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With Buffalo Wild Wings’ stock up 32.5% year-to-date, our negative research stance heading into the 4Q11 EPS print has definitely left a scar.  We are also not going into hiding because the facts indicate that some important questions need to be answered by Buffalo Wild Wings to sustain its stock price at current levels.  Besides the more specific issues facing the company, the macro environment for restaurant stocks is generally positive – for now.  Here we run through our updated thoughts on the stock.


Our view of Buffalo Wild Wings’ 4Q11 results was that, while the top line numbers were impressive, it was disconcerting that margins did not expand despite the fact that elevated wing prices were yet to impact the P&L.  On its own, this fact would likely have been enough to prompt skepticism among investors but – unfortunately for our research call – the 1Q12 to-date (as of 2/7) same-store sales number, at 12.9% at company locations, superseded any margin-related concerns. 


The stock has settled in at around $90 and the EV/EBITDA (NTM) multiple has expanded to 10x.  We are less than convinced that this current price level is sustainable over the intermediate term TREND and see significant risk to the downside if the company does not execute to perfection over the next two quarters.  The Street, it seems, shares this view; despite the impressive 1Q guidance and the implied same-store sales trends, FY12 EPS estimates did not move significantly.  Estimates for 1Q12, appropriately, were revised sharply higher but it seems that analysts are waiting to see how the rest of the year plays out (chart1, 2).  Our view is that costs will play a more significant role in 2Q and 3Q than consensus is allowing for. 


Here are some points we are currently focused on:

  • The sequential move in comparable-restaurant sales from 8.9% in 4Q11 to 12.9% for the first five weeks of 1Q12 benefitted by 3% from the impact of gift cards and also, we estimate 2-3% of favorable weather impact.  Our estimate for the real current run-rate of comps is 7%.  Gift cards may not have as much of a favorable impact on the full quarter comp versus January’s but we still expect a significant boost from gift cards and weather for 1Q12 comps.
  • The Street obviously gave the company a pass on flat margins in 4Q, despite a stronger-than-expected top line, due to the 12.9% 1Q12 to-date same-store sales number released coincidentally.  4Q11 was a poor quality quarter for BWLD given the lack of flow through on strong comps and the fact that the tax rate was lower than expected.  Unless the company can keep disclosing quarter-to-date comps far in excess of expectations, the lack of leverage in the business model will be a concern for investors.  Without gift card and weather benefits, especially in the event that the broader employment outlook softens the stock price could move lower.  Tougher top line compares are coming in 2Q and 3Q for BWLD and we believe investors will be seeking reassurance from management that the momentum in sales is continuing into April when 1Q EPS is reported (chart 3).
  • We are hearing from some franchisees that sales softened in the second half of February.  Gas prices (up 6% in the two weeks from 2/15) are thought to have been a factor.
  • Chicken prices continue to head higher.  While chicken wings led the way, other cuts are now following; breast, leg, and full bird prices are all gaining as elevated beef prices push food service toward chicken products.  This demand for chicken is a bullish indicator for wing prices.  Additionally, as the processors continue to struggle, supply remains constrained (chart 4).
  • Sanderson's Farm (SAFM) is up 14% over the past month on the improved outlook for chicken prices.  
  • In order to manage inflation and meet EPS expectations, management will likely need to cut costs and/or raise prices.  Both of these strategies could ultimately have a negative impact on the top line.  Cutting G&A costs is not without its risks for a "growth" restaurant company given the likelihood that it might impact revenue growth down the road.  Additionally, as we learned on the 2Q11 EPS earnings call, expanding the concept's geographical reach - a key component of the growth story - requires significant G&A investment.
  • Management mentioned the possibility of acquiring or developing a second concept.  This is generally a huge drain on company resources and can require significant investment.  We would be initially skeptical of this notion but obviously will reserve judgment until such a time that management might disclose more detail.  Our initial concern is founded upon the fact that BWLD is not generating much cash flow (after growth-related expenses).   The company’s net CFFO-to-net income ratio has been barely positive over the last year (chart 5).  If margins contract in 2Q and 3Q, that only heightens our negative view of BWLD acquiring an additional concept; the company would have to lever up to acquire a second concept of significant scale.
  • AT 10x EV/EBITDA, BWLD looks very expensive for a company with a checkered past of inconsistent operating performance.  

