Knapp Track data, as we wrote about on Monday morning, suggests that the third calendar quarter finished strongly for casual dining.  The CPI data released today provides another bullish data point for the restaurant space with respect to traffic; to the extent that the more severe inflation in the grocery aisle relative to the restaurant dissuades people from eating at home, it is a positive for restaurants’ guest counts.  However, it is important to note that effective food prices remain high for many restaurant companies.  Despite spot prices for most foodstuffs declining recently, contracts and inventories need to be worked through in order for companies’ margins to derive any benefit, or relief, as inflation subsides.




Howard Penney

Managing Director


Rory Green


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An in-line quarter negatively impacted by mix




  • GEG Adjusted EBITDA of HK$1.793BN
  • Galaxy Macau Adjusted EBITDA of HK$973MM and revenue of $6,390MM
    • VIP RC: HK$163BN; win: $4.9BN
    • Mass drop: HK$5BN; win: HK$1BN
    • Slots handle: HK$4BN; win: $262MM
    • US GAAP Margin of 23%
    • 2,100 rooms open in 3Q, 91% occupancy
    • "All 2,200 rooms and Macau’s first mega 3D Cineplex to open in late Q4 2011"
  • Starworld Adjusted EBITDA of HK$779MM and HK$6.4BN of revenue
    • VIP RC: HK$180BN; win: HK$5.9MM
    • Mass drop: HK$2.3BN; win: HK$433MM
    • Slot handle: HK$917MM; win: HK$58MM 
    • US GAAP margin 21%
  • City Club Adjusted EBITDA of HK$32MM
  • Construction material Adjusted EBITDA of HK$117MM
  • Balance sheet: Cash of HK$7BN 



  • Galaxy Macau
    • Opened 3 new VIP rooms at Galaxy Macau in the quarter for a total of 10 now
    • Wave pool had 2,000 visits per day in August
    • Hold challenges impacted their results by HK$60MM (bad mix) - would have been $1,030MM
  • Starworld also had an unfavorable mix of RC vs RevShare business which also negatively impacted their business but didn't quantify it.
  • City Clubs's result decline was a result of hold challenges and YoY volume declines


  • 95% gaming and 5% non-gaming revenue split at both Starworld & GM
  • Will likely make an announcement sooner rather than later on PH2 of GM
  • GM's hold was fine but the mix was unfavorable 
  • Added a slot marketing team, new signage around the property at Starworld are some of their new changes that are driving mass
  • Mass business is growing at Galaxy Macau. Their brand awareness is growing. As their dealers gain experience, their Mass hold has increased.  Busing program is successful. 
    • Growing their database is important to grow the Mass business at GM - it just takes time to ramp. Shuttle bus and day tripper business are growing. 
  • The addition to fixed cost isn't as high as you would think as the additional hotel rooms come online; it's mostly just variable costs


MCD will announce September sales, along with 3Q11 results, before the market opens on Friday, October 21st.


I suspect that there will not much to complain about when MCD reports 3Q11 numbers on Friday.  Over the past three months, 3Q11 consensus estimates have declined by 0.4% and now stand at $1.42.  I suspect that the $0.06-$0.07 of currency benefit the company guided to at the start of the quarter is likely now only $0.01-$0.02.  Given all that and any non-operating items, MCD should come close to hitting consensus; but there not a lot of wiggle room.  I put it at $1.41 for the quarter.


From a MACRO stand point MCD is facing some issues.  In particular, beef prices continue to trade higher and consumer confidence and retail sales numbers in Europe are sluggish. 


Recapping the quarter to date sales trends, we know July was a strong month, beating expectations globally.  August, on the other hand, was not a very strong month for MCD sales, largely due to timing issues and one-time items in Europe (Ramadan) and APMEA (power outages in Japan), respectively.  Global comps came in at +3.5%, below the street’s +4.7% estimate.  U.S. comps of +3.9% were only 10 bps shy of expectations, but Europe comps came in +2.7% versus +5.5% expectations.  APMEA missed by the widest margin, -0.3% versus the street at +3.9%. Weak sales in Japan weighed on the overall results.


As important as the reported number in the quarter, sales trends in September and October will likely have a bigger impact on market psychology.  On that front, I suspect that MCD will have sequentially better month in September. 


Compared to September 2010, September 2011 had one less Wednesday and one additional Friday.  As a result, I would not anticipate any major calendar shift.  Below I go through my take on what numbers will be received by investors as GOOD, BAD, and NEUTRAL, for MCD comps by region.  For comparison purposes, I have adjusted for historical calendar and trading day impacts. 


U.S. - facing a compare of +5.7% (including a calendar shift which impacted results by +0.1% to +0.3%, varying by area of the world). 


GOOD: A print above 5.0% would be received as a good result, as it implies acceleration in two-year average trends.  Despite the slight miss in August, two-year average trends improved on a calendar-adjusted basis.  It will be interesting to see if McDonald’s can continue to drive trends higher in September.  I am expecting a strong month.


NEUTRAL:  A print between 3.0% and 5.0% would be received as a neutral result by investors given that the mid-point of this range implies two-year average trends, on a calendar-adjusted basis, that are relatively in line with trends in August. 


BAD: Same-restaurant sales below 3.0% would imply a sequential slowdown in two-year average trends and could raise significant doubt about the ability of MCD to maintain its recent impressive top-line performance. 


EUROPE - facing a compare of +4.9% (including a calendar shift which impacted results by +0.1% to +0.3%, varying by area of the world).  Europe was a disappointment in August but the timing of Ramadan was largely responsible for the sales shortfall.  As a result, investors are expecting to see this trend reverse in September.


