M: Has Its Time Come?

I did not like M in 4Q, and I was dead wrong. But the thesis still holds, and we're starting to get indications on the fringes that one of the biggest consensus longs in retail could finally face some intense pressure. 



In hindsight, these Macy's management changes make sense.  Ron Klein, Macy's Chief Stores Officer, and the 4th top executive in the company, is stepping down.  This happened a day after the top management team was paid a cash dividend for a 2-year performance incentive plan. In fairness, it was not an options exercise, or flat-out stock sale. But a dividend that was put to them on a pre-determined date. The verbiage from yesterday's 8k is actually quite clear.


This is however, excellent timing for Mr. Klein. The consensus is looking for a robust 4% top line growth rate at Macy's alongside a peakish 40% gross margin for the next two years. I'll give 'em one or the other, but not both. Our particular concern is the competitive landscape, and the falling dominoes that are being set in motion by JC Penney (and perhaps Sears), as Target, Kohl's, Macy's of the world WILL have a planned response. But their planned response probably does not account for the planned response of others. Welcome to the world of retail.



From Yesterday's 8K

In accordance with the terms of the 2008-2009 stock credit plan, earned performance-based stock credits and time-based stock credits were all subject to two-year and three-year holding periods commencing on January 31, 2010 with their ultimate value to the participants dependent on Macy's stock price. The value of one-half of the stock credits, with dividend equivalents accrued during the holding period, was required to be paid in cash to the senior executives at the conclusion of the two-year holding period (with an automatic payment on or about January 30, 2012). The value of the remaining one-half of the stock credits, with dividend equivalents accrued during the three-year holding period, is required to be paid in cash to the senior executives at the end of the three-year holding period (with an automatic payment on or about February 4, 2013).



The stock credit plan provides that the value of the stock credits is determined on the basis of the average closing price of Macy's common stock as reported on the New York Stock Exchange for the 20 business days preceding a payment date. For the January 30, 2012 payment, this value was $34.25 per share.



The named executive officers received the amounts shown below with respect to the 2008-2009 stock credits for which the two-year holding period ended as of the end of fiscal year 2011. Janet Grove, a named executive officer in the March 30, 2011 proxy statement, retired during fiscal 2011 and is not listed below.



Stock Credit Dividend

Value Equivalent


T. Lundgren $6,357,879.90 $141,850.83

K. Hoguet $1,397,017.43 $31,168.52

T. Cole $1,397,017.43 $31,168.52

R. Klein $1,068,315.73 $23,834.91


This week’s commodity chartbook shows significant gains in grains and chicken wing prices along with declines in beef, coffee, and chicken breast prices.  Below is some commentary pertaining to select commodities and the companies that have exposure to them.  Further on, we show the latest price charts of select commodities. 






Beef prices impact the prices of most restaurant companies but WEN (20% of food and paper spend), JACK (20% of commodity basket), TXRH, and CMG are especially exposed.  Even companies that do not buy beef on the spot market are expecting significant margin pressure due to beef costs in 2012.  The chart of live cattle prices, in the “charts” section of this post, below, shows just how far prices have run. Grain prices gaining over the past couple of weeks do not bode well for investors hoping for a rapid snap-back.




Last Friday, the biannual cattle inventory report on Friday offered no surprise; short supplies and higher prices look likely over the next few months, at least.  The impact of the 2011 drought is obvious in the numbers: cattle numbers in Texas are down by 11% from a year ago, and numbers in Oklahoma are down by 12%. Cattle and calf numbers in Florida, Mississippi, Nebraska and Wyoming were up by 5%, 6%, 4% and 5% respectively.


One point worth noting is that beef replacement heifers were up by 1% year-over-year.  A replacement heifer is a young, female bovine that is raised for the purpose of replacing and improving the cow herd.  This could suggest that producers in certain areas have begun to react to attractive prices by starting the process of expanding their herds.



Beef shipments strengthened for the week ended January 21st by 1,956 metric tons versus the week prior’s 13,128 as Mexico, Japan, and Canada purchased 5,100 MT, 3,000 MT, and 3,000 MT, respectively.



Chicken Wings – BWLD


Traditional chicken wing prices comprise 20% of sales, from a COGS perspective, for BWLD and we expect that the elevated level of wing prices will pressure EPS and bring estimates lower.  FY12 estimates have not moved materially over the last few months, despite a steep gain in wing prices.  4Q11 estimates have gained, and the stock price has traded well over the last few days.  Our thesis on the stock remains intact; we do not think the strong 4Q results which we and the market, obviously, are anticipating detract from our view.  FY12 estimates need to come down, management guidance and tone needs to be revised from prior discussion on FY12 outlook, and the company still does not have the right to grow (fully capitalized sales to investment ratio of 0.91). 




Egg sets are still down ~5% versus a year ago as the food processor industry continues to search for profit.  At the same time, wing prices continue to move higher.







We believe that the food service industry will continue to focus on chicken to offset the elevated levels of beef prices in 2012. 



