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TODAY’S S&P 500 SET-UP – July 25, 2012

As we look at today’s set up for the S&P 500, the range is 20 points or -0.70% downside to 1329 and 0.80% upside to 1349. 











  • ADVANCE/DECLINE LINE: on 07/24 NYSE -1477
    • Up versus the prior day’s trading of -1601
  • VOLUME: on 07/24 NYSE 808.38
    • Increase versus prior day’s trading of 8.81%
  • VIX:  as of 07/24 was at 20.47
    • Increase versus most recent day’s trading of 9.94%
    • Year-to-date decrease of -12.52%
  • SPX PUT/CALL RATIO: as of 07/24 closed at 2.08
    • Up from the day prior at 1.23 


  • TED SPREAD: as of this morning 35
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.43%
  • Increase from prior day’s trading at 1.39%
  • YIELD CURVE: as of this morning 1.22
    • Up from prior day’s trading at 1.17 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, July 20 (prior 16.9%)
  • 10am: New Home Sales, June, est. 372k (prior 369k)
  • 10am: New Home Sales M/m, June, est. 0.8% (prior 7.6%)
  • 10:30am: DOE inventories
  • 11am: Fed to purchase $4.5b-$5.5b notes due 8/15/20-5/15/22
  • 11am: U.S. to sell $35b 5-yr notes 


    • House, Senate in session
    • Senate Finance holds hearing on education tax Incentives, 10am
    • Senate Commerce holds hearing on short-supply prescription drugs, 2:30pm
    • House Education and Workforce Committee holds hearing on proposals to strengthen National Labor Relations Act, 10am
    • Senate Appropriations hears from Education Secretary Arne Duncan on effects of budget cuts on education, 10am
    • Senate Foreign Relations holds hearing on increasing trade with Africa, 3pm
    • House Armed Services panel holds hearing on military capabilities for cyber operations, 3:30pm
    • Treasury Secretary Tim Geithner presents annual report of FSOB at House Financial Services hearing, 9:30am
    • Peregrine Financial’s collapse amid shortfall in customer funds will be examined at House Agriculture hearing on oversight of swaps,, with CFTC Chairman Gary Gensler, 10am
    • Sen. Richard Shelby, R-Ala., speaks at U.S. Chamber of Commerce event on financial regulatory reform, 1pm 


  • Apple shrs tumble as earnings, forecasts miss analyst ests.
  • Netflix plunges on guarded outlook for new 2012 subscribers
  • Ancestry.com said to discuss buyout with Providence
  • New U.S. home purchases may have risen to 371k annual rate in June, most since April 2010
  • C.R. Bard told by jury to pay $5.5m over vaginal-mesh implant
  • Food inflation may rise 4.5% in 2013 on worst drought since ’50s
  • Wells Fargo ranks No. 1 in hardest-to-value securities: S&P
  • Perella said to be hired in Morgan Stanley, Citigroup price rift
  • U.K. GDP falls most in 3+ yrs; 2Q GDP falls 0.7%, median forecast 0.2% decline
  • German business confidence fell 3rd straight month in July to lowest since March 2010
  • Spanish, Italian notes rise on bets ECB may boost rescue fund
  • IMF says China downside risks significant as growth slows
  • Japan June exports fall 2.3% Y/y vs. est. 3% drop
  • Nintendo 1Q net loss 17.23b yen, analyst est. 16.4b yen loss
  • ECB’s Nowotny sees arguments for giving ESM banking license 


