Loving Life

This note was originally published at 8am on November 07, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Choose a job you love, and you will never have to work a day in your life.”



On this day in 2007, my first son Jack was born. Less than a week prior to that, on November 2nd, 2007, I was fired. Having recently achieved my highest ranking “title” in the vaunted hedge fund universe, this was a rather abrupt end to what was only a 10 month old affair at Carlyle’s new hedge fund.


All that ends abruptly creates opportunities for new beginnings. I’d never been cut from a team or fired by a firm before (unless I fire myself, hopefully that doesn’t happen again!). However, I firmly believe that men and women have to be able to “fail” in order to ultimately succeed. It’s the only way to learn how to rethink and rework what it is that we are here to do. Evolve.


Thank you to Laura, my family, and firm for giving me such a tremendous opportunity to help create Hedgeye. I am Loving Life.


Back to the Global Macro Grind


With all of the October 2011 fanfare associated with the only good month stocks and commodities have had since April, last week was a reminder of what intermediate to long-term equity investors should recognize as bearish. Welcome to November.


If you’ve taken the lessons of the October 2007 US stock market top and embraced it as an opportunity to change your process to one that’s more diversified and Global Macro in scope, last week was a very good one for you. Both the US Dollar and US Treasuries outperformed, big time.


On the week, with the US Dollar Index realizing an impressive +2.5% week-over-week return, here’s how everything that’s inversely correlated to the USD moved:

  1. US Stocks (SP500) = down -2.5%
  2. Asian Stocks (MSCI Index) = down -3.6%
  3. Latin American Stocks (MSCI Index) = down -3.3%
  4. Euro/USD = down -2.1%
  5. Canadian Dollar (CAD/USD) = down -2.0%
  6. CRB Commodities Index = down -0.9%
  7. WTIC Oil = up +0.9%
  8. Gold = up +0.5%
  9. Copper = down -3.8%
  10. 10-yr US Treasury Yields = down -12.5%

Interestingly, with both Oil and Gold maintaining 0.7-0.9 inverse correlations to the US Dollar, they diverged versus just about everything else in our Global Macro Correlation model. The intermediate-term TREND between Oil and the US Dollar since May remains intact, however, with the USD Index up +5.4% and Oil down -8.7%, since.


Positively correlated with the US Dollar Index (this is the good news, if you’ve been long them since May) are:

  1. Long-term Treasury Bonds (TLT)
  2. US Treasury Flattener (FLAT)
  3. Corporate Bonds (LQD)

Oh, and Volatility (VIX)…


Volatility was up +23% last week alone and is up +101% since The Bernank offered us his first global press conference on what he calls “full employment and price stability” (end of April 2011).




With the so called “catalyst” of the G20 meetings gone, and another terrible 2011 US employment report behind us, “the gales of November came early.”


That line, as many locals from Thunder Bay, Ontario would recognize, comes from one of our local risk management ballads called The Wreck of the Edmund Fitzgerald:


“The legend lives on from the Chipewa on down

Of the big lake they called ‘Gitche Gumee’

The lake it is said, never gives up her dead

When the skies of November turn gloomy”


And since today is just another day for Risk Managers who have proactively prepared for the Growth Slowing storm of 2011, I’ll just end this morning’s missive here. Given the number of rants you’ve all put up with in the last 4 years of my writing these notes, I owe you all some brevity.


My immediate-term support and resistance ranges for Gold (bullish TRADE, TREND, and TAIL), Oil (bearish TAIL, bullish TRADE), German DAX (bearish TRADE, TREND, and TAIL), and the SP500 (bullish TREND; bearish TAIL) are now $1732-1778, $92.97-93.88, 5711-6068, and 1210-1267, respectively.


Happy Birthday Jack and best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Loving Life - Chart of the Day


Loving Life - Virtual Portfolio

LIZ: It's All About Execution


It wouldn’t be a LIZ call without plenty of puts and takes, but the bottom-line is that our thesis remains unchanged on the name. At this point, it’s all about execution. That will ultimately determine whether this is a $10, or closer to $20 stock 12-18 months from now. Either way, we think LIZ is headed higher.


