The TAST-BKW Divergence

We’ve been following the breakdown in Carrol’s (TAST) stock price with interest over the last few months, particularly relative to the strong performance of Burger King (BKW). Carrols is the largest franchisee of the Burger King system, globally, and is considered by BKW’s management team to be one of the best.  All of its Burger King stores are located in the U.S., within the Northeastern, Midwestern, and Southeastern states. 



Stock of BKW’s Biggest and “Best” Franchisee Not Doing Well


Share in TAST have been underperforming the broader market and BKW since late 2012.  Some obvious reasons spring to mind; for instance, TAST has missed recent earnings expectations twice in succession while BKW has beat.   Perhaps the turnaround at the 278 Burger King stores that Carrols acquired in 2Q from the Company (BKW) is proving more cumbersome than expected.  On its last couple of earnings calls, Carrols’ management team has highlighted issues with staffing, deferred capex, and lower restaurant-level margins at the acquired restaurants as impairing its ability to provide guidance for FY13. 


Anyone can tell a story but the chart below evokes several questions that we think are worth posing.

  • If Carrols is struggling, how is the rest of the U.S. and Canada franchisee base doing?
  • Is BKW trading on fundamentals or is there a “3G halo” that is impacting sentiment?
  • Are BKW investors more focused on the international opportunity?
  • Is Carrols a reliable read on the state of the North American business?

Depending on your view on these questions, it may be worth avoiding BKW on the long side.  We have our bias, which is negative, but thankfully backed away from our call to short the stock recently given what was clearly poor timing.  From here, we think it’s worth considering what, if anything, the chart below is implying about the state of the North American business.


The TAST-BKW Divergence - bkw tast div chart


Howard Penney

Managing Director


Rory Green

Senior Analyst

Athletic Sales: Tough Week, But ASPs Hanging Tough

Takeaway: Last week's Athletic sales were consistent with the downtick we saw in broader retail, but ASPs remain extremely solid (i.e. bullish).

Last week we saw a sequential downtick in both athletic apparel and footwear, which was fairly consistent with the tough week that retail had in aggregate. In fact, it was not a bad showing at all given that the ICSC numbers put up the biggest sequential slowdown relative to prior-year levels in at least two years. The saving grace for both apparel and footwear is that price point integrity remains extremely high, with footwear ASPs up in  the +10% range, and apparel up in the teens. A negative swing in ASPs would likely coincide with heavy promotional activity -- and we're not seeing it.


No surprises as it relates to winners and losers by brand. Nike and Jordan still dominating. Adidas and Reebok still trying to find a bottom, and Underarmour making very slow and steady improvement.


Athletic Sales: Tough Week, But ASPs Hanging Tough - sales1

Source: SportscanINFO, NPD, and Hedgeye 


ICSC RETAIL SALES INDEX (Sequential % Chg -- 80 Store Sample)

Athletic Sales: Tough Week, But ASPs Hanging Tough - icsc1

Source: International Counsel of Shopping Centers


Athletic Sales: Tough Week, But ASPs Hanging Tough - sales1point5

 Source: SportscanINFO, NPD, and Hedgeye


Athletic Sales: Tough Week, But ASPs Hanging Tough - share2

Source: SportscanINFO, NPD, and Hedgeye 

The Eurozone's Economic Woes

Takeaway: Here's a reminder of just how much most Eurozone economies are struggling.

Here's a chart that was just prepared by our Macro team here at Hedgeye. It shows quarterly GDP growth for the Eurozone both on a month-on-month and year-on-year basis. As you'll see, it's been a rough past 12 months.


The Eurozone's Economic Woes - Euro GDP

Rolling Euro Sentiment

Sentiment has recently rolled on the EUR/USD, which is substantiated by CFTC data. The Hedgeye Macro team is calling for a strong USD, however we are nowhere near calling for parity in the cross as others on the Street are, which we think is a misguided thesis. 


Below we show recent data that confirms a slow growth environment in the Eurozone laced with political risk that we expect to continue to play out in 2013 – we pare some of the positive charts we’re looking at versus negative ones to better express the landscape. 


Our takeaway remains that while we expect to see flair-ups of sovereign and banking risk this year, with the largest threats from Italy and Spain, we believe the spotlight on Cyprus to be short lived, and continue to discount the risk. Here we see both Draghi at the ECB and the Eurocrats –in their belief in the European project – as stability mechanisms to prevent contagion and maintain the current 17-member union.