    • TE Connectivity (TEL) 6am, $0.78
    • WellPoint (WLP) 6am, $2.08; Preview
    • Encana (ECA CN) 6am, $0.19; Preview
    • Thermo Fisher Scientific (TMO) 6am, $1.16
    • Cenovus Energy (CVE CN) 6am, C$0.53
    • Praxair (PX) 6:02am, $1.42
    • Regeneron Pharmaceuticals (REGN) 6:30am, $0.50
    • Wyndham Worldwide (WYN) 6:30am, $0.84
    • Eli Lilly & Co (LLY) 6:30am, $0.77
    • Alexion Pharmaceuticals (ALXN) 6:30am, $0.36
    • Tupperware Brands (TUP) 7am, $1.27
    • General Dynamics (GD) 7am, $1.74
    • Motorola Solutions (MSI) 7am, $0.69
    • US Airways Group (LCC) 7am, $1.55; Preview
    • AOL (AOL) 7am, $0.23
    • PepsiCo (PEP) 7am, $1.10
    • Northrop Grumman (NOC) 7am, $1.61
    • Rockwell Automation (ROK) 7am, $1.31
    • Lorillard (LO) 7am, $2.32
    • Nasdaq OMX Group (NDAQ) 7am, $0.60
    • Ford Motor Co (F) 7am, $0.29; Preview
    • Corning (GLW) 7am, $0.31
    • Nielsen Holdings NV (NLSN) 7am, $0.41
    • RadioShack (RSH) 7am, $0.04
    • MeadWestvaco (MWV) 7:05am, $0.39
    • Canadian Pacific Railway Ltd (CP CN) 7:30am, C$0.85
    • Caterpillar (CAT) 7:30am, $2.29
    • Hess (HES) 7:30am, $1.38
    • IAC/InterActiveCorp (IACI) 7:30am, $0.71
    • Bristol-Myers Squibb Co (BMY) 7:30am, $0.48; Preview
    • Southern Co (SO) 7:30am, $0.68
    • JetBlue Airways (JBLU) 7:30am, $0.16
    • Airgas (ARG) 7:30am, $1.15
    • T Rowe Price Group (TROW) 7:30am, $0.81
    • Delta Air Lines (DAL) 7:30am, $0.68
    • Boeing Co (BA) 7:30am, $1.13; Preview
    • Omnicare (OCR) N , 7:31am, $0.79
    • ConocoPhillips (COP) 8am, $1.19; Preview
    • Level 3 Communications (LVLT) 8am, $(0.23)
    • Cooper Industries PLC (CBE) 8am, $1.12
    • Loblaw Ltd (L CN) 8am, $0.60
    • Canadian National Railway Co (CNR CN) 8am, C$1.47
    • Akamai Technologies (AKAM) 4pm, $0.37
    • Las Vegas Sands (LVS) 4pm, $0.60
    • Torchmark (TMK) 4pm, $1.30
    • LSI (LSI) 4:01pm, $0.17
    • Varian Medical Systems (VAR) 4:01pm, $0.93
    • AvalonBay Communities (AVB) 4:01pm, $1.34
    • Owens-Illinois (OI) 4:02pm, $0.76
    • Stericycle (SRCL) 4:02pm, $0.80
    • Whole Foods Market (WFM) 4:03pm, $0.61
    • Symantec (SYMC) 4:04pm, $0.38
    • Everest Re Group Ltd (RE) 4:05pm, $3.83
    • Zynga (ZNGA) 4:05pm, $0.06
    • Citrix Systems (CTXS) 4:05pm, $0.60
    • Angie’s List (ANGI) 4:05pm, $(0.39)
    • Lam Research (LRCX) 4:05pm, $0.65
    • Visa (V) 4:05pm, $1.45
    • Ameriprise Financial (AMP) 4:05pm, $1.34
    • Tesla Motors (TSLA), 4:06pm, $(0.94)
    • Western Digital (WDC) 4:15pm, $2.45
    • Cheesecake Factory (CAKE) 4:15pm, $0.49
    • Assurant (AIZ) 4:15pm, $1.41
    • Equity Residential (EQR) 4:25pm, $0.68
    • Community Health Systems (CYH), 4:30pm, $0.89 