Wheat/Corn – WEN, TXRH, CMG, PNRA, DPZ


Grain prices have been climbing for the past two weeks.  Bernanke’s sustaining of dollar-bearish monetary policy does not bode well for investors looking for substantially lower feed costs. 




Wheat is trading higher today as cold temperatures in Europe and Russia may damage the winter crop. 

According to the Congressional Budget Office, improving yields in the U.S. over the next ten years should lead prices lower from current levels.  In the near-term, however, lower yields in Argentina continue to support corn prices.  Adversely dry and hot weather conditions are being blamed for the reduction in the Argentine crop.




Demand for grains should remain strong as demand for proteins, globally, remains strong.  In terms of news flow, the supply side of the grains set up has been garnering more attention over the past week.






























Chicken – Whole Breast





Chicken Wings















Howard Penney

Managing Director


Rory Green



Another solid quarter.



“Ameristar’s fourth quarter financial performance capped off a record-breaking year that was driven by our consistent delivery of a superior guest experience, focus on cost management and effective marketing... Our ability to generate significant free cash flow has allowed us to make substantial debt repayments, increase our quarterly dividend and opportunistically repurchase shares and pursue growth"

- Gordon Kanofsky, Ameristar’s Chief Executive Officer




  • Excluding share repurchases, YoY EPS would have still increased by 6% YoY
  • Continued to implement central best practices across all properties, which clearly helped their results
  • Promotional efficencies and favorable weather helped the quarter
  • There was a one time $5.6MM stock comp impact in the quarter resulting from equity reward modifications that accelerated the recognition of the expense. This impacted EPS by $0.16
  • The only gaming company that continued to pay dividends from 2008-2011 - only missing one quarter during that period 
  • Dividend for 2012 is only 10% of their FCF and therefore a very sustainable level
  • New Kansas City facility will open next quarter and the bridge by their St Charles facility will have some construction - which will lead to a complete bridge closure by November 2012 for about a year and that will negatively impact them. However, there are alternative routes to get to their facility
  • $15-20MM will be a normal maintenance capex run rate per quarter in 2012
  • Will pay down $155-165MM of debt for the year and $xxMM in 1Q12
  • Shares should be about 34MM in 1Q12
  • MA: 25% gaming tax rate, no limit on positions, 3 casinos in 3 regions and a racino with a 40% tax rate
    • ASCA site in Springfield, MA: 27 miles from Hartford and 86 miles from Albany, 74 miles from the closest existing casino
    • Springfield has the largest population in Western MA
    • There are 2.45MM adults within a 50 mile radius with a total household income of $106BN with only 1 future casino within a 50 mile radius. This compares to St Charles which has 1.98MM adults within a 50 mile radius with a total household income of $82.6BN and 6 casinos within a 50 mile radius 
    • Minimum of $500MM spend and $85MM licensing fee


  • Nebraska gaming legislation is very preliminary, they are hopeful that nothing will move forward in the term
  • To maximize their chances in Springfield it doesn't make a lot of sense to pursue a lot of other greenfield opportunities - would rather look at an acquisition. They do look at everything however
  • They are looking at pursuing I-gaming
  • MA will be a substantial facility, enough to compete with the CT facilities although not as large. It will be a full scale facility for them
  • Goal is to be in a position to present a license application to show that they will have no financing contingency for whatever they want to build in MA
  • Seeing decent degree of stabilization across their markets. There are some indicators that point to a recovery but its too soon to tell.
  • Yes the farm economies are doing well
  • Flow-through in 2012 should continue to be strong
  • The bridge won't be completely closed near St Charles - just a partial closure. So they think it will be a short term, manageable impact. They learned how to manage around this sort of thing in East Chicago.
  • Corporate expense increase is mostly due to their development efforts in MA
  • Thinks that their gains in East Chicago are sustainable
  • Gaming tax rate reduction will be a topic of discussion in Colorado this year
  • They are pushing maximum margins at their properties until revenues increase
  • 4Q tax rate:
    • Costs that were built into the stock buyback that weren't deductible and hit them in the 4Q
  • CZR's is still a formidable competitor and not asleep at the switch, but the competitive environment has remained stable and rational
  • Cline Avenue Bridge- replacement talks are going on behind close doors. Its been radio silent over the last 60 days. Plan is for the state to turn over the bridge to the city and for the city to enter into an agreement with a private contractor using tolls to pay for the repair.
  • One of their core goals is to strive for continuous improvement.   



