We were dead wrong on 4Q and this squeeze higher definitely hurts.  2012 is far from a done deal, however.


BWLD printed $0.73 4Q11 EPS which was six cents above the street.  $0.04 was due to a favorable tax rate but, that said, the top-line was exceptional.  Our short thesis on the stock was based largely on increasing costs and margin compression in 2012.  While we did see compression in operating margins in 4Q, the top line strength rendered that less relevant than we had anticipated it to be.  We have been consistent in our view that 1Q was the quarter where Buffalo Wild Wings would be hurt by sky-high wing prices and we still believe that inflation will be a factor in 1Q results.  What we were not ahead of, however, was quite how strong the top-line would be for BWLD.  Clearly the company is having great success driving the top line though advertising and successful new unit openings and this, at least for now, is more than enough to satisfy investors.  With 1Q to-date comps at +12.9%, the stock’s reaction is understandable but we believe the surge will subside a little tomorrow as some – albeit tangential – issues around the quarter are worked into the equation. 





Company-owned comparable restaurant sales grew +8.9% versus consensus of +6.3% while franchise comps came in at +5.9% versus expectations of +5.1%.   As an additional positive, management disclosed that 1Q to-date comparable restaurant sales are running at +12.9%.  4Q new unit volumes grew by 53% year-over-year and the company is expecting 60 new locations in 2012.


Advertising was effective for BWLD in 4Q as the company bought media in additional markets while raising its social media presence.  Alongside record viewing of NFL football this season, advertising was highly impactful for the company and we underestimated this in our thought process around how the top line would shake out.


Another factor we were wrong on was the impact of gift cards.  The holiday gift card program was extended, particularly in retail outlets, and this helped more than double gift card sales during the 2011 holiday season.  For 1Q to-date, gift card redemption has accounted for roughly 3% of comparable restaurant sales growth.  Management stated that redemptions of gift cards, which are generally purchased around the holiday season, tend to be focused through the first couple of months of the year.


BWLD: OUCH - bwld pod1




Restaurant operating margin came in at +8.4%, which was down 50 basis points year-over-year and 30 basis points below consensus.  If there was one sign of potential trouble from the quarter, it was this; margins declining on an 8.9% comp with commodity costs flat but turning into a headwind in 1Q is a cause for concern.


Cost of sales came in at 29.4% of sales or 60 bps higher than last year.  Traditional chicken wings were at $1.42 per pound for the quarter, 5% below 4Q10’s average price of $1.49.  Traditional wings comprised 20% of restaurant sales while boneless wings made up 18% of sales in the fourth quarter.  For the first two months of 2012, traditional wing prices are averaging at roughly $1.89 per pound versus $1.22 a year ago, an increase of 55%.  Management was not giving any firm guidance as to how this inflation would be dealt with but did say that strong same-store sales growth and new unit openings would continue to help the company manage through the inflationary pressures.


Other factors driving 4Q11 operating margin were labor, which was flat year-over-year as a percentage of sales, occupancy costs, which declined by 60 bps year-over-year, D&A, which was flat, and G&A, which was 8.8% of sales or 9.2% lower than 4Q10.




The tax rate benefitted EPS by $0.04, coming in at 27.8% versus 32% last year.  This benefit was due to unexpected tax credits.


2012 Outlook

  • Potential  price benefit in 1Q roughly 1.8%
  • Will increase advertising presence in national and local media during college basketball season
  • Excluding traditional wings, commodity inflation estimated to be ~4% higher than 2011.
  • Company expecting leverage over labor and operating expenses with high same-store sales trends.
  • Maintaining 20% EPS growth guidance for 2012.



This was a strong quarter from a top line perspective.  Comps and new unit volumes were far better than we had modeled.  However, going forward it is important to think about how this flows through to the bottom line to generate EPS growth.  Operating margins did contract year-over-year despite the strong top line trends and we see costs increasing in 1H12 from 4Q11.  Inflation will be high during the first half of the year and, while management did say that additional pricing is something being contemplated for 2012 that could have an adverse impact on traffic.  With a normalized tax rate, a rolling off of the expanded gift card strategy, and higher costs, management will need double digit comps to achieve 20% EPS growth.  We clearly got this one wrong for 4Q but that is not to say that the risks for holders of this stock have been eliminated. 