  • China to Flood Steel Market Hurting ArcelorMittal: Commodities
  • Exxon Seen Leading Drop in Oil Earnings on Lower Prices: Energy
  • Oil Near Lowest in a Week on U.S. Stockpile Gain, China Concern
  • LME Shareholders Approve HKEx’s $2.2 Billion Takeover Offer
  • Midwest Drought Impact Reaches Indonesia as Soybean Levy Ends
  • Corn Rises, Erasing Drop, as Rains May Fail to Reverse Losses
  • Gold Advances for Second Day on European Debt Crisis Concerns
  • Germany Lowers Gold Holdings for First Time in Eight Months
  • Copper Seen Falling as IMF Warns of Risks to China’s Economy
  • East Iowa Corn, Soy Yields Plunge From 2011, Doane Tour Shows
  • South Korea Considering Stockpiling Corn, Wheat, Soybeans
  • Oil Import Peak in China Set to Curb Brent Rally: Energy Markets
  • Fertilizer Maker Seeks Canadian Potash Mines: Corporate India
  • Chinese Steel Exports Rise to Two-Year High
  • Sugar Rises on Speculation of a Surplus Cut; Coffee Declines
  • Food Inflation Seen Rising 4.5% in 2013 as Drought Sears Crops
  • North Dakota Spring Wheat Yields Seen Climbing on Early Planting 

























The Hedgeye Macro Team


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






  • "We continue to experience a slow but steady recovery in our booking patterns."
  • "On the other hand, not surprisingly, the second and third quarters are suffering the most. They book a great deal during the wave period and the summer is our most valuable season, especially in Europe, with less of a cushion than the first quarter, they are therefore and not surprisingly the most vulnerable. On the other hand, as we enter the fall, we appear to be turning a corner. Sailings in the fourth quarter and for all of 2013 show promise. Both remained stronger than comparables from the same time last year and I think that further validates our belief that this is a shorter-term issue."
  • "Another point of encouragement is the strength of our developmental itineraries this year. Brazil performed nicely in the first quarter. Asia appears to be rebounding from last year's tsunami and then some and Australia is nicely absorbing some meaningful growth in capacity this year."
  • "We expect that half of our guests will be coming from outside the United States this year." 
  • "The pace of new bookings and the price points in the market have been very consistent with the midpoint of our previous guidance. Demand is still somewhat volatile and as many of you have witnessed there are many mixed signals in the pricing surveys being done. Uncertainty still remains, especially for European itineraries this summer, but so far the performance has been consistent with our earlier expectations."
  • "Over the past four weeks though, we have seen better demand especially from the United States where year-over-year bookings have been exceeding last year's levels."
  • "As of today, our total booked load factors are slightly behind the same time last year for the second and third quarters, but ahead for the fourth quarter and for 2013. Our booked APD's are higher than the same time last year in all quarters. Overall, our current pricing remains in line or higher than the same time last year for all major itinerary groups except Europe. At this time last year, the Arab Spring was in progress but it wasn't until May that we felt the full impact on bookings in the Eastern Med and we took our most aggressive pricing actions. This year, the challenge is more widespread than the Eastern Med, but the level of discounting is more contained."
  • "The net effect of all this, we expect some yield improvement in the Eastern Med, but overall European yields will likely be down slightly versus last year. On the other hand, all of our other major itinerary groups, including the Caribbean, Alaska and our developmental products are expected to have solid yield performance, with both exceeding 2008 levels."
  • "We expect to have overall yield improvement in the second and fourth quarters, but we expect the weighting of Europe to put pressure on our third quarter performance. Most importantly though, the full year still looks to be on pace with our original projections."
  • "Royal Caribbean International's year-round Caribbean programs are doing nicely, spearheaded of course by Oasis of the Seas and Allure of the Seas, which continued to maintain their impressive performance throughout the year. We expect our Caribbean yields to be higher in 2012 than they were in 2008."
  • "We are at the beginning of our summer seasonal programs, many Royal Caribbean seasonal ships will be in Europe where we are still a few months away from the peak holiday period. Although our capacity in the Mediterranean is down by double-digits from 2011, we remain focused on our sales and marketing effort in the region, both to fill this year's capacity and to continue to build awareness of and preference for our brand."
  • "The bigger story of Royal Caribbean seasonal deployment, however, is the move of Voyager of the Seas to Singapore and then China, while the ship will not arrive in Singapore until May 26, it is clear the perspective presence of Voyager in Asia has galvanized interest in Royal Caribbean in the region. Asia is in general a late booking market, so we still have limited visibility into the performance of specific sailing, but at this stage of the selling effort, we are pleased at the market's response to Voyager."
  • "Royal Caribbean continues to revitalize its older ships under the Royal Advantage umbrella at a brisk pace. Rhapsody of the Seas has recently undergone a complete makeover in Singapore and Grandeur of the Seas is about to have very similar work performed in the Bahamas."
  • "For the summer season, our Alaska product, where we are once again operating three ships, is performing well. Bookings for our seven-night Bermuda sailings out of Cape Liberty this summer are also doing well and we are on pace to achieve healthy yield improvements over last year on both of these products."
  • "We will have Solstice in Australia and New Zealand this coming winter and as a result the Solstice-class ship for the first time sail the West Coast of the United States during the summer of 2013."
  • "One of the characteristics of Europe as a cruise market is that the peak holiday season is more, let's say, July-August whereas in North America it's become in recent years more June-July. So there is a little bit more time. We are beginning to see this now in April, but I would say April, May, June into July, that is the key booking period for really understanding the visibility of how the peak European cruise season will perform."
  • "We've tried a number of different promotional efforts, from prepaid gratuities, onboard credits, buy one get half off for the companion, things like that as well as reduced air. And they respond – the different markets respond differently to all those promotions. I think we're getting better at it, and I think that's helped us gain some traction in Europe, but the rest of our categories, we really haven't had to be very aggressive with the promotions. It's really all been focused on Europe."
  • "We've seen it across the board, we've seen it – very strong beverage revenue, we've seen strong shore ex. revenue. Casino has not rebounded yet, but we've put programs as a whole, but we've put programs together with high rollers to help casino improve."
  • "We are seeing a lot more hesitancy from the first time cruiser."
  • "We kind of look at a 3.75 ratio of net debt-to-EBITDA as kind of the benchmark that we're looking for."