Generally speaking we got the added color we were looking for on the conference call regarding several items that we called out earlier – we’ll hit on that in a minute. Our overall take on the quarter is that sales and segment margins are coming in better with more wood to chop on corporate overhead than expected. Coupled with uncertainty regarding the timing of debt reduction, we expect this process to be choppy near-term, but think the visibility of F12 and F13 EBITDA remains greatly improved and highly attractive on an annual basis.


We’re taking up our top line growth forecast by 2% to 14.5%, though we’re also taking up costs needed to secure the growth. Netting those two out, our numbers are down modestly (to EPS of $0.36 and $0.73 and $155mm and $215mm in EBITDA for this year and next year, respectively). We NEVER like a downward revision – but in a market like this where investors are paying up for stories that have rapid underlying growth with strong visibility, we’re going to give LIZ a bit of a pass. That’s especially when our estimates remain 2x consensus in the outer years.


Here are the key highlights from the quarter:

  1. Direct Brands: Kate and Lucky continue to press forward with both Q3 and October sales coming in strong. In fact, management got incrementally more bullish on both increasing the long-term outlook for Kate margins to high-teens to low-twenties (from 15%-20%) and margins at Lucky noting they expect to turn profitable for the year in Q4. In addition, the company is accelerating store growth at Kate by another 10%-20% to 20-25 in 2012. Given that Kate accounts for over 50% of EBIT this is exactly where you want to see incremental investment. Juicy came in a little lighter than expected in October. Since we aren’t expecting any real turn in sales until the 1H of next year when new product hits shelves – we’re not overly concerned.
  2. Partnered Brands: With assets sold rolling off and the DKNY license expiring at year-end, this segment is quickly consolidating to a base of ~$20mm in revs per quarter. It will be closer to $60mm in Q4 for the aforementioned factors, but the margin profile is coming in better than expected. Instead of the 10-12% margins we were modeling, on a go forward basis this business is going to have a margin profile in the mid-teens.
  3. Corporate Expenses: This was an incremental negative in the quarter. As it turns out, the corporate expense line is currently $70-$75mm, which the company intends to work down to $40-$50mm over time – more than we expected. By the end of F12, the company expects to have corporate overhead down to $55-$60mm with ~$15mm earmarked for next year. Roughly $10mm is associated with Mexx, which we expect to be cut on the front end resulting in corporate expenses of ~$60mm for F12.
  4. CapEx: Given the consolidation in sales, we expected CapEx to come in around $50-$60mm in F12 following ~$60-$65mm of CapEx in F11. Instead, the company is taking CapEx up to $70-$75mm next year to drive store growth as well as e-commerce and IT systems. At ~4.5%-5% of sales, this would represent the highest level of capital spending in company history. While a slight negative for F12 FCF, this has positive implications for revenue growth 2-3 years out.
  5. Debt Reduction: There is still uncertainty regarding the exact timing of when the company is going to settle either the Eurobond or convert. As such, we expect continued earnings volatility near-term until the Eurobond is settled, which is still the company’s first priority.
  6. Net Operating Losses: The updated loss carry forwards the company will have on its books by year-end is $200-$250mm, which LIZ can use as a tax shield for next few years.

All in, we’re adjusting our numbers to reflect higher sales growth of 15% in each of the next two years while also accounting for higher corporate expense. As a result, we’re reducing our EPS estimates by ~$0.10 to $0.36 and $0.73 in F12 and F13 respectively and EBITDA by ~$15mm to $155mm in F12 and $10mm to $215mm in F13. Using a blended 8x multiple, we’re still looking at a mid-teens stock. At this point, it’s all about execution. That will ultimately determine whether this is a $10, or closer to $20 stock 12-18 months from now. This remains at the top of our long list.



