Wendy’s is a company heading in the right direction but we would look elsewhere for exposure to the QSR category at this point in time.  We anticipate the stock continuing to trade in the $4.50 - $5.50 range that it has been in for the last three years until management provides investors with clearer guidance as to the timeline for the system reimaging to reach completion.




President and CEO Emil Brolick, CFO Steve Hare, CMO Craig Bahner, SVP of Strategic Initiatives and Planning Abigail Prince, and others presented at the Wendy’s Investor Day yesterday in Dublin, Ohio.  Hosting its second Investor Day this year, the company was expected to share good news and that came in the form of a preannouncement of +3% same-store sales growth for 2Q at company stores versus expectations of 1.5%, according to Consensus Metrix.  McDonald’s same-store sales growth slowing has definitely been picked up by other domestic QSR chains, including Wendy’s.  However, we have not seen participate in any rally in QSR stocks over the past number of years.  The second chart, below, highlights the price action in the stock versus domestic QSR competitors over the past nine months; we believe that a lack of visibility on cash flow is keeping investors on the sidelines.




WEN: DUBLIN WASN’T BUILT IN A DAY - trad qsr 9 months



The Crux of the Debate


Our view remains that gaining clarity on the timeline for the system to go through the reimaging process is essential before establishing an intermediate- or long-term position in the stock.  The company’s priority is shifting from dividends and share repurchases to “strategic investment” related to the brand revitalization.  The company offered a timeline for reimaging 50% of the company-owned restaurants by the end of 2015 (70% of the company-owned stores need reimaging longer term) but no such specificity was offered with respect to the franchised portion of the system (~78% of total restaurant count).  We see several unresolved components to this story that will keep us on the sidelines until the facts change. 


Below, we address several key takeaways from the meeting:


Reimaging: CFO Steve Hare presented what, to us, was the most important part of the presentation as he offered some details around what management expects the financial implications of the reimaging initiative to be. 

  • 10 Company reimages in 2011, 50 in 2012, and 100+ expected in 2013
  • 50% of total ~1420 company stores reimaged by end 2015 with $500mm of CAPEX during 2013-15
  • Three tiers of image activation investments depending on needs/location/economics of each store
    • Tier 1 = $650-700k
    • Tier II =$500k
    • Tier III = $300k
  • The company expects annual positive free cash flow during those years
  • Of 372 franchisees, 28% own 78% of the franchise stores
  • Management believes that reimages may bring 25% sales lifts with a 30% flow-through to profit

This could all play out as Mr. Hare outlined but we think there is too much risk to the company’s assumptions to place capital behind them at this point in time.  For instance, franchisees’ enthusiasm for the reimaging program will likely depend on negotiations between corporate and the franchise community; royalty relief and other options will surely be discussed.  Recent conversations we have had with prominent members of the franchisee community have expressed concerns about the “eye-popping” numbers involved in the reimaging program.  Such concerns may prolong the process.  The benefits of the reimaging program, it seems, will need to be proven over a broader span of time and a larger number of restaurants before franchisees join the effort en masse.  The reimaged Bethel Road, Dublin, prototype location that we visited on Wednesday night reopened its doors 10 months ago in a core Wendy’s market.  While the ~$700k sales lift on the restaurant was impressive, we believe that the franchisees we have spoken to will seek further evidence that a positive yield can be expected from any investment they make in the reimaging initiative. 


The next meeting between management and the company’s franchisees, in October, is the next major milestone for the long-term Wendy’s story.  The support of the franchise community is important for the company to attain the benefits of the reimaging program.  Management believes that when 35-40% of dominant marketing areas have reimaged the restaurants, the long-term improvement in traffic should become material.


Cash Priority Shifting: Management is changing its focus to reimaging and reinvestment in the brand.


Marketing: Wendy’s has picked up its marketing game from non-existent to evidently effective over the last few quarters and the results, of 3% positive comps in 2Q, are clear for all to see. 