BWLD UPDATE - bwld consensus EPS




BWLD UPDATE - bwld pod1


BWLD UPDATE - egg sets wing prices


BWLD UPDATE - bwld pod3





Howard Penney

Managing Director


Rory Green



VRA: Structurally Incapacitated

We don’t like VRA headed into the Q4 print, or coming out of it. It’s next to impossible for us to make a valuation call in this tape. But our model is 20% below Street expectations next year, which pretty much speaks for itself.



TRADE (3-weeks or Less)

We’re at $0.44 vs. the Street at $0.47E for Q4. We expect the shortfall to come from lower margins despite the likelihood of sales coming in above the upper end of guidance.

  • Current expectations for a rebound in gross margins implies the impact of a timing shift in sourcing costs and opportunistic sale of retired inventory were one-time events and does not appear to reflect the current promotional climate or VRA’s exposure to cotton.

TREND (3-months or More)

Comps have been driven by pattern proliferation and additional category expansion over the last two years and are starting to slow putting greater emphasis on store growth to drive the top-line driving higher costs.

  • Managing the inventory/sales growth spread will remain challenging in the 1H with sales slowing at the same time retailers get increasingly cautious on inventory.
  • Top-line trends are already starting to roll. The top end of Q4 guidance implies a significant deceleration in both the 1yr and 2yr trends. We expect this trend to continue with mid 20%s revenue growth over the last two years slowing to a low-teens rate over the next two as retail and e-commerce growth offsets a decline in wholesale sales.
  • In addition, our sense is that VRA is getting more aggressive with the terms it’s offering wholesale accounts to encourage earlier receipts. This tactic might work to drive sales over the near-term, but it’s not sustainable. Particularly given the profile and size of 25%-50% of VRA’s wholesale accounts, which simply don’t have the capacity to store excess inventory.
  • Perhaps this is already happening. Management addressed concerns about product showing up at Costco on a recent conference call essentially revealing that while they don’t sell directly to Costco, a large wholesale account had flushed excess inventory through the discount channel. There is nothing to keep this from this happening again. It may be through smaller channels (think flash sale sites), but the evidence of over inventoried product inevitably comes to roost.

TAIL (3-years or Less)

VRA risks overextending the brand in pursuit of additional category expansion. At the same time, the company is looking to expand internationally into Japan and double the size of its DC which requires incremental investment.

  • Square footage growth can come, but at a price we think is grossly underappreciated when it comes to VRA’s business model. Unlike the other brands, VRA is sold not through department stores (with the exception of a few Dillard’s locations), but rather through small independent retailers where VRA often drives and accounts for a meaningful percentage of sales at each wholesale account. Its network of 3,400+ small independent retailers is far more sensitive to the competitive threat of company-owned retail stores opening nearby than typical brands that are distributed in department stores that are far less reliant on any one vendor.
  • Despite efforts to expand its product offering (e.g. rolling luggage), VRA is more constrained than the other brands in its ability to drive meaningful category growth limiting store productivity potential. This has been reflected in a material deceleration in comps to HSD with little to suggest a material reacceleration is likely.
  • Over the last three years, SG&A leverage has accounted for 9 pts of margin expansion, which is now likely to shift in the other direction and suggests VRA was over earning in its first year as a public company. We expect this shift to result in a 2pt margin swing as a 1.5pt tailwind turns into a 0.5pt headwind this year (F13). (see table below)
  • Over each of the last two years, VRA has kept Advertising, Marketing and Product Development flat to down. This is the line that accounts for new product initiatives for a brand that’s starved for expansion ideas – not good. We think VRA is going to be forced to take this line higher over the next few years. We are modeling this line up +10% and along with continued growth in selling expense expect SG&A deleverage for the first time in four years.

