BWLD: Upside Surprise

We have generally been bearish on Buffalo Wild Wings (BWLD) for some time now for multiple reasons. Be it the inflation risk associated with the cost of wings or an expectation of weaker same store sales, we were generally bearish on the stock…until yesterday.


A similar wings-and-beer chain called Wingstop that has 600 units across 31 states posted strong same-restaurant sales of +12.6% for the second quarter. Over the last two years, BWLD has been highly-correlated to Wingstop in terms of same-restaurant averages. This surprise move to the upside has us backing off the bearish tone we originally had. The current consensus the Street has on BWLD is 6%. We expect that to get blown out of the water as it’d require a complete reversal of the Wingstop correlation, which we don’t see happening. The chart below really gives you a feel for what to expect.



BWLD: Upside Surprise  - BWLD SSS


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This Wednesday, July 11th at 11am EST, the Hedgeye Macro Team, led by CEO, Keith McCullough, and DOR, Daryl Jones, will be hosting our 3Q12 Macro Themes Call.    


Topics will include:  

  • Growth Slowing's Slope - Our fundamental view is that growth will come in lower than expectations across a collection of major economies - including the U.S. We refute the notion of the U.S. decoupling and will present the main indicators that signal a higher probability of equities crashing from here. 
  • The Cliff - We analyze the assumptions embedded in consensus/CBO forecasts regarding the "fiscal cliff" and offer our view on how heightening uncertainty regarding this event should impact global financial markets. Further, we discuss the question: will slower domestic growth pull forward the debt ceiling debate and introduce uncertainty on a fiscal cliff resolution? 
  • Obama vs Romney - As elections approach we evaluate the policy impact on the broader economy based on the victor. Could the U.S. look more like Europe if Obama wins? And what asset classes stand to outperform based on the next president?  



Hedgeye Risk Management is a leading independent provider of real-time investment research. Focused exclusively on generating and delivering actionable investment ideas, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing. The Hedgeye team features some of the world's most regarded research analysts - united around a vision of independent, uncompromised real-time investment research as a service.


Please contact if you have any questions.




The Hedgeye Macro Team


In preparation for MAR's 2Q earnings release tonight, we’ve put together the recent pertinent forward looking company commentary.



Marriott International Expands Group And Meetings Portfolio With Acquisition Of Gaylord Hotels Brand And Hotel Management Company For $210 Million (May 31, 2012)

  • The transaction will add 4 hotels and approximately 7,800 rooms to Marriott's portfolio.
  • MAR mgmt contract: initial term of 35 years
  • MAR expects to earn an incentive fee in its first full year of management, based on improvement in Gaylord Hotels' profitability, and expects the transaction to be accretive to Marriott's EPS by approximately 2 cents in 2013.   


  • 2012-2014 guidance
    • 2012-2014 Worldwide compound REVPAR 6-8% growth and +90k-105k gross room additions assumption (or Net rooms growth of 3.5% to 4.0%), excludes Gaylord transaction:
    • EBITDA CAGR: +15-19% growth ($1.51-1.66 billion)
    • EPS CAGR: +23-30% growth ($2.45-2.85)
    • FCF:  $1.8-2.0 billion
    • Diluted share count: 293-304 million
    • $1.8 billion and $1.9 billion in worldwide fee revenue through 2014
      • NA incentive mgmt fee: $145-165 million
      • International incentive mgmt fee: $210-240 million
    • Owned leased and other revenue: $165-195 million
    • G&A: $720 million
    • Investment spending of $2.6 billion to $2.8 billion (recycle $800 million to $1 billion of capital)
    • $4.0 billion to $4.7 billion to return to investors or deploy in additional opportunistic investments


    • Plans to hire 30,000 employees in the country by the end of 2015
    • Target Adjusted Debt/Adjusted EBITDAR of 3.0x to 3.25x
    • Marriott Great Room: full roll-out in 2013


  • "On average...about 40% of a full service hotel is group business. So that leaves 60% which is all transient driven, fairly short term in bookings, you're talking about days or a few weeks. You're not talking about months of advanced look."
  • "You can envision a world in which something happens in Europe, it's not good for the economy either there or in the United States and I think there's still significant slowdown that we could take before we had really problematic RevPAR performance." 