Stinky Carpets: Good food is important and it was encouraging to see the distinctive new offerings Wendy’s is bringing to the consumer.  As Emil Brolick admitted to a group of analysts at a lunch in New York shortly after he was appointed CEO, increasing traffic in the lobby depended very much on the asset base being upgraded; essentially, (our words) stinky carpets will lessen the appeal of new food offerings.  Management recognizes this and rightly asserts that the asset base should not preclude the company from leading in terms of product.  We agree, but believe that the broader system will continue to struggle versus major competitors in terms of traffic until the reimaging process reaches a satisfactory run rate.


Breakfast Yet to Leave the Station: The company has a strong pipeline of breakfast products and its coffee sales have grown encouragingly (up 25% since rollout of “Red Headed Roasters”).  22% of QSR traffic occurs during breakfast and the day part represents all of the growth in QSR over the last 5 years.  Wendy’s is missing out on the only rising tide in the industry and is forced to battle it out with competitors for traffic growth in other day parts.  The product, for what it’s worth, seemed very competitive to us but is real estate a problem?  Are the stores on the wrong side of the Street?  Are franchisees going to want to roll out breakfast while so many other changes are taking place?  We don't know the answer to these questions but that they persist is a concern in and of itself.


WEN: DUBLIN WASN’T BUILT IN A DAY - wendy s breakfast





Wendy’s has a great management team that is aware of the challenges it faces.  That said, this Investor Day was loaded with statements that hinge on many uncertain factors.  If, for lack of available details, we conservatively assume that the average reimage will cost $500k, it would imply $2.6 billion of investment required to revitalize the franchised portion of the asset base.  Reimaging remains a dark cloud hanging over the Wendy’s story and we expect the stock to remain range-bound until investors gain more visibility as to the timeline and the cost associated with this core component of the brand revitalization effort.  There will be a time to get behind this stock but, for the foreseeable future, we will stay on the sidelines until we gain clarity on the company’s timeline and future cash flow generation.



Howard Penney

Managing Director


Rory Green




NKE: Just Plain Awful

Nike (NKE) reported its FYQ4 results yesterday and missed the Street consensus by a whopping $0.20. Essentially, it was a total wash and Nike put up one awful print. This is a company that has continued to grow quarter-over-quarter for the past few years up until 2012. Gross margins were off management’s projections for the third quarter in a row. Plain and simple: Nike messed up and management knows it simply cannot screw up next quarter. The board will not allow it.



NKE: Just Plain Awful - NKE 1yr



To put it in perspective, the company had several factors affecting the outcome of its earnings report. Higher R&D costs, a negative customs ruling for four years of imports and gross margins hovering at a 2004 level. And consistent with our macro outlook, growth in China slowed to abysmally low levels, but it can be argued that was to be expected. Furthermore, management’s tone on the conference call displayed a laid back attitude that does not bode well for a company posting a miss like Nike did. In short, it’s time to hunker down and focus.


Despite yesterday’s horrid earnings report, we do remain bullish on the stock over the long-term. Capital expenditures are leveling off, the new NFL contract will grow into a half-a-billion dollar business in about two years, and the sale of Cole Haan and Umbro (both of which Nike had no business owning) will generate cash to play with. 

Fun: SP500 Levels, Refreshed

POSITIONS: Short Industrials (XLI) and Energy (XLE)


So the SP500 went up 41 handles in less than 2.5 hours of trading, and everyone nailed both sides, right?


This is obviously getting out of control, and anyone who doesn’t realize that probably didn’t in Q3 of 2008 either. No, this is not 2008. This is 2012, and Q3 starts Monday.


Across my core risk management durations, here are the lines that matter most: 

  1. Intermediate-term TREND resistance = 1366
  2. Immediate-term TRADE resistance = 1359
  3. Immediate-term TRADE support = 1335 

In other words, what was a hyper short-term TRADE line of resistance (1335) is now support, and I fully expect to test this 1 wall of resistance. When/if the market fails at the wall, the central planners are going to need another central plan.


