LIZ: Completing Deals and Marching On…


LIZ just completed the last of five deals that yielded the company $471mm over the last 3-months as planned. In addition, the company also reaffirmed its outlook for year-end net debt of $270-$290mm. The transformation from a battered stock to a solid growth story is clearly underway. Moreover, there appears to be little to interrupt current stock momentum when the company reports earnings next Wednesday.


Here are a couple of the key highlights headed into the quarter:

  • It’s the first earnings call since the close of $471mm in asset sales.
  • Key update on the quarter is going to be the inclusion of the first pro-forma financial statements for “NewCo” – additional clarity is a big positive relative to the legacy model.
  • As a non-cash tax payer and with the Mexx deal now completed, we should get an update re the current amount of NOLs. 
  • We expect additional clarity regarding the potential inclusion of a corporate expense line due to some residual overhead expenses that was suggested on the most recent call. While we are building in nearly $25mm in Partnered Brand related SG&A, this is one of the key questions heading into earnings on November 9th as management looks to reduce costs. Ideally, all costs associated with the sold off assets would have been eliminated along with them, but it sounds like we might see at least a few quarters of further ‘streamlining’ as NewCo takes shape.

With near-term noise expected given all of the moving pieces, our focus remains squarely on how we see 2012 shaping up for “The Company Formerly Known As LIZ” and beyond. The company’s current guidance of $130-$150mm in EBITDA in 2012 assuming $10mm of EBIT from Partnered Brands and ~$75mm in D&A implies $45-$65mm in EBIT from Direct Brands – we’re shaking out closer to ~$85mm with less than heroic assumptions. Looking out to 2013 EBITDA of $225-$235mm and using a blended 8x multiple, we’re looking at a mid-teens stock. This remains one of our favorite longs despite the recent run.



For greater detail on what the financials of “NewCo” are going to look like, see our post from 10/17 titled, “LIZ: NewCo Just Getting Started.” For clients interested in running through the numbers before the call, I can be reached at .



Casey Flavin




Shorting France (EWQ)

Positions in Europe: Short France (EWQ)

Keith shorted France via the eft EWQ in the Hedgeye Virtual Portfolio today.  We opportunistically shorted EWQ from a quantitative set-up with the CAC 40 broken on its long-term TAIL and intermediate-term TREND lines (see chart below).


Shorting France (EWQ) - 1. MEE


France remains an important EU country in the crosshairs—constrained by fiscal pressures (debt and deficit) and a web of cross-country sovereign banking exposure, the two combined put pressure on the country’s AAA credit rating. On 10/18 we penned a note titled “France is Going to Get Downgraded”, and made the important point that there exists an enormous outsized risk to the entire European bailout project for sovereigns and banks should France lose its credit rating: essentially the entire EFSF would be jeopardized, as France is the second largest contributor of collateral to the facility, at 20%, behind Germany at 27%.


From the fiscal side, France’s public debt as a % of GDP is likely to hit 88.4% this year, near the important 90% (and above) level that Reinhart and Rogoff outline in their seminal book This Time is Different as prohibitive to growth.  Through austerity, the government hopes to bring down the budget deficit, forecast to hit 5.7% of GDP this year, to 3% in 2013, or in compliance with the EU’s Growth and Stability Pact. Nevertheless, there’s been great push-back to Sarkozy’s austerity programs (including the most recent €8 Billion in additional budget cuts), which has also eroded his polling results for elections next April.


In response, last week the government came out and revised GDP to 1.0% in 2012 versus a previous estimate of 1.75%. Politically, Sarkozy remains faced with high unemployment, at 9.2% (vs 7% in Germany), or 22.8% among the French youth, and unlike Germany does not have the ability to cushion slowing growth through exports. 


As a risk signal, we continue to follow the spread between German bunds and 10YR French yields, which today reached an all-time high of 125bps since the creation of the EUR.


Shorting France (EWQ) - 2. ME


Matthew Hedrick

Senior Analyst


The important commodities, at least for the restaurant industry, moved higher over the last week.  Tellingly, corn moved higher despite outside market pressure.


Please scroll down to view the charts below the commentary.