Howard Penney

Managing Director


Rory Green



Our crystal ball is telling us that some margin compression may be in LVS’s future.  



While everyone is focused on the weekly and monthly top-line numbers out of Macau, we think margin pressure is building, particularly for LVS.  Labor pressure will hit all Macau properties this year and potential upward pressure on commission rates/player rebates, and junket credit could also hurt margins.


Starting with the obvious, Four Seasons is likely to experience the most compression.  Before LVS transformed the Four Seasons into a primarily junket property, about 40-50% of VIP play at the property was driven by direct play.  For the last few years, Four Season’s all-in commission expense (including rebates) was running at under 1.1% and at least 10bps below their sister properties.  LVS recently struck pretty aggressive deals with several junkets and specifically with Neptune.  So the incremental business is coming in at a materially lower gross margin and VIP revenues are comprising a larger component of the pie – both of which should pressure margins.  Based on January’s low hold and assuming normal hold in February and March, we estimate EBITDA margins of 21% in 1Q12 and 25.5% for the full year. This compares to 33.4% in 1Q11 and 32.1% for 2011.


For Sands Macau and the Venetian, we expect mild margin compression caused by:

  • Slowing market growth and cannibalization from the opening of Sands Cotai Central
  • Labor inflation, exasperated by the opening of Sands Cotai Central
  • Pressure from junket commission consolidation

In the 4th quarter, we saw a few signs of margin creep:

  • Given the huge incentive rents being paid in 4Q, one would’ve expected better margins at Venetian and Four Seasons
  • YoY fixed costs increase at Sands and Venetian
    • Sands Macau saw the 3rd straight quarter of YoY cost increases following deep cost cuts in 2009 and holding expenses flat in 2010.  We estimate that fixed costs increased 12% in 4Q and 6% for the year.
    • After 11 quarters of fixed cost decreases, it looks like costs increased in Q4 by 3.5% YoY.  Prior cost cuts at Venetian were achieved through better expense and inventory management including the reduction of tables from 850 tables at opening to 577 tables at year-end.
  • Rebate rates shot up at Sands and Four Seasons
    • At Sands, rebates increased to 37% from 33% in 4Q10.  For the year, rebates increased to 36% from 33% in 2010
    • At Four Seasons, the 4Q rebate rate was 35% of win or 92bps vs. 28% for the first 9 months or 85bps


McDonald’s will release January sales tomorrow before market open. 


McDonald’s has been one of our favorite stocks in the restaurant space and the company continues to take share from competitors domestically.   This month is not expected to yield any huge surprise as management guided to 5.5-6.5% global same-store sales for January during the earnings call on 1/24. 


Below we go through our take on what numbers will be received by investors as good, bad, and neutral MCD comps numbers by region.  For comparison purposes, we have adjusted for historical calendar and trading day impacts (but not weather).


Compared to January 2011, January 2010 had one less Saturday and one additional Tuesday.  We expect a negative calendar shift as a result.


U.S. – facing a compare of +3.1%, including a calendar shift of between -1.3% and -0.4% varying by area of the world:


GOOD:  A print of higher than 7% would be received as a good result as it would imply a sequential acceleration in two-year average trends on a calendar-adjusted basis.  Additionally, 7% is above the guided range for global January comps and, since the U.S. business represents 45% of the operating income of the company, healthy trends in the domestic market are good for the stock. We expect the US comp to come in at 7%.


NEUTRAL: A print of between 6-7% would be received as neutral as it would imply two-year average trends that are roughly flat on a calendar-adjusted basis.  Expectations for MCD are lofty as the sell off on strong 4Q11 results indicated, and any signal that things are slowing on the margin may lead to further declines in the stock.


BAD: A result of less than 6% would imply a slowdown in two-year average trends on a calendar-adjusted basis and, therefore, would likely be received as a poor result by investors.





Europe – facing a difficult compare of +7.0%, including a calendar shift of between -1.3% and -0.4% varying by area of the world:


GOOD:  A result of 4.0% or higher would be received as a strong result as it would imply two-year average trends higher than those seen in December on a calendar-adjusted basis.  We are holding Europe to a high standard in our estimates as economic weakness has seen consumers seek out the value McDonald’s offers.


NEUTRAL:  A print between 3% and 4% would be received as neutral by investors, in our view, as it would signal a stabilization, rather than further expansion, of two-year average trends.


BAD:  A Europe comp of below 3% would be received as a bad print by investors as it would imply a slowdown in two-year average trends.  The consensus estimate for Europe comps is at 3.72%, per Consensus Metrix.


APMEA – facing a compare of 5.2%, including a calendar shift of between -1.3% and -0.4% varying by area of the world:


GOOD:  A result of 7% or higher would be received as a good result by investors as it would imply two-year average trends that are roughly flat on a calendar-adjusted basis.  The Chinese New Year fell on January 23rd in 2012 versus February 3rd in 2011 so we expect a positive impact from that on the company’s China business.  YUM also mentioned on its earnings call this morning that its business performed well in January. 


NEUTRAL: A result of between 6% and 7% same-store sales in January would be a neutral result for APMEA.


BAD:  A print of less than 6% in January would imply a significant slowdown in two-year average trends in APMEA on a calendar-adjusted basis.


Howard Penney

Managing Director


Rory Green


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Looking at the past two transactions in the restaurant space, the implied range for the PFCB is $38-$50.  We are not saying that PFCB is going to get bought any time soon, nor are we saying that the stock is set to trade to $50, but applying the 8.7x EV/EBITDA multiple FNF paid for O’Charley’s implies a price of $50 for P.F. Chang’s.


This biggest issue facing PFCB coming into the 2/16 earnings release on is guidance for 2012.  While we hold a positive view of the direction the company is being taken by management, there are difficulties ahead that may bring guidance lower for 2012.


In our view, we are likely seeing a bottoming process in PFCB earnings.  The timing or duration of this bottoming process largely depends on where guidance comes in.  However, even if management does guide down and EBITDA goes to $115 million from the current expected $125 million, the valuation range based on recent restaurant transactions is $35-46.  PFCB’s current EV/EBITDA NTM multiple is 6.4x having bounced from as low as 5x in 4Q11.  With the stock trading at $34, we do not see significant downside in this name, even in the event of a guide down.


If we wanted to recommend a stock that goes sideways, we would save ourselves the work and just direct you to WEN.  For upside to PFCB, management has to build credibility with the investment community that is has a plan to fix the business and expand the multiple further.  Part of that creditability will come from having a strategic direction that will help arrest the decline in the operating performance of the company.  Where we differ from most of the investment community as it relates to PFCB is that we believe management’s plan makes sense and that investors and analysts will get on board over the course of 2012. 


This stock is being valued lower than Ruby Tuesdays at current multiples which, we can only assume, means that consensus believes management is not improving the business.  As we wrote yesterday, we are buyers of PFCB on down days.


PFCB: ANY TAKERS? - pfcb matrix



Howard Penney

Managing Director


Rory Green










Comments from CEO Keith McCullough


Top 3 Most Read so far this morn on Bloomberg = Greece – means it probably doesn’t matter like it did 106% higher (FEB 2011):

  1. ASIA – follow the bouncing macro ball – China fails at TREND line resistance yesterday (down 1.7% overnight); Singapore’s PM warns of a Chinese “rough landing” ahead of this week’s China data; and Glenn Stevens at the RBA refused to cut Aussie int rates last night = inflation expectations in Asia rising like the chart of Brent Oil.
  2. OIL – so the price of Brent Oil is at $115.95 this morning = up +6% since the #SOTU and #BernankTax on the wk of Jan 23rd; since we know that inflation slows real-consumption growth, I think being long energy (XLE) and anything inflation really (as opposed to being long Consumer Discretionary (XLY) like we were before Jan 26th) is the right sector shift.
  3. USD – attempted to have an up day yesterday, then got pounded into the close; the US Dollar Index really needs to hold its intermediate-term TREND line of 78.69 support or Gold, Oil, etc can go a lot higher.

If I only had 1 live quote to make a call on the slope of Global Consumption growth, it would be Oil. Deep simplicity.





THE HBM: YUM, SBUX, WEN, DRI - subsector





YUM: Yum Brands reported 4Q11 EPS of $0.75 versus $0.74 consensus.  Comps in the U.S. were the big 4Q surprise, coming in at +1% versus -2.5% expectations.  China comps came in at 21% for the quarter versus 17% consensus.  See our note published last night for more details.  The earnings call is at 9:15 a.m.


YUM: KFC has opened a store in Ramallah, in the Palestinian territories.  A Pizza Hut is set to open next door.


SBUX: Starbucks is, from today, offering Starbucks Blonde Roast as a brewed option in stores across Canada.


WEN: Wendy’s shareholder Trian Fund has increased its stake to 27% from 23%.




COSI: This stock has been a rocket lately, up 13% on heavy volume yesterday.




DRI: Darden CEO Clarence Otis has received a letter from Color of Change, an activist organization, complaining about apparent racism in hiring and promotion practices.  Capital Grille was singled out as rarely hiring African-Americans for high-paying jobs.




CHUX: Shares were acquired by Fidelity National Financial





Howard Penney

Managing Director


Rory Green




TODAY’S S&P 500 SET-UP – February 7, 2012

As we look at today’s set up for the S&P 500, the range is 23 points or -1.44% downside to 1325 and 0.27% upside to 1348. 












  • ADVANCE/DECLINE LINE: -540 (-2253) 
  • VOLUME: NYSE 687.23 (-24.90%)
  • VIX:  17.76 3.86% YTD PERFORMANCE: -24.10%
  • SPX PUT/CALL RATIO: 1.78 from 1.29 (37.98%)


USD – attempted to have an up day yesterday, then got pounded into the close; the US Dollar Index really needs to hold its intermediate-term TREND line of 78.69 support or Gold, Oil, etc can go a lot higher.

  • TED SPREAD: 45.71
  • 3-MONTH T-BILL YIELD: 0.07%
  • 10-Year: 1.91 from 1.91
  • YIELD CURVE: 1.68 from 1.68

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am/8:55am: Weekly retail sales
  • 10am: Fed’s Bernanke testifies to Senate Budget Committee
  • 10am: JOLTs job openings
  • 10am: IBD/TIPP economic optimism, est. 48.6 (prior 47.5)
  • 11:30am: U.S. to sell 4-week bills, $26b 52-week bills
  • 1:00pm: U.S. to sell $32b 3-yr notes
  • 3:00pm: Consumer Credit, Dec., est. $7b (prior $20.374b)


  • Republican presidential caucuses in Minnesota, Colorado, non-binding primary in Missouri
  • President Barack Obama speaks at White House Science Fair
  • House, Senate in session:
    • House Energy Committee marks up North American Energy Access Act, 9 a.m
    • House Appropriations panel considers GAO, CBO budget, 9:30am
    • House-Senate Conference meets on payroll tax-cut extension, 10am
    • House Education and Workforce Committee holds hearing President Obama’s recess appointments to the NLRB, 10am
    • Joint Economic Committee holds hearing on payroll tax- cut extension, unemployment benefits, 2:30pm


  • Glencore agreed to buy Xstrata for $62b in the biggest mining  takeover
  • California, New York AGs still haven’t signed on to a proposed mortgage-foreclosure settlement
  • Fed Chairman Bernanke testifies before Senate Budget Committee on outlook for U.S. economy, monetary policy, 10am
  • Goldman Sachs said to be seeking outside investors for its REDI Technologies trading-software business
  • Oracle seeks new trial in suit against SAP: court filing
  • Toyota raised profit forecast for year on rebounding sales in the U.S.
  • UBS 4Q profit trails est.; investment bank posts second straight loss
  • SEC said to be near a proposal to shore up the $2.7t money- market fund industry, WSJ says


  • Becton Dickinson (BDX) 6 a.m., $1.17
  • Emerson Electric (EMR) 6:45 a.m., $0.51
  • Broadridge Financial Solutions (BR) 7 a.m., $0.13
  • Church & Dwight (CHD) 7 a.m., $0.51
  • Scotts Miracle-Gro (SMG) 7 a.m., $(1.21)
  • TransDigm Group (TDG) 7 a.m., $1.25
  • AGCO (AGCO) 7:30 a.m., $1.33
  • Harman International Industries (HAR) 7:30 a.m., $0.74
  • Coca-Cola (KO) 7:30 a.m., $0.77
  • Perrigo Co (PRGO) 7:47 a.m., $1.15
  • Louisiana-Pacific (LPX) 8 a.m., $(0.20)
  • Magellan Midstream Partners (MMP) 8 a.m., $0.95
  • Martin Marietta Materials (MLM) 8:12 a.m., $0.39
  • Bell Aliant (BA CN) 8:19 a.m., C$0.38
  • Saputo (SAP CN) 9:37 a.m., C$0.63
  • Netgear (NTGR) 4 p.m., $0.64
  • Panera Bread (PNRA) 4 p.m., $1.42
  • Axis Capital Holdings (AXS) 4:01 p.m., $0.44
  • Cerner (CERN) 4:01 p.m., $0.53
  • Life Technologies (LIFE) 4:01 p.m., $1.04
  • Western Union (WU) 4:01 p.m., $0.40
  • Buffalo Wild Wings (BWLD) 4:01 p.m., $0.67
  • Waste Connections (WCN) 4:04 p.m., $0.35
  • CBRE Group (CBG) 4:05 p.m., $0.43
  • ValueClick (VCLK) 4:05 p.m., $0.40
  • Solera Holdings (SLH) 4:05 p.m., $0.68
  • Lincoln National (LNC) 4:10 p.m., $1.00
  • Two Harbors Investment (TWO) 4:10 p.m., $0.42
  • Walt Disney (DIS) 4:15 p.m., $0.72
  • Hartford Financial (HIG) 4:15 p.m., $0.60
  • RenaissanceRe Holdings (RNR) 4:30 p.m., $1.04
  • CYS Investments (CYS) 5:01 p.m., $0.51
  • RAL Holdings (RAH) 5:04 p.m., $1.37



OIL – so the price of Brent Oil is at $115.95 this morning = up +6% since the #SOTU and #BernankTax on the week of Jan 23rd; since we know that inflation slows real-consumption growth, we think being long energy (XLE) and anything inflation really (as opposed to being long Consumer Discretionary (XLY) like we were before Jan 26th) is the right sector shift.

  • Farmers Plan Biggest Crops Since 1984, Led by Corn: Commodities
  • Corn Falls as U.S. May Plant Most Since 1944; Wheat Declines
  • Glencore’s 2011 Trading Earnings Slide on Cotton Plunge, Metals
  • Copper Falls for Second Day as Chinese Output Growth May Slow
  • Sugar Falls as Brazil’s Production May Increase; Cocoa Drops
  • Oil Trades Near Six-Week Low on Forecast of Rising U.S. Supplies
  • Gold May Decline as Dollar Strengthens Amid Greece Bailout Talks
  • Sugar May Fall 20% This Year Before Second Consecutive Surplus
  • Russia May Not Need to Limit Grain Exports, Producers Union Says
  • Billion-Ton Coal Market Looms as India Increases Sea Cargoes
  • Glencore, Xstrata Deal to Squeeze Japan Coal After Fukushima
  • Carbon Capture Projects Imperiled by Worst-Case Scenario: Energy
  • Tanker Rates Seen at Four-Year High as Refineries Shut: Freight
  • Copper Stockpile Drop May Herald China Revival: Chart of the Day
  • Glencore Agrees to Buy Xstrata for $41 Billion in Shares
  • Distressed Ship Owners to Rise as Rates Plunge, Fitch Says












ASIA – follow the bouncing macro ball – China fails at TREND line resistance yesterday (down 1.7% overnight); Singapore’s PM warns of a Chinese “rough landing” ahead of this week’s China data; and Glenn Stevens at the RBA refused to cut Aussie interest rates last night = inflation expectations in Asia rising like the chart of Brent Oil.










The Hedgeye Macro Team


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 80.52%
  • SHORT SIGNALS 78.68%