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The last note I wrote about COSI was titled “Destruction in Deerfield.”  In breaking down the company’s recent letter to Brad Blum it appears now that management is in desperation mode and will do anything possible to keep their jobs, even if it is to the detriment of the company.


On the day the management reported another disastrous quarter, management felt the need to send Brad Blum a letter stating their dissatisfaction with Mr. Blum and his campaign to get the company back on track. 


The letter comes across as a desperate attempt to discredit Mr. Blum, without providing any reasons why shareholders should support the current management team and their efforts, or lack thereof, to turn the brand around.


The earnings call was an awkward event; it was clear that there was no vision for the future.  The experience must have been uncomfortable for the management team, given that no participants on the call seemed to be convinced by what the executives had to say.


I have broken down the letter to Mr. Blum and added my take on what it all means:


COSI Board: “As we have said to you on several occasions, including our two recent face-to-face meetings, we would welcome your offers of assistance if only they were sincere.  Believe us, we appreciate fully the frustration of our fellow shareholders.”


HEDGEYE: Why would management think that someone who owns 6.7% of the equity would not be sincere?  How can they appreciate the frustration of fellow share holders when they (collectively) own less than 1.5% of the equity?  As I see it, the use of the word “sincere” is disingenuous; they just want to keep their jobs!



COSI Board: “This Board is conducting an aggressive but deliberate search to identify a new leader for our company.  We are searching for a CEO who brings vision, a passion for our brand, operating excellence and a track record of success.  We have met several excellent candidates and hope to conclude our search shortly.  Sadly, your so-called activist activities have only complicated our efforts and kept several promising applicants on the sidelines.”


HEDGEYE: Did management not read the letter from James A. Skinner from Royce Associates, which owns 9.6% of COSI?  Here is a small excerpt: “I am also writing to express our dissatisfaction with the Board's and Management's performance over the last several years. Whether measured by the company's revenue growth, profitability (or lack thereof), cash management, capital allocation and share price performance, COSI has fundamentally been an underperforming entity for the better part of a decade.” 


I guess there are now two (as management says) “so-called” activists.  Brad Blum is not complicating the efforts to find a CEO, because he should be the CEO and most qualified observers know that.


COSI Board: “Your demand to hand-pick the majority of the board and thus control Cosi as a precondition to your willingness to serve as CEO or as a director would in effect ask shareholders to deliver to you control of their company as the price for your services.  Shareholders are paid for changes in control, not the other way around.”


HEDGEYE: I love this statement.  Does management have an inflated view of what the company is worth?  What would you pay for a company that is bleeding cash, needs $7-10 million in capital to survive and management team that can’t articulate a vision of the future?  The current shareholders are getting paid a premium with the stock at $0.73.  If the Board appoints any CEO other than Brad Blum the stock will likely be down 30-50% and the bankruptcy clock will start ticking.     


COSI Board: “Believing you to be sincere in your offers of assistance, we heard you more than once say that you would not insist on such a preposterous governance structure.  In that belief, we interviewed you in Winter Park for the CEO position.  We also met with you in Chicago to discuss your joining our board.  Each time, we hoped that your offers of help were sincere.  Each time we discovered they were not and that you continue to insist that the only way you would serve as CEO is if we turned over control of the company to you.  We cannot do that.”




COSI Board: “During our two face-to face meetings, you failed to present any new ideas and plans for improving Cosi’s products and services, improving Cosi’s marketing program, expanding the Cosi  brand, accelerating Cosi’s revenue growth, enhancing stockholder value and, of course, achieving and maintaining profitability.  Rather, your major suggestion was to move the Company’s headquarters from Chicago to Orlando, Florida, where you reside, a concept that would be both expensive and counterproductive to the operations of the Company.”


HEDGEYE: Again this appears to be a statement is intended to discredit a restaurant executive with a track record that the brand needs.   Also, who are they to talk – the losses continue to mount every quarter!  It should also be noted that the current Blum proposal does not actually suggest the company move to Orlando, Fla.


COSI Board: “We also discovered other concerns.  In evaluating your candidacy, we spoke with several references.  Many spoke of your arrogant management style, your lack of fiscal responsibility and the string of failures that followed Olive Garden.  We were also surprised by your statement the other evening that you, while CEO of another Company, “manipulated” the comparable store sales in order to portray a story of consistent quarter over quarter growth.  Your duplicitous behavior, your public rants and your disregard for the federal securities laws in your dealings with us and our shareholders only heighten these concerns.”


HEDGEYE: The clock in running out and there are no other options but to throw a Hail Mary and cross the line of integrity and accuse Mr. Blum of violating securities laws!  Blum has offered quantifiable evidence of shareholder discontent by conducting a survey of COSI shareholders and all that management can respond with is hearsay and insults.