Corn is an important commodity for all of the restaurants that we cover because either the companies have direct exposure or have exposure to protein costs (which are driven by feed costs).  Corn has moved higher despite outside market pressure from the strong dollar, weak equity market, and weak crude prices.  At the SAFM Investor Day recently, we learned that Illinois has the largest corn crop relative to its annual ethanol capacity of the major corn-producing states.  Therefore, Illinois is a good state to monitor watch in terms of its corn crop fundamentals.  News emerging today that the USDA has declared 44 Illinois counties disaster areas due to the effects of drought is bullish for the price of corn and negative for restaurant margins.  Farmers and ranchers in an additional 33 counties also qualify for assistance because they are contiguous to the affected areas.   The impact of dry summer weather is impacting much of North America’s corn and cattle country.


Cheese prices gaining 4.2% week-over-week is a negative for CAKE, DPZ, and PZZA given that all three have (varied degrees of) exposure to dairy prices in the fourth quarter.  CAKE had guided to year-over-year deflation in dairy for the fourth quarter but, despite significant volatility, it seems that dairy may be a headwind for the company in the fourth quarter. 


Chicken wing prices have continued their march higher.  As we wrote recently, food industry experts’ commentary as well as our own analysis gives us confidence that BWLD could have year-over-year inflation in wing prices beginning in the first quarter of 2012.  Replicating the 3Q11 strategy of driving comps via a promotion would be difficult in 2012 if the company faces significant inflation.  Some industry experts see $1.50 wings next year and sustained year-over-year inflation versus 2011 next year.


Coffee prices have been moving lower on the dollar strength and economic concerns stemming from Europe. 
































Chicken Whole Breast


WEEKLY COMMODITY CHARTBOOK - chicken whole breast 112



Chicken Wings
















Howard Penney

Managing Director


Rory Green





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.

The spear of the souvlaki stick: Assessing the Papandreou bombshell


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




  •  Authorized the repurchase up to $75MM from time to time through Sept. 30, 2014 



  • “We’re operating right now in a rational promotional spending environment.”
  • “You can also see the tremendous stability overall in these margins, there is obviously some seasonality in the second quarter... and it’s most pronounced at Jackpot... The properties have very successfully managed to absorb increased volumes in the second quarter without an increase in controllable costs.”
  • “Six properties had year-over-year adjusted EBITDA growth with Black Hawk the only exception and there has been construction on the Canyon Road this summer that have had some impact on Black Hawk’s performance we believe.”
  • [Share count guidance] “We expect Q3 and Q4 in 2011 and all of 2012 to be approximately 34.5 million shares.”
  • “The credit facility side rates are generally compared to our previous bank facility at the time of its retirement. Despite an initial debt increase of over $500 million annualized interest, we expect it to increase annually only approximately $6 million pre-tax at current LIBOR rates.”
  • “On an year-to-date basis, approximately $156 million in year-to-date debt repayments have been made, including a $35 million payment that we made in July subsequent to the end of the second quarter.”
  • [Q3] “We estimate non-cash stock-based compensation expense will be $3.5 million to $4 million…. Capital spend will be in the $10 million to $15 million.  Net interest expense will be somewhere between $26 million and $27 million. Noncash interests expense to be $1.3 million.  The blended tax rate for the third quarter is going to be somewhere between 20% and 25%.”
  • “Including in Q4, we expect our blended income tax rate to be approximately 40% down from the 42% to 43% that we’ve been using again related to changes in our state tax allocation.”
  • “We expect to continue to generate significant free cash flow in the third quarter as shown by the $35 million debt reduction that took place in July.  We anticipate that for the quarter in whole we will be retained somewhere between $40 million to $45 million in debt; we’ll probably be closer to the $45 million number.”
  • [$12MM of corp expense going forward] “It might be just slightly less. I mean, we’ve obviously had some, as we defined in nonoperational expenses related over the last several quarters to the various transactions that we looked at and the stock buyback, but $12 million is a reasonable number to use.”
  • “To see improvements in gross revenue when operators are decreasing promotional giveaway dollars, which artificially lower the market revenues, I think you should look at it as a positive.”
  • [St. Charles bridge] “The bridge construction hasn’t started yet. It will probably start sometime late first quarter, early second quarter of next year.”
  • [Black Hawk construction] “There’s actually two projects going on. They were doing some sewer line work up close to our property in the city for a part of 2Q. They’ve now sort of reached a stopping point on that phase and will pick it up again in a few months and move it further down towards the bottom of the field leading into the city. But there’s a fairly long-term project to widen and straighten Highway 119, which is the road that comes up from the Interstate up into Black Hawk. And they’re doing the first portion of it over the next year and a half.”

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.