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





    • Revenue: $190-195MM
    • EPS: $0.87-0.92
    • D&A: $4.6MM
      • Above the line depreciation: $3.4MM
      • Below the line depreciation: $900K
      • Below the line amortization: $300K
    • Capital spending: $12.5MM (includes $7.5MM for FL corp office purchase)
    • Revenue: $810MM
    • EPS: $3.80
  • "The scheduled capital repayments on the term loan commenced at the end of the first quarter of 2012 and due at the end of each of quarter of 2012 is an amount of $4.125 million, with the interest on the loan for 2012 anticipated to be LIBOR plus 2.5%."
  • "We have commenced the build-out of our second Texas location, and expect to enroll students in the Houston location by the third quarter of 2012."
  • "Ideal Image continues to perform well. We have opened two new laser centers this year, and continue to track well on our target of 15 new centers for 2012."
    • "Cash sales generated in the quarter exceeded expectations and increased our deferred revenue liability on the balance sheet, which was a healthy barometer of the future earnings potential of our laser hair removal division."
  • [$17MM as run rate for SG&A?] "There's probably some stuff in there that could come down a little bit. But it's about right, I mean, that looks like the run rate that is going to track along. I mean, we're still working on some of the synergies in Cortiva, but I wouldn't look for that thing to drop down much through the back end of the year."
  • [Education segment ex Cortiva] "The headwinds that we've faced since July of last year have not changed direction, nor have they changed their intensity. We're all working much harder to get enrollments with less money in terms of Title IV. So it's clearly a struggle, Steve. We're not different than anybody else. Having said that though, we're watching our costs as much as we can."
  • [Product business] "If you take a look at the 2% clip in our revenue growth, it would have been higher, but for a big QVC promotion that was scheduled for March, and part of our control was pushed into the second quarter. So it will still be there....We expect that to take place, I think, it takes place on April 30. So really QVC just switched that up at the last moment on us, so we really don't have any control of it. It wasn't that we lost that; it's just that it was shifted from a timing perspective. So good news is we'll still do it. It will impact the second quarter. So that was a big chunk of it."
  • "So trend's difficult to say. I haven't seen any change, negative change. I haven't seen anything that really sort of is noticeable on whatever we look at across the board. I would say Europe is still soft-ish. And I don't think that is very different from what our cruise line partners are seeing. Certainly, there are soft points in our itineraries, but the most noticeable one so far, and continues to be, which is similar to my comments on my last quarter, is Europe is weaker than last year at this time. Outside of that, I haven't seen any trends."
  • "We do see a little bit of softness in Europe still and I don't see that fixing itself in the near term."
  • [Sales trends and margins in product business] "I expect it to be much of the same. I mean, I think clearly we were impacted by some timing issues in there. Europe, UK, I mean, is turning to be tougher. Just this morning they reported that the economy there has got a little tougher. And a large part of the elements business is there. So it's really an unknown for us to say that we're seeing downward pressure from where we're at today. Hopefully, we can continue to roll as we are and not take so many more hits."
  • "Schools are a tough environment right now. The good news is after second quarter, we'll anniversary the regulatory changes. So it'll be apples-and-apples to compare how we're doing from an enrollment perspective, and all the other metrics that we follow. I don't see the environment getting any better. It's a tough environment. There's less money for the students. And that's making them think a lot longer about coming to school and enrolling. And we'll certainly see how we do sort of in the third quarter where we have the larger enrollments. But it's been tough for the last seven months. And I don't think it's going to lighten up for the next eight months. We will see how things turn out after the election. And we'll see how the regulatory headwinds change, if any, next year. And if they do for the better, then so too will the schools get better. But who knows where the focus will be next year post-elections."

