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BWLD: DON’T MENTION THE WINGS

This may not be the best career risk management move, but BWLD is a story that we are still grappling with.  The company could be facing a staggering 20% increase in COGS during 1Q12, yet all research and commentary on the stock seems to skirt around this risk.  Are sales trends really that strong, and are they continuing to be as strong heading into 2Q, even given the drop off of the weather benefit and the slowing of the casual dining segment from February to March.

 

Don’t Mention the Wings

 

At the Telsey Advisory Group Spring Consumer Conference, Buffalo Wild Wings management had the following to say about commodity inflation:

 

“Commodities continue to receive a lot of attention these days. We have a long history of successfully managing our business and believe with our strategic focus on guest experience and operational excellence, our ongoing sales trends and unit level execution, and the benefit of a 53rd week, we will overcome rising commodity costs and achieve our net earnings goal.”

 

Here is what the company had to say on the same topic on the 4Q11 earnings call:

 

“We believe that with our strategic focus on guest experience and operational excellence, our ongoing sales strength and unit-level execution, and the benefit of a 53rd week, we will overcome rising commodity costs and achieve our 20% net earnings growth goal for 2012.”

 

Clearly there is a script that this management team is sticking to.  On the date of the 4Q11 earnings call, wing prices were up 75% year-over-year.  Now, they are up 98% year-over-year.  As our sensitivity table shows, below, based on guidance provided in the most recent 10-K, assuming a tax rate of 34% and shares out of 18.5 million, there could be a ~$0.70 impact to 2012 EPS from wing price inflation alone.  The question is, how much of an impact is consensus baking in?  Is the Street assuming blockbuster top-line and realistic COGs or are they assuming a large decline in wing prices during 2H12? 

 

BWLD: DON’T MENTION THE WINGS - BWLD wing sensitivity

 

 

Today at the Columbia Investment Management Association Conference, David Einhorn was quoted as saying that “Sometimes it’s a conspiracy to misinform people.  Wall Street has this agenda”.  We’re not saying that this is the case here, but we find it alarming that such a pertinent factor as commodity inflation is for BWLD over the next 3-6 months is barely being paid any attention.  The top-line story has been fantastic and we underestimated that in 4Q11’s results.  However, the lack of flow through was a worry to us then and is an even more acute worry now; inflation is only becoming more of a factor as time passes.

 

Perhaps the company can leverage labor, lighten up on G&A, and trim some fat elsewhere.  The reality is, however, that part of this company’s story is the growth story and G&A spending cuts may hamper growth efforts.  Labor leverage is definitely an available strategy but we do not see sufficient gains coming from that line to offset COGS significantly.

 

There is some risk to our bearish stance; the level of pricing that management is planning to take in the face of inflation pressures has not been determined.  Depending on how complicit consumers are with this price increase/increases, our view may change. 

 

The benefit of the 53rdweek is another offsetting factor.  At this point, the Street seems to be giving management 100% credit that it can manage through this period and meet investor expectations.  While the company has managed through inflation historically, investor expectations have not always been met.

 

 

Another Concept?

 

On another concept, management had the following to say:

 

We are also considering the possibility of acquiring or developing an additional concept to maintain our position as a high-growth restaurant company for the long term.”

 

We know never is a long time but never, in our recollection, has there been a restaurant company successfully transition from an original concept into two concepts while maintaining its growth profile concurrently.  Comments like the above statement from management make us weary.  Any transaction for Buffalo Wild Wings to acquire a growth brand is almost certain to be dilutive to EPS and the company lacks the cash flow to grow two concepts without taking on further capital.

 

Our EPS estimate for the year remains below consensus.  We are not satisfied that the risks to the company’s outlook are fully appreciated. 

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 


Defining Asymmetry: Investor Complacency At Multi-Year Lows

Conclusion: Measures of investor complacency are signaling to us asymmetric risk from an intermediate-term perspective. As such, we’re either at/near a cyclical top in “risky assets” or we’ve achieved “escape velocity” and are entering a new era of investing. We believe this is the key market debate to focus on.

 

After recently shifting out of being long the Inflation Trade from an asset allocation perspective, we’ve been loud in recent weeks highlighting the risks to real GDP growth, both domestically and internationally. Further, we continue to anticipate those risks (namely higher input cost inflation in the absence of commensurate employment and wage growth) to roll through the global economic system and slow growth on a lag. At these market prices (SPX = ~1,400; MSCI All-World Country Index  = ~160) we find there is asymmetric risk to the downside.

