Continuing our theme of a potential silver lining in Casual Dining!

Casual Dining operators on average are facing a much easier EBIT comparison in the current quarter as 4Q07 marked the first quarter of significant YOY declines, with margins on average down over 200 bps. Although same-store sales growth started to taper off in 2006, the casual dining companies saw a dramatic fall off in growth in 4Q07 when comparable sales growth fell 2.4% and traffic declined 4.2%. Trends have obviously deteriorated further since then but that sequentially more substantial decline in top-line growth in 4Q07 coincided with a sequential and YOY spike in both food and labor costs, which put increased pressure on EBIT margins.

This easier margin comparison in 4Q08 will not be enough to offset the significant same-store sales declines. We already know that October casual dining same-store sales declined 6.1% with traffic down 8.2% and we are expecting November to not get any worse. However, should top-line growth start to stabilize in December and early 2009 as a result of Obama’s expected fiscal stimulus program, the YOY comparisons could finally start to play in these companies’ favor. Casual dining operators are lapping both higher food and labor costs in 4Q08 and 1Q09 so the YOY pressure on margins should start to moderate, particularly with the recent declines in commodity costs. Most of the companies are forecasting that their cost of sales will be up in FY09 but at a much more manageable pace relative to the increases experienced in FY08 with the biggest YOY benefit expected in the back half of the year. Lower gas prices (down nearly 45% YOY) should help margins both from a cost and demand perspective.

Although the timing around when top-line results start to stabilize remains the number one question, I would not be surprised to see this group rally in early 2009. Any incremental lift to same-store sales growth in 2009 will coincide with moderating food costs on a YOY basis and should improve margins from their current depressed levels.


When you can borrow $2.2bn (or more) from your credit facility at 4% and the debt doesn’t mature until 2013, shouldn’t you put some capital to work? This is the situation that BYD finds itself in thanks to the suspension of Echelon back in August. And it’s not like we’re at the top of the market either. MGM just sold Treasure Island at a gross purchase price of around 8x depressed 2009 EBITDA. We are in a buyer’s market, after all.

We believe MGM may be interested in selling other assets. It would seem to make sense for MGM to sell its 50% interest in Borgata back to BYD. BYD already manages the facility and has liquidity. MGM, needs to de-lever and find liquidity. Strategically, it makes sense for BYD to fully control the asset for future cross-marketing benefits combined with an eventual Las Vegas development. Most importantly, the deal would be accretive from both a free cash flow and earnings per share perspective.

BYD is effectively borrowing at an incremental rate under 4%. At 7.5x our projected Borgata 2009 EBITDA, BYD would be paying $800 million, including $350 million in assumed debt, for the remaining 50% of Borgata it does not own. We calculate EPS accretion of $0.07-0.13 at that price, or 11-17% accretive to the current consensus estimate. On a free cash flow per share basis a Borgata deal could generate accretion in the 20% range.

This is a deal BYD probably should pursue.

Brazil: "Re-Flation", South American Style...

I bought Brazil yesterday for 3 reasons:

1. It was down (I buy red)
2. They are next up to cut rates aggressively
3. It’s the high beta “Re-Flation” Trade

That’s it. The Brazilian exchange traded fund, EWZ, has just shot up to +9% on the day. Remember the “R” in BRIC? This one has a bid to cover.


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Does Anyone Believe This Rally?

I don't think so - the feedback I am getting from my network has one conclusion: people are not long enough.

I’ll agree with everyone’s super duper analysis that this is bad for the intermediate “Trend”… as for the Trade, the dumbest guys in the room are going to get this the most right… over thinking it gets the intellects to perpetuate the squeeze


The running category is going to be a share war in 2009. UA will emerge a winner…NKE will sustain at all costs…AdiBok has its back against the wall.

The Running category is going to have its share of fireworks in 2009. For starters, Under Armour is making a big push into the space – and my strong view is that UA will succeed. The company is going in at price points averaging around $90, which is at the very high end of what runners will pay, and they’re going about the R&D and marketing in all the right ways. Huge opportunity for UA given that this is a $5bn category at retail. Nike owns this category with 65% share, and the next largest brand (Asics) at 15%. Past that, there are several more brands that bring up the rear in the 2-6% range. UA is not even on the map. The consumer genuinely wants this brand to succeed. Don’t underestimate that. Every point of share is 3-4% top line growth to UA (not including running apparel). I still don’t see why this company cannot have 3-5% of the US footwear industry over 3 years, which alone grows UA by 2/3.

But what about everyone else? Asics and Saucony (owned by Payless) each garner over 80% of sales from running, and they’ll put up a fight. New Balance is 32%, and will put up a fight as well. This is not to mention brands like K Swiss that are growing into running, and Nike that will defend its turf at all cost. The big loser? I’d hate to be Adidas/Reebok. I personally think neither stands a chance in the US next year. They’re not proactively managing for the tail risk we’re likely to see.

The Road To ZERO

I am not sure that everyone is aware of the global macro calendar this week, but on Friday (our Thursday night), the Bank of Japan is going to be making their call on interest rates. While the chart below looks more Japanese than it does American, look at it for what it is… and don’t think for one second that Japan won’t follow “Heli-Ben’s” move on Friday and cut to ZERO as well – been there, done that. These guys are the FREE money, flat yield curve, pros.

Now people who have been missing the latest “Re-flation” in Chinese stocks and gold (we have been long both) are going to be delivered the revisionist memo as to the ever so elusive macro “WHY”!

FREE money is crushing the US currency alongside the integrity of “Investment Banking Inc.’s” handshake. As the bond market begins to figure out that all is no longer safe in the land of nod – the “Re-flation” squeeze in US equities, and equities globally, will defy the academic view (which I agree with) that this Japanese exercise will not end well.

Strap on your seatbelt’s.

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 78.70%