DNKN did report a relatively strong quarter (with a few holes)  today, with the obvious exception being the implication from the secondary offering announcement that the equity sponsors want out ASAP.  This news was not very surprising to us given that the stock is the most expensive in the restaurant universe.


The line of questioning that the Street took with management is often insightful and on the DNKN call today, as with the EAT call last week, the dialogue was focused strongly on one area. For Dunkin, comparable store sales and K-Cups were the most touched upon topics.  We believe that the significance of comps and K-Cups is overemphasized by some; Dunkin’ Donuts is a franchise business model and the growth of its footprint is a far more meaningful driver of earnings.  With respect to unit growth, the quarter was a little disappointing.  To hit the mid-point of the target net unit opening range for the year of 220-230 new points of distribution, 107 net new openings are required in the fourth quarter.


Below are the top takeaways from the quarter:


  1. The company reiterated its goal to more-than-double Dunkin' Donuts' footprint in the USA to reach 15,000 locations over the next 20 years.  The company failed to disclose any details on its backlog of stores.
  2. In 3Q11, Dunkin' franchisees opened 57 net new locations; 70% of that development took place outside of the core markets.  But they are narrowing our projection of net new Dunkin' locations in the U.S. this year to 220 to 240 versus the previous wider forecast of 200 to 250. Its represents an acceleration from the net 206 restaurants in 2010, but a long way from reaching the 450 annual run rate needed to get the 15,000 target.
  3. On the call they said they have actively begun recruiting franchisees for markets in Texas, Colorado, New Mexico, Oklahoma and Nebraska, but do not expect new Dunkin' restaurants to open in any of these markets until early 2013.  On the call they said “we are focused on keeping our development pipeline build,” but fell short of revealing any numbers. 
  4. For the quarter, revenue growth of 13.3% far exceeded the system-wide sales growth of 8.3%.  According to the company they “offer our franchisees the opportunity to extend the term of their original franchisee agreement. And usually, when we do that, we can charge a fee associated with it.”
  5. It appears that the company booked a couple million in supply chain product designation/incentive fees this quarter, as well as $2M in refranchising gains, from where terminated stores are resold by DNKN at a profit.
  6. Dunkin International is not providing any real incremental growth to the overall organization.
  7. The management team does not really see SBUX’s move in to K-Cups as a competitive threat.


All in all, we do not see DNKN’s story as being compelling on the long side.  The equity sponsors are clearly not enthused and we contend that the Dunkin’ Donuts business model, as it currently operates in the US, is not viable west of the Mississippi and will not be for quite some time.  The hub-and-spoke model that the brand uses in existing markets would require a lot of capital to replicate in brand new markets.  For now, the donuts and other baked foods cooked at commissaries in existing markets will be flown into new markets frozen.  Whether or not that passes muster with consumers, the run-rate of new store openings needs to escalate rapidly in order for the guidance of a footprint of 15,000 domestic locations within 20 years is to be reached.  The lack of disclosure concerning the backlog is the biggest red flag from the quarter.






Howard Penney

Managing Director


Rory Green


Spear of the Souvlaki Stick; Covering FXE

Positions in Europe: Covered short position in EUR-USD (FXE) today


When I was in Greece in late September I remarked to my cabbie on the 35 minute ride from the airport to downtown Athens that there was astonishingly very little traffic as we approached the city center. His answer: Greeks can’t afford to fill up their tanks. At the time, gas prices were at €1.71/litre, some of the highest in Europe given the government’s added gas tax.


It’s clear that austerity is hitting the Greeks hard. And for an economy highly dependent on tourism, you can bet all the strikes, riots, and government indecision has chased away a number of tourists.


Austerity’s Bite alone however doesn’t justify PM George Papandreou’s decision late yesterday to call a confidence vote on his party and referendum on the newly-minted (though rough) framework for a second bailout of Greece.  Frankly, neither Papandreou nor the Greek Parliament have been calling the shots on the country’s go-forward policy over the last eighteen months, Eurocrats have—in particular the Germans from Chancellor Angela Merkel’s podium. However now Papandreou’s actions threaten to create further outsized market risks as he reaches out to the people, rather than Brussels, for direction. This is a reckless decision!


Below are the important developments in the past 48 hours and our take on the impact of Papandreou’s actions on the market and common currency: 



Papandreou’s Party is on the Brink: The confidence vote that Papandreou called is a very risky maneuver. It’s clear he wants to prove he has the people’s vote behind him on the go-forward, however his PASOK Party has a slim majority of 3 votes in Parliament (perhaps down to 2 on unsubstantiated reports today).  Debate is to commence tomorrow with a vote on his confidence expected on Thursday or Friday.  A crisis meeting between Papandreou with Germany and France was called early today for tomorrow afternoon, as Brussels was largely blindsided by Papandreou’s announcement, which led to an extreme plunge in European equities (down -3 to -7% today) and a hit to the common currency (EUR-USD is down 80bps to $1.375 intraday). Could Merkozy somehow force Papandreou to about-face and undo his action? It seems unlikely, but we can’t completely rule it out either.