The stock appears to be baking in the kind of growth that we’d associate with the possibility of another department store partnership. We prefer to value what we see in front of us and that’s a brand challenged to grow with operating margins already over 20%. We are shaking out at $1.55 and $1.61 in EPS for F12 and F13 respectively 20% below Street expectations next year (F13). With the stock trading at 22x and 12.5x consensus F12 EPS and EBITDA estimates, this is not reflected in the stock here at $37. Nor is the structural risk in VRA’s wholesale accounts once it starts rolling out owned retail stores more aggressively.

Casey Flavin



VRA: Structurally Incapacitated  - VRA WhslRevDoor Chart


VRA: Structurally Incapacitated  - VRA RevsTable


VRA: Structurally Incapacitated  - VRA SG A


VRA: Structurally Incapacitated  - VRA SIGMA









Interesting story on Bloomberg today: Asian Buyers Buoy New-Home Demand in California’s Orange County.  Asian buyers, many paying, cash are boosting the local economy in Southern California, particularly in Orange County.  This could be providing some boost to PFCB, CAKE, BJRI and other restaurant companies with exposure to the area.



Commentary from CEO Keith McCullough


If your portfolio is 50% long SPY and 50% long AAPL, you are all set – Bonds, Gold, Currencies all getting crushed:

  1. STOCKS – fascinating, but maybe not surprising, that the lowest “quality” countries in the world are leading the upside this morn (Japan +1.5%, Greece +2.6%, Romania +1.5%). China and Hong Kong closed down -2.6% and -0.2% post the “stress test” squeeze into the US market close. We should hang out up here in the nosebleed seats, until we don’t – new SPX range = 1.
  2. BONDS – kaboom! 2-yr US Treasury yields are only up about +33% in 10 days, so there’s really no Global Macro interconnected risk w/ this Bernanke pancake plan, is there? Only if you are long anything Bonds, Gold, or FX – 10yr absolutely ripped after it crossed my 2.03% line. This is one of the biggest off-sides 1-day moves I’ve ever seen in Global Asset Class attribution.
  3. CURRENCIES – so the Japanese Yen is crashing (down -9.1% in 2 months) and now the Euro is back into a Bearish Formation. The best news we have here, but only for Americans, is that Strong Dollar is potentially back (until Qe4 whispers come on a 50bps SPY down move). But the globally interconnected risk to a sustained strong dollar (Gold hammered) is tangibly evident.

I have a 0% asset allocation to Commodities and Int’l FX. I finally re-shorted SPY at 1388 yesterday. I’ll definitely be trading these new ranges of risk. Being long VIX 14-15 has worked until it hasn’t – then this whole thing flips, violently, again. Long live the “Price Stability.”







THE HBM: MCD, SONC, CAKE - subsector





MCD: McDonald’s COO Don Thompson said this morning that about 20% of U.S. restaurants are remodeled and that most European stores will be remodeled by the end of the year.  U.S. remodeling is set to ramp up which, we believe, will pressure Wendy’s as it struggles to fix its asset base.


SONC: Sonic is tinkering with its marketing strategy as it adds new menu items to boost sales and new drive-in prototype to reduce franchise costs, according to NRN.com




COSI: Cosi gained 8.4% on accelerating volume yesterday. 


CBOU: Caribou was the only stock in QSR that posted a decline yesterday.





CAKE: Cheesecake Factory’s move to introduce “Small Plates and Snacks” was mentioned in a story by the LA Times about customers’ increasing preference for “grazing” through smaller servings instead of sitting down to longer, more expensive meals.






Howard Penney

Managing Director


Rory Green



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%


The Macau Metro Monitor, March 14, 2012




A filing submitted to a court in Macau in January by Asian American Entertainment, an estranged former partner of LVS controlled by the Taiwanese businessman Shi Sheng Hao, who also goes by the name Marshall Hao, alleges LVS of improperly breaking off a 2001 agreement to bid for a Macau casino license and seeks compensation of 3 billion patacas, or more than US$375MM.  