Maybe today is a fun one for politicians. That’s just great, for them. Their behavioral similarities to 2008 are mounting, by the week.


Enjoy your weekend,



Keith R. McCullough
Chief Executive Officer


Fun: SP500 Levels, Refreshed - SPX

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TODAY’S S&P 500 SET-UP – June 29, 2012

As we look at today’s set up for the S&P 500, the range is 17 points or -0.68% downside to 1320 and 0.60% upside to 1337. 











    • Down from the prior day’s trading of 1589
  • VOLUME: on 6/28 NYSE 906.61
    • Increase versus prior day’s trading of 32.45%
  • VIX:  as of 6/28 was at 19.71
    • Increase versus most recent day’s trading of 1.34%
    • Year-to-date decrease of -15.77%
  • SPX PUT/CALL RATIO: as of 6/28 closed at 1.85
    • Up from the day prior at 1.56 


TREASURIES – US Treasury Bonds continue to be the only sober asset class not being whipped around by central planning headlines. At 1.62% this morning, yields haven’t budged (the 10yr is actually down 5bps on the wk and the Yield Spread (10s/2s) is 6bps narrower. More bailouts only slow growth further; that will be obvious in July/August. 

  • TED SPREAD: as of this morning 38
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 1.64
    • Increase from prior day’s trading at 1.58
  • YIELD CURVE: as of this morning 1.33
    • Up from prior day’s trading at 1.28 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: Fed’s Rosengren speaks on banking crisis in Amsterdam
  • 8:30am: Fed’s Dudley speaks in Puerto Rico
  • 8:30am: Personal Income, May, est. 0.2% (prior 0.2%)
  • 8:30am: Personal Spending, May, est. 0.0% (prior 0.3%)
  • 8:30am: PCE Deflator M/m, May, est. -0.2% (prior 0.0%)
  • 8:30am: PCE Core M/m, May, est. 0.2% (prior 0.1%)
  • 9:45am: Chicago Purchasing Mgr, June, est. 52.3 (prior 52.7)
  • 9:55am: University of Michigan consumer sentiment, June final, est. 74.1 (prior 74.1)
  • 11am: Fed to purchase $4.25-5.25b notes in 6/30/2018-5/15/2020 range
  • 12:05pm: Fed’s Bullard speaks on U.S. economy in Arkansas
  • 1pm: Baker Hughes rig count
  • NAPM-Milwaukee, June, est. 55.2 (prior 57.7) 


    • House, Senate in session
    • President Obama travels to Colorado for wildfires
    • EPA Asst. Administrator Gina McCarthy speaks at House
    • Energy panel hearing on EPA’s greenhouse-gas regulations, 9am
    • Last day to submit comments to CFTC on agency’s proposal to ease part of Dodd-Frank regulations limiting speculation in oil, natural gas, wheat and other commodities 


  • EU summit continues in Brussels; Euro-area leaders agreed to relax conditions on emergency loans for Spanish banks and possible help for Italy
  • Anheuser-Busch InBev buys rest of Modelo for $20.1b
  • Basel said to agree on draft changes to bank liquidity rule
  • Personal spending probably stalled in May, household purchases est. unchanged after 0.3% gain in April
  • Melrose to buy Elster for $20.50/shr. or $2.3b
  • Credit Suisse says it expects to be profitable in 2Q
  • Nomura cuts executive pay, halts some business on insider leaks
  • Ford said pretax oper. profit will be “substantially lower” in 2Q
  • JPMorgan allowed CIO Ina Drew to retire with $21.5m in stock, options
  • RIM drop puts pressure on co. to “sell, break up or die”
  • Apple Says Dan Riccio to run hardware as Bob Mansfield retires
  • Melrose to buy Elster Group for $2.3b
  • Peter Madoff, the younger brother of Bernard L. Madoff, is set to plead guilty to conspiracy and fraud
  • Qualcomm CEO Paul Jacobs said he wouldn’t rule out owning a manufacturing plant or tapping its cash pile
  • Bain Capital said to raise $2.3b for 2nd Asia fund
  • Nissan adding Sentra output, 1k jobs at Mississippi plant
  • Today is last trading day of month, quarter, half-year
  • U.S. Jobs, Tankan, Mexico Presidency: Wk Ahead June 30-July 7 


