Buffalo Wild Wings has enjoyed a tremendous tailwind thanks to the sharp decline in chicken wing prices that continued through 2010 and much of 2011.


Buffalo Wild Wings put up surprisingly strong 3Q11 results on the back of stronger-than-expected comparable restaurant sales of +5.7%, which implies a two-year average trend of +4.2% (versus +2.9% in 2Q).  While this was an impressive number, the comp was largely fueled by the unlimited wings promotion that ran through the summer months.  The year-over-year menu price increase, at +1.4%, was the lowest it had been since 2006.  Thanks to -18% deflation in chicken wing prices during the third quarter, this impact of this strategy on the company’s restaurant operating margin was immaterial. 


The chart below shows the year-over-year menu price increase trend over the last five years. We would argue that the uptick in menu price that the Street is modeling (the 4Q11 and 1Q12 points below are consensus per Consensus Analytics) are likely too low.  Please note that the price increase estimates for 4Q11 and 1Q12 (blue line) in the chart below are based on Consensus Analytics' consensus.  We believe that wing prices in 4Q and 1Q will force this line higher than the Street is forecasting.  The year-over-year trend in Chicken Wing Prices over the next couple of quarters is based upon an assumption that the upward trend will continue to $1.20 for 4Q and $1.40 for 1Q.  At the SAFM Investor Day, Joe Sanderson stated that he was expecting $1.45 per lbs chicken wings by the time the Superbowl comes around.  As processors cut production and the year-over-year demand profile points to higher prices, we believe a significant increase along the lines of what Mr. Sanderson anticipates seems reasonable. 


BWLD: PARTY’S (ALMOST) OVER - BWLD menu price vs wings


BWLD: PARTY’S (ALMOST) OVER - BWLD wing price vs margin



The reason why this is important for Buffalo Wild Wings is that it will no longer be feasible, from a margin perspective, for sales to be driven by a promotion similar to “Unlimited Wings”.  In the event of there being upside risk to the Street’s menu price increase estimates for 4Q11 and, more likely, 1Q12, we would argue that comparable restaurant sales could disappoint. 


Some may point out that one risk to our thesis is that many food service operators successfully took advantage of comparatively low chicken tenderloin prices and promoted boneless chicken wings to alter the mix.  Buffalo Wild Wings has been fairly consistent in the proportion of its revenue coming from the sale of boneless chicken wings over the past few years, despite significant moves in the price of traditional chicken wings.  As a percentage of sales, boneless wings have been running at roughly 19% of sales during 2011 and 2010.  In 2009, when chicken wing inflation peaked, that figure was 19% (versus traditional wings at ~20%).  2009’s figure was a jump from the 16% of sales that boneless wings represented in 2008 and this helped offset the commodity headwind to a degree.  Given that wing deflation did not lead to customers shifting back to traditional wings, it seems that this proportion of 20% of sales traditional and 20% of sales boneless may be difficult to shift without significant price manipulation. 


BWLD: PARTY’S (ALMOST) OVER - chicken wings 1116



One question worth thinking about at this point is whether or not, in the event of significant inflation hitting the company’s P&L in 4Q11 and in particular 1Q12, the company can adequately shift customer preference away from traditional wings (spot market pricing) to boneless wings (which are contracted for the entirety of 2012 and some of 2013).  We would doubt it.  Even in the unlikely event that management can emulate the shift that we saw from '08 to '09 , we would argue that menu prices still need to rise more than consensus is projecting for 1Q12 earnings to meet expectations and this will be detrimental to traffic trends, which the business has –over the last few quarters – become increasingly dependent upon for comp growth.


Looking at the Street’s view of Buffalo Wild Wings, it would seem that our concerns may not be shared by other analysts.  Negative sentiment around the name evaporated more or less in step with chicken wing price inflation and we believe there is a high likelihood that it will reappear as wing prices start to impact the P&L. 


BWLD: PARTY’S (ALMOST) OVER - bwld sentiment



From a valuation perspective, BWLD is richly valued.  Currently trading at 7.8x EV/EBITDA NTM versus a casual dining average of 6.8x (6.4x ex-BJRI), we believe that a negative catalyst could cause multiple contraction.  For reference, one turn in the multiple represents $7.66 of upside/downside in the stock.  All in all, we believe that the next couple of quarters could prove difficult for BWLD given that the strategy it has used to drive sales as its commodity tailwind has subsided will not be viable when the tailwind is a strong headwind.  




Howard Penney

Managing Director


Rory Green










Corn, wheat and beef all came down meaningfully over the last week as the dollar strengthened. 





THE HBM: SBUX, WEN, BOBE - subsector fbr





SBUX: Despite coffee prices coming down, Starbucks is raising prices in several major markets, according to Reuters.  Prices were raised yesterday on some drinks in major markets like Southern California, Chicago, Washington, Oregon, and Hawaii.


SBUX: Starbucks restaurants in New York have, in many cases, closed restrooms in their stores because, as the New York Post puts it, “Starbucks cannot be the public bathroom in the city anymore”.


SBUX: Starbucks, speaking at the Morgan Stanley Global Consumer & Retail Conference, said that one-third of coffee prices for 2013 have been locked at lower levels than where 2012 was locked.


WEN: Wendy’s announced that David Karam, President of North America, will be leaving the company, effective as of the end of 2011.  The company will not replace the President of North America position, as CEO Emil Brolick will assume direct management responsibility for leading the business.





BOBE: Bob Evans reported 2Q EPS of $0.47 versus consensus $0.53.  Bob Evans comps were -1.5% versus consensus -1.3% with pricing at +2.0%.  Mimi’s Café comps came in at -4.8% versus consensus at -1.1% with pricing at +4.2%.  Higher sow costs impacted the company’s margins.


THE HBM: SBUX, WEN, BOBE - stocks 1116



Howard Penney

Managing Director


Rory Green




The Macau Metro Monitor, November 16, 2011




IAG says currently most junkets are operating under a profit-sharing model with the most aggressive offer at 47% of win. IAG understands from insiders that the big junkets are all operating under a profit-sharing model while the smaller junkets and sub-junkets are all operating on the traditional RC model, capped at 1.25%.  IAG says there was a persistent rumor regarding a major Macau junket which had halved its credit issuance in recent weeks. 


IAG added that there has been a industry rumor that a Macau operator has a packet of bad VIP debt dating back several years that has so far been kept off the operator's books.  There's a suggestion in the past few weeks that some form of mutual write downs between the operator and the junkets concerned may serve in effect to cancel out the debt. 



The 58th Macau Grand Prix will kick off on November 17th.  Hotel rooms are expected to be short in supply.  The room rates for some hotels near the race circuit go up three times higher than normal weekends, rocketing from around MOP1,000 to more than MOP3,000.  



Based on the latest visitor arrival data which indicate that Mainland visitors on package tours (compared with those on IVS visas) are on the rise, IM says someone is getting more aggressive in the mass market and paying more for tour packages from travel agencies.  Every property in Macau has paid middlemen described as "executives in the people-moving business" during their opening, although how much they pay and for how long has varied.


NEW CASH HANDOUT FOR 2012 Macau Business

Macau CEO Chui said the government will keep the cash handout of MOP7,000 (US$875) for each permanent resident in 2012.  Non-permanent residents will get MOP4,200.  That is the same amount residents received in 2011, but divided into two cash handouts.


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From a quick trip to Macau 




  • No softness yet but some concessionaires are definitely more conservative on the near term VIP outlook
  • Part of that is the hold comparisons which are difficult through January
  • Consensus is that there are no real structural problems with credit and junkets but the collapse of a smaller junket is possible which would spook the market but not really impact the overall business
  • LVS may spark a junket war in Macau


  • Mass business still strong - we think they may be up 30% YoY November MTD
  • VIP business is slow for them
  • Venetian/Four Seasons already very aggressive on junket volume discounts and commission advancement – this will impact Wynn
  • For now Wynn is staying put on the junket credit side and commission levels
  • Wynn is in a little bit of a pickle because if they still don’t want to sacrifice margin they are likely to continue losing VIP share


  • More defensive should VIP go under pressure
  • Upside in Mass is also limited due to lack of hotel rooms
  • SJM could pay HK$1 annual dividend (8% yield) and still fund Cotai 


  • Holding could be as low as 2.5% November MTD
  • We think they are still well over US$100 million in EBITDA midway through Q3 despite the bad hold
  • Worried about Venetian/Four Seasons junket aggression.  Deciding whether to match or hold steady.  This is their number one concern.
  • US$200 million quarterly EBITDA run rate even with the low hold and potential margin compression from increasingly competitive environment
  • It is my sense that management is more optimistic than US$200 million per quarter next year
  • Aside from the junket pressure, there are numerous headcount reduction opportunities next year so margins are still likely to be higher
  • Still evaluating an expansion of CoD – retail, new premium Mass space, and new high end suites
  • Premium Mass segmentation may insulate them from the opening of 5/6


  • Some concern that the interior of 5/6 will not be “real Chinese” enough
  • Connecting walkways will be constructed by the government and not LVS – so all connections will be done at the same time but not in time for the opening
  • Neptune opened 2 weeks ago and is doing well
  • Neptune could impact November – sounds like Neptune has a pretty sweet deal with incentive triggers at volumes well below market averages
  • Already expanded junket commission advancement to 2 months for some junkets

Faulty Interventions

This note was originally published at 8am on November 11, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Intervention based on faulty theories of causes could easily make the problem worse.”

-Sylvia Nasar


I just started reading Sylvia Nasar’s “Grand Pursuit.” Her aforementioned quote comes from Chapter II titled “Must There Be a Proletariat? Marshall’s Patron Saint”, where Nasar focuses on Alfred Marshall’s contributions to the study of economics in the late 1800’s.


Ultimately, Marshall had a relatively easy go at it – certainly easier than I feel we have it in going after the Keynesians (Krugman, Bernanke, Dudley, etc.) here in 2011. All Marshall had to disprove were the dogmas of Malthus, Mill, and Marx (both “The Communist Manifesto” (Marx and Engels) and Mill’s “Principles of Political Economy’ were published in 1848).


By the time Marshall was finally able to put together his most influential British textbook (“Principles of Economics”) in 1890, the socialist ideas of “fair share” and left leaning Big Government Interventions had been broadly debased in the public forum.


A lot has happened since then, but the way academics cling to their dogma has not. Since becoming the Chairman of the US Federal Reserve in 2006, Ben Bernanke has operated on a faulty theory that his central plannings would:


A) maximize full employment and B) provide price stability.


Rather than some version of the opposite occurring, the exact opposite has occurred since Bernanke became responsible for his policy recommendations. Or has he been held responsible? As far as these eyes can see his policies have helped perpetuate:


A) shortened economic cycles and B) amplified price volatility.


Economics is not a “hard” science. It’s a social science that needs more math. The long-term history of economics is one where the dogmas of the older academic generation ultimately get rejected by the new generation.


In his 30s, Alfred Marshall was refuting Karl Marx… and by the time the 1920s rolled around, a 34 year-old currency trader (John Maynard Keynes) was refuting all of the British academic elite’s economic conclusions…


What’s different this time is that it’s taking a little longer to accept that Keynesian Economic theories of “causes” is what is making our global economic problems worse.


It’s Policy, Stupid. And we plan on standing on the front lines of this generational economic debate.


Back to the Global Macro Grind


I shorted the SP500 on the market’s opening strength yesterday (935AM EST, Time Stamped at 1244 SPX), and I plan on doing more selling throughout this morning’s Global Macro rally to yet another lower set of highs.