 

Of course, that risk is mitigated if we have reached “escape velocity” (to borrow the Fed Chairman’s own academic theory within the soft science of macroeconomics). At Hedgeye, we are inclined to defer to the math backing hard sciences, like physics, for example. Central plan as they may, we remain of the view that economic gravity can’t be arrested in perpetuity. Furthermore, we continue to hold steadfast on our views that Big Government Intervention does two things:

  1. It shortens economic cycles; and
  2. It amplifies market volatility.

Speaking of market volatility, we’ve been in print lately flagging the risk to U.S. equities that is a CBOE SPX Volatility Index at/south of the 15 level (closed at 14.26 on Monday). Specifically, as we’ve seen over the last ~4yrs, VIX-15 has been key contrarian indicator to fade consensus bullishness at cyclical equity market highs:

 

Defining Asymmetry: Investor Complacency At Multi-Year Lows - 1

 

Broadening our read-through on volatility as a measure of investor complacency, we’ve created a proprietary cross-asset class volatility index that uses an unequally-weighted average of the following volatility indices:

  • CBOE SPX Volatility Index (VIX);
  • Merrill Lynch U.S. Treasury Option Volatility Estimate Index (MOVE);
  • CBOE Oil ETF Volatility Index (OVX);
  • JPMorgan G7 FX Volatility Index; and
  • JPMorgan EM FX Volatility Index. 

On this score, the Hedgeye Global Macro VIX is at levels last seen since early OCT ’07. Note: that date is coincident with the all-time peak in U.S. equities amid consensus faith that “shock and awe” interest rate cuts and other modes of central planning would ultimately prove effective in delivering a shallow, manageable domestic growth slowdown.

 

Defining Asymmetry: Investor Complacency At Multi-Year Lows - 2

 

At such levels of consensus complacency, we feel it is prudent for investors to pick sides and make a call on which is the more probable of the following two scenarios:

  • Scenario A: We’re at/near a cyclical top in assets perceived to be generally more risky (equities; HY credit; EM currencies and debt); or
  • Scenario B: Measures of volatility will trade sustainably around these depressed levels for the foreseeable future, as we’ve entered a new era of global growth and financial market returns (akin to the mid-90’s and early-00’s).

You know where we stand. At a bare minimum, we think you should be having this debate with your respective teams.

 

Lastly, and certainly not to mine for contrarian data points, but the following anecdote is worth flagging for those of you who aren’t yet familiar:

 

The latest II Bulls/Bears Survey Spread (% Bull less % Bears) came in at 2,900bps – good for the widest spread since APR ’11. Per Keith’s commentary on yesterday’s Morning Macro Call:

 

“This is the other problem with [no] volume. We all know there’s no inflows into U.S. equities… there also isn’t going to be any more short covering. If this is how low the bears can go, this is what perpetuates the crash. Ben Bernanke’s policies have [many] unintended consequences… one of the big ones is that it gets the short sellers out of the game. They can’t efficiently cover stocks and keep that bid alive, so you get these real big draw-downs. That’s what we’ve seen: 1Q08, 1Q10, 1Q11. Are we going to have one in 2012? We’ll see…”

 

Measures of investor complacency are signaling to us asymmetric risk from an intermediate-term perspective. As such, we’re either at/near a cyclical top in “risky assets” or we’ve achieved “escape velocity” and are entering a new era of investing. This is the key debate we feel investors must focus on at the current juncture.

 

Darius Dale

Senior Analyst


INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING

This note covers both this morning's initial unemployment claims and MBA mortgage application weekly data released yesterday. 

 

Revisions, Revisions, Revisions

The media is running with the headline that jobless claims fell 5k week over week to 359k. That's fine, but it's definitely misconstruing what really happened. Last week's jobless claims number was 348k. This week? 359k. So how does an eleven thousand increase become a five thousand decline? Revisions! Last week's number was upwardly revised by 16k. There is a serial upward revision bias to this data driven by its calculation methodology, but that upward revision normally averages 2-3k per week. This week it was 16k. We suspect this is a byproduct of this being the week in which the government incorporates the annual revision to its seasonal adjustment factors. The bottom line is that claims are now rising, which is a marked reversal from their steady trend of improvement over the past several months. This is consistent with our call for the tailwind of Lehman's Ghost to become a headwind from March through August.

