Takeaway: We expect $BWLD to trade well below $70 over the immediate-term TRADE.

Buffalo Wild Wings printed a highly disappointing 3Q12.  This has been a difficult stock to call this year – the market’s reaction to earnings prints have been testament to that.  As things stand post 3Q earnings, we are back where we started: $3.05 in FY12 EPS. 


Below is a slide from our January 19th 2012 conference call outlining our bearish view of BWLD for the year.  We stuck our neck out and made a contrarian call of $3.05 in earnings for 2012.  Needless to say, that was an ill-timed call, but the two pillars of our bear case – input costs and the cost of growth – have been proven out.  We expect earnings revisions from the Street, which remains at $3.21 for FY12.  We remain negative on Buffalo Wild Wings and would expect the stock to break $70.


BWLD’S LONG AND WINDING ROAD TO $3.05 - bwld slide jan call





Management highlighted “high cost of sales and incremental preopening expenses” as moderating factors in earnings per share of $0.57 versus $0.61 in 3Q11 and $0.61 consensus. 


Comparable restaurant sales, for company stores, grew 6.2% year-over-year, which was in line with consensus.  The revenue miss was driven in part by new unit volumes declining year-over-year.  This was especially disappointing for the bulls, given that this has been described – and valued – as a growth concept for restaurant investors.  Operating income declined 8% versus last year.  Consensus was expecting 5.2% operating income growth. 


From here, it seems that margin pressure will continue with decelerating same-restaurant sales.  Weather could be a potential headwind for the stock as we head into the winter months.  Independent of weather, traffic trends remain a concern going forward as the company is – incredibly – taking 6% price in the fourth quarter.  That level of pricing could have unintended consequences for the brand. 


BWLD’S LONG AND WINDING ROAD TO $3.05 - BWLD earnings recap



Howard Penney

Managing Director


Rory Green







Retail Macro Series #1: The Sourcing and Pricing Trade

Takeaway: Here's our first deep dive in a series of Retail Industry Macro topics. First up, sourcing costs vs pricing.

This is the first in a series of Retail Macro reports where we take a deep dive into some of the key sector-specific Macro factors that are driving fundamentals. We’re firm believers that you can’t simply look at POS data or a stream of made-up government data and use it in an investment process. Well, I guess you could, but you’ll probably lose money rather consistently.


Today combine everything from company-reported information, to bills of lading on imports, to specialized government office receipts to BEA/BLS data to tell us the truth about what’s happening with product costing and pricing behavior, how it’s impacting margins, and ultimately how it is represented in the stocks. We’re not going to make a sweeping macro call, but what we will do is isolate the key questions that need to be asked and answered in considering how inflation is impacting the dollars a company pulls out on its gross margin line. Note, there are 8 Exhibits in this report that are critical in understanding our analysis. If, for whatever reason you cannot view them, please reach out to us directly.


The unmistakable math is that we are on the wrong side of incremental change in sourcing/pricing's impact on the supply chain. We're currently at a run-rate of about $6bn per quarter. That might not seem like much in a $280bn industry. But keep in mind that the $280bn is revenue. It has 10% margins -- at best. So we're talking $6bn accretion to a $28bn margin figure. Something tells us that the CEOs in this business are not looking at the math like this, and are not asking themselves if it is sustainable. 


As we are squarely in the period where Average Unit Cost (AUC) is down while Average Unit Retail (AUR) is presumed to be holding up, we want to consider the following analytical build-up…


1)      Get The Cost Component Right. In looking at the cost component, PPI is irrelevant. That encompasses the apparel that is produced in the US, which is less than 5% of what we purchase. We need to look at the actual import cost, which is released by OTEXA (the Office of TEX and Apparel). But to take it a step further, you cannot simply look at PPI vs. CPI. ‘All percents are not created equal’. The simple fact is that the average unit retail is about $11, while the average unit cost is about $3.50. On an apples to apples basis, 1% of the former = about 3% of the latter. In other words, cost can be up 15%, or $0.53 per unit, and all it takes is about a 5% change in Price to generate $0.55 to offset the cost increase.