In October 2001, LVS signed a letter of intent to team up with Asian American in bidding for a casino license.  Hao had recruited financial support from China Development Industrial Bank, a Taiwanese lender that had agreed to underwrite the joint bid.  Asian American submitted a formal offer to the government of Macau in December 2001 on behalf of itself and Venetian Venture Development, a subsidiary of LVS.


Asian American’s suit alleges that Venetian Venture Development violated the terms of their bidding agreement in early 2002 by going behind its back to seek a rival bidding partner.  When results of the tender process were announced by the government on Feb. 8 of that year, LVS had won — not in partnership with Asian American, but with Galaxy of Hong Kong.


Asian American had previously filed a breach of contract suit against Sands in 2007 in US federal court in Nevada, but that case was dismissed by the court in 2010.  In that 2007 suit, LVS had argued that Nevada had no jurisdiction over the case and that Asian American’s claims were void because of the statute of limitations. But on appeal, a higher court allowed some of Asian American’s claims to go ahead, sending the matter back to the lower court in 2009. The matter was ultimately thrown out by the lower court after Asian American failed to retain lawyers to press the case — effectively giving up.


It is unclear why the company has chosen to take up the case again now, in Macau.  Under Macau’s laws, LVS has two months to respond to Asian American’s suit.  Based on the timing of most civil cases, the matter would be unlikely to go to trial before 2013.



Visitor arrivals in package tours surged by 43.6% YoY to 634,993 in January 2012, attributable to the Lunar New Year holidays.  Visitors from Mainland China (424,234) increased by 34.1%, with 176,498 from Guangdong Province.  Moreover, visitors from Taiwan (60,273); Hong Kong (41,877); and the Republic of Korea (34,428) soared by 151.5%, 139.0% and 43.2% respectively YoY.  The average length of stay increased by 0.02 night to 1.5 nights. 


TODAY’S S&P 500 SET-UP – March 14, 2012

As we look at today’s set up for the S&P 500, the range is 30 points or -2.07% downside to 1366 and 0.08% upside to 1397. 












  • ADVANCE/DECLINE LINE: 1813 (2178) 
  • VOLUME: NYSE 907.12 (40.92%)
  • VIX:  14.80 -5.37% YTD PERFORMANCE: -36.75%
  • SPX PUT/CALL RATIO: 1.42 from 1.36 (4.41%)


STOCKS – fascinating, but maybe not surprising, that the lowest “quality” countries in the world are leading the upside this morning (Japan +1.5%, Greece +2.6%, Romania +1.5%). China and Hong Kong closed down -2.6% and -0.2% post the “stress test” squeeze into the US market close. We should hang out up here in the nosebleed seats, until we don’t – new SPX range = 1.


BONDS – kaboom! 2-yr US Treasury yields are only up about +33% in 10 days, so there’s really no Global Macro interconnected risk with this Bernanke pancake plan, is there? Only if you are long anything Bonds, Gold, or FX – 10yr absolutely ripped after it crossed my 2.03% line. This is one of the biggest off-sides 1-day moves I’ve ever seen in Global Asset Class attribution. 

  • TED SPREAD: 39.24
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 2.20 from 2.13
  • YIELD CURVE: 1.84 from 1.78 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:00am, MBA Mortgage Applications, week of Mar. 9 (prior - 1.2%
  • 8:30am, Import Price Index (M/m), Feb., est. 0.6% (prior 0.3%)
  • 8:30am, Current Acct Balance 4Q, est. -$115.0b (prior -$110.3b)
  • 10am, Bernanke speaks in Nashville, Tenn. at Independent Community Bankers convention
  • 1:00pm, U.S. to sell $13b 30-yr bonds (reopening) 


    • British PM David Cameron visits White House, holds joint press conference with President Obama
    • House not in session, Senate meets
    • Senate Agriculture Committee holds hearing to develop a 2012 farm bill. 10am
    • Senate Foreign Relations Committee hears from actor George Clooney on Sudan and South Sudan. 10am
    • Senate Finance Committee holds hearing on proposal to establish permanent normal trade relations with Russia. 10am
    • Supreme Court not in session 