COSI Board: “Brad, our shareholders deserve more than self-promotional gimmicks   A veiled takeover by a wanna-be “activist” trying to make a name for himself at the expense of their company really isn’t in the best interest of our shareowners.  This Board of Directors is made up of serious business people whose motives are very straightforward.  We are not motivated by the meager financial rewards of the job.  We are not motivated by empire-building or some self-interested agenda.  We are motivated by our sincere commitment to providing the best available options for our fellow shareholders and to doing the job we agreed to do.”


HEDGEYE: Mr. Demilio, the shareholders deserve a chance to have a real restaurant executive run this company. 



Howard Penney

Managing Director



The Week Ahead

The Economic Data calendar for the week of the 14th of November through the 18th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - 1. cal

The Week Ahead - 2. cal

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Shorting EUR/USD

Positions in Europe: Short EUR/USD (FXE); Short France (EWQ)

Keith shorted the EUR/USD cross via the etf FXE in the Hedgeye Virtual Portfolio in the last hour of trading today. We’ll take the other side of Goldman’s bullish EUR call today and fade the bounce on the replacement of Papendreou in Greece and the likely removal of Berlusconi in Italy (in the coming days) as we see weakness associated with the inability of Europe to contain its sovereign and banking imbalances, and volatility ahead as specific terms on the expansion (or leverage) of the EFSF, banking recapitalizations, and Greek haircuts remain unanswered.


Compounding these factors, Italy’s sovereign and banking risks have move squarely in the spotlight and the threat of a downgrade of France’s AAA credit rating continues to loom large, which presents risk for the country, region, and EFSF. Finally, and here we’re stating the obvious—outsized public debt and deficit levels by Eurozone member states aren’t going anywhere despite leadership changes. The damage done will take years to hone in (if we don't see member states leave beforehand) and in the balance, growth should be crimped over the longer term. 


For a market that is looking for quick answers to Europe’s ail, we’d expect disappointment and therefore want to be short the common currency.


Tomorrow, Italy’s lower house of Parliament will vote on the 2012 austerity budget. Berlusconi has indicated that its approval is conditional to his resignation. We’d expect its approval and Mr. Bunga Bunga’s resignation to give a short term boost to the currency pair. However, the pair remains broken on intermediate TREND and TAIL durations and should $1.37 not sustainably hold, we don’t see downside support in the EUR/USD until $1.21 in our quantitative models (see chart below).


Passa un buon fine settimana!


Matthew Hedrick

Senior Analyst


Shorting EUR/USD - 111eur


Yesterday, SBUX was up 1.3% on light volume but the nature of the announcement that the company made intra-day is bigger that the reaction in the stock price implies.  Understanding that the implications on the P&L are years away, the call yesterday with senior management yesterday made it clear to us that it was a significant event for the future of the company.  The announcement was made when the restaurant analyst community was in Oak Brook at the McDonald’s Analyst Meeting.


In announcing the acquisition of the Evolution Fresh Juice Company for $30 million in cash, Starbucks gave a clearer picture of the blueprint for future of the company’s “organic” growth beyond the coffee category.  Unlike other retail companies, the Starbucks brand (changed the logo last year to be less coffee-specific) already competes in a number of different retail categories, so moving into the juice category was hardly a conceptual leap. Starbucks is using this acquisition to “build a broad-based multi-billion-dollar health and wellness category” under the Starbucks logo.


According to Starbucks, the category of Health and Wellness is a $50 billion category (US Coffee market is $38 Billion) and the acquisition of Evolution is to provide the foundation for the company’s entry into the business.  Starbucks’ intention is to “re-invent” the category in the same they re-invented the coffee market.  While I understand the company’s goal here, the comparison is not necessarily the same.  The coffee segment lacked real innovation and was declining before Starbucks came along.  The juice and the overall health and wellness category are growing rapidly and are seeing new innovation on an ongoing basis.  To that end, just what Starbucks has up its sleeve will be important for how this plays out.        


Evolution is not a concept we are overly familiar with but clearly it has been carefully selected to be the launch pad for a much larger strategic move.  The High Pressure Processing technology that Evolution uses to pasteurize (without heating) its juice was a key characteristic pointed out by management in the press release and during the call yesterday as a differentiator for Evolution within the juice category. 


HPP is a method of food processing where food is elevated to pressures of up to 87k lbs per square inch with or without the addition of heat.  The method retains food quality, maintains natural freshness, and extends shelf life.  Fans of the methodology contend that HPP provides juice drinks that are the equivalent of getting fresh-pressed juice with an extended shelf life. 