Despite the diplomatic statement from European Council Herman Van Rompuy this morning…


“We take note of the intention of the Greek authorities to hold a referendum. We are

convinced that this agreement is the best for Greece. We fully trust that Greece will honour

the commitments undertaken in relation to the euro area and the international community.”


… realize Papandreou’s move is a slap in the face – after all, the EU, IMF, and ECB have worked to support Greece, most recently at the EU Summit ended 10/24. Here’s what Otto Fricke, the budget spokesman in parliament for Merkel’s Free Democratic Party coalition partner, said today:


“If the Greek people don’t see the necessity of backing Papandreou we have a whole different ballgame. If he doesn’t get a majority, then there’s no second aid package, no voluntary haircut. We’d have a potentially explosive situation, one that leaves us today baffled as to what we could possibly do next.”


That quote says a lot. Further, should Papandreou lose the confidence vote, expect even in an optimistic scenario that much indecision would surround reconciling existing bailout terms with a new government.  


According to the Kapa poll, The New Democracy party would win 22% of the vote if elections were held today, with Papandreou’s PASOK party receiving 14.7%, and neither getting enough to form a majority in parliament. More than 26% of voters said they were undecided on whom to back.



Debt Referendum Stretches the Window: Papandreou’s call for a referendum on the terms of the second bailout of Greece (€130 Billion), which is being call for the beginning of Dec. 2011 or Jan. 2012, heightens the already tenuous state of the Greek state.  It elevates the prospect of a Greek default/exit of the Eurozone, and could stretch concrete decisions on the expansion of the EFSF, recapitalization of European banks, and haircuts on Greek debt.  More concretely, the bailout tranches that Greece receives from its original bailout could be put on hold which could ground the country further to a halt or default. Any way you slice it, little good can come from the actions taken by Papandreou yesterday. 



Square in a full Calendar: On the theme of blindsiding Brussels, the timing of Papandreou’s announcement is complicated by the G20 beginning on Thursday in Cannes, at which the market is expecting more exact details on the rough framework outlined at the EU Summit, that is: how the EFSF will be reinforced; details on bank recapitalizations and the write down of Greek debts. Further, the ECB convenes on Thursday to announce its main interest rate policy. We expect no change (more below), yet the timing of the decision adds further market consternation.  This is all on the backdrop of slowing growth (Germany and France revised GDP for 2012 down to 1.00%, vs previous estimates of 1.80% and 1.75%, respectively), declining PMIs for Services and Manufacturing [most in contraction territory (sub-50) over the last months], and stubbornly high unemployment across the periphery. 



Common Currency Weakness: Today we covered our position in the EUR-USD via the etf FXE in the Hedgeye Virtual Portfolio. While the EUR-USD has once again broken its TREND ($1.42) and TAIL ($1.40) lines, it's holding our immediate-term TRADE line of support at $1.36. We’re covering this -4.2% drawdown over the last 72 hours as the pending confidence vote and referendum calls are being discounted for the trade.


We also don’t expect a rate cut on Thursday’s meeting, which may bring some support to the currency pair. Not only do we not see Mario Draghi making a big splash in his first week (his first day as ECB president was on Tuesday), but inflation still remains elevated at 3.0% (above the ECB’s mandate of 2.0%) over the past two months. We do think the ECB will cut over the intermediate term, perhaps as soon as next month, as slowing growth concerns elevate.  We’re looking to re-short any immediate term bounces in the EUR-USD.


Spear of the Souvlaki Stick; Covering FXE - 1. ME



Risk Signals: Markets are extremely volatile, running off the next headline or rumor, as the game changes with nearly every Eurocrat sound bite. As we mentioned in today’s Early Look, we’re keying off risk signals from Italy, namely the all-time wide in the spread between 10YR German Bunds over Italy 10YR yields, at 118 bps, as a signal that Europe is far from reaching any resolution on its sovereign and banking crisis.  Italy, with a public debt of 120% of GDP, poor leadership, lack of resolve on its austerity package, and considerable banking risk, remains a far larger shoe that could drop in this European soap opera and stoking the larger fear trade we continue to see play out.


And a stiff glass of ouzo is not going to cure these ails!


Spear of the Souvlaki Stick; Covering FXE - MH 11111


Matthew Hedrick
Senior Analyst


In preparation for HYATT's Q3 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • $1.5 billion senior unsecured revolving credit facility that matures in September 2016, which replaces its existing $1.13 billion facility which had been scheduled to mature in June 2012
  • New R/C pricing at current ratings is L+1.175% plus a 20bps facility fee
  • "We are extremely pleased to have secured this committed facility at more favorable terms, backed by a strong group of diversified banks"


  • Acquired 20 hotels for $660MM
    • "With one hotel acquisition to close during the fourth quarter of 2011.
  • "The acquisition also includes the management or franchise rights to an additional four hotels."
  • "Hyatt expects the acquisition to have a positive impact of approximately $10 million, exclusive of transaction costs, on Adjusted EBITDA for the remainder of 2011. In 2012, the purchase is expected to generate approximately $40 million of Adjusted EBITDA."