Exhibit 1) Need to look at dollar value spread between cost and price instead of percent change in both.
Retail Macro Series #1: The Sourcing and Pricing Trade - macro1

Source: BLS, OTEXA and Hedgeye


2)      Aggregate Supply Chain Impact Is Easy To Gage. When we can isolate the units shipped and the cost/price per unit, we can break down the economics of selling pretty easily. Specifically, we can gage the price/cost spread, and quantify how much money is either being inserted in, or detracted from, the apparel supply chain. We like to look at the 3 month trend, which shows prior 2-month shipments vs. current month retail. This appropriately accounts for the lag through which product is clogged up in the supply chain.

Exhibit 2) As is clear in this chart, we’re still clearly in the green as it relates to positive margin impact on retailers, but the trend has decidedly turned negative.
Retail Macro Series #1: The Sourcing and Pricing Trade - macro2

Source: Hedgeye 


3)      The 12-month trend is even more stunning. We’d argue that it is not as relevant as it relates to modeling immediate-term margins for the retail supply chain (i.e. retailers, brands, manufacturers), but as it relates to playing the BIG Macro trend where the group meaningfully outperforms and you make money regardless of what you own – that trade is probably done.
Retail Macro Series #1: The Sourcing and Pricing Trade - macro3

Source: Hedgeye, Factset, BLS, BEA, OTEXA 


4)      The Stocks Recognize This Relationship. To prove the point, let’s look at the relationship between the S&P Retail Index (RTH) and the Spread between Consumer Price and Retail Cost. The relationship is quite strong – though there have been certain points in different cycles when the market discounted the impact of inflation/deflation at different times.  But the discounting mechanism was clearly and definitely there.
Retail Macro Series #1: The Sourcing and Pricing Trade - macro4

Source: Hedgeye, Factset, BLS, BEA, OTEXA 


5)      Reversion To The Mean is Likely, And Is Net Bearish. This one gets a bit more complicated. But in essence, it shows the change in the RTH compared to the change in the price/cost spread. In effect, as the line goes down, it means that either the market is underperforming the inflation spread, meaning that either a) the RTH is underperforming the inflation spread, or b) that the inflation spread is getting positive, but that the market does not care. There have been several notable moves, which are outlined below. But the punchline is that we just came off a 2-stage process whereby 1) both the stocks and inflation spread worked simultaneously, and then 2) the group stopped working, but it did not go down. Inflation spreads caught up partially to the already realized price performance, but to revert to the mean, spreads need to get meaningfully better, or the stocks need to head lower.
Retail Macro Series #1: The Sourcing and Pricing Trade - Macro5

Source: Hedgeye, Factset, BLS, BEA, OTEXA 


6)      Triangulating The Data…With More Data. Let’s slice and dice the data another way by triangulating it with container imports. Theoretically, if we know a) the average price per container at cost for every box coming into US ports, which we do (about $57,000 per container), and b) the average cost per garment coming into the US, then we know one of two things… 1) The change in mix, or 2) the load factor (the amount of stuff crammed into the box). Almost always, the difference is the load factor (which currently sits at about 16,300 garments per box). For the record, that ratio fluctuates greatly by category – women, men, footwear, athletic, baby, underwear etc…, and we have all that data and will have a future Macro Deep dive on it.   

