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WEN/TRY - Trying to get to $50.....

What $50 implies for WEN....

We have not had the privilege to talk to Bill Ackman about his thoughts on WEN, but here is my take on the Wendy's situation. Upon completion of the WEN deal, Pershing square will own TRY, which is trading at the low end of the valuation matrix we created. On a pro-forma basis, TRY is being valued in line with other domestic QSR companies that are experiencing declining traffic and margins. See the valuation matrix chart.

To summarize, I think the Ackman model for creating value at Wendy's requires the company to sell off assets and focus on the core business of being a franchisor. For Wendy's, this means selling the company's real estate portfolio and/or re-franchising the company store base. At this point, the market will value the company at a higher multiple due to the stability of the high margin, high return royalty stream.
  • Research Edge thoughts:In isolation, sale leaseback transactions do not create significant value. At the completion of a given transaction the company swaps valuable real estate for increased leverage. If the proceeds are used to re-purchase shares, the incremental interest expense offsets the benefits of the lower share count.
  • Both the Arby's and Wendy's chain are roughly 70% franchised. For competitive reasons, it's important for a QSR franchisor to own 10-15 of the store base. It was not long ago that Arby's was nearly 99% franchised, so we don't think management is headed down that road again. So there are not that many stores to sell to create significant value. In addition, selling company-owned stores is dilutive to EPS and reduces EBITDA.
  • In the end there is some financial engineering to do, but it's not a game changer for TRY. It all boils down to operations and can management get WEN margins back to historical levels. While operationally there may be some low hanging fruit that can improve margins, most of the margin issues rest outside of management's control.

SAFM - Comments on the current commodity environment

Sanderson Farm reported EPS and the company commented that it does not see any relief from the current commodity environment. The following are comments from Joe Sanderson, Chairman and Chief Executive Officer, Sanderson Farm, Inc.

Market prices for both corn and soybean meal have remained high and volatile and I expect that trend to continue through this fiscal year and into next year. The March Planning Intentions report indicated a move away from corn to soybeans. In addition, recent planning progress reports indicate that the corn crop is not getting into the ground as fast as usual. This fact will contribute even more volatility. The volatility in the grain markets does not surprise us, and I believe the conditions are such that there remains a significant risk of feed grains going even higher through the summer. Any weather event anywhere in the world this summer that threatens the yield or quality of this year's grain crop could trigger a run up in the price of grain, as could any event that results in even higher crude oil prices. With respect to soy bean meal, the planting intentions and planting progress reports indicate a tight supply of soy bean meal as well. Like corn, price for soy beans have risen and we expect continued volatility in the soy bean meal market. The bottom line is that our feed ingredient costs will be significantly higher in fiscal 2008 than during fiscal 2007.

Needless to say, SAFM wants chicken prices to higher.

The restaurant industry does not!


EYE on Insane - stealing grease

Running your car on gas or grease? At today's prices, some are choosing grease, or should I say, stealing grease. I read today that restaurants across the U.S. are reporting thefts of cooking oil, which is being refined into biofuel. Apparently, the value of grease is directly correlated to the price of diesel!

I guess this is a sign of the times, but the price of soybean oil, which is used in the production of biodiesel, has increased nearly 70% in the last year and some restaurants are feeling the pinch - outside of having to lock down trash cans. Specifically, Sonic has mentioned that soybean oil costs are continuing to go up, adding to the already significant commodity cost pressures and P.F. Chang's has said it expects to see continued pressure in wok oil due to the increases in soybean pricing.

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Footwear ASPs Remain Healthy

NPD's weekly footwear sales for the week ending this past Sunday were just released, and the numbers kept me in the 'mildly encouraged' camp as it relates to the state of sales out there right now. We're still running with dollar sales about flat on a 1 and 2-year trend, but average selling price is still up mid-single digits. Is Under Armour's (higher-priced) cross trainer launch helping these figures? My math says yes -- but by no more than 20-30 bps. My gut is still that inventories in this space have found a near-term bottom.

Let's see what Foot Locker and Hibbett say later today. Though their business still is pretty bad, I think they'll agree with my take on inventory trajectory.

As a sidenote, Under Armour's trainer numbers look good. Not great -- as price point eroded $2 over 2 weeks -- supporting my take that the $100 price point shoe is not catching on as well as the lower cut models). But the momentum at retail is certainly still healthy for UA.

1 and 2-year sales hart below courtesy of NPD Fashionworld.

BigResearch Consumer Survey

According to a BigResearch survey of 4,198 respondents, 3 in 5 Americans (62.3%) think the economy is in the worst shape they've experienced in their lifetime. The May American Pulse Survey showed 77.1% of Democrats and younger people between 18-34 years old (65.8%) are most likely to echo this sentiment.

Less than six months out from the November election, most Americans (77.8%) are already tired of it and wish it was over. Regarding the media coverage they have heard to date, 31.5% feel the media favored Obama in their coverage during the primaries. Only 10.4% say the media favored Clinton.

Other key findings:
With the economy weighing on Americans' minds it may not only affect their vote in November, but also their campaign contributions in the interim. 36.5% say they will give less contributions to political candidates this year.

Regarding gas prices, 52.9% think the U.S. government should open the Alaskan Wildlife Refuge (ANWR) for drilling...71.6% of Republicans and 46.4% of Democrats agree.

Americans are using all forms of media more frequently than in 2004 getting information on the candidates for the Election, with television (62.9%) being the preferred medium followed by the Internet (45.9%) and newspaper (43.4%).

MCD - Holding The Line On The $ Menu

The news flow from the McDonald's annual meeting was consistent with past comments, but uncertainties remain.

Jim Skinner, McDonald's CEO, said the company remains committed to its low-price dollar menu. "This is not the time to be passing that on to consumers. They have long memories. We're the value leader. We always have been, and they expect us to continue to be the value leader. The company's low-price dollar menu, which offers items like double cheeseburgers for $1, has been popular with cash-strapped customers. The menu drives traffic to stores, and the additional volume has helped protect profits by knocking out some of the pressure from higher commodity costs.

Given the inflation pressures the company is seeing, holding the line on the Dollar menu puts the McDonald's system in a difficult position. In 1Q08, despite 2.9% same-store sales, higher commodity costs drove U.S. margins down 20 basis points for the quarter. In 1Q08, in the U.S. cheese costs rose 30% while beef and chicken both increased nearly 4%. For 2008, McDonald's expect U.S. chicken prices to rise nearly 6%, cheese up 14% and beef up slightly.

We understand the need to drive traffic, but at what cost and who is paying the price?

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