  • Rick Santorum won Alabama, Mississippi presidential primaries, strengthening his status as Mitt Romney’s main challenger; Romney won Hawaii’s caucuses: AP
  • Apple said to be subpoenaed by FTC as part of antitrust probe of Google, seeking information on how company incorporates the search engine on iPhone, iPad
  • Fed yesterday said 15 of 19 banks passed stress tests; JPMorgan, Wells Fargo raised dividends, share purchases after getting approval while Citigroup will resubmit capital plan
  • Boeing to pay Air India $500m in compensation because of delays in delivering 27 on-order 787 Dreamliners
  • Carlyle, Onex Group seeking to take Allison Transmission Holdings public at valuation almost triple what they paid
  • BofA, JPMorgan, three other banks agreed to pay $25m to NY to resolve some monetary claims over use of mortgage database after reaching $25b national settlement on foreclosure practices
  • Senate will vote today on two-year, $109b bill to fund highway construction, mass transit
  • Roche gets second FTC information request on Illumina deal
  • Yahoo! put CFO Tim Morse on board of Alibaba to fill position vacated by Jerry Yang when he stepped down in Jan.
  • U.S. budget deficit shortfall for 2012 will be $1.2t, ~$93b more than forecast two months ago, CBO said in report yesterday
  • Five biggest European telecoms may face investigation by EC, FT says 


    • Lin TV (TVL) 7:30am, $0.20
    • Marcus (MCS) 7:45am, NA
    • Vera Bradley (VRA) 4pm, $0.47
    • Youku (YOKU) 4pm, $0.05
    • Guess? (GES) 4:05pm, $1.04
    • Power Corp of Canada (POW CN) 4:17pm, $0.55
    • Semafo (SMF CN) 4:50pm, $0.13 


  • Anglo’s Diamonds Seen as M&A Turnoff for Glencore: Commodities
  • Copper Drops as China Signals Housing-Market Curbs Will Remain
  • Oil Declines on Forecast U.S. Supply Rose to Six-Month High
  • Gold Seen Heading for 12th Annual Advance on Investor Hoarding
  • Gold Drops as Economic Recovery Curb’s Metal’s Investment Demand
  • Palm Oil to Climb to Year High as Cooking-Oil Supply Drops
  • YPF Given Five Days to Retract Argentine Province Price Increase
  • Soybeans Reach Six-Month High on Supply Concern, China Demand
  • IEA Predicts Bumpy Ride for Oil Prices Amid Non-OPEC Supply Cuts
  • Vekselberg Crisis Warning Spurs Rusal Yield Surge: Russia Credit
  • Wheat Stockpiles in Australia Seen at Record 10.5 Million Tons
  • Dubai Oil Draws Near to Brent on Iran, Asian Use: Energy Markets
  • Copper Stocks at ‘Critical Level’ Signal Rise: Chart of the Day
  • Gold Seen Heading for 12th Annual Advance
  • Coffee Reaches One-Week Low as Supply May Improve; Sugar Drops
  • Indian Funds Best Gold Deal as Producers Trail: Riskless Return
  • Gazprom Trips in India as Shale Upends Asia Gas Markets: Energy 





CURRENCIES – so the Japanese Yen is crashing (down -9.1% in 2 months) and now the Euro is back into a Bearish Formation. The best news we have here, but only for Americans, is that Strong Dollar is potentially back (until Qe4 whispers come on a 50bps SPY down move). But the globally interconnected risk to a sustained strong dollar (Gold hammered) is tangibly evident.

















The Hedgeye Macro Team


Demographic Reckoning

This note was originally published at 8am on February 29, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Demography is destiny.”

-Auguste Comte


This Friday we are hosting a conference call for our macro subscribers on Japan titled, “Japan’s Debt, Deficit and Demographic Reckoning”.  (If you aren’t a macro subscriber and want to get access to the presentation, email sales@hedgeye.com  for subscription details.)  During the presentation, we will spend a fair amount of time framing up the economic history of Japan starting with the American occupation post World War II.  When contemplating economic history, I’m often reminded of George Santayana’s quote:


“Those who cannot learn from history are doomed to repeat it.”

