Fool's Gold

This week started off with the price of gold plummeting nearly 11% intraday on Monday, followed by a small recovery in price as the week progressed. Institutional investors, including hedge funds, banks and asset management firms, fled the precious metal, selling off gold and gold-related stocks like miners.


The SPDR Gold Trust ETF (GLD), by far the most popular and liquid way to trade gold, is down -5.75% since Monday and is down a whopping -14.9% over a one-year period. Pundits who said gold would go to $2000 are undoubtedly in need of a stiff drink after this week. We've made our case for long consumption/short commodities since the beginning of the year and believe that gold can fall further, especially if the US dollar continues to appreciate in value.


Fool's Gold - GLD 1year

JAPAN: Burn The Yen

The Japanese Yen is down another -1.0% this morning versus the US dollar, hitting a new low. Japan's de facto currency has been devalued considerably over the past month (and beyond) as the country's central bank announced monetary stimulus plans that would help artificially boost the stock market whilst destroying the Yen.


Finance Minister Taro Aso and Bank of Japan Governor Haruhiko Kuroda have defended their actions, stating that the G20 nations will "understand" the need for stimulus. The Japanese people will likely have a hard time understanding why their food and gas prices have shot up; McDonald's recently announced it would be hiking burger prices by 20% due to commodity inflation. 


JAPAN: Burn The Yen - USDJPY cross

2Q13 Macro Call: Employment Trends


Hedgeye held its second quarter of 2013 Macro Themes Call for subscribers earlier this week, