DNKN is trading at 14.75x EV/EBITDA NTM.  The multiple has come in as the float has expanded (secondary) but other higher quality growth names like SBUX and DPZ continue to trade at a discount to DNKN at 11.6x and 11.5x, respectively.


Dunkin’ Brands is in the news today announcing 25 new Dunkin’ Donuts and 2 new Baskin-Robbins locations set to open in Louisiana over the next several years.  As we have written in the past, comparable sales growth is important for Dunkin’ Donuts but, given that the Dunkin’ Donuts business is 97% franchised, new unit openings are far more important for EPS growth. 


The premium multiple assigned to DNKN by the Street, then, is largely dependent on the “white space” growth opportunity that lies west of the Mississippi.  Management has stated its goal to double the store base within 20 years.  In order to do this, the company must build a backlog of stores that will allow them to open 500 stores per year beginning in 2013, up from a projected range of 220-240 in 2011 (more or less flat versus 226 domestic development agreements last year).


The chart below shows two columns; the first illustrates the openings that have occurred over the past three quarters and what the company will need to open in 4Q to meet the midpoint of the 220-240 openings range for 2011.  The second, on the right, indicates the contracted openings that have been announced thus far in 2011.  The announcements of new contracted openings typically guides to the openings happening “over the next several years”.  Below the chart, we have included bullet points detailing the markets and quantity of stores detailed in each announcement of 2011.  It is also worth bearing in mind that announcements do not equal openings; attrition is a very real risk to these numbers.  Like with cash flows, a nearby penny is worth a distant dollar.


WHAT DOES DNKN RUN ON? - dunkinbacklog


  • April 27th, 2011 – Dunkin’ Donuts announced six new restaurants in Cincinnati.  Gilligan Oil Company, LLC, an existing franchisee is the development partner.  The six stores will be added to Gilligan’s set of locations and will be open and operating by 2016.
  • April 27th, 2011 – Dunkin’ Donuts announces five new restaurants in North Kansas City.  The first restaurant will open in 2012 and the remaining four units will be developed by 2016.  An agreement was struck with Savoureux Corporation to develop restaurants.  HEDGEYE: Why is there such a back-loading of the schedule of unit openings in this agreement?
  • August 3rd, 2011 – Dunkin’ Donuts announces development of eleven new restaurants in Little Rock, Arkansas.  Seven units are to be developed in Ft. Smith and Northwest Arkansas by Littlefield Oil Company.  The first restaurant is slated to open in 2012 with the remaining six to open by 2018. The remaining four units are to be opened by Eric McDuffie and Sam Carter in Hot Springs and Benton.  The first unit is scheduled to open in 2012 and the remaining locations are scheduled to open by 2015.  HEDGEYE: Again, why is there such a back-loading of the schedule of unit openings in this agreement?
  • August 3rd, 2011 – Dunkin’ Donuts announces twelve new restaurants in Cedar Rapids, Iowa.  The development agreement was signed with Eastern Iowa Food Service, Inc.  The first restaurant is slated to open in 2012 and the remainder by 2018.
  • October 31st, 2011 – Dunkin’ Donuts announces eighty-six new restaurants in Washington D.C. (really 64 “new” contracts – the 86 included 22 previously contracted restaurants).  15 development agreements were signed over the past year.
  • November 29th, 2011 – Dunkin’ Donuts announces twenty-five new restaurants and two Basin-Robbins locations in Louisiana.  6 development agreements were signed.  The schedules of each developer’s unit openings vary but, similar to the other announcements of 2011, the schedules are back-loaded 4 or 5 years out.

The number of contracted openings is clearly not increasing at the same rate that stores openings are accelerating.  We need to see that backlog grow considerably to gain confidence in management reaching of doubling the store base within 20 years.  The lack of disclosure during the most recent earnings call as to where the backlog stands was, in our view, less than encouraging.  K-Cups may drive same-store sales but if it is earnings growth you are seeking as an investor, we believe there are better vehicles in the restaurant (or coffee) space.


Howard Penney

Managing Director


Rory Green


Retail: Confident Again?

Key factors for December shopping in light of today’s strong Consumer Confidence reading.


Let’s add some context.

a)      First off, let’s not forget that last year’s confidence reading was 59.7 and 62.4 in November and December, respectively, and peaked out at an impressive 3-year high of 73.1 by February of this year. That’s a great pre-and post holiday set-up, and is what drove 5.2% growth in Holiday sales last year.

b)      For the past two months, however, everyone was scratching their heads trying to figure out why Retail Sales and PCE were both so robust (steady-mid single digit) in light of a precipitous decline in Confidence down to 41.2. No fewer than 20 people asked me “what’s the disconnect?”.

c)       Now we’re back to declaring victory for Retail because Confidence rebounded to a 56.2 level. Perhaps it should have been there all along over the past two months? Seriously…Check out the chart below. It’s as if the government’s BLS and BEA numbers simply ignored the 3-month decline in confidence – or the other way around.


Retail: Confident Again? - PCE  Retail Sales  Comps  Consumer Confidence  1 yr


Aside from Consumer Confidence, here’s Hedgeye’s updated Consumer Income Statement along with some observations for the month of October (Note: this is VERY rear-view mirror as the data is on a one-month lag).


Retail: Confident Again? - Consumer Income statement ACTUALS


Retail: Confident Again? - Consumer Income statement ESTIMATES

The punchline…

  1. Gross personal income slowed by 40 bps to 2.9%, with an interesting shift in mix. The unemployment rate went from 9.1% to 9.0%, but the rate for those with a college degree (that had otherwise been improving all year) eroded by 20 bps to 4.4%. The rate for those without a degree improved by 10 bps, and stands a full 50bps better than last year.  
  2. Here’s a funny one for you…(if not sad), the consolidated personal tax rate came in at 11%, up 10bps sequentially, but a full 150bps higher than last year.. That’s a direct hit to consumption. So what did the consumer do? You guessed it. The personal savings rate came down by another 10bps, and is 190bps below last year. The consumer, as always, is finding room to spend. This rate is sitting at a 3-year low. It can always head towards zero, but the set-up into 2012 would be downright scary, and worthy of me getting overtly bearish on virtually every part of retail.  

So what does this mean for Q4?

In our previous note “Retail: Key 4Q Themes” we highlighted 3 themes that emerged in the third quarter and will weigh heavily on Q4 execution:

  • Driving Operating Expenses Higher:  This was a common theme across all sub-categories -- especially among the poorer quality companies that need to catch up on years of deferred spending. Whether it be in the form of incremental marketing, added head count, or various IT improvements (e.g. mobile POS functionality), retailers are having to work harder and spend more to drive sales.
  • Price Elasticity: Simply put, the better the product, the lower the elasticity. This has nothing to do with price. It’s all about perceived value.
  • The Inventory Growth/Gross Margin Trade-Off: Five sequential quarters of sales/inventory erosion without commensurate decline in margins is absolutely unsustainable. There’s meaningful Gross Margin risk if the consumer does not comp the 5.2% holiday performance last year.

Downgrade Dominoes

Conclusion: Based on the potential for negative deltas across a few rather important credit ratings in a specified order, we think it will pay to stick with our King Dollar and Eurocrat Bazooka theses throughout the intermediate term.


This morning, in our firm-wide internal research meeting, Tom Tobin, Josh Steiner, and Keith McCullough all shared various thoughts on the ratings downgrade catalyst calendar. While we do not find much value in the opinions of ratings agencies, we do accept the implications that these downgrades have on market prices and financial market risk via hardwire ratings linkages with financial institutions and the perceived creditworthiness of bailout schemes such as the EFSF.


Given, we’ve decided to take the opportunity to quickly highlight what the calendar looks like on this front, which shows serious headwind of credit downgrade risk:


Downgrade Dominoes - 1


The recent and relevant commentary from the ratings agencies is as follows: 

  • Moody’s: “Moody's Investors Service has today placed on review for downgrade all subordinated, junior subordinated and Tier 3 debt ratings of banks in those European countries where the subordinated debt still incorporates some ratings uplift from Moody's assumptions of government support, with the potential complete removal of government support in these ratings. The review will affect 88 banks in 15 countries in Europe with average potential downgrades of subordinated debt by two notches and junior subordinated debt and Tier 3 debt by one notch... The review has been caused by the rating agency's view that within Europe, systemic support for subordinated debt may no longer be sufficiently predictable or reliable to be a sound basis for incorporating uplift into Moody's ratings…The banking systems and number of banks affected by the review are in the following countries: Austria (9), Belgium (3), Cyprus (2), Finland (3), France (8), Italy (17), Luxembourg (3), Netherlands (6), Norway (5), Poland (1), Portugal (2), Slovenia (2), Spain (21), Sweden (4),Switzerland (2). A list of affected institutions is attached:
  • Standard & Poor’s [per French newspaper La Tribune yesterday]: "It [revision to negative outlook] could happen within a week, perhaps 10 days." La Tribune further reports that it canceled at the last minute such an announcement that was originally supposed to accompany last Friday’s downgrade of Belgium. Recall that last week Fitch reiterated France’s AAA LT/LC rating, but that it would have “limited room” to absorb new fiscal shocks without endangering that status (i.e. backstopping it’s banking system or other large European sovereigns – both things France is likely to have to commit to doing in 2012).
  • Fitch: “The rating Outlook on the Long-term [U.S. sovereign LT/LC debt] rating is revised to Negative from Stable… The Negative Outlook indicates a slightly greater than 50% chance of a downgrade over a two-year horizon. Fitch will shortly publish its revised economic and fiscal projections for the U.S. and will conduct a further review of its sovereign ratings in 2012. However, in the absence of material adverse shocks, Fitch does not expect to resolve the Negative Outlook until late 2013, taking into account any deficit-reduction strategy that emerges after Congressional and Presidential elections.” 

As you can see from the aforementioned timing setup, we think there will be an opportunity to re-short the EUR vs. the USD (among other things) throughout the intermediate term – a view supported by this singular factor of potential negative deltas across a few rather important credit ratings in a specified order. While we would never gain conviction on any long or short position using a simple one-factor model such as this one, this is an incremental factor among a myriad of supportive data points for our intermediate-term King Dollar & Eurocrat Bazooka positioning, which is manifested in our current positioning below: 

  • Long the US Dollar;
  • Long long-term U.S. Treasuries and a Treasury curve flattener;
  • Long U.S. investment-grade corporate bonds;
  • Short French equities;
  • Zero percent allocation to U.S. money center banks; and
  • Zero percent allocation to European equities or credit. 

For the sake of brevity, we’ll keep it tight here. Email our sales team at if you’d like to dialogue further regarding any of the above; Steiner’s Financials team and Tobin’s Healthcare team have done a great deal of work regarding ratings linkages, etc. and the U.S. debt/deficit outlook.


Be mindful of that Global Macro calendar!


Darius Dale



Downgrade Dominoes - 2

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Trade Update: Covering Hong Kong

Conclusion: We continue have a fundamentally negative outlook for the slope of Asian economic growth over the intermediate-term TREND and trading Hong Kong with a bearish bias around our quantitative levels remains our favorite way to play that view on the equity front.


Earlier this afternoon, Keith covered our short position in Hong Kong equities in our Virtual Portfolio for a decent gain vs. our cost basis. We continue have a fundamentally negative outlook for the slope of Asian economic growth over the intermediate-term TREND and trading Hong Kong with a bearish bias around our quantitative levels remains our favorite way to play that view on the equity front.


As mentioned in prior notes, we specifically like Hong Kong on the short side (relative to other alternatives) because of the following domestic factors/catalysts: 

  1. Pronounced domestic stagflation will continue to compress corporate earnings growth over the intermediate term;
  2. An inflecting property market will weigh on credit quality across the banking sector; and
  3. Slowing global growth will weigh on Hong Kong economic growth, which is among the world’s top two trade-oriented economies.  

Trade Update: Covering Hong Kong - 2


Trade Update: Covering Hong Kong - 3


Trade Update: Covering Hong Kong - 4


We’ve been bearish on Hong Kong equities in print since May 24th and, since then, that research/risk management has produced a substantial amount of alpha (Hang Seng Index down -19.7% vs. a median decline of only -10.5% across Asia’s other benchmark equity indices).


For those of you less familiar with our thoughts here, we encourage you to review our research on this idea and the associated thematic analyses: 

Lastly, our proprietary quantitative risk management levels are included in the chart below.


Darius Dale



Trade Update: Covering Hong Kong - 5

Shorting France (EWQ): Trade Update

Positions in Europe: Short France (EWQ)

Keith shorted France via the eft EWQ in the Hedgeye Virtual Portfolio today with the etf broken on its immediate term TRADE and intermediate term TREND lines (see chart below). 


Shorting France (EWQ): Trade Update - 1. EWQ


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. Moody’s put France’s credit rating on watch back in October; last night La Tribune rumored that within 10 days Moody’s will place France's AAA rating as “negative outlook”; today Moody’s said it may cut EU subordinated bank debt (including a review of SocGen); and in late November Fitch Ratings warned that France’s AAA credit rating would be at risk if the crisis intensifies.


The likelihood of a rating cut comes as no great surprise to us. 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 22%, behind Germany at 29%.


Shorting France (EWQ): Trade Update - 2. efsf


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, and we expect growth to come in below estimates.


On the banking side, France is the largest holder of Italian public debt ($106.8B) and private debt ($309.6B) of any country according to June BIS report, which compounds risk given Italy’s own debt imbalances and investor uncertainty around leadership in the wake of Berlusconi.


Early this month Sarkozy’s government 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. 


Matthew Hedrick

Senior Analyst

India: Shift in FDI Policy Opens Doors to Retailers


Conclusion: India is easing its policy on foreign retailers. Not huge now, but  10-years ago, no one cared about China. Those successful there today are the ones who invested when no one cared.



India is easing its policy on foreign direct investment (FDI) – a positive shift for global retailers.


For those of you who are tired of talking about Black Friday, Cyber Monday, etc., here’s a big picture point to chew on…


The Indian government has agreed to allow 51% FDI in multi-brand retail and 100% FDI in mono-brand retail in an effort to help buoy the currency. This effectively opens the door to one of Retail’s most attractive international markets to (aspiring) global retailers.


Previously, multi-brand retailing was forbidden in India and the country restricted mono-branded retailers to 51% ownership requiring a local partner. The new shift in policy no longer blocks the likes of Wal-Mart, Carrefour, or Tesco from entering the market and enables mono-brand retailers to pursue more aggressive self-funded expansion plans (ie Nike, VFC, etc…).


As a point of reference, the Indian retail sector is currently worth approximately $450-$500Bn in USD, but has been growing at a HSD-LDD digit rate over the last few years One recent study called for the market to double by 2015.


Sounds like a lot, but keep in mind that India’s per capita GDP stands at US$1,477, while China currently sits at about $4,393. So perhaps not a stretch. No, India is not China, and vice/versa. There are distinct geopgaphical, cultural and idealogical differences that make them both distinct.


Also, keep in mind that with just ~6% of India’s retail distribution organized (i.e. not via stalls, etc.), it will take years for investment from global players – especially multi-brand retailers – to establish adequate supply chains to make meaningful progress so we need to be mindful of near-term expectations.


But 10-years ago, no one cared about China. It was not every other word out of a CEO’s mouth because the core markets are too mature to grow. The companies that are successful there today are the ones who invested when no one cared.


While India accounts for roughly 1% of the global luxury market compared to China at closer to 10%, the opportunity for global retailers is clearly evident. Several companies like VFC, SHOO, and others have already established a foothold with local partners. For a company like VFC, which has clearly outlined its plan to grow sales in India from ~$50mm in 2010 to over $200mm by 2015 accounting for a mere 20bps of growth annually, this announcement could accelerate efforts in the region. Either way, we expect India to quickly become part of the expansion dialog among retailers – particularly with the reality of slowing growth across much of Europe and China.


India: Shift in FDI Policy Opens Doors to Retailers - India China GDP per capita


India: Shift in FDI Policy Opens Doors to Retailers - India China GDP



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