  • "In 2012, we expect worldwide system-wide RevPAR to increase 6% to 8%.  Our higher RevPAR expectations reflect stronger transient business and strong group bookings, particularly bookings at smaller hotels in the U.S. We expect total fee revenue to grow 9% to 12%."
  • "Our Great Room should be in two-thirds of our Marriott Renaissance Hotels by the end of 2012. And we expect three-quarters of our more than 800 domestic Courtyard Hotels will offer the new Courtyard Refreshing Business lobby by then as well."
  • "We expect supply growth to remain very low for a number of years, particularly in the full-service segments."
  • "We expect a modest pullback in supply growth as the Chinese government attempts to cool the hot residential real estate market. This will likely slow the extraordinary pace of new hotel deals and openings a bit. Despite this, we continue to expect China to remain one of the fastest growing lodging markets in the world. Among upper upscale and luxury hotels in Asia overall, we have a 10% share of operating rooms but a 15% share of rooms under construction."
  • "In Europe, we believe the supply growth will likely remain under 1% for the next few years. There we are pursuing conversions for our full-service brands including Autograph and we see great opportunities for ground up development of Courtyards and AC hotels as well."
  • "Booking pace for the Marriott brand for the remainder of 2012 is up over 11% compared to only 2% a year ago. And what we see underneath that 11% for the brand as a whole is something more like 16% to 17% growth in group bookings for the smaller hotels and high single digits for the largest convention hotels.  Attendance at group meetings is running ahead of expectations. A few meeting planners are complaining about the lack of available space for new bookings during peak times."
  • "RevPAR in the Middle East declined 6% in the quarter and while Egypt remains a challenging market, we
    expect easier comps as the year goes on."
  • "For the full year, we expect to open 25,000 to 30,000 rooms. We've seen some construction delays for ground up development in the Middle East and Asia. Conversions are taking a bit more time as many new Autograph hotels are undergoing renovations prior to opening. About half of our expected room openings in 2012 are outside the U.S."
  • [Incentive fee 2012 guidance] "The 20% is probably a good number for the full year and it will vary quarter-to-quarter."
  • "Rate growth is a mix of all prior bookings from all prior years. So while the rate growth for new bookings is better, maybe a bit – maybe something like double that 2% number when we look at the bookings that are being made today, the rate growth is still going to take a little while we come along just as the older business burns off."
  • "As we sit here today we would say – with one quarter in the bag, it makes us feel a bit more confident about the balance of the year in Europe, but we still are mindful of the fact that we have got weakness in provincial UK, which has been the case now for a year, a year-and-half. We've got anxiety in France, which is increasing; Spain is not strong and Southern Europe is not strong."
  • "We've got a decent distribution in Germany. The German economy is the strongest in the Western Europe anyway, but there are risks there and we will sort of watch them. I think the other bright spot over there and where we are quite strong is Russia and the East. We've got strong distribution of hotels there and I think we'd see by-and-large continued strong performance in those markets."
  • [Higher guidance for owned and leased segment] "It's primarily our leased hotels that are showing strength, and benefiting just from the RevPAR that we talked about in the manage and franchise side. The leased hotels are experiencing the same benefits.... I think the other thing in there is Tokyo, is coming on very strong. And last year, it's an easier comp."
  • [Weak Washington DC market] "Those conditions will continue through the balance of the year and as a consequence, we wouldn't sit here today and say that you should expect something meaningfully more positive in 2012....I think the group bookings in 2013 look reasonably good. So we would anticipate a better 2013 than 2012."

MAR YOUTUBE - chart1

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Bearish Enough?