    • Constellation Brands (STZ) 7:30am, $0.39
    • KB Home (KBH) 8am, $(0.35) 


  • Gold Traders Extend Bullish Streak on Debt Crisis: Commodities
  • Commodities Up Most in Six Months as Europe Eases Credit Rules
  • Oil Rises From Nine-Month Low on Europe Measures, Supply Concern
  • Corn Poised for Biggest Weekly Gain Since 2008 on U.S. Drought
  • Copper Rises Most in Two Weeks Amid Reduced Debt-Crisis Concern
  • Palm-Oil Exports From Indonesia Set to Advance on Ramadan
  • Gold Pares Worst Quarterly Loss in Eight Years on Europe Deal
  • Raw Sugar Rises Before ICE July Futures Expiry; Coffee Advances
  • Rio Tinto Sees China Growing 8% in 2012 as Euro Crisis Deepens
  • Drought Rivaling 1980s Won’t Produce More U.S. Farm Assistance
  • Iran Offers to Ship Crude to South Korea on its Own Oil Tankers
  • Gas Drop to $2 Seen After Worst-to-Best Rebound: Energy Markets
  • European Carbon Permits Are Fastest-Rising Commodity in June
  • Alcoa Plans Job Cuts in Australia to Lower Cost, Retains Smelter
  • China, Singapore Granted U.S. Exemptions From Iran Sanctions
  • Oil May Rise After Imposition of Iran Sanctions, Survey Shows 





EURO – get the EUR/USD right, you get all the Correlation Risk trades right – and that’s pretty much the biggest reason why everything from Copper to the Spanish IBEX are ripping. At +1.2% the Euro is having one of its biggest up days of Q2 here, so that is going to train wreck anyone who nailed the quarter, on the last day of the quarter. Nice.






GERMANY – probably the most important lines to watch are Euro $1.26 (immediate-term TRADE resistance) and DAX 6251 (immediate-term TRADE line); for the DAX, holding above that line would be as bullish as it looked bearish below the line only 24hrs ago. Guys running billions can probably flip their entire book upside down in 24hrs, right?













The Hedgeye Macro Team





The Wall

This note was originally published at 8am on June 15, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Would it be excessive of me to ask you to save my life twice in a week?”

-Tyrion, Game of Thrones


I was speaking at a Canadian Economic Development dinner last night. At the end of my presentation I opened it up for the customary Q&A. Most of the questions were concerned with where Oil and Metal prices could go when Bernanke and Geithner run out of US Dollar Debauchery bullets.


Whenever talking about mean reversion and/or tail risks, the most obvious two-word risk factor that I explain (that neither Berrnanke or Geithner ever mention) is CORRELATION RISK. After I walked through that, a nice Scottish-Canadian man stood up and said, “this is more of a statement than a question – you are scaring the hell out of us.”


I politely replied (he was Canadian remember), “after what happened again out there into the US market close today, you should be scared.”


Back to the Global Macro Grind


Yesterday’s stock and commodity markets were trading off into the close, and then completely reversed course to the upside after our overlords floated a headline to the market that central planners were “prepared to take coordinated action.”


Whew, thank God for that!


Fear is what central planners are feeding you. Without fear-mongering the citizenry, they can’t print, bail, and print. Without fear of being held accountable for their own policy moves (Growth Slowing, equity market outflows, crashing market prices, and no political re-election) they wouldn’t be making these ridiculous short-term decisions.