Casey Flavin





Large bad debt provision hurt results. Cautious tone on credit and Macau.




  • Adjusted GGR grew 10% sequentially helped by a high 3.17% win rate while volumes remained stable
  • Slightly lower visitation was offset by increasing spend per visit
  • With close to peak occupancy, the pending opening of their new hotel will help complement their VIP business
  • They are entering the busiest period of the year now
    • Nov 3rd opening of December
    • West Zone openings
  • The tightening of lending in China is going to have a negative impact on VIP play.  They have already seen an impact of the tightening policies in China. As a result, they are provisioning more against their receivables.



  • RC market share volume: 44%
    • Have 200 luxury rooms coming online by the end of the year and then 20 more villas in the beginning of next year which should help their market share
  • Gaming will always be their core business.  They are very optimistic about some opportunities in Asia.  They are pretty optimistic that Japan will legalize gaming within the next 1-2 years.  The bill will be tabled in this current parliamentary session and voted on in the Spring Diet session.  Looks like there will be one or 2 licenses in Japan.
  • Nothing will happen in Korea for at least 7 months until after the presidential elections
  • Mass market share was 48%
    • Volumes in Mass were flat sequentially
  • No changes with commissions – stable
  • More optimistic that junkets will happen in the next few months
  • Doesn’t think that Macau can keep growing at the rate that it is growing given that China tightening is impacting the real estate business and that property prices have already started to come down.  That must have at least some trickling affect on to the players.
  • A higher provision rate than prior years? This year is already at a higher rate than last year.  Don’t think that they will see a continued rate of provision creep.
  • They were a little slow in ramping up to the max slot/ETG machines.  Will max out to 2500 by year end. They are also replacing some poor performing tables.  Their competitor has already maxed out their machines.
  • They are still looking at their receivables each month. They are taking a more conservative view on collections but they haven’t changed their methodology.
  • Their margins should be between 45-50% going forward for the next 4 quarters. Between now and 3Q12 they will have lots of pre-opening expenses and they are hiring a lot of people but there is no revenue.  So they won’t have stabilized margins until 4Q12/1Q13.
  • 570 tables right now - 1/3 VIP table
  • 1,315 slots, 544 ETG's. By YE, they will have the same # of tables and 1,744 slots and 726 ETGs
  • Not interested in partnering up in Miami; Genting Malaysia looks after NA so they would have no involvement there.
  • Yes, they are very active in North Asia.  They are interested in Korea.
  • They cannot pay dividends until the end of 2013 or 2014 under their bank covenant agreement
  • 48% market share was for Mass + slot; which was roughly the same for each segment
  • No meaningful adjustment needed for luck this quarter because of the bad luck provision
  • Maintenance will stay at $200MM
  • Extra hotel rooms should drive $2MM per day per hotel room of contribution - $713MM * 16-20% = $100MM of extra gaming revenue per year.
  • The villas can drive the Middle East and West Asian markets which they haven’t even tapped yet.  Think that they can also drive North Asian business along with the attractions opening at Marine Life Park
  • Mass market hold has been doing quite well and has been on an increasing trend
  • Split of VIP vs. Mass revenue: 53% of Rolling is gross and on a net basis VIP is 42% net
  • If they are tapped out on rooms why is it that their occupancy isn’t higher vs. what MBS is seeing – same question for ADR.
    • Anything above 90% occupancy you end of giving away your rooms for free on a same day policy many times.
    • They only have half the rooms that MBS has so they need to be more prudent in yielding their rooms than MBS
  • Equarius rooms pretty similar to Ritz Carlton Singapore rooms and the Villas will be 4x the size of their current 4 villas
  • ETG count at the end of 2Q:  543 tables, 1,290 slots, 496 ETGs
  • Change in the profile of their VIP players this past quarter? No
  • What kind of criteria do they look at when they decide how much receivables to write down?  They have a credit committee meeting every month and then decide if they need to write anything down.
  • 80-90% of their VIP customers come from overseas
  • Why is their Mass volume flat QoQ?
    • Even for Mass market, rooms also play a big part – since still a large % of their players are overseas
  • Sense is that the theme park is subject to seasonal trends around the school holidays but since they are just lapping the first year they are just learning about how to manage through seasonal patterns.  Once they open the Marine Life Park they will be able to bundle packages to get people to stay longer.
  • Total gross gaming revenue split – was 48% for them
  • 48% share: Mass drop
  • VIP turnover was flat QoQ
  • Since the average yield per machine hasn’t been increasing, why are they adding more machines?
    • Utilization of machines is different during different days and times of days.  During peak times, they are tapped out- so even if there are only 10-20 days a year where they are peaked out it makes sense to add more machines