Specific to Cyprus, and despite the weak card and messaging that Eurocrats have sent to the markets and other Eurozone countries about deposit holders at risk to cover bailout packages, we do believe the Eurocrats when they say Cyprus is a unique case (despite the confusion around wording of the issue from Eurogroup head  Dijsselbloem).  In fact, we think the political backlash would be so harsh if similar measure were issued on larger economies with larger populations that the Eurocrats would be too frightened to even suggest it.


One area to highlight is the larger threat of political uncertainty playing out in Italy. While it’s still anyone’s guess just how the scene will unfold, we think it’s probable that Bersani will stumble to form a coalition (he continues to reject Berlusconi’s hand) and a technical government will have to be issued until new elections can be called. We view Italian (and Spanish) equities as relative laggards. Both are broken across the TRADE and TREND in our models.





Interestingly, Hans- Guenter Redeker, the head of global currency strategy at Morgan Stanley, recently said:


“Within 2 1/2 years or so, you could be very close to parity, so the risk of an undershoot is quite significant… The long-term implication is that monetary transition in Europe is not working, there’s no credit, no growth, and fiscal policy is still fragmented. So, therefore, you need to be fairly pessimistic for the outlook.”


While we don’t disagree with Redeker’s latter point, we do not agree with the former that the EUR/USD is heading to parity. First off, we think it is reckless forecasting so far out into the future, however we return to a long-held conclusion about incentives that we believe will prevent anything close to parity:

  1. Eurocrats are out to save their own jobs and pursue stability in the EU and Eurozone projects. This means limiting contagion at all costs. (Importantly, Merkel is still on board to write the checks so long as she can win her election in September first).
  2. The ECB is on-board to use its balance sheet to aid the Eurocrats and their member states. 

In the first of two charts below we present our key levels on the EUR/USD cross. In the second chart we show that net positions in the EUR/USD according to CFTC data have turned decided bearish since the last weekend of February (Italian elections), which reflects sentiment.


Rolling Euro Sentiment - xx. eur usd


Rolling Euro Sentiment - xx. cftc



Shifting Sentiment


In the three charts below we take a look at confidence metrics across the Eurozone. We think market reactions are resetting to slower growth expectations across the region, particularly in the peripheral.  Data across much of the region has not improved and governments continue to revise down their GDP targets as they reduce (or are excused on) deficit reduction targets, a perfect storm for increased bearish sentiment.

  • Spain today revised its 2012 public deficit to 6.98% of GDP from 6.74% previously.
  • Spain yesterday dropped its 2013 GDP forecast to -1.5% versus -1.4% previously.

Rolling Euro Sentiment - xy. manu and serv confid


Rolling Euro Sentiment - xy. economic and bus conf


Rolling Euro Sentiment - xy. business conf



By the Charts: The Haves

Below are three charts to keep in mind on the bullish side of the coin:

  1. Draghi’s willingness to leverage the ECB balance sheet, which is 15% smaller since last summer, due to factors such as the repayment of LTROs.
  2. CPI is below the ECB’s 2.0% target and the reduced tax on consumers hit hard by austerity and weak economic performance is a positive.
  3. External trade balances outside of the EU are heading in the positive direction.

Rolling Euro Sentiment - xx. draghi bs


Rolling Euro Sentiment - xx. cpi


Rolling Euro Sentiment - xx. external trade balance



By the Charts: The Have Nots

Below are five charts that reflect a constrained economic region, one that depends largely on the member states as its main trading partners for goods and services.  This is represented by PMIs (mostly under 50 = contraction), GDP, Industrial Production and Retail Sales, and Car Registration. Finally we show ECB loans to Non-financial corporations and households that continue to show an anemic trend.


Rolling Euro Sentiment - xx. pmis


Rolling Euro Sentiment - xx. gdp


Rolling Euro Sentiment - xx. eurozone ip and retail sales


Rolling Euro Sentiment - xx. car registration


Rolling Euro Sentiment - xx. ecb loans down




While it’s still anyone’s guess how the political scene will unfold in Italy, we think the political uncertainty will continue to pull the arrows in these charts lower.


Rolling Euro Sentiment - xx. italy economic sentiment


Rolling Euro Sentiment - xx. italy gdp



Matthew Hedrick

Senior Analyst


Podcast: Sell in May? It’s Not even April

Here’s an excerpt from today’s morning call as Keith talks global markets and more. 


Two Countries, Two Directions

Takeaway: The Philippines earns its first-ever investment grade while Cyprus stays a mess. Take a look at this chart of the countries' market indices.

If you look at the three-year performance of The Philippines key stock market index over the past three years on the chart below, it makes sense that Fitch just gave the country its first-ever investment grade rating. 


However, when you look at the Cyprus market over the same period, it tells a completely different story. The market knew what was happening there, too.


Two Countries, Two Directions - Phil Cyprus



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