Bearish Enough? - client talking points




Our quarterly macro themes call takes place today at 11AM and will feature 49 slides in a 40 minute time span followed by anonymous Q&A. We are really fired up to talk about how growth is slowing and how commodity bubbles are bursting. Remember that our friend King Dollar is on a tear and is taking gold, copper and oil down with him.

If you’d like access to this morning’s Q3 Big Macro Themes call, please email



Everyone on the retail side and sellside will argue that if the Dow Jones Industrial Average is up year-to-date, then everything is groovy. Not the case. We are a mere 10 days into the third quarter of the year and check out how bad the three worst performing sectors of the S&P 500 have it:


1.    Industrials (XLI) = down -2.94%

2.    Basic Materials (XLB) = down -2.49%

3.    Energy (XLE) = down -2.12%



That’s a tough question to answer. People are still of the consensus that everything is going to work out in one way or another. The VIX is below 19, so how bad could it really be out there? We are at the start of a breakdown that is part of a bigger, macro-themed picture (see what we did there?) that must be understood. The consensus says the market is “bearish enough” -  we don’t buy that. We can always be more bearish.



Bearish Enough? - asset allocation


Bearish Enough? - assets July11



Bearish Enough? - top long ideas




The bulk of the bad news is on the table following disappointing F2012. Rebased F2013 estimates far more reasonable, and revenues should be supported by our expectations for rising physician utilization, and in the near-term, a flu season that is shaping up as a considerable tailwind.







SS volume accelerated in 1Q12 and employment remains a tailwind to both admissions & mix. We expect acuity to stabilize and births and outpatient utilization to accelerate out of 1Q12, while supply cost management continues as a margin driver and acquisition opportunities remain a source for upside.







The company continues to control its own destiny through investments in all the right areas. We think 30%+ top line and EPS growth for 5+ years. One of its failures, however, has been in penetrating markets outside the US. That will happen. But for now, its failure is a competitive advantage in the face of a strengthening dollar. We like it in sympathy with a LULU sell-off.







Bearish Enough? - three for the road



Tweet of the Day: “Microsoft store directly across from the Apple store. Guess which is full and which is empty?” -@Amaryllis         


Quote of the Day: “The most merciful thing in the world, I think, is the inability of the human mind to correlate all its contents.” –H.P. Lovecraft


Stat of the Day:  Hedge fund withdrawals jump to highest since 2009.





The Macau Metro Monitor, July 11, 2012




The construction of the Zhuhai section of the Guangzhou‐Zhuhai Intercity Railway is scheduled to be complete in September, and a test run will be done in October.  The railway is expected to be open to the public by end of 2012.  The construction of the railway connecting Guangzhou's Sanyanqiao and Zhuhai's Gaolangang will be completed shortly.  Ministry of Railways confirmed its preliminary acceptance and pilot run will be done in October this year.

Watch the Incentives

This note was originally published at 8am on June 27, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Call it what you will, incentives are what get people to work harder.”

-Nikita Khrushchev


Nikita Sergeyevich Khruschchev served as Premier of the Communist Party of Russia from 1958 to 1964. In Russian Communist Party terms, Khrushchev was considered a liberal reformer, especially vis-à-vis his predecessor Stalin.   Although to be fair, a comparison to Stalin is a relatively easy comp in that regard.


The irony of using a quote on incentives from a prominent Communist leader is not lost on me.  Obviously, most attempts at Communism, with China currently being a slight exception, have failed to actually provide the incentives to create economies that are sustainable, flexible, and adaptive.  The root of this is that the actual individuals who underscore any economy do not have the correct incentives in a communist society.


Just imagine, if you will, an economic system in which the harder you work and the more you make, the more the government takes from you.  Sounds crazy, no?  Or perhaps it just sounds a little like the escalated taxation system that we have also developed in the West in which the more you make the more the government takes and then the more they spend.  And then when they can’t take anymore from you without the risk of popular unrest, they just borrow.  Then the governments default and feel shame. 


But I digress.


Contemplating incentives are critical when considering the investment landscape.  As it relates to Europe, one of the more interesting charts I’ve seen recently is that of real euro exchange rates.  The chart was produced by the Peterson Institute for International Economics.  The chart, which is highlighted in the Chart of the Day, indexes real effective exchange rates based on relative labor costs.