  • Group revs: S$801.8MM, +10% YoY, attributed to higher VIP hold
  • Daily visitation to Universal Studio Singapore: 9,400
    • Average spending: S$84
    • Hotel occupancy: 89%; ADR: S$315
  • Adjusted EBITDA: S$375.6MM, higher VIP hold offset by higher bad debt by S$37.8MM
  • Development/construction at west zone of RWS
    • Equarius Hotel will open at end of 2011, with Beach Villas soon thereafter
    • The last phase will be complete by mid-2012
  • The economic uncertainties in Europe and the U.S. have presented challenges to the Asian economies. Amidst such volatile financial environment, we have exercised caution in our dealings and prudence in our approach.

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Big Sports Apparel Trends

Sports apparel numbers continue to defy gravity. Let's see if the trend holds in the coming weeks when comps get tough. Regardless, the numbers look solid. Good for FL FINL DKS HIBB.


Big Sports Apparel Trends - FW aPP chart 1


Big Sports Apparel Trends - apparel 11 9 11


Big Sports Apparel Trends - FW chart


Big Sports Apparel Trends - FW chart 2


Big Sports Apparel Trends - FW chart 3


Big Sports Apparel Trends - FW chart 4


Here are some quotes from recent earnings calls highlighting what we see as two camps in the restaurant industry with respect to rhetoric around the issue of the economy.




"When you look at the backdrop of the economy against our numbers or the other retailers that did not perform as well the last few months, it's really a stunning result."

-SBUX, 11/3/11


"But we still look guardedly at the overall economy, and we didn't really dwell on it looking at next year's comps… The truth is that over a multi-period now, over a decade plus, our consumers, we've proven fairly resilient in both boom times and more difficult economic times. And we continue to be very respectful of that, though we understand the issues that are in the economy."

-PNRA, 10/26/11


"Despite some uncertainty among consumers about the macroeconomic environment, we're pleased to report our fifth consecutive quarter of double-digit comps since the economy began to recover last year, with a comp of 11.3% in the quarter."

-CMG, 10/20/11 [only one mention of “economy” in the transcript]


"As I've mentioned before on these calls that even though today's slow national economy has caused the postponement or cancellation of many new retail projects, our BJ's new restaurant development pipeline remains in excellent shape."

-BJRI, 10/20/11 [only one mention of “economy” in the transcript]


"And in the midst of a global economy that's been both challenged and volatile for over three years, our business has been resilient and even prosperous."

-DPZ, 10/18/11


"In terms of month-to-month, quarter-to-quarter economic trends, I don't know if we're any better than anybody else who is out there. As I said before, I feel we could deal with the environmental shifts, whatever they are, pretty well given the quality of our team, our national presence, and the different day parts that we have” (specific to China).

-YUM, 10/05/11




"As bullish as we are about this initiatives, there's no question that the soft economy is creating challenges."

-DIN, 11/3/11


"As bullish as we are about this initiatives, there's no question that the soft economy is creating challenges."

-PFCB, 10/27/11


"During the quarter, we continued to face challenging macroeconomic conditions, unemployment rate remained high and the policy debates that occurred in Austin around the budget deficit along with the downgraded U.S. credit rating caused the consumer to form a more pessimistic view about the future of the economy."