 

The rolling claims number was similarly affected. The government is reporting a decline in rolling claims of 3.5k to 365k even though last week the rolling number was 355k. On a non-seasonally adjusted basis, claims were essentially flat vs. the previous week. Non-seasonally adjusted rolling claims fell 3.7k to 336k from 339k. 

 

On a separate note, it's interesting to observe that the mean reversion between the S&P and jobless claims has finally played out. The two series are currently mean reverted. Given our expectation for claims to rise steadily over the next five months that should put a headwind on the market and XLF.

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - Rolling

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - Raw

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - NSA

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - NSA rolling

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - S P

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - Fed


2-10 Spread

The 2-10 spread tightened 6 bps versus last week to 186 bps as of yesterday.  The ten-year bond yield fell 9 bps to 220 bps.

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - 2 10

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - 2 10 QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - Subsector performance

 

Mortgage Purchase Applications Were Stronger Last Week 

MBA Mortgage Purchase Applications rose 3.3% last week, ending at an index level of 180.5. Purchase activity has been showing resilience after a dismal display in February. For reference, today's print is 11% higher than the February average of 162.1. Purchase Applications are currently 4.2% lower than a year ago. On a longer-term basis, demand for housing remains weak. Note in our long-term chart that the current 2012 average is now hovering around 1 levels. 

 

Refinance Applications fell 4.6% last week. Mortgage rates fell 7bps to 3.98% yesterday from 4.05% last Wednesday.

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - shark

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - Refi

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - Mortgage Rates

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - shark LT

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - Refi LT

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - YoY

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

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THE HBM: YUM, GMCR, RRGB, CBRL

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Gas Prices

 

According to the most recent American Pulse survey, even though gas prices have been rising for some time, the recent increase is not welcome and consumers are having to adjust their spending habits.  The survey suggests that 73.7% of Adults 18+ somewhat or strongly disagree with the statement, “I have become used to high gas prices and paying more than $4/gallon would not impact by spending in other areas.”


THE HBM: YUM, GMCR, RRGB, CBRL - gas prices chart

 

Commentary from CEO Keith McCullough

 

"While VIX 14 has been drawing people into buying high since the first week of March, this is not new – VIX 14, going back to 2008, is one of the most relevant sell signals (gross long equity exposure to beta) we can keep highlighting.

 

From a Sector perspective, Energy was the first Sector to snap its intermediate-term TREND line (today). Energy looks nothing like Apple - the Sector peaked on Feb 24thand has since had a -6.6% draw-down. Basic Materials (XLB) and Industrials (XLI) are broken from an immediate-term TRADE perspective, but those signals are less worrisome than broken TRADE and TREND (Energy).

 

This is a very pro-cyclical group of sectors Breaking down in unison, and it makes sense to us given that Global Growth has been slowing for at least a month."   

 

 

SUBSECTOR PERFORMANCE

 

THE HBM: YUM, GMCR, RRGB, CBRL - subsector

 

 

QUICK SERVICE

 

YUM: Yum filed an 8-K with the SEC detailing a new $1.3 billion credit deal.  The new facility carries interest rates of LIBOR plus 1-1.75%.

 

GMCR: New allegations of fraud are emerging against Green Mountain in the form of an amended class action lawsuit alleging violations of various federal securities laws.

 

KKD: Krispy Kreme announced a buyback equal in magnitude to roughly 4% of the market cap.

 

 

CASUAL DINING

 

CBRL: Cracker Barrel shareholder Sardar Biglari increased his stake in the company by ~27k shares on 3/23, according to SEC filings.

 

RRGB: Red Robin Gourmet Burger was rated New Buy at DA Davidson.  The PT is $46.

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

RRGB: Red Robin gained on accelerating volume on the DA Davidson upgrade.

 

THE HBM: YUM, GMCR, RRGB, CBRL - stocks1

THE HBM: YUM, GMCR, RRGB, CBRL - stocks2

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 



The Sum of Experiences

“Be who you are and say what you feel because those who mind don’t matter and those who matter don’t mind.”