GOOD: A print of 5% or higher would be received as a good result for Europe as it would imply a nearly 200 bp acceleration in two-year average trends after the 190 bp decline (calendar-adjusted basis) in August.  If MCD can reverse last month’s slowdown, investors will more likely be convinced that the slowdown in August was indeed a timing issue.


NEUTRAL: A result between 3% and 5% would be received as a neutral result because it would imply two-year average trends that are improved from the weaker-than-expected trends in August 


BAD:  A result below 3% would imply two-year average trends that are only slightly better than or level with the disappointing two-year average trends seen in August. 



APMEA - facing a difficult compare of +6.2% (including a calendar shift which impacted results by +0.1% to +0.3%, varying by area of the world).  As in Europe, MCD faced some one-time issues in APMEA during August as power outages negatively impacted results in Japan.


GOOD: A print of 6% or higher would be received as a good result as it would imply a sequential acceleration of nearly 200 bps in two-year average trends, thereby showing a reversal of the slowdown during August.  Again, this would help to convince investors that the power outages in Japan were largely to blame for the significant falloff in trends in August.


NEUTRAL: A result between 4% and 6% would be received as a neutral result because it would imply two-year average trends that have accelerated from the worse-than-expected trends in August. 


BAD: Same-restaurant sales in APMEA below 4% would be received as a bad result because it would imply only a slight uptick or level trends with what was a disappointing month.



MCD - A LOOK AHEAD - mcdss


MCD - A LOOK AHEAD - mcdbs


Howard Penney

Managing Director


Rory Green




Underwhelming results and no special dividend.  Not quite what people were expecting.




  • Wynn Resorts reported net revenues of $1.3BN and $381MM of Adjusted EBITDA- in-line with consensus estimates
  • Wynn Macau reported net revenue of $951MM and Adjusted Property EBITDA of $296MM
  • Wynn Las Vegas reported net revenue of $347MM and Adjusted Property EBITDA of $85MM
    • 3.1% of total rooms were unavailable during the quarter due to an air rebalancing project compared to 6.2% last year
    • Entertainment growth of 21% YoY was largely due to revenue growth at the Garth Brooks and La Reve shows
  • "Board of Directors has approved a cash dividend for the quarter of $0.50 per common share. This dividend will be payable on November 16, 2011, to stockholders of record on November 2, 2011."
  • Cash: $1.8BN; Total Debt: $3.1BN ($2.6BN in Vegas)



  • Had a lower hold in Las Vegas, which if normalized would take them back to $100MM of EBITDA vs. $85MM.
  • In Macau, it's not so much about market share but bottom line - which keeps climbing
  • Doing their budgeting on the work that will unfold over the next few years but special dividends are in fact special and there is no certainty about what the board will decide to do going forward.



  • Impact of credit tightening on the VIP segment in China
    • Don't see any change in their business
    • They have never had to increase their reserves because they take adequate reserves
  • Have excess cash in Macau - will go through a financing exercise - combo of bank debt and cash next year 
  • Cash: $1.1BN is offshore and $700MM onshore
  • October trends: "October is gangbusters" 
    • $73MM in Macau so far in October through the 18th
    • In Las Vegas. they are doing about $1.25MM per day
  • Depreciation is a real expense for them.  Eventually if you spend less than D&A in Vegas it catches up to you
  • Promotional activity in Macau.  Usually when a new place opens up, things get more promotional and then come back to normal. 
  • MA & FL are very interesting markets - senses that they are acting in a more stable way which should encourage serious investment in those markets. They are looking at those markets. They are also considering if their brand makes sense in those markets. Feeling very positive in a very preliminary way about MA & FL.
  • Leisure has been pretty stable for them in Vegas - Leisure ADR has improved 21%. Also had another great quarter for convention business. 4Q business is also looking great. 1Q12 is coming in similar YoY for group business for them.  Some people are waiting to get their budgets approved.  March will be a challenge since Con Agra isn't in Vegas. So they may be down on group in the first quarter, but feel like things will be stable for the year.
  • Thinks that there continues to be excess demand than supply in Macau. Thinks that they are in the 3rd or 4th inning of development.
  • They have $30MM of retail profits in Macau per quarter - quite phenomenal
  • Every time a new resort opens in Macau, supply gets fully absorbed. They are not concerned about new supply.
  • Only 1% or less of upscale citizens are coming to Macau right now 
  • No change in days outstanding for credit in Macau
  • Florida perfectly suited for being a destination resort destination.  Miami could be a great destination resort city if done right.
  • Wynn Macau is capacity constrained, but there is an opportunity to optimize business. They manage table limits very prudently. Have a little capacity mid week. 
  • YTD in Macau $956MM, last year $561MM EBITDA - through October 18th.  Even for the month, they are up 30% so far. Headed for another $100MM+ month.
  • Cotai update: The government issues a draft contract - which has been signed. That is usually associated with the final approval stages.  A premium was already set.  They are waiting for the gazetting to happen. They have already submitted their plans to the government. When the gazetting takes place, hopefully they can start construction. In Cotai, their hallways are 8 feet wide and 11 feet high. Laying foundation will take a lot of time. Sometimes they need to fill 92 meters and as little as 78 meters.  Between keystones and pile caps, that's almost 10 months of work.  Once they are done they can build one floor per week. 
  • Doesn't think it's relevant to compare the past timelines to now since the approval process is now taking longer. They are going to be the first stop at the monorail. 
  • It's possible to spends hundreds of millions of dollars on foundation 
  • Why was corporate expense so high? It can be choppy but they should be similar in 2011 to 2010 for FY
  • Low hold in the quarter was due to bacarrat. They come in groups - they had some guys win a few million here and there. This month was off by 3-4% - $15-20MM. It wasn't just one event - they are too big for that. 
  • Market share trend in second week of October?
    • Their market share is up
  • According to Steve, the current table cap has to do with the current tables not for future developments, i.e. those that fall outside the limit