Certainly, history provides a critical frame of reference for Japan.  In particular, the last twenty years of economic history in Japan, which witnessed a massive build up in Japanese sovereign debt (currently 220% debt to EBITDA) and stagnating economic growth (just +8.5% nominal growth over the last 20 years), have set the table for Japan’s future.  But as my colleagues (hat tip to Darius Dale and Josefine Allain) and I have been grinding through this 80+ page presentation, the idea that Demography is Destiny truly represents the next chapter for Japan.


Currently, according to estimates from the CIA fact book, 23% of the Japanese population is over 65 years old.  This compares to only 13% in the United States and approximately 8% for the rest of the world.  As one of the world’s oldest countries, the burdens of supporting this aging population are seen directly in the Japanese federal budget.  In the 2012 Japanese federal budget, social security spending will be just over 29% of the entire budget.  This compares to 17% of the federal budget in 1990.


Due to a low fertility rate, the Japanese death rate currently exceeds the Japanese birth rate.  In the absence of meaningful immigration, this implies that the Japanese population is in decline.  As I outline in the Chart of the Day, based on the Japanese government’s own projections, their population will decline by more than 25% by 2050.  In conjunction with said declines, the Japanese population is aging and by 2050 more than 40% of the population will be over 65. (And to think at 38 I thought I was getting old!) The demographic future of Japan will only accelerate social security entitlement spending. 


The other concern with an aging population is growth.  Robert Arnot and Denis Chaves recently wrote a paper for the Financial Analysts Journal called, “Demographic Changes, Financial Markets, and the Economy”, in which they attempt to quantify the relationship between demographics, growth and capital market returns based on 60 years of data.  They conclude that:


“ . . . senior citizens contribute to neither GDP growth nor stock and bond market returns; they divest to buy goods that they no longer produce.”

Based on their projections, the aging population will negatively impact Japanese growth over the next decade by ~-5% in aggregate. 


In theory an aging Japanese population, even if a major headwind for growth, could be overcome by the appropriate mechanisms and policy.  Unfortunately, after more than twenty years of deficit spending, Japan’s proverbial hands are increasingly tied by debt.  Specifically, Japan has massive non-negotiable financial burdens due to the second largest component in the proposed 2012 Japanese budget being debt service.


Servicing and interest on sovereign debt outstanding are projected to total 24% of Japan’s federal budget in 2012.  This line item has almost doubled since fiscal 1980, when it was at 13%.  I may not have a PHD in economics, but even I can tell you that if 1/4thof the Japanese federal budget is going towards debt service that spending is not generating an incremental return, either in the way of GDP growth or a higher standard of living, for Japanese society.


In a scenario analysis, we used a more normalized interest rate of 5.5%, which last occurred back in 1995, and applied that interest rate to the current debt servicing burden.  At this interest rate level, the Japanese debt servicing burden would be 100% of the current federal budget.  Clearly, increasing interest rates would squeeze out the government’s ability to more proactively invest in the nation and/or support rising social security expenditures.


To be sure, we are not projecting an imminent Japanese default, but in the short term with Japanese maturities accelerating in 2012, and specifically in March, there is increased concern as to Japan’s creditworthiness.  Based on the scenario I described above, the longer term question is whether Japan will be able to fund its future.  For the last twenty years, this funding has been enabled by a combination of high savings rates (both corporate and individual) and a current account surplus. Currently, we are seeing negative inflection points in both areas.


Ultimately, as Shakespeare wrote, “What is past is prologue”, and as it relates to Japan the past is indeed written.  Increasingly, Japan’s future is also already largely written by her Demographic Destiny.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), USD/JPY, and the SP500 are $1752-1806, $122.01-126.19, $79.71-80.98, and 1361-1376, respectively.


Keep your head up and your aging stick on the ice,


Daryl G. Jones

Director of Research


Demographic Reckoning - Chart of the Day


Demographic Reckoning - Virtual Portfolio

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