-Dr. Seuss

 

I’m sure after reading the quote above, especially after reading yesterday’s declaration of the Bernanke War, you are wondering if Keith has gone soft.  Well, since I’ve known Keith for upwards of 15 years, I can say categorically he hasn’t gone soft, but he has handed the proverbial hockey stick on today’s Early Look to me as he is flying up to Thunder Bay, Ontario.

 

Yesterday, we had a long internal debate about branding and marketing.  The key questions, which of course are similar for your organizations, related to who we are, who we want to be, and what people actually think we are.  These are challenging questions for any organization, especially one that perceives itself to be the standard bearer for Wall Street 2.0.

 

Naturally, being the social media addict that I am, after our meeting I posed the question to the Twitter Sphere.  Specifically, I tweeted:

 

@HedgeyeDJ Question for the day: What is a brand?

 

The best answer actually came from a good friend and former colleague who tweeted back that “a brand is specifically the *perceived* sum of all the experiences, actual and emotional, associated with your brand.”  If you think about it, that’s not totally dissimilar to a stock price or stock index price.  It is actually the sum of all fundamental inputs, plus the behavioral or emotional input of market participants.

 

In the Chart of the Day, we actually emphasize that last point in looking at Chinese equities.  The Shanghai Composite, which is a capitalization weighted index which tracks all A-shares and B-shares listed on the Shanghai Stock Exchange, is at a 10-week low.  Further, the index is only up +3.9% in the year-to-date and is down -22.5% in the last year.  In as much as China is a proxy for global growth, as one of the world’s fastest growing and largest economies, the performance of Chinese equities is a little disconcerting. 

 

The next key catalyst for the Chinese economy is Chinese PMI, which is out this Saturday.  Ahead of that, as is typical before disappointing Chinese data, rumors are circulating that China will implement another reserve requirement ratio cut.  In theory, this action will free up money supply within the Chinese banking system.  My belief is if the Chinese indeed have to ease again, then it is probably ominous for the Chinese growth outlook.   Incidentally, the last time the Chinese cut the “RRR” was on the weekend of February 19thand the Shanghai Composite is literally in a straight line down since then.

 

For those that are looking for bullish global growth catalysts, you need to look no further than Morgan Stanley and HSBC.  This morning Morgan Stanley upped its China GDP growth forecast to 9.0% from 8.4%, while HSBC raised its price targets for all major Chinese indices.   HSBC may be on to something as slowing growth is starting to, obviously, be priced into Chinese equities.  As for Morgan Stanley, I’m not sure what they are feeling (or smoking for that matter).

 

The other key data points from global macro land this morning come from Europe.  As usually occurs when austerity is implemented aggressively, a general strike is underway in Spain this morning.  Interestingly, neither strikes, especially those that result in clashes with the policy, nor austerity are all that positive for economic growth.  I dare say that Spain is starting to look a little like Greece, but don’t take my word for it.  According to the head of the Spanish Banking Federation, “the strike takes us a lot closer to Greece and farther from Germany.”

 

For starters, I’m not sure Spain was ever all that close to Germany, except perhaps by plane or high speed train.  Germany’s unemployment rate fell -18,000 in March versus an estimate of -10,000 and the unemployment rate is now at 6.7%, which is a 20-year low.  Conversely, the Spanish unemployment rate is just shy of 23%. 

 

Also, unlike Germany, Spanish credit default swaps have accelerated dramatically recently.  In fact, Spanish 5-year CDS are now trading at 423 basis points, which is up more than 14% since the start of the month.  While still below the all-time high, this measure of risk certainly agrees with the idea that Spain is moving closer to Greece than Germany.  Incidentally, Spain Housing permits were down -25% year-over-year this morning, as well.

 

I’ll leave you with one last thought this morning from an email my colleague Darius Dale just sent to our team:

 

“Global cross-asset volatility hasn’t been this low since OCT ’07. Terrifying. Unless, of course, this time is different and we’ve reached “escape velocity”. Bernanke’s war has begun; we’re either off to the races from a growth perspective or things are about to get weird. You have to pick sides at these levels of investor complacency.”

 

Weird? Indeed.  Almost as weird as starting a Wall Street morning strategy note with a quote from Dr. Seuss.  Or, perhaps, that is all part of the brand . . .

 

Our immediate-term support and resistance ranges for Gold, Oil (Brent), and the SP500 are now $1, $122.12-124.96, and 1, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

The Sum of Experiences - Chart of the Day

 

The Sum of Experiences - Virtual Portfolio


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