Here’s your real-time Global Macro economic data check:

  1. Chinese Exports for OCT dropped again sequentially to +15.9% vs +17.1% in SEP (Asian Growth Slowing)
  2. India’s Industrial Production growth dropped to its lowest level in 2 years (+1.9% SEP)
  3. Thailand Consumer Confidence plummeted to 62.8 OCT vs 72.2 SEP (food/energy inflation and floods)
  4. Indonesia surprised with another 50bps rate cut to 6% citing “external factors”; stocks closed down on that
  5. France’s inflation rate rose again in OCT to +2.5% as Industrial Production growth in France has moved to negative -1.7% y/y
  6. British PPI input prices up +14.1% y/y in OCT! ouchy

Most of this economic data has nothing to do with what’s going on with Princess Nancy or Super Mario.  It has everything to do with the two things that drive economic demand most in our models – Growth and Inflation.


Does the trifecta of Keynesian experimentation (Cutting rates to ZERO, then doubling down with Quantitative Easing) in Japan, USA, and now Europe (in that order) perpetuate rising inflation and slowing growth? You’re darn right it does.


This has already been empirically proven by some of the more mathematically oriented Keyensians themselves in “This Time Is Different” (Reinhart & Roggoff).


What are the real-time leading indicators saying about this (ie market prices):

  1. US Stocks are making lower-highs across all 3 durations in our risk management model (TRADE, TREND, and TAIL)
  2. US market Volatility is making higher-lows across all 3 durations
  3. European bond and stock markets continue to test a series of all-time lower-lows

Both the economic data and the markets that reflect upon that Growth and Inflation data are refuting Keynesian economic resolve. As the facts change, what do we do, Sirs?


I can tell you what I am going to do – I am going to keep doing what I have been doing since late 2007 when I decided not to be suckered in by these Faulty Interventions and broken assumptions about how it is that globally interconnected markets and economies work.


My immediate-term support and resistance ranges for Gold (we’re long GLD), Oil (bullish breakout – perpetuating European Stagflation), German DAX (broken), and the SP500 (we’re short SPY) are now $1756-1818, $94.21-98.46, 5699-6108, and 1226-1247, respectively. Our DOR, Daryl Jones, will be hosting our “Best Ideas. Period” call at 11AM EST.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Faulty Interventions - Chart of the Day


Faulty Interventions - Virtual Portfolio


TODAY’S S&P 500 SET-UP - November 16, 2011


Santa Claus is coming and we are sure all of this is going to end according to the central plan…


As we look at today’s set up for the S&P 500, the range is 32 points or -1.65% downside to 1237 and 0.89% upside to 1269. 






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance



  • ADVANCE/DECLINE LINE: +795 (+2380) 
  • VOLUME: NYSE 781.03 (+10.0%)
  • VIX:  +31.22 flat YTD PERFORMANCE: +75.89%
  • SPX PUT/CALL RATIO: 1.59 from 1.20 (+32.56%)



  • TED SPREAD: 45.54
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.06 from 2.04    
  • YIELD CURVE: 1.80 from 1.80


MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage, (prior 10.3%)
  • 8:30am: CPI, est. M/m 0% (prior 0.3%)
  • 9am: Net long-term TIC flows, est. $50b (prior $57.9b)
  • 9:15am: Industrial production, est. 0.4% (prior 0.2%)
  • 9:15am: Capacity, est. 77.6%, prior 77.4%
  • 10am: NAHB housing, est. 18 (prior 18)
  • 10:30am: DOE inventories
  • 11:15am: Fed’s Lacker speaks on credit allocation in Washington
  • 12:45am: Fed’s Rosengren speaks on economy in Boston


  • Bank of America CEO Bryan Moynihan to tell board company is on right course – WSJ
  • Four NBA players sue league, its teams in federal court in Minneapolis - Minneapolis St. Paul Business Journal
  • Citigroup said to consider cutting as many as 3k jobs
  • John Paulson said to cut risk in his hedge funds further amid European debt crisi




COPPER – apparently Santa didn’t find his way to Asian Copper demand overnight either. Copper down -1% at 3.48/lb is just one more reminder of what it and US Treasury yields continue to remind us. Growth Slowing remains the issue, globally, that just won’t go away (especially with $100 oil).