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




  • "We're the biggest in China by a wide margin. We have 200 hotels coming up in China."
  • "We are roughly in that 10% range and fees coming from Greater China. Our pipeline, 40%-60% of it is now Greater China. So you can see that it will grow. So it's not inconceivable that China will get to 20%, somewhere in that range at some point in time."



  • "We have just announced that we will redeem our 2013 debt early by the end of June."
  • "9% of our profits are exposed to the Europe per se."
  • "So we've been hedging about half our euro profit exposure each year, not a directional bet, just a fixed variable approach, and we happen to have
    hedged about half our exposure for 2012 at $1.44. So that will certainly help us mitigate some of the impact this year."
  • "We are reinvesting in our own hotel portfolio. That will probably continue for another year."
  • "Typically, we spend about $100 million a year on the pipeline, so to speak, whether it's key money here or a mezz loan there."
  • "Our goal is to stay investment grade through cycles. We're there with the next paydown. We pretty much brought our debt down to levels where we want it to be. We think, over time, the ratings will all line up at BBB."
  • "We do expect to pay a good dividend. We've announced our dividend policy. Our dividend will grow with earnings, and we announce that every year as to sort of what the dividend is going to be some time later this year. But we've clearly stated that our dividend is going to be a certain percentage of our EPS and therefore as EPS grows you should expect our dividend to grow."
  • "We had cash on the balance sheet at the end of the last quarter. So, we're using some of that cash to redeem our debt early.  We have a share buyback authorization already; we've had it for a while. I think the timing of our share buyback is going to be linked more to assessment of intrinsic value than any kind of trigger around asset sales and so on."
  • "The rate part of the RevPAR is where all the action is going to be in the next couple of years especially in the developed world."
  • "Corporate negotiated rates always take a little while to catch up, but they are beginning to catch up. We've had some rate increases in the negotiated rates."
  • "You have old group business that you booked at lower rates that needs to fall off and that's beginning to happen and then you do want the group business to come back in a reasonable way so that you get that base load of business that allows you to reduce your dependence on some of the lower-rated channels and that mix shift is happening and it's really – as it happens more and more that you start getting more and more rate flexibility."
  • "No hotels are being built as we speak in the U.S. or Europe. There is really no financing available to build full-service hotels."





