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MCD - Asia Slowing?

As noted in HedgEye's early look today - the prime investment focus should be moving away from the credit crisis and towards Asia's double edged sword of accelerating inflation and decelerating growth."

A data point from MCD Japan supports this thesis. MCD Japan reported that same-store sales fell 0.5% in April, the first decline in 27 months. One-time issues like difficult comparisons and one fewer Sunday should be noted, but even after adjustments the trends are slowing from 1Q08 same-store sales of 4.4%.

WEN/TRY - On Saving $60 Million...

On May 12, 2008, a letter from Roland Smith was distributed to all Wendy's employees and franchisees and posted on Wendy's internal portal.

The $60 million in synergy saving was not mentioned but, he did say: There will be job cuts at Wendy's. I don't know how to put it any other way and say that I am acting with integrity. We will continue to be truthful with you about these as they come up and as we look at the plan for organizing our company as we go forward.

This is the hard part about trying to not look like the bad guy from the south.....

CKR - Moving The Compensation Goal Posts Mid-Year

Shareholders can't be happy about this!

Determining Executive Compensation......

The Employment Agreements for senior management permits bonuses to be paid based on the discretion of the Board. In FY 2008 CKE restaurants did not hit the targeted income for management to receive a performance bonus. So, the Board felt that it was important to analyze why the company missed numbers and determine if senior management should get a bonus.

And guess what........ The market value of the company declined nearly by $600 million The CEO made $6.2 million, down from $6.8 million last FY.


According to the CKE proxy - During fiscal year 2008, a number of material events occurred which were not anticipated at the time the original target income was approved and which changed the Company structurally. Since these events were not anticipated, they were not factored into the original budget.
These events included the following:

(1) In July of fiscal year 2008, the Company sold its La Salsa brand. The original budget contemplated owning La Salsa for the entire year.

(2) The Company refranchised 136 Hardee's restaurants pursuant to a refranchising program the Company announced in April of fiscal year 2008. The original budget contemplated owning these Hardee's units throughout the fiscal year.

(3) The Company repurchased $266,640,000 of its common stock during fiscal year 2008. The Company increased its borrowings under its credit facility by $219,404,000 in fiscal year 2008 principally as a result of the share repurchases, thereby increasing interest expense during the fiscal year. The original budget did not contemplate this volume of share repurchases or the attendant interest expense.

(4) The primary unforeseeable events creating these adverse consequences were the significant increase in commodity costs, the extent of the increase in the minimum wage, and the substantial decline in interest rates resulting in mark-to-market accounting charges which the Company was required to take on the interest rate swap agreements the Company had entered into with respect to certain of its debt.

Because of the structural changes to the company and unforeseen events the board believed that the original budget was no longer relevant in determining management compensation. As a result, there was no impact to senior management compensation, despite a nearly 50% decline in the value of the company.



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India to the Rescue (Not)

We think that the slowdown in India's industrial production has particularly strong implications for the apparel industry -- and we feel even stronger that this will likely fly right under Wall Street's radar screen.

Consider this. Indian Industrial Production slowed to 3% in March from an 8.6% rate in February. Not good. Aside from increased signs of a slowdown in Asia, we need to highlight the Indian/Chinese production trade off.
The chart below shows that over the past 7 years, China's share of US apparel imports went from 8% to 30%. That was a seismic event for the industry. The share gain was very steady, with one major exception - the first 3 quarters of 2006. During that time period, China began to hold firm on price, subsequently lost share, and it went right into India's pocket.

Now, China is holding firm on price again, simply because it can. But with both production and exports slowing in India as Singh tames the inflation beast in hopes of securing re-election, we're not so sure if India will be there to bail out US apparel importers by hacking prices and eating the margin pinch like it did in 2006.

Yet more proof that the US apparel industry needs to pick one of three options; a) either succumb to the prospect of sustained higher prices out of Asia, b) find some ingenious way to grow margins in a slow growth, high-cost environment (i.e. M&A), or c) attempt to pass through higher prices to consumers, and likely take it on the chin with unit demand.

Bad stuff all around.

MCD - Global Growth Trends

How long before McDonald's European Trends look like the US?

On May 14, The Bank of England will talk about the outlook for interest rates as the UK struggles with faster inflation and signs the economy might be headed for a recession. The UK economy is struggling with record food and oil prices, a global credit crisis and the worst housing downturn in 12 years. Additionally, with consumer confidence in Germany slowing the grey clouds are forming for McDonald's most important European country.

Surprising Read on UA Trainers

Under Armour's much anticipated cross-trainer launch did not break any sales records last week -- by a long shot.

Our contacts suggest that initial sell-throughs were around 10% in the mall (i.e. mostly Finish Line). Fyi, 'sell through' refers to the percent of allocation sold through in a single week.

The surprising aspect of this statistic is that it is actually above the 6% we're seeing in some major sporting goods retailers. We'd think it would be the opposite given UA's stronghold in the sporting goods channel.

These are not disastrous numbers by any means, and we certainly won't judge the success of UA's footwear initiative by a mere week -- or even a full season. In fact, these numbers are pretty good in the context of such a weak retail environment.

But let's not forget that UA's initial launch of its cleated footwear business last year sold through at a rate of about 20-30%.

Such a wide divergence is simply too great to ignore.

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 80.33%
  • SHORT SIGNALS 78.51%
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