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YUM - CEO's Comments on China

Comments made by David Novak, CEO, of YUM brands speaking at a conference:

in that province - just one part of province, we had 73 restaurants, all but two of them are back in operation today. We've made significant contributions to people in need there. We had some financial issues with some of the stores in that particular province. So when we look at the business, we think we probably had about around a $5 million impact overall.

He went on and implied that the three day of mourning slowed same-store sales trends. The obvious question is how much have sales slowed and for how long?

RRGB - Buying back stock because?

RRGB put out a press release stating during the board of directors meeting on May 28, 2008, the board reaffirmed its intent, as previously announced in a press release dated August 16, 2007, to repurchase up to $50 million of the Company's common stock.

Buying back stock makes no strategic sense to me. Is this a great use of shareholder's capital? At 15x NTM EPS, I guess the stock looks cheap, but given the Q1 miss the earnings estimates may be aggressive. Is the board trying to send a signal that everything is ok? Even though the advertising campaign did not lift same-store sales as expected. Between buying back franchisees and it's accelerated pace of development, the company is burning cash. If we add in cash spent on buying back stock, RRGB will be taking on more debt, adding to the P&L volatility.

In this environment, debt is s dirty word!

BWLD - The Trends are accelerating...

BWLD is up 31% since reporting Q1 EPS.

In 1Q08 same-store sales increased 4.1% vs 9.0% last year. The averaged check increased 3.5% and they opened 25 new company-owned restaurants. Importantly, average weekly sales increased 5.6% for the quarter, 150 basis points better that same-store sales increase. Driving the impressive 1Q sales trends was a 27% increase in media spending. The trend should continue into Q2 with media spending up 50% versus last year.
  • Bucking the trend of most restaurant companies, BWLD was able to leverage its strong sales trends with EBIT margins up 50bps. Helping drive margins higher were lower COGS. Specifically, wings averaged $1.33 per pound during 1Q08 versus last year's average of $1.40. Additional leverage came from significantly lower SG&A in absolute dollars. The lower SG&A help BWLD get to the numbers due to significantly higher pre-opening expenses.
  • At 22x NTM EPS there is significant momentum at BWLD, but the aggressive ramp in capital spending catches our eye. History has shown that aggressive capital spending can lead to careless decisions. It will be important to look for signs of stress in new stores average unit volumes.

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For The Record, Women Are Driving Comp

Someone pinged me today asking which apparel stocks were best to play the revival in menswear that a TV personality noted in her commentary last night. For the record, menswear is not strong. It stinks something fierce and is getting worse.

Remember that weakness in womenswear is just one of the factors pressuring department store comps over the past 18 months. Menswear has actually been pretty decent. Recently, however, menswear has turned down and women are gaining share on a yy basis.

It's no mistake that Phillips-Van Heusen just announced that it is closing down its Geoffrey Beene outlet stores (GB total revs account for about 13% of PVH total by my math). This also coincides with a simply massive round of layoffs on Wall Street. PVH makes one in every three dress shirts in the US. Notice a trend?

I like looking at the year/year change in the ratio of spending on menswear vs womenswear. When the line goes up, men are spending more. When then line goes down, guys like me are spending less on a relative basis.

I'd be surprised to see this go up again in a meaningful way anytime this year. (Source: NPD Fashionworld and Research Edge, LLC).



What's In These Stocks?

Over the past month, we've seen the greatest disconnect between softline EPS revisions and stock price performance in almost 10 years. The market is suggesting that EPS has bottomed for the group at large (except for J Crew, which just blew up). You know my take -- margins are still coming down by at least another 3 points for this industry over 3 years. The 'trend' is awful. But we also need to at least respect the 'trade', which (selectively) is not half bad.
  • The earnings revision model in the first exhibit has historically been super tight as it relates to synching revisions with the stocks. But in April it started to break down, and now we're starting to see an inverse relationship. There's a million ways to attempt to explain this, but I think one clear point is that there is a growing contingent looking at easy compares in 2H08 and the prospect that revisions have finally bottomed.
  • After looking at the rate of change, let's simply take a look at the next 12-month consensus EPS growth rate for the Softlines group. A year ago we were looking at consensus growth expectations of about 20% -- that since dropped like a stone. We're now looking at forward growth expectations of about 4%. The only time in over 10 years we saw numbers this low was for about a month circa Sept 2001.
  • Even more bullish is that we've got a troughy 13.4x P/E on trough growth expectations. More important is that the 2-year forward growth outlook is only 6%. Usually we see sell side estimates ramp up materially (i.e. 20% plus) after a bad year. But at least directionally, the sell side is starting to get it.

Some good news!

A House bill approved recently includes provisions to extend tax breaks for retail/restaurant companies looking to remodel. The Energy and Tax Extenders Act of 2008 allows retailers who lease their stores to write off remodeling costs over 15 years.

The bill extends the 15-year depreciation period first approved in 2004, which was set to expire at the end of the year (previous tax laws required retailers to write off remodeling costs over 39 years). Part of the reasoning for the extension, was to help boost the economy by encouraging more companies to re-invest in their businesses.

Unfortunately, for most retailers remodeling is not an option, but in a difficult economic environment remodeling can help improve sales trends.

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