  • "Primarily driven by rates, we expect RevPAR growth momentum to be sequentially stronger from Q1 to Q2."
    • "Rate in the first quarter was roughly 50/50 and we're heading towards more like a 60%-plus rate to occupancy mix as we head into the latter part of the year."
    • "Occupancies are getting to the point where rates should begin to move more than it has to date. It's clearly helped by the fact that the business we're now booking on the group side is clearly at a much higher rate. Recent group bookings have been at rate increases that are in the range of 7%, 8%, 9%. The corporate negotiated rate business that we're getting this year is 6%-plus more than last year."
  • "Despite continuing concerns around the outcome of the French election or Spain's refinancing needs, we are seeing improving business trends in our key European markets. These trends would suggest that RevPAR growth in Q2 should approach 4% in local currencies from under 2% in Q1. We are currently tracking at a 4% level in April."
    • "We see strong booking confidence across Germany, the U.K., and early signs of a pickup in Italy. Booking windows are also returning back to normal. Based on what we are seeing, we would expect the European recession to be shallow, as some economic forecasters are now predicting. As such, we are more confident today that the second half in Europe will be better than the first half, helped along by easier comparisons."
  • [Asia] "We expect a sequential acceleration in Q2, with RevPAR growth returning to a double-digit pace."
  • "In the Middle East and Africa, we saw big jumps in RevPAR in March, as North Africa started to lap the start of Arab Spring events of last year. However, in absolute terms, business is still weak in countries like Egypt, where the situation remains unsettled for travel. Saudi and the Gulf, on the other hand, are on a strong cyclical recovery track, and sub-Saharan Africa is delivering solid double-digit growth. As a result, we expect RevPAR growth to accelerate in this region in Q2."
  • "You might recall that last quarter we suggested that 2012 had more potential to surprise to the upside than to the down side. We still believe this."
  • "Commercial real estate loans in general and especially construction loans continue to decline. So supply is tight and it looks set to stay that way for a while, but demand in North America, Europe and Japan has continued to build. Companies are profitable and in great financial shape and they're in search of growth."
  • "We also expect best ever performance in rooms growth in 2012 outside of their home markets."
  • "Although there have been concerns about the real estate sector in China, the pace of hotel signings and openings remains steady and strong, especially in tier two and tier three markets, where we have been focused for the past few years."
  • "We expect things will pick up as the Central Bank is entering an easing cycle. Indonesia and Korea are booming, up 15% in Q1. Japan continues on its recovery track with double-digit growth as we lapped last year's earthquake tsunami impact. We expect Asia to finish 2012 as our second largest division accounting for 20% of profits."
  • "All indications are that Latin America will remain our fastest growing region."
  • "Significant renovation reduced Q1-owned EBITDA by approximately $5 million and we expect a similar impact in Q2."
  • [Vacation ownership business] "We remain on track to deliver over $100 million in cash from this business in 2012."
  • [Bal Harbour] "To date, we have closed on 138 condo units, 102 this year and 36 last year. 32 units have been sold but not yet closed. As such, the project will be over 50% sold and closed by the end of this quarter."
  • "In Q1, we received over $260 million in cash from closings. As we look ahead, sales momentum is looking good."
    • "A new positive trend is that we're seeing a sharp increase in interest from North American buyers who accounted for 50% of sales in Q1. The South American season starts in another 45 days as their winter begins. We expect a very good selling season."
  • "We remain steadfastly focused on holding cost in line. Run rate costs are only increasing in Asia and Africa, where we continue to invest in infrastructure to support our growth. For the year, we are still targeting a 4% to 5% increase."
  • "We now forecast Bal Harbour will deliver $300 million in cash in 2012."
  • "In terms of assets sales, we are always exploring opportunities to sell our owned hotels at attractive prices to high quality, long-term owners. We have several conversations currently underway. We expect some or all of these transactions to close later this year."
  • % of properties paying incentive fees:  "typically on the international side, that number is always in the 70%, 80% range. On the U.S. side, I think we're probably still in the 30% to 40% range."
  • "In terms of the renovations, it's a comprehensive set of renovations. It's the luxury collection, as Fritz said, is about $100 million out of that. But then we have other big hotels like the Sheraton Rio coming up for renovation later this year. The Westin, which is 1,000 rooms in Atlanta, under renovation. So those are pretty sizable underway. We do have some more coming up in the next year, so the St. Regis in New York is up for a pretty major renovation potentially next year, and a few other hotels."