-EAT, 10/26/11


"And so, it's been a challenge for us with this change in the economy to use the resources we have, dollars for advertising, menu items, new product news, to be able to move business across those multiple day parts because of what I referred to earlier, that is pre-recession, one promotion really driving business generally."

-SONC, 10/18/11


"Conditions in the U.S. economy and the prices and supply of food and oil continue to be concerns."

-CBRL, 09/13/11


"It's just – I'm just saying the economy has been so difficult, but that's just the conditions. So there's no whining around here. It's the new normal. We'll make it work. (mentioned “economy” 6 times, more than any other restaurant company in our screen)."

-COSI, 08/11/11



Howard Penney

Managing Director


Rory Green



Over the past month, Wendy’s has traded up 16% on the back of the uptick in comparable restaurant sales coming from the launch of the new burgers.  While the company is headed in the right directions there are still some issues that are an overhang for a sustained improvement in same-store sales. 


It is the early days of the Emil Brolick’s reign at Wendy’s and there is significant work to do.  The new CEO is still working through the legacy issues of his predecessor and we expect him to further refine his approach to the company’s problems as we go forward. 


The following are some of the key takeaways from the quarter. 



BREAKFAST IS NOT WORKING – Wendy’s will continue to struggle at breakfast for the near future.  “While work remains to commercialize breakfast, we are very optimistic.”  The competition that Wendy’s is facing in this category is formidable and will continue make life difficult.  In addition, I don’t understand the company’s coffee strategy as it was described on the call.  Why are they evaluating a “proprietary branding approach” to the coffee program called Redhead Roasters?  It seems like “RedHeaded Roasters” is a branding approach that is somewhat confining.  This is especially clear when one considers that McCafé is a platform that allows MCD to market a number of different beverages and not just coffee.  Why would Wendy’s not follow a similar suit and use a broader branding approach like “Wendy’s Café?   There are going to continue to manage the test markets that they have, but to be successful it will come at the expense of margins.  With beef prices looking to be up significantly in 2012, they can’t afford the margin erosion at breakfast.



DAVE’S HOT AND JUICY BURGER – EARLY TRENDS ARE STRONG BUT FOR HOW LONG? – “We would have to go back to early April-May of 2004 to find a five-week period of sales growth higher than the most recent five-weeks in sales.  We are confident that with the strong results of Dave's Hot 'n Juicy and the continued sales strength with Asiago Ranch Chicken Club we will be able to move the third quarter year-to-date same-store sales growth of 1.1% to the middle of our annual target of 1% to 3% same-store sales growth by yearend.”  In our view, it seems like the company might be adding extra marketing to the calendar to keep sales trends propped up. 



PRODUCT/PRICE MOMENTUM TO CONTINUE IN DECEMBER – Wendy’s is introducing a mid-tier priced burger called “the W.”  The W is positioned between the line of Dave's Hot 'N Juicy Cheeseburgers and the $0.99 price point.  I’m sure the franchisee pushed hard for this to help keep the momentum and to be driver of a higher average check.



MARKETING STILL NEEDS TO BE UPGRADED – The new CEO is looking for a new CMO to fill the existing vacancy and hopes to complete that search in the first quarter of 2012.



ASSET BASE STILL A WORK IN PROGRESS – The Company is currently looking at nine new prototype restaurants.  “We are working to reduce the investment cost of these prototypes, working to determine which prototypes to focus on and, of course, we are anxious to learn how well sales sustain themselves over month’s period of time.”



MARGIN BENEFIT – As I said above, the breakfast business is a drag on margins and the company can’t afford that right now.  “We were able to offset higher commodity cost with strategic pricing and mix shifts that produced a net positive change of approximately 120 basis points. In addition, restaurant margin was favorably impacted by 80 basis points due to a year-over-year reduction in breakfast advertising expense.”



Howard Penney

Managing Director


Rory Green


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.35%