  • Sino-Forest Faces ‘Herculean’ Task After Ponzi Scheme Denial
  • Sino-Forest Bonds Signal Timber Inflated by 100%: Canada Credit
  • Nationalism Tops Crisis as Key Risk to Mine Supply: Commodities
  • Maersk Poised to Benefit as Overcapacity Hits Rivals: Freight
  • Oil Drops From Three-Month High on U.S. Stockpiles, Europe Debt
  • Shale Oil Saps African Crude as Libya Returns: Energy Markets
  • Japan Buys 800,000 Tons Corn From Ukraine as U.S. Substitute
  • Copper Drops on Concern Europe May Fail to Contain Debt Crisis
  • Cotton Harvest in Australia May Jump 25% to Record on Area
  • Spring-Wheat Premium Widening Over Winter Crop: Chart of the Day
  • China Said to Buy 600,000 Tons of U.S. Soy to Boost Reserves
  • Galena Plans to Boost Staff 35% Next Year as Commodities Expand
  • Thailand to Buy 100,000 Tons of Rubber Stocks to Lift Price
  • Palm Oil Jumps to Five-Month High as Weather Threatens Supplies
  • Wheat Drops as Rain in Argentina, U.S. May Aid Crop Development
  • Sino-Forest Says Probe Refutes Muddy Waters Allegations
  • Gold Climbs for Second Session in Three as Investor Demand Gains
  • China Rare Earth Export Quota May Not Be Fully Used, News Says

THE HEDGEYE DAILY OUTLOOK - daily commodity view





THE HEDGEYE DAILY OUTLOOK - daily currency view





FRANCE – we covered our short position in French Equities yesterday because they were immediate-term TRADE oversold – managing risk around a refreshed 3037-3176 range in the CAC (which remains in a Bearish Formation) as does the Euro which is looking worse by the hour as our 1.37 TRADE line resist confirms.


THE HEDGEYE DAILY OUTLOOK - euro performance




CHINA – only problem w/ that fear (and it is a fear institutional investors are scared to miss) is that Asia isn’t getting the memo. China (down -2.5% overnight) and Hong Kong (we re-shorted EWH yesterday) down a stiff -2% taking the Hang Seng back into crash mode (-22% from YTD peak) as India continues lower as well.


THE HEDGEYE DAILY OUTLOOK - asia performance








  • Qatar Air Says ‘Belt Up’ as Middle East Carriers Pull In Orders
  • Airbus Draws With Boeing at Dubai Show Dominated by 777, Tirades
  • Bank of America Said to Cut Dubai Sales, Trading Team by 40%
  • Arab Project Finance Goes Local on Europe Debt Woes: Arab Credit
  • Indonesia Sale Supports Investment-Grade Rating: Islamic Finance
  • Obama Microphone Slip Shows Scary Israel Rift: Jeffrey Goldberg
  • ADCB Said to Sell Sukuk at 275-287.5 Basis Points Over Midswap
  • Oman Central Bank Plans to Sell $390 Million of Five-Year Bonds
  • Gas Exporters Seek ‘High’ Prices as They Cooperate on Supply
  • BBK Makes Exchange Offer to Holders of $152.4 Million of Notes
  • Australia, Iran, Iraq Advance in Asia 2014 World Cup Qualifying
  • Qatar May Buy Stake in Greece’s Ellaktor, Reports
  • Genel Energy Targets DNO to Boost Kurdish Oil Foothold
  • Schoeller Says Libya Oil Recovery May Match 5-Year Iraq Wait
  • Oil Tankers Loading in Persian Gulf at Lowest Since June
  • Qatargas Providing Extra 9 Million Tons of LNG to Japan
  • Qatar Seeks Stakes in Russia’s Novatek, Yamal LNG Project
  • Rio Seeks to Boost Aluminum Production in Oman: Company Link
  • Qatar Air CEO Makes Up With Airbus After Lashing Planemaker                

The Hedgeye Macro Team

Howard Penney

Managing Director


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.