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As we have been writing consistently in the run up to today’s earnings, we are buyers of PFCB on down days over the next three months (TREND duration).  4Q11 performance was below consensus, with EPS ex-items of $0.30 versus $0.45 consensus.  Management’s statement at the top of the press release, that 2012 will be an inflection point, was lent credence by top-line beats at the Bistro and at Pei Wei in 4Q11 as well as positive commentary on current trends at both concepts.  While 4Q11 results were disappointing from an EPS perspective, management articulated a comprehensive plan to fix the P.F. Chang’s Bistro brand and provided evidence that the plan is working.  Given that PFCB is trading at 6.1x EV/EBITDA NTM versus one of the worst run companies in the restaurant space (RT) at 6.6x, we continue to believe this gap will close as people become more comfortable with management’s strategy to turn around both concepts.  Today, management also upped the dividend by 10% so the stock has a yield of 3.2%.


Nearly every restaurant concept gets a second chance; for the P.F. Chang’s brand its time is getting closer.  There remains much work to be done but the risk/reward favors the longs at this price. 


Coming into today, the street was not in tune to the reality of the current numbers thus the miss relative to consensus.  It was really hard to get aggressively long the stock ahead of this quarter, but we believe the stock is near the bottom from an earnings revisions standpoint and may even overshoot to the downside given the severe bearishness surrounding the stock. That being said, we’re betting that the turn in operating performance for PFCB will begins to take hold in 2012.  As management suggested today, that will be more evident in 2H12.  If the current initiatives are real and sustainable 2012 will be the inflection point for PFCB.


PFCB is focused on altering the price value proposition in four core areas:

  1. Menu innovation
  2. Improved service
  3. Lower price dining options
  4. Reimaging of the restaurants base


At the PF Chang’s concept initiatives have led to a number of changes:

  1. Introduction of the specific lunch menu (increase frequency)
  2. The Irvine Project (elevate the guest experience)
  3. Investments in both labor and technology (focus on guest satisfaction)
  4. Broader brand marketing (more communication with customers)


At Pei Wei the changes include:

  1. Rollout of new small plates
  2. Introduction of a lower priced complete meal offering called Diner Selects
  3. Advanced plans for a new Pei Wei format called Pei Wei Asian Market
  4. New LTO - Thai Basal Chicken


PFCB has launched a more compelling lunch experience with lower priced offerings (smaller portions), faster ticket times, and more lunch-specific menu items.  The test includes 20 menu items served with a choice of soup or salad, each priced under $10 in stores throughout Arizona and two stores in Dallas; the test included a marketing campaign on television, radio, print ads, billboard and social media.  The tests have driven guest traffic up around 20% at lunch, which more than offset the average check declined 10%, leaving lunch with positive comps around 10%.  The company plans to introduce the new lunch menu across the Pei Wei system.


As we have written before, the benefits of the Irvine Project will be broad and varied.  The exercise is allowing management to plan meticulously for the reimaging and remodeling program that is expected to elevate the Bistro business.  Using the Irvine Project as an example, management is selecting the best aspects of that design and incorporating them into the system-wide program.  Along with the new look and feel of the restaurant itself, changes at the Bistro will include a new menu with enhanced small plates, a separate lunch menu, a new wine list and enhanced beer selection, new staff uniforms, and an updated music system.   In short, the restaurant is still called P.F. Chang’s but almost everything everything else that the customer sees has changed: new look restaurant, staff, menu, and new music.  All of this equals a new customer experience.


April 2nd will be an important date to be aware of as management will launch the Bistro Triple Dragon initiative which blends “a number of the key initiatives including our new lunch menu, some of the best items from our innovation Bistro menu; new music and a new look for our service teams.  All of these are designed to elevate our guest experience and energize our employee team”.


The company is planning significant media support behind the April 2nd launch of the Triple Dragon initiative to help ensure that the changes are effectively communicated.  A second initiative is being planned for the fall which will include adding sushi and other vegetarian items to the menu.  Consumer research conducted by the company has indicated that these items would be well-received by customers.