We advised not staying short, but staying away, from this stock on the print.  That ended up being the wrong call; the sell-off we were looking for happened more abruptly than we were expecting.  We still see risk in the stock from here.  Below we offer some takeaways and a recap of the quarter.



Buffalo Wild Wing’s quarter (recap below) was disappointing.  Same-store sales missing expectations and, more predictably, elevated food costs led to a 7% miss on the bottom line.  Here are the key takeaways:


1. Management layered on roughly one point of price in July bringing the total run rate to 3% for the third quarter.  On September 3rd, with the rollout of revised menus, the company will take an additional 1%, bringing the run rate to 4% for the fourth quarter.


HEDGEYE: We believe that Buffalo Wild Wings’ competitive set may be broader than some think.  Running price at 4% versus Food Away from Home CPI at ~3% could negatively impact traffic.  CMG struck a cautious tone when discussing price, and consumer demand in general, on its earnings call last Thursday.  Even with much less price on the menu than a year ago, CMG is not seeing an uptick in traffic that some were expecting.  CFO John Hartung said, on price, “when a lot of restaurants get resistance, when they increase prices, they either see resistance and people spending less on each visit or they visit less. We don't usually see that. So last year when we raised prices, we didn't see any kind of decline in transactions. We didn't see any kind of decline in average check.”  If Chipotle is observing some incremental softness in consumer demand, we believe it is reasonable to assume that all restaurant companies are experiencing it to some degree.



2. Management lowered FY12 guidance from 20% net income growth, provided on April 24th, to 15-20% net income growth.


HEDGEYE: We believe that there is further downside to that guidance.  Our range of expectations is for EPS growth of between 11-14% for FY12. 



3. The commodity cost set up for this company is not favorable.  Corn prices remaining elevated suggest that chicken wing prices may take longer to fall than many have been anticipating.   Management said, “It’s hard to believe that wing prices could go much higher”.  Chicken wing prices were up 86% versus 2Q11 levels and the remainder of the commodity basket was up roughly 3% year-over-year.  For 3Q to-date, wing prices are tracking roughly 70% above 3Q11 levels.


HEDGEYE: An upgrade on the EPS miss last quarter was based on the chicken wing conversation turning from higher prices to lower prices.  We believe that consensus is now much less certain about chicken wing prices declining in the near future, particularly given recent movements in the grain markets and the ongoing struggles of the food processors within the chicken industry. 



4. Same-restaurant sales growth for 3Q to-date at company-owned stores was +6.8%.  This implies a sequential acceleration in two-year average trends from 2Q.


HEDGEYE: In his monthly write-up, Malcolm Knapp mentioned a shift from June to July related to the fourth of July this year that favorably impacted casual dining revenues this month.  Additionally, management mentioned one additional UFC event versus the same period last year that will benefit traffic for the quarter.  Other non-recurring factors in the third quarter include a positive impact from the NFL adding Thursday night games versus 3Q11.  Despite these positives, there are many other variables, such as the elasticity of demand, that remain to be seen.  Our sense from this conference call was that the Wall Street community is far less trusting of this management team today than it was in April when the company last reported.  The line of questioning was far more skeptical and we believe appropriately so. That management can navigate the delicate path between protecting margins and not overly discouraging traffic in the current cost environment is less than certain.  



2Q12 Earnings Recap


BWLD missed on the top-line largely due to comps coming in at 5.3% at company-operated restaurants versus 6.1% consensus.  Earnings per share of $0.62 also missed the Street’s target of $0.67 as food costs “moderated” the company’s earnings growth, according to management.  Earnings per share grew 7.7% year-over-year versus 15.8% consensus. The tables below offer further details.