This chart shows Germany versus the so called PIIGS – Portugal, Ireland, Italy, Greece, and Spain.  The analysis is staggering in that it emphasizes the massive advantage that Germany gets from having a fixed currency, the euro, across the Euro-zone.  Instead of the currency market acting rational and increasing the value of the German currency, the Germans are given a long term relative advantage by being part of the Euro-zone.


So, on one hand, despite domestic political pressure, Germany is clearly at least somewhat incentivized to protect and sustain the euro.  That said, while the euro does provide Germany with a long term and sustainable economic advantage, the Germans are not incentivized to protect the euro at all costs.  Germany will exist just fine if the euro failed, while for many nations – Italy, Spain, Portugal, Greece, and so on, it will be an unmitigated disaster.  Those nations would effectively be shut out of the international debt markets and would likely experience massive inflation.


Arguable Ray Dalio said this best, when he wrote in a recent note:


“For this reason, we think the popular assumption that the Germans and the ECB (which requires agreement of the key factions within it) will come through with the money to make all these debts good should not be taken for granted. Said differently, we think there are good reasons to doubt that European bank and sovereign deleveragings will be prevented from progressing to the next stage in a disorderly way, without a Plan B in place. This "fat tail" event must be considered a significant possibility.”

As I interpret it, his point is primarily that incentives are not fully in place for Germany and the ECB to provide a carte blanche bailout of Europe.   Therefore, the more likely scenario is that sovereign debt debacle continues in Europe.


And if you don’t want to believe me or Ray Dalio, then take Angela Merkel at her words.  According to reports from last night:


The chancellor told lawmakers a quick move to eurobonds or other forms of joint liability would be constitutionally impossible in Germany and insisted that "supervision and liability must go hand in hand." She said they could only be considered if and when "sufficient supervision is ensured."


Changing topics slightly, this morning we will be launching coverage of the Industrials Sector with Jay Van Sciver.   Hopefully, you won’t hold the fact that he has a Yale degree against him (we certainly don’t).  In addition, he also has over a decade of experience covering Industrials from the buy-side.  Like many of our Sector Heads, he will cover a broad universe and go to where the action is in terms of investable ideas.  In the call today, he is going to discuss some of his investment ideas as well a deep dive on airlines.  Email if you are institutional investor and would like to participate.


Not to totally steal Jay’s thunder, but his initial view of the airlines is not overly positive.  In fact, some airline “stalwarts” such as Delta and United have more than 85% buy ratings from the sell side.   Delta, in particular, is at almost a 52-week high and only 1.2% of its shares are short.   This isn’t totally surprising since Delta is “cheap” on conventional metrics.


Now if this time is totally different for the airlines, Jay may be wrong on his thesis.  That said, it is a little hard to believe that much has changed in this highly competitive industry.  Just like every other period in modern airline industry, management teams are incentivized to shift planes to competitive routes to suck the profits out of those routes and eventually out of the system.


A key catalyst from Jay’s research is the American bankruptcy, which may actually kick start a new bankruptcy cycle.  By the end of Q3, AMR should have lower costs than both Delta and United and these costs will be rapidly passed on to customers.  Since Delta and United cannot rapidly cut costs to compete since many costs involve long tail labor expenses, their profitability will come under increasing pressure in Q3 and beyond. 


I should probably stop there at risk I give away too much and you aren’t incentivized to sign up for Jay’s call at 11am eastern today.  But I will leave you with one quote on airlines from Sir Richard Branson:


“I’ve always said the quickest way to become a millionaire is to start as a billionaire and get into the airline business.”


Of course, Branson has his incentives as well, which are to keep competitors out of the airline business!


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1549-1593, $88.02-93.62, $81.99-82.63, $1.24-1.26, and 1306-1336, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Watch the Incentives - Chart of the Day


Watch the Incentives - Virtual Portfolio

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