Turning to Pei Wei, the company had previously expressed awareness that the price-value proposition at the concept needed improvement.  Along those lines, on October 10th, management rolled out several new lower priced menu offerings to the entire Pei Wei system.  This initiative was labeled “Diner Selects” and a 400 basis point improvement in traffic and a “negligible” decline in average check at Pei Wei since October 10th, as a result of the initiative, was underscored by management.  The initiative was supported by nationwide marketing.  “Diner Selects” has a starting price point of $6.25 and features five (smaller portions) of signature entrees combined with rice and the customer’s choice of a spring roll, soup, or Asian slaw.  There are also three new small plates included in the offering that are priced at $3.95 each. 


The most important initiative at Pei Wei is the introduction of the Pei Wei Asian market which is a higher margin form of the current Pei Wei format.  According to management, Pei Wei Asian Market was developed based on direct consumer research and addresses both price point and speed of service issues that were identified as main barriers to greater guest of frequency at Pei Wei.  The new format gives the company greater real estate flexibility and carries a smaller store footprint of about 2,500 square feet versus the current format’s area of 3,200 square feet.  The end game is that the concept will carry higher operating margins as well as a lower sales hurdle requirement than the existing store base.  Importantly, management is changing three or four of the planned new stores for 2012 are Pei Wei Asian Market.


The Global Brands business continues to perform exceptionally well, with the company seeing accelerated development in 2012 and beyond.  Additionally, the company ended the year with $50 million in cash and announced it will be buying back 16% of the current enterprise vale on the company as soon as they can.


There is no question in my mind that there are still a number of skeptics about the PFCB turnaround plan.  After all, the stock is at the bottom of our Hedgeye Restaurants Sentiment Score Card.  4Q11 was a mess and 1Q12 will likely be another.  After that, we expect better sales trends and margins at the Bistro and Pei Wei to head back to 18% and 16%, respectively.  Rarely does anything move in a straight line, but we think that earnings revisions are now in a bottoming process and The Queen Mary (2/6 post) is starting to turn.











Howard Penney

Managing Director


Rory Green


Shorting Tail Risk: EWJ Trade Update

Current Virtual Portfolio Positioning: Short Japanese equities (EWJ).


Earlier today, Keith re-shorted Japanese equities via the iShares MSCI Japan Index Fund (EWJ) in our Virtual Portfolio. The Nikkei 225, which is up +2.6% week-to-date, is being propelled to the upside largely on the strength of FX translation relief (the yen is down -1.6% against the USD in the-week-to-date vs. a regional median of -0.3%).


To be clear, we think consensus risks going back to the well one-too-many times on this one, as the sequential ramp in sovereign debt maturities in MAR (¥57.1T or $725B or 5.8% of total marketable JGBs) provides a potential starting point for a Japanese sovereign debt issues. Broken from our long-term TAIL perspective (despite the YTD beta-rally across global equity markets), the Nikkei 225 index is signaling to us that there is at least some degree of tail risk that we must appropriately explore.


Shorting Tail Risk: EWJ Trade Update - 1


To be even clearer, we are not calling for a Japanese sovereign debt crisis in MAR. Rather, our analysis of the drivers within the JGB and JPY markets suggest that a number of key tailwinds have inflected/look to inflect in 2012. Coupled with an all-time high amount of JGB issuance that needs to come to market throughout this calendar year, we think the tea leaves suggest being appropriately hedged against what may be the next stop in our Sovereign Debt Dichotomy theme (originally published in 2Q10).


One of those tea leaves is the yen’s underperformance in the YTD (down -2.6% against the USD vs. a regional median of +2.5%). While much of the yen’s underperformance has been fueled by decreased risk aversion, which manifests itself via higher U.S. rate expectations on a relative basis (as measured by the spread between U.S. and Japanese 2yr OIS swaps), we don’t view a -500bps negative divergence as something to shrug off ahead of increased stress in the Japanese sovereign debt market. Should the risks we are flagging materialize, we ultimately think this trade plays out in the currency market via yen weakness vs. the USD.


Shorting Tail Risk: EWJ Trade Update - 2


Email us is you’d like to dialogue further on this growing topic.


Darius Dale

Senior Analyst

Weekly European Monitor: Molotov Cocktails and Extending the Runway

Positions in Europe:  No Active Positions


Asset Class Performance:

  • Equities:  European equity performance has been mixed over the last 5 days, with the balance towards the negative led by the periphery. This bucks the trend of strong performance from the PIIGS over the last month. Top performers:  Russia (RTSI) 2.9%; Denmark 2.5%; Norway 1.2%; Sweden 1.0%; and Switzerland 80bps. Bottom performers:  Greece -4.7%; Cyprus -4.7%; Spain -3.9%; Hungary -3.6%; Austria -3.3%.
  • FX:  The EUR/USD is down -0.4% week-to-date.  Divergences: HUF/EUR +1.3%, CZK/EUR +0.8%, PLN/EUR +0.5%
  • Fixed Income:  10YR sovereign yields were mixed week-to-date. Portugal led the move on the downside, falling -98bps to 11.99% followed by Germany (-14bps) to 1.83%. Greece increased the most, gaining +44bp to 33.35% followed by Italy (+26bps) to 5.78%.

Weekly European Monitor: Molotov Cocktails and Extending the Runway  - 1. yields



In Review:

Deadlines for decision on the PSI and second Greek bailout came and went for another week as Molotov cocktails flew in the streets of Athens…. As Keith has noted in his Early Looks, Greece is but a tree in the forest, yet Greece isn’t going “away” anytime soon, which we stressed in our note “Greek PSI Is NOT Getting Done” (2/8)— we think Eurocrats will continue to suspend gravity around Greece to maintain the Eurozone project.  


As we show in the extended calendar below, there are many political zig-zags ahead, including the German Bundestag’s vote on Greece’s second bailout package on February 27th. The vote could be far from a resounding “Ja”, which increases the probability that we drift towards an 11thhour decision on a Greek bailout (and PSI) ahead of the country’s €14.5 Billion bond due March 20th. Finally, this week saw elevated “rhetorical” brewing between German Finance Minister Wolfgang Schaeuble and Greek officials, yet we are not of the camp that Schaeuble speaks for Merkel.


"But it's important to say that it cannot be a bottomless pit. That's why the Greeks have to finally close that pit. And then we can put something in there. At least people are now starting to realize it won't work with a bottomless pit."   -Schaeuble



Call Outs:

  • Eurozone Q4 GDP (Q/Q) contracts for the first time since Q2 2009 (see chart below).
  • Moody's cut its ratings on Italy, Spain (2 notches), Portugal, Slovakia, Slovenia, Malta, and placed the Aaa ratings of UK, France, and Austria on negative outlook yesterday evening. 
  • EU thinks Spain overstated its 2011 deficit figures to make this year’s deficit look better, and that it's also moving too slow in addressing a deterioration in public finances that is expected this year.
  • Spain’s regulator announced that it is lifting its ban on short selling of financial stocks effective February 16th. 

Key Regional Data This Week:

Positives (+)

Germany ZEW Current Situation 40.3 FEB (exp. 30.5) vs 28.4 JAN

Germany ZEW Economic Sentiment 5.4 FEB (exp. -11.8) vs -21.6 JAN

UK CPI 3.6% JAN Y/Y (exp. 3.6%) vs 4.2% DEC [slowed to the least in 14 months]


Negatives (-)

Eurozone Industrial Production -2.0% DEC Y/Y vs 0.1% NOV

Greece Q4 GDP -7.0% Y/Y vs -5.0% in Q3

EU 25 New Car Registrations -7.1% JAN Y/Y vs -6.4% DEC

Portugal Unemployment Rate 14% Q4 vs 12.4% in Q3




(2/16) Riksbank Repo Rate CUT 25bps to 1.50% (in-line with expectations)


CDS Risk Monitor:

On a week to date basis, CDS was largely up across European sovereigns (vs up last week), with Spain leading the charge at +63bps to 416bps, followed by Italy (+56bps) to 438bps (see charts below).   


Weekly European Monitor: Molotov Cocktails and Extending the Runway  - 1. cds a


Weekly European Monitor: Molotov Cocktails and Extending the Runway  - 1. cds b


Charts of the Week:

Weekly European Monitor: Molotov Cocktails and Extending the Runway  - 1. gdp


Weekly European Monitor: Molotov Cocktails and Extending the Runway  - 1. industvs retail


Weekly European Monitor: Molotov Cocktails and Extending the Runway  - 1. cars


Weekly European Monitor: Molotov Cocktails and Extending the Runway  - 1. greece maturity


Weekly European Monitor: Molotov Cocktails and Extending the Runway  - 1. euribor



The European Week Ahead:

Monday:  Eurogroup Meeting; Feb. France Production Outlook and Business Confidence Indicator; Dec. Italy Industrial Sales and Orders


Tuesday:  Feb. Eurozone Consumer Confidence – Advance; Jan. UK Public Finances


Wednesday:  Feb. Eurozone PMI Composite, Services, and Manufacturing – Advance; Dec. Eurozone Industrial New Orders; Feb. Germany PMI Manufacturing and Services – Advance; UK BoE Minutes; Feb. France PMI Manufacturing and Services – Preliminary; Jan. France CPI; Jan. Italy CPI – Final


Thursday:  ECB Policy Meeting; Feb. Germany IFO Business Climate, Current Assessment, and Expectations; Feb. UK CBI Trends Total Orders and Selling Prices; Jan. UK BBA Loans for House Purchase; Feb. Italy Consumer Confidence


Friday:  Q4 Germany GDP – Preliminary, Domestic Demand, Exports, Imports, Capital Investments, Government Spending, Construction Investment, Private Consumption; Q4 UK GDP and Total Business Investment- Preliminary, Private Consumption, Government Spending, Capital Formation, Exports, Imports, Index of Services; Feb. France Consumer Confidence Indicator; Jan. France Jobseekers; Dec. Italy Retail Sales



Extended Calendar Call-Outs:

27 February:  The German Bundestag plans to vote on the issue of Greece’s second bailout, including the embedded terms of the PSI.


25-26 February:  G20 Finance Ministers Meeting in Mexico City. Decision on IMF loan of €500B is expected.


29 February:  2nd 36-Month LTRO Allotment.


29 February:  Eurogroup Meeting to sign the previously endorsed agreement between the 17 members on the Treaty for the European Stability Mechanism.


1-2 March:  Signing of the Fiscal Compact by 17 Eurozone leaders together with the non-euro area leaders of countries willing to join. Further, the group will reassess the adequacy of resources under the EFSF and ESM rescue funds.


20 March: Greece’s €14.5 billion Bond Redemption due.


April:  French Elections (Round 1) begins to conclude in May.


April:  Greek Presidential Elections.


30 June:  Deadline for EU Banks to meet €106 billion capital target/the 9% Tier 1 capital ratio.


1 July:  ESM to come into force.




Matthew Hedrick

Senior Analyst

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RevPAR and Baccarat have been the focus areas of investors but high margin slot revenue has been quietly creeping up and growth looks sustainable.



Could slots be the next big thing?  We think slots will be the big delta for the Strip and relative to expectations and margins, that’s where the leverage is.  Consider this, the incremental margin on an increase in slot play per visitor is around 90%.  The incremental margin on an increase in slot play due to an additional visitation is nearly the same.  There is no other important revenue driver in Las Vegas that has this type of economics.


Without a doubt, slots are a profitable business.  Yet, they’ve been in a long time slump, until recently. Every other Las Vegas revenue driver has been in recovery mode for some time.  Slot volume growth was consistently negative from November 2007 until October 2010 (with the exception of a slight gain in February 2010).  Since then they've been inconsistent.  It’s only during the 2nd half of 2011 did we see more a trend of positivity.  We think 2012 will be the first meaningfully positive year for slot growth since 2006. 


The following chart shows the recent monthly performance of the Strip’s slot business and our projections for 2012.  We model sequential seasonality using a 3 month moving average, adjusted for historical seasonality and GDP.  We would caution that the monthly projections can be volatile but directionally, our model has been accurate.  For instance, we think it is unlikely that we will see a double digit growth month, but we do think March growth will accelerate.  Annually, our model is less volatile and is currently projecting 2012 growth of 4-5%. 


Most importantly, if the slot business recovers as we expect, the flow through should be a major tailwind for Strip earnings (MGM and the 2nd derivative, BYD) and the stocks with significant exposure to the Strip.  There is still a long way to go for slot volume.  In Q4 2011, slot volumes were 21% lower than levels achieved in Q4 2006.  If our projection for 2012 is met, slot volumes would still be 19% below 2007.  Now if only the Macro will behave.







HBI’s stock not being down significantly is one thing, but GIL being UP? People aren’t contextualizing the real dynamics here. Both of these names look very risky (with minimal reward) to us.



Recall that HBI is blaming a $0.30 hit  to earnings on weakness in something that is only 8% of sales and profits. That same number is about 70-80% of sales for GIL.  We’re talking about $370mm for HBI, of which HBI noted that ¼ is what it refers to as ‘highly competitive’. That’s where it competes most heavily with GIL. This is $95mm that runs at a loss. Our sense is that for it to get to a point where HBI would let it go, it would need to be at about a -10% margin (this is usually a loss leader linked to other business).

GIL definitely has a more efficient cost structure, as well as the benefit of a zero percent tax rate. Let’s say that in a best case scenario, they stole this business from HBI and were somehow able to do so at a +10% margin. At best, we’re talking $0.04, or 3% on this year’s numbers, and less than 2% of the consensus 2013 estimate. But at a $25 stock and 12x P/E on next year’s estimates, the Street is already looking for 2013 earnings to nearly double for GIL.

This also assumes that HBI did not step up price discounting on the other 75% of its imagewear business. That’s far too safe an assumption.

It also assumes that HBI won’t get hit meaningfully due to the dominos set in place by Ron Johnson’s move to auction off space inside JC Penney stores.

Remember that HBI still has price integrity built into its 2H assumptions – which suggest margins right up there with the best names in the apparel industry (that don’t sell in basic categories like underwear).

The point here is that GIL’s stock is already above where it was when it collapsed last quarter, and yet the risk profile associated with one of its top competitor went up materially. HBI is more than 2x GIL’s size, and though I know people will argue with me that they don’t have perfect overlap with their businesses, I could care less. If HBI experiences pressure in its US branded wholesale business, it will find any area of weakness in its supply chain and competitive set to help fund any price or margin concessions.

Whether the first or second derivative of HBI impacts GIL, it won’t matter. Cash is cash.  In the meantime, if you want to bank on GIL putting up never before-seen earnings levels in 2013 (and pay 12x for it), be my guest.


An important note on TRADE here.

Keith added HBI to the short side of the ledger of the Hedgeye Virtual Portfolio this afternoon.

"TRADE support is 26.65 – should get smoked if/when it crosses that.”


His thoughts on GIL:

“Looks somewhat like HBI but needs a catalyst or will rip the shorts up to its TAIL at 28.19.” 


Let’s be careful on timing here. There’s no reason why the upcoming quarter can’t be the catalyst. 2H of CY12 looks bad. Did they give themselves cushion with their latest guide down? Everyone thought the same for HBI 13 weeks ago. Also, the market shrugged of GIL’s last guide down. If things change for HBI (which they should) then they will have likely changed for GIL as well.




HBI: Shorting

Keith adding HBI to the Hedgeye Virtual Portfolio. This has been one of our least favorite names fundamentally, and there’s a severe disconnect between fundamental and economic reality and the market’s reaction to the print. There’s enormous tail risk here.


As a follow up to yesterday's conference call, see our note "HBI: FAIL".


HBI: Shorting - HBI levels

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 80.46%
  • SHORT SIGNALS 78.35%