What it shows us is that as unit costs rose due to the commodity bubble, shipment value actually came DOWN. We know that mix between subcategories did not erode during that time period, not did average price inter-category. What that tells us is that the Load Factor came down significantly. Remember that if you own a factory in Asia and you ship a container every Monday and Thursday, you don’t cancel the box simply because there’s less stuff to go into it. You ship it, but with less product in the hold.
Retail Macro Series #1: The Sourcing and Pricing Trade - Macro6

Source: Hedgeye, PIERS, OTEXA, BEA, Company Documents, Factset


7)      Strength Could Take Margins Higher. When we look at this Load Factor versus aggregated margins for every company in the industry, the relationship is simply unmistakable. The only problem for margins is that the Load Factor change is at peak. We agree that it could head higher from where it is today…
Retail Macro Series #1: The Sourcing and Pricing Trade - Macro7

Source: Hedgeye, PIERS, OTEXA, BEA, Company Documents, Factset


8)      But It HAS To Print Those Numbers To Satisfy The Bulls From Here. The market recognizes this relationship just as well as we do. Unfortunately, it suggests that the Load Factor change will remain about where it is today, or better,  and in no way discounts that we could see a slowdown in unit shipped.
Retail Macro Series #1: The Sourcing and Pricing Trade - MACRO8

Source: Hedgeye, PIERS, OTEXA, BEA, Company Documents, Factset

HBI: Look Elsewhere

Takeaway: HBI continues to reduce debt at an impressive pace, but it’s not cheap on EBITDA and there are other places we’d rather to be.


This was a less than inspiring P&L quarter for HBI with the EPS upside and beat coming entirely from lower SG&A and the outlook for Q4 below Street expectations. That said, we have to give credit where it’s due – this is a business that’s been managed for cash flow and it delivered with $287mm used to retire $300mm of floating-rate debt, and posted an extremely impressive SIGMA performance. With another $500mm in debt targeted next year, HBI will have its debt burden down to ~$1Bn by the end of 2013 if it hits its operating margin targets – half of where it was in 2010.


But this is a business now exceeding peak margins and trading at 9x EBITDA benefiting from a number of near-term tailwinds. While HBI has the majority of its pricing locked up through 2013, it’s corresponding volume is not certain, and this is not a business without risk. HBI is not a raging short in the absence of a catalyst (valuation – even for an overpriced stock) is not a catalyst, but there just isn’t enough potential reward for us to get more constructive at these levels.

The company is looking to go up market driven by innovation (ComfortBlend underwear, slim fit t-shirts, and Smart Size bras) and that’s great if early shelf gains continue, but these initiatives cost money to support. HBI is now on its 3rd straight year of realizing $30-$40mm in supply chain savings one-third of which comes out of SG&A, which is noteworthy, but begs the question of just how much is left to squeeze. In addition, HBI will be reinstating its media spend next year ($10mm+), the benefits of which helped drive the beat this quarter. In reality, the investment should exceed what was simply held back in 2012 and will likely impact operating margins by -20bps-40bps next year.


Gross margin recovery driven by easing product costs and additional supply chain efforts will offset higher SG&A. A particularly strong SIGMA trajectory should support strong margins for the next two quarters, but we think operating margins beyond 10%-11% are simply not sustainable over time in this business. The only time HBI posted margins like that was when it was part of Sara Lee and preparing to go public. Now if HBI is willing to substantially ramp investment spending to drive double-digit top-line growth by taking pricing up with innovative basics while capturing shelf space resulting in top-line instead of cost reduction driven EPS growth then this story would be more attractive. But as it stands now, there is still uncertainty in the mid-tier channel and International is having execution issues that make it challenging to get above MSD revenue growth over the next two years.

At 9x and 8x F13 and F14 consensus EBITDA expectations, much of the potential reward scenario is already baked in at these levels. With the stock up +50% YTD and at 4-year highs, we need sustainable top-line acceleration or margin expansion to get more constructive – we don’t see it.


HBI: Look Elsewhere - HBI S




In preparation for WYNN's 3Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • "Normalized is about 26% for that [baccarat] game."
  • "We have been able to hold the percentage we pay the junket operators to 40% plus 3% or so for complementaries, and our competitors are about 5 points ahead of us in terms of what they give the junket operators."
  • "The price war has extended into the mass end of slot markets....we always focus on how much junket commission that's given out, but we are actually giving out a lot more incentives now in slots and mass market to also buy back business."
  • "We are very conservative about credit....we don't use a rolling's 15 day credit on the 15th of the month."
  • "I don't think there is as much of a change between direct and junket."
  • [2nd half 2012 Cotai capex] "~$150 million on foundations over the next nine months to 12 months."
  • [Macau opex] "We're running between $1.3 million and $1.4 million per day before we take into account commissions or bad debt or anything like that. I expect that to continue. But, there will be continuous cost pressures, primarily driven through the pressures on payroll."
  • [Cotai timeline] "First is the foundation permit which is currently under consideration.  That will be forthcoming. We'll be driving pilings and digging and excavating with augers the great caissons of the high rise this fall. Once we get out of the ground that will take probably the better part of a year from now. Then, it goes very fast because it's just another important place building; it's pretty quick. The building permits are issued in stages as you submit final working drawings, specific construction documents that have very detailed stuff on them. And that's scheduled along with the rest of our construction schedule to go along in stages and phases that match the moment. And it results in about a 46-month schedule."
  • [Two major international retailers in Macau] "Now that's being done this summer and fall, and they'll be open, I hope, by Christmas or something like that. Maybe a little later."
  • "We built a new junket room that's going to be open for Christmas. Another retail space -  a small one for jewelry at the entrance of the casino."


Today we shorted the iShares Dow Jones U.S. Home Construction Index Fund (ITB) at $20.64 a share at 3:22 PM EDT in our Real Time Alerts.


Some investors are too optimistic about the housing recovery and a lot are still long housing at these levels. Immediate-term mean reversion risk finally moves to the downside with market beta turning bearish. Another down day like today can do wonders for a short. We’ll watch and wait with this one.


TRADE OF THE DAY: ITB  - image001

What’s Next For Agriculture Prices? (Corn, Wheat, Soybeans and Protein)

Takeaway: Join us for our Expert Call with Professor Darrel Good on Monday, October 29th at 1:00pm EST.

On Monday, October 29th at 1:00pm EST, the Hedgeye Macro Team and Restaurants Team will be hosting a Agricultural and Consumer Economics Expert Call with Professor Darrel Good of the University of Illinois. Good has been part of the faculty since 1976 and took part in developing a comprehensive farm risk management website ( His efforts are now focused on the performance of grain futures contracts as well as corn and soybean yield trends. 


Topics will include: 

  • Supply side - planting intentions and farmer's economics
  • Demand side - key drivers of demand - ethanol, protein, consumption (domestic and abroad)
  • General long term trends to think about for farming - utilization, fertilizers, seed evolution
  • Thoughts on USDA projections, and their historical accuracy and what the implications are now
  • View on supply, demand, key drivers and prices next year (or next 6 - 12 months) for:
    • Corn
    • Wheat
    • Soybeans
    • Cattle
    • Chicken

Current subscribers of our Macro and/or Restaurant verticals will receive the dial-in information automatically, if you have any further questions please email .


Good's Background

Darrel Good has a comprehensive understanding of agricultural markets and their economic implications.

"There was a time period in the early seventies when grain markets changed dramatically," said Good. "Russia started importing grain, prices just exploded to the upside and there was renewed interest in markets and prices. I was hired to help develop a very extensive educational program in marketing and risk management."  

  • Professor in the department of Agricultural and Consumer Economics, is marking his 33rd year with the University of Illinois
  • Developed, along with two other faculty members at U of I, a seminar called "Price Forecasting and Sales Management"
  • One of the founding members of the farmdoc team
  • Writes one of the featured newsletters on the farmdoc site, Weekly OUTLOOK , and he is a primary contributor to the AgMAS section
  • Current research includes:
    • Evaluation of the pricing performance of agricultural market advisory services
    • Evaluation of USDA production and price forecasts
    • Evaluation of pricing performance of Illinois corn and soybean producers  

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