At this point, it’s clear that they have gone over The Wall. They cannot go back. And no, that doesn’t mean that it ends well when they realize what’s on the other side either.


In HBO’s latest mini-series hit, Game of Thrones, The Wall separates the known (centrally planned kingdom societies) from the unknown. It’s the perfect metaphor for how conflicted and compromised Keynesian politicians must feel right here and now in 2012. They fear what they cannot see. They fear letting free market prices clear.


We let losers win until The Wall no longer holds. In the meantime, Mr Market is already in motion in taking down the Old Wall.


If you are afraid of a small part of The Wall coming down this weekend, you should be – because now these market morons have ramped expectations (market prices) right back up to the walls of Hedgeye’s immediate-term TRADE lines of resistance.


What does that mean?


That means that if market prices fail, again, at this interconnected wall of resistance, there is very little left in terms of Big Government Intervention catalysts and/or downside market price supports.


Across countries, commodities, and currencies, here are your immediate-term TRADE walls of resistance:

  1. SP500 = 1344
  2. Russell2000 = 775
  3. Euro Stoxx50 = 2179
  4. CRB Commodities Index = 280
  5. Japan’s Nikkei225 = 8731
  6. Shanghai Composite = 2348
  7. South Korea’s KOSPI = 1897
  8. Germany’s DAX = 6281
  9. Spain’s IBEX = 6797
  10. Greece’s ATG Index = 664
  11. Oil (Brent) = $104.87
  12. Gold = $1645
  13. Copper = $3.44
  14. 10yr UST Yield = 1.73%
  15. EUR/USD = $1.27

If, by chance, The Wall of resistance to do more of what has not worked is overcome, beyond that is another wall – The Wall of intermediate-term TREND resistance. Economic gravity is thick.


It remains unclear if these people making these short-term political decisions to manipulate market expectations have any idea about what I am talking about. It remains unknown if they ever had a proactive process of preparation to meet the challenges that remain outside The Wall of their leadership’s groupthink. It is a problem – it is them.


Fortuitously, in anticipation of some version of this political gong show, I got longer earlier this week. Don’t expect me to keep a 67% Cash position into this weekend though. I only have 4 SHORT positions left in the Hedgeye Portfolio. Expect that number to go up, maybe a lot, too.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1586-1634, $95.90-98.71, $81.73-82.36, $1.24-1.27, and 1310-1344, respectively.


Happy Father’s Day Dad – best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Wall - Chart of the Day


The Wall - Virtual Portfolio


The Macau Metro Monitor, June 29, 2012




Steve Jacobs alleges in court documents that Sheldon Adelson personally approved of prostitution and knew of other improper activity at his company's properties in the Chinese enclave.  Brad Brian, an attorney representing LVS, called the allegations false and scurrilous.  Jacobs alleges other documents that haven't been turned over include records of misuse of "blue card' work permits and the hiring of illegal workers in Macau; emails and records of Adelson controlling a "Chairman's Club" allowing favored members, including known or suspected organized crime figures, exclusive access to Sands China's most luxurious accommodations; and email requests from Adelson to a Macau lawmaker who Jacobs said was hired as outside counsel after Jacobs was fired.


The judge scheduled a July 13 hearing on possible sanctions against the company and its lawyers for failure to disclose to the other side and to hear that some documents sought by Jacobs' legal team had been brought from Macau to the U.S. more than a year ago.



Clark County District Judge Elizabeth Gonzalez delayed Kazuo Okada’s request for Wynn Resorts Ltd’s books.  A decision will only be made after the casino operator’s lawyers have a chance to question Mr Okada about his request, Clark County District Judge Elizabeth Gonzalez ruled.  She agreed with Wynn Resorts’ attorneys that the deposition was needed to determine if Mr Okada had a “proper purpose” for requesting Wynn records and books from as far back as 10 years ago.

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