Initially the Evolution Juice product and brand will “live nationally” in Starbucks stores and experience a sampling and trial to judge consumer acceptance.  Assuming a successful introduction, SBUX will build a national business through its CPG channel.  In addition, management intends to begin opening up a retail footprint towards the end of the first half of calendar 2012.  Over time, it’s management’s intention to have a national footprint of health and wellness stores.  Starbucks’ bold plans are to build the first consumer “juice” brand that has both the national distribution of a CPG company and the national footprint of retail stores base.


As Howard Schultz said on the conference call, “we are leveraging the core capability and infrastructure of our company, and we've identified a major growth vehicle that, over time, will be highly complementary to our core business, and that is the experience that we create in our stores around beverage, the romance, the theater, and obviously the momentum and trend of health and wellness, we think we can build a major business.” 


I found it interesting that when asked about the potential for the new “national brand”, the comparison to Whole Foods came up and the response was as follows: “Other than Whole Foods, which is really not a health and wellness store but a grocery store selling high-quality products, we think we can bring this to life by really replicating the understanding we have about beverage capability, beverage recipes, and bringing the theater and romance, and ultimately the efficacy of juice, fruit and vegetables, to life in a unique way that positions us to build a health and wellness business.”


This suggests that this is not going to be a “juice bar” but a “juice/food bar”.   It will be interesting to see if they really do create something that's unique and proprietary in the size and scale of an existing Starbucks store.  The due diligence for the new concept included “traveling throughout the world, examining what others have tried to do around juice, health and wellness, tea, and things that are medicinal and have efficacy, and feel very strongly that we understand the beverage business perhaps better than anyone else who has been in small-box retail.”   


As management said on the call - “We've done a lot of research and found out that two-thirds of U.S. consumers want healthier options with wholesome ingredients.”  This is a strategy, from a marketing standpoint, that has served Chipotle well and, in time, Starbucks could adopt a similar angle.





Howard Penney

Managing Director


Rory Green


Weekly Asia Risk Monitor: Pessimism Abounds

Conclusion: Asian financial markets, economic data, and official policy commentary continues to echo recent pessimism, which is ultimately reflexive in nature.



Asian equity markets completed another off week, closing down -2% wk/wk on a median basis. Hong Kong, our highest-conviction bearish thesis on the Asian equity front led decliners (-3.6% wk/wk). Asian currencies also broadly declined vs. the USD, closing down -0.5% wk/wk on a median basis. The Indian rupee was particularly weak, closing down -2.1%. FX-translation remains a key risk for U.S. investors on the emerging market front, as well as for emerging market corporations from a liability standpoint.


Asian sovereign debt markets continue to price in monetary easing, led by China’s -53bps wk/wk decline in 1yr yields. Australia, whose economic performance is highly correlated with Chinese demand, also saw yields decline on the short end of the curve to the tune of -29bps on the 2yr tenor. Both country’s interest rate swaps markets agreed with this dovish outlook, tightening -22bps and -23bps, respectively. Farther out on the sovereign debt maturity curve, the -18bps decline in Australia’s 10yr yield is noteworthy in the context of some “not-terrible” economic data from “down under” this week. Clearly the bond market isn’t impressed.


Asian 5yr credit default swaps markets were mixed for the first time in a while, widening a marginal +0.7% wk/wk. Notably, Chinese swaps widened +12bps (+9.4%) wk/wk, while Indonesia’s tightened -11bps (-4.8%) wk/wk – signaling to us a very short-term decoupling of risk perception throughout the region.



Rather than delineate these data points by country, given the varying size and importance of these economies, we thought we’d try something different by grouping them by theme. Ideally, this should make it easier to absorb and contextualize anything of significance. Lastly, the callouts below are from the prior seven days:


Global Growth Slowing:

  • Chinese October growth data largely slowed on the margin to at/near multi-year lows: retail sales (+17.2% YoY vs. +17.7% prior); industrial production (+13.2% YoY vs. +13.8% prior); YTD fixed asset investment (+24.9% YoY – flat); exports (+15.9% YoY vs. +17.1% prior); trade balance (-$10.1 billion YoY vs. -$2.4 billion prior); and M2 money supply (+12.9% YoY vs. +13% prior).
  • Continuing with the government’s recent focus on easing SME credit conditions, Chinese monthly loan growth accelerated in Oct +24.9% MoM to CNY586.8 – the largest sequential increase since March ‘11. It appears the communist party played a role in the acceleration, with nearly a third of the “big four” state-owned banks credit extension coming in the last two days of the month.
  • Hong Kong YoY real GDP growth continued to slow in 3Q (+4.3% vs. +5.3% prior). The latest reading is the lowest since 4Q09. Exports dropped -2.2% YoY in 3Q – a negative leading indicator for global demand. From a sequential perspective, Hong Kong narrowly skirted a technical recession, growing +0.1% QoQ (vs. -0.4% prior). On the release, officials lowered their 2011 GDP estimate to +5% from a previous range of +5-6%. This is following chief executive Donald Tsang’s bearish commentary earlier in the week: “I am pessimistic about short-term global growth. I am afraid a major eruption in the largest market in the world, i.e. Europe, is going to affect everyone on earth and Hong Kong cannot be totally exempted.”
  • India’s trade deficit widened in Oct to the highest in 17 years, as the near -11% decline in the rupee (vs. the USD) puts incremental pressure on import prices – particularly in the energy sector (India imports 3/4ths of its total crude consumption).  Industrial production growth came in at +1.9% YoY – the slowest rate since Sept ’09 – as the RBI’s +375bps or rate hikes over the last 18mo continues to stunt corporate investment.
  • As the floods continue to negatively impact economic growth in Thailand, consumer confidence in the economy fell -13% MoM in Oct to 62.8 – the lowest level in exactly ten years!
  • Malaysian industrial production growth slowed in Sep to +2.5% YoY vs. +3.7% prior. We’ve made this point in prior notes, but it’s worth repeating: If Asia is producing and shipping goods with less and less velocity, we (the developed world) are ordering and purchasing it with less and less velocity.

Deflating the Inflation:

  • Chinese CPI slowed to +5.5% YoY in Oct vs. +6.1% prior. PPI slowed as well: +5% YoY vs. +6.5% prior.
  • Japanese corporate goods prices (a proxy for PPI), slowed in Oct to +1.7% YoY vs. +2.5% prior.

King Dollar:

  • South Korea, a country sensitive to the global economic cycle continues to hold off on raising interest rates (currently at 3.25%) – despite real rates being in negative territory (-65bps) with headline CPI a mere 10bps below the high end of the central bank’s target range. We share the same view that the Korean won has been telling us for months (-4.5% over last 2mo) – their next step will be to ease, rather than tighten policy.
  • Indonesia, which has been the most aggressive on the easing front throughout Asia, lowered interest rates again, this time by -50bps to an all-time low of 6% in the reference rate. The move confounded all 19 economists surveyed by Bloomberg, suggesting to us that consensus is still not fully on board with our expectation of dovish monetary policy throughout the region over the intermediate term.
  • Australian Treasurer Wayne Swan confirmed our view that Australia will continue to see its interest rate and fiscal advantage deteriorate on the margin relative to the U.S. over the intermediate term, saying: “There is room to move in Australia when it comes to both monetary policy and fiscal policy” – suggesting to us that Gillard & Co. may join the RBA in easing “down under”.

Eurocrat Bazooka:

  • Japan bought 10% of the €3 billion EFSF issue earlier in the week, down from 20% of the fund’s initial 5yr sale back in January. A former BoJ official said that Japan may have reduced its demand on mounting fear of losses. We continue to maintain conviction that a) the EFSF is a mere transfer of Eurozone risk – an incomplete one at that; and that b) it will meet growing demand headwinds as France inches closer to a downgrade. Where will demand from EFSF paper come from going forward if both China and Japan (two largest FX reserves accounts) are leery of backing up the truck?


  • While certainly nothing to get excited about, Australia’s Oct economic data was surprisingly “not-terrible”. Payrolls growth slowed to +10.1k MoM, but the acceleration in full-time hires and the -10bps reduction in the unemployment rate was doubly encouraging. Trade balance growth accelerated ever-so-slightly to +A$600 million YoY alongside a similar acceleration in NAB business confidence to 2 (vs. -1 prior). Again, nothing to get excited about, but at least it is briefly inconsistent with the string of negative growth data we’d been seeing out of Asia recently.


  • Japanese optoelectronic producer Olympus Corp shares plunged after former CEO Michael Woodford exposed the company’s multi-decade fraudulent practice of hiding financial losses that have amounted to $1 billion to-date.
  • Japan, which is the largest foreign direct investor in Thailand (~57% of all recent projects), stands a risk of lost production as the Thai floods exacerbate auto, machinery, and electronic supply chains. Toyota became the latest company in a growing list to scrap full-year guidance as a result of the lack of visibility on production. The yen’s +6.8% gain vs. the USD over the LTM remains another key headwind to Japanese corporate earnings, and, ultimately, Japanese economic growth. The ratio of Japanese corporations’ planned capital expenditures abroad increased to 51.4% in FY12 – up from 39.5% in the prior year – as more businesses find it incrementally costly to produce and hire domestically.

Darius Dale



Weekly Asia Risk Monitor: Pessimism Abounds - 1


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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 80.46%
  • SHORT SIGNALS 78.35%