  •  $250MM principal amount of 3.875% senior notes due 2016
    • Priced at 99.571; grade: BBB
  •  $250MM principal amount of 5.375% senior notes due 2021.
    • Priced at 99.846; grade: BBB



  • “Rate growth was a result of continued shift in mix of business, as well as increased pricing power due to higher levels of occupancy.”
  • “We own 40% of the joint venture and have committed to invest over $30 million of equity, which together with Noble’s investment and with moderate levels of leverage, should allow the JV to build six to eight new select-service hotels over the next few years. The first of these hotels is already under development in the Atlanta area.”
  • “Group revenue pace for the year is still positive, with short-term bookings still limiting longer-term visibility....rates are getting firmer."
  • "No plans for future share repurchase"
  • “In 3Q, we expect the renovations to have a less than 100 basis point impact to RevPAR and a less than $5 million impact to adjusted EBITDA. Starting in the fourth quarter, and into 2012, we expect to see the positive impact of the renovations in our reported owned and leased segment results.”
  • [ROI on Lodgeworks] “If you begin in a framework that’s sort of mid to higher single-digit kind of cap rates, we would look to expand that into double-digits over time on a return on gross investment.”
  • [Transaction opportunities] “We’re seen more select-oriented opportunities both in the U.S. and outside the U.S., as well as full-service and some luxury deals….. I would say that the direct comparison for the deals that we just talked about are fewer and far between, but the overall level of activity in the market has been growing.”
  • “We expect to open 15 properties this year, excluding LodgeWorks acquisitions….I think we opened about seven so far, about eight balance of the year.”
  • “The mindset’s fairly cautious right now given the undertone on the macroeconomic factors, especially in North America.”
  • “Business that we have on our books or booked for 2012, the rates are about 8% higher than where we think we will end in terms of areas for the group business at the end of ’11….We also saw that our corporate and association business on the group side, which is about 70% of the Group side, was up in terms of revenue in the low double-digit combination of demand and rate."
  • “We’ve been very focused on employment and housing prices and general confidence levels in the economy.”
  • “The best way to model our tax rate is 35% on our U.S. income and 20% on our international income….If you adjust for the reversal in this quarter, tax rate varies anywhere from 35% to 40%. So, I think that would be a good indication of the tax rate that you can project.”
  • [Fee impact] “We still believe that a full year downside ... will be in the region of about approximately $5 million...that’s an even split between the Middle East and Japan."

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Bullish TREND? SP500 Levels, Refreshed

POSITION: Long Consumer Discretionary (XLY)


So 3 days and 65 points (5%) lower in the SP500 what do you do? What I’ve done is easy to figure out. Time Stamps.


The key to being able to move to a net long position today is being Duration Agnostic. Yes, the long-term TAIL (1267) broke yesterday. But, the intermediate-term TREND (1213) is holding steady today. Provided that 1 holds, there’s no reason why this market can’t rally right back up to its refreshed immediate-term TRADE line of resistance (1248).


There are three different durations in that statement – TRADE, TREND, and TAIL. In managing the risk associated with beta, that’s how we roll: 

  1. TAIL resistance = 1267
  2. TREND support = 1213
  3. TRADE resistance = 1248 

There was a day when 20 to 190 handle moves in the SP500 (in 19 trading days) was unfathomable. Today, as we beg for more Big Government Intervention, all we get for that is A) shorter economic cycles and B) amplified market volatilities.



Keith R. McCullough
Chief Executive Officer


Bullish TREND? SP500 Levels, Refreshed - SPX

TGT: Big TREND Support

Fundamentally, TGT is in our penalty box, as noted earlier. But based on initial trading, it's oversold according to Keith's models.


"Big TREND line support here – stock down on the Scovaner news is a buy more" KM

TGT: Our Take On Scovanner


Conclusion: Any way you slice it, this puts Target in the penalty box.



This definitely puts TGT in the penalty box for us – for so many reasons…

  1. This was sudden. He’s been on the conference/double secret 1-on1 circuit over the past quarter. To do so knowing he was on his way out would have been uncharacteristically and unacceptably misleading.
  2. Scovanner was clearly the faceplate of the company to Wall Street, and has been for the better part of 10-years. There’s no clear successor yet.
  3. With Francis (25-year veteran) leaving to JCP last quarter, we’re now looking at two of the most seasoned executives at the company stepping down over 90 days.
  4. Both of these gentlemen collectively were charged with fixing EVERY major intermediate-term issue plaguing this company.
  5. Does anyone really think that they won’t sweep every little item under the carpet and shore up every accrual and blame it on him/them? Better yet, that’s so tough to do quickly on such a big balance sheet. This could take a few quarters.
  6. Even if the company puts up good numbers over the short term (as they’ve been doing), there’s big enough uncertainty that people will not give TGT the benefit of the doubt.
  7. This is precisely the wrong time of year for this to happen to TGT. Conversely, it’s great for Wal-Mart, and perhaps even KSS.

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