  • "Council Bluffs... benefited from market share growth and overall market strength."
  • "East Chicago had a 2.6% year-over-year decline in net revenues that was mostly attributable to a new competitor in Des Plaines, Illinois, partially offset by market share growth in the more immediate Northwest Indiana market."
  • "Notably, Jackpot and Black Hawk delivered Adjusted EBITDA margin improvements of 8.4 percentage points and 5.3 percentage points, respectively."
  • Balance sheet info:
    • $257MM of borrowing capacity under the R/C
    • Total Net Leverage Ratio: 5.04x vs. a 7.0x covenant
    • Senior Secured Net Leverage: 2.53x vs. a 4.5x covenant
    • Interest Expense Coverage: 2.62x vs. a 2.0x covenant
  • 4Q Capex: $36.5MM, "included a $9.3 million settlement payment to the general contractor for our St. Charles hotel construction project completed in 2008."
  • In 4Q, ASCA repurchased 200k shares for $2.4MM
  • 1Q12 outlook: 
    • D&A: $26.5MM to $27.5MM
    • Interest expense (net of capitalized interest): $26.5MM to 27.5MM (including $1.4MM of non-cash interest)
    • Tax rate: 43-44%
    • Stock comp: $4.5MM to $5.0MM
    • Capex: $31MM to $36MM (including $16MM MA land purchase)
    • Corporate expense (ex stock comp): $12.5MM to $13MM
  • 2012 outlook: 
    • D&A: $105MM to $110MM
    • Interest expense (net of capitalized interest): $103.5MM to $108.5MM (including $5.5MM of non-cash interest)
    • Tax rate: 43-44%
    • Stock comp: $14.8MM to $15.8MM
    • Capex: $85MM to $90MM (including $16MM MA land purchase)
    • Corporate expense (ex stock comp): $52MM to $53MM

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Short Selling Opportunity: SP500 Levels, Refreshed

POSITION: Long Energy (XLE), Short SP500 (SPY)


So, the HedgeyEconomics model says that as inflation expectations (prices) accelerate, growth slows sequentially. That’s the fundamental reason why I am shorting the SP500 (SPY) today. I think most late January and early February growth data slows.


On the other side of that, I’m long Bernanke’s Policy To Inflate (Energy –XLE). Not good for the country (real-growth), but it’s good for our P&L’s while it lasts. Perverse, but true.


Across all 3 durations in my risk management model, the quantitative view supports this Short Selling Opportunity:

  1. Immediate-term TRADE overbought = 1327
  2. Immediate-term TRADE support = 1317
  3. Long-term TAIL support = 1267

So, theoretically, I’m in this short position for at least 10 SP500 points. But the beauty of embracing uncertainty is that I can, at any time, throw the theoretical out the window. If 1317 breaks, then it’s a long way to 1267.


Right here, right now, this is the high probability move in my model, so I’m making it for the 1sttime in 2012.




Keith R. McCullough

Chief Executive Office



Short Selling Opportunity: SP500 Levels, Refreshed - SPX.02.01.12

WMT: Trade Update

Keith managing risk around one of our high conviction TREND and TAIL longs by selling WMT from the Hedgeye Virtual Portfolio.


WMT is immediate-term TRADE overbought; no change to the fundamental call.


WMT: Trade Update - WMT






Comments from CEO Keith McCullough


It’s February, welcome to round 2 of the inflation/deflation/reflation game of expectations:

  1. CHINA – immediate-term growth expectations are coming down in a hurry now that commodity inflation expectations are rising – last night’s PMI print of 50.5 was not only a miss vs uninformed whispers (sad), but was a sequential deceleration in the slope of improvement (hard to beat the DEC v-bottom vs NOV). Chinese stocks closed down -1.1% on the news, and they should have.
  2. GERMANY – just absolutely ripping this morning on a big breakout above my long-term TAIL line for the DAX of 6503. Germany’s stock market is now up +11.7% YTD! (vs SPX +4.3%) as the old Bundesbankers prove out that there is an economic model that resides right of left-center (Keynes).
  3. TREASURIES – kaboom! US Growth expectations are getting hammered into the hole now w/ 10yr yields hitting YTD lows this morn at 1.81%. A lot of people will convince themselves that US stock futures up is whatever they want it to be, but I see that simply as inflation expectations rising which, in turn, slow growth even further. The Yield Spread hitting its lowest YTD at 161bps wide – should put a lid on the Financials at $XLF 14.24.


After 4 consecutive down days in the SP500, we’re due for another low-volume bounce to another lower long-term high. Immediate-term resistance = 1323.





THE HBM: WEN, JACK, MRT - subsector fbr





WEN: Wendy’s was cut to “Neutral” at Roth Capital.


JACK: Jack in the Box was initiated “Buy” at Lazard.





WEN: Wendy’s traded down -6.4% on accelerating volume. See our note from Monday; this concept needs $3.7 billion to right itself and become competitive again. 





MRT: Tilman Fertitta announced today that this wholly-owned company, Fertitta Morton’s Restaurant’s, Inc., has successfully completed a tender offer for all of the outstanding shares of common stock of MRT at $6.90 per share.





BWLD: Traded up 2.2% a week ahead of earnings.  We think the forward commentary will be bearish for the stock.


KONA:  Traded down -13% on accelerating volume after appointing Berke Bakay as president and CEO



THE HBM: WEN, JACK, MRT - stocks



Howard Penney

Managing Director


Rory Green



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