Howard Penney

Managing Director


Rory Green





In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance.




  • WORSE:  Even international was worse, the one area we thought was performing well.


  • WORSE:  EPS guidance remained unchanged at $0.98-$1.04, even though 4Q will have 22MM less shares outstanding.  Despite the IGT's denial's on the call we can all do the math which implies a 2 cent reduction in EPS


  • SAME:  operators are optimistic in their intent to purchase but some anxiety still remains
  • PREVIOUSLY:  "I would say the mood is improving but still tempered. I think we're all wondering about the economy as we go into this election cycle, and then, post-election, kind of what things look like next year. And I think there's always a great intent to make investments and then just stopping short of actually making it at the same robust level....I would say people are enthusiastic but still a little anxious."


  • BETTER:  IGT received 900 units in FQ3, previously they had expected to maybe get some in Canadian units out by the 4Q
  • PREVIOUSLY:  "We feel very good about our position there, that market is going through a huge replacement cycle in fiscal 2013 and 2014; for us, it is kind of a once-every-10-year opportunity, so when it comes, you have to really be prepared. We feel like we are prepared. We still think we might get some [Canadian VLT] in the September quarter. It just kind of comes down to timing and revenue recognition issues. It's really going to be more of a 2013 event. There may be 1,000 contracts or so that sneak into September. But we... obviously got a very good share from the first announcement and we're hopeful that those kind of trends continue."


  • SAME:  management continues to say Double Downs is performing ahead of expectations. But monthly daily users fell 7% QoQ. We'll split the difference - perhaps results were better than IGT expected but not quite as good as the where investors would expect things to be performing given the price tag paid and margin dilution.
    • "On your projections, EBITDA should roughly triple from here, and that would equate to a purchase multiple of roughly 6.5 to 7 times EBITDA on 2014. Are we in the same ballpark?"
      • "So I would say your math makes sense in this kind of a worst-case, and we think there's actually a lift from that in the business, just based on the R&D that has been spent years ago, and putting some legs on that R&D as we repurpose a lot of our content into the social gaming space and monetize it, again, when it's been sitting on the shelf."
    • "We expect slight margin pickup there in the back half"


  • MUCH WORSE:  Patti admitted that heightened competition, lower MegaJackpots yields,  and most importantly poor product performance, had negatively impacted their gaming operations performance
    • "We're generally pleased with our WAP product performance. It continues to perform as expected.  Really, the quarter was really just a mix to the lower earning units and we expect continued improvement sequentially over the remainder of the year."
    • "So I feel like we have a nice lineup of product in the bag of the sales folks at this particular point in the game ops side."


  • WORSE:  lower units sales in Europe and South America drove a miss in this segment and IGT admits that they have no visibility here.  So much for market share gains
  • PREVIOUSLY:  "Our international business pace continues to accelerate, with improvement in both quantity and quality of order flow."


  • MUCH WORSE:  at 48.9%, it is 3% lower QoQ.
  • PREVIOUSLY:  "We had an isolated non-standard cost situation in our Asia-Pac region in the quarter, so we are anticipating that the gross margins across the board... will pick up between now and the year – and the end of the year back to more normalized levels."


  • BETTER:  North American unit sales were one of the very few bright spots this quarter. The earlier than originally guided to shipments to Canada made all the difference between hitting consensus estimates and the reported beat in this segment.
    • "Our outlook is positive for North American replacements. It will, we think, continue to strengthen throughout the year, we will expect North American replacements to grow modestly over the remainder of the year...the replacement market is going to be flat to growing has kind of been IGT's stance now for about six months. 
    • "We've recognized 8,100 units. I think that's a comfortable kind of six month rate for us that we feel very comfortable with."


  • SAME:  Scioto Downs VLTs, Toledo and Cleveland casino were all recognized in the quarter
  • PREVIOUSLY:  "Our current forecast is that the Ohio properties will be recognized in June."