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WEEKLY COMMODITY CHARTBOOK

The important commodities, at least for the food and restaurant industries, were mixed in terms of price action over the last week.  Grains moved lower, as did beef and chicken broilers, but wings, dairy and coffee posted strong gains.

 

STOCK THOUGHTS

 

Beef – WEN, TXRH, CMG

 

The supply and demand profile for beef remains highly bullish.  Despite the retracement in beef prices over the last week, the trend is straight up and to the right.  Some analysts are estimating that cattle feedlot placements in October fell 3.9% year-over-year, according to cattlenetwork.com.   The USDA Cattle on Feed report comes out on Friday and, if there is a decline of the magnitude that some are expecting, it will be signal tighter beef supplies and likely higher beef prices in 2012.  In the fourth quarter of this year, tight feed stocks and the seasonal uptick in the slaughter of cows is expected to support price.

 

The demand setup remains strong as emerging markets, particularly in Asia, increase beef consumption and US exports continue to grow rapidly.  In September, beef shipments were up double digits.  We believe this is a negative for WEN, TXRH, and CMG. 

 

 

Chicken – BWLD

 

Chicken wing prices continue to march higher as year-over-year as chicken processors cut production and the year-over-year demand dynamics also support price.  We are confident that wing price inflation is going to escalate into 1Q12 and put pressure on Buffalo Wild Wing’s margins and pricing power.  Please see our note (“BWLD: PARTY’S (ALMOST) OVER” 11/16) for further details.  Chicken wing prices are now up year-over-year for the first time since 2Q10 (chart below).

 

 

Grains – WEN, TXRH, CMG, PNRA, PZZA, DPZ

 

Grains’ decline over the last week is a positive for the restaurant industry.  As a word of caution, prices need to come down considerably for protein producers to feel any relief and the benefit of that to pass through to purchasers and consumers.  For PNRA and the pizza names, the decline in wheat is a positive.  AgResource is predicting that the 2012 global wheat crop will be flat while the corn crop, due to a projected increase in U.S. production, will be up year-over-year. 

 

 

Dairy – CAKE, TXRH

 

Dairy moved sharply higher over the last week despite concerns about soft economic trends in Europe.  The recent spike in prices is a concern for The Cheesecake Factory and Texas Roadhouse and comes as global dairy supplies have been increasing.  For CAKE, in particular, we see this as having an impact on gross margins.  Management, earlier in the year, guided to favorable dairy prices in the fourth quarter on a year-over-year basis. 

 

WEEKLY COMMODITY CHARTBOOK - levels 1116

 

 

CORRELATION TABLE

 

WEEKLY COMMODITY CHARTBOOK - correlation 1116

 

 

CHARTS

 

Coffee

 

WEEKLY COMMODITY CHARTBOOK - coffee 1116

 

 

Corn

 

WEEKLY COMMODITY CHARTBOOK - corn 1116

 

 

Wheat

 

WEEKLY COMMODITY CHARTBOOK - wheat 111

 

 

Beef

 

WEEKLY COMMODITY CHARTBOOK - live cattle 1116

 

 

Chicken – Whole Breast

 

WEEKLY COMMODITY CHARTBOOK - chicken whole breast

 

 

Chicken Wings

 

WEEKLY COMMODITY CHARTBOOK - chicken wings 1116

 

 

Cheese

 

WEEKLY COMMODITY CHARTBOOK - cheese 1116

 

 

Milk

 

WEEKLY COMMODITY CHARTBOOK - milk 1116

 

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


Apparel Strength Onward

 

Sports Apparel Sales continue to remain strong despite more difficult compares. We like FL and FINL into the quarter but these trends suggests a solid start to Q4 on the apparel side.

 

Additional Noteables:

  • Athletic Specialty Sales continue to outperform the other channels with strength in both pricing and units driving the 16% growth over 32% LY (this is the peak compare for the channel for the remainder of year)
  • Outerwear continues to ramp earlier than in years past with growth north of 20% over the last 9 weeks; a potential pullback in unit sales looms but it is a better margin event on the whole. This is also positive for COLM & TNF – the latter of which is on a tear (see chart below)
  • Basketball continues to grow LSD despite the increasing likelihood that the 2011-2012 NBA season is no more; Basketball looking more and more like a fashion play over performance
  • Adidas continues to gain share but on a base of 8-10%
  • Champion, which is about 15% of HBI’s total sales, has taken a rather dramatic turn down over the past two weeks. We initially viewed this an anomaly. Now we’re not so sure. 

Apparel Strength Onward - sports apparel tables 11 16 11

 

Apparel Strength Onward - outerwear 11 16 11

 

Apparel Strength Onward - athletic specialty 2 yr

 

 


BWLD: PARTY’S (ALMOST) OVER

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

Analyst

 


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THE HBM: SBUX, WEN, BOBE

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Commodities

 

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

 

 

SUBSECTOR PERFORMANCE

 

THE HBM: SBUX, WEN, BOBE - subsector fbr

 

 

QUICK SERVICE

 

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.

 

 

CASUAL DINING

 

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

Analyst

 


THE M3: JUNKET COMMENTS; MACAU GRAND PRIX; PACKAGE TOURS; CASH HANDOUT

The Macau Metro Monitor, November 16, 2011

 

 

VERY IMPORTANT PERIOD Inside Asian Gaming

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. 

  

RATES OF MACAU HOTELS SHOOT HIGH DURING GRAND PRIX WEEK Macau Daily News

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.  

 

VISITOR ARRIVAL STATS TELL US WHAT WE SUSPECTED Intelligence Macau

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.

 



MACAU OBSERVATIONS

From a quick trip to Macau 

 

 

Overall

  • 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

Wynn

  • 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

SJM

  • 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 

MPEL

  • 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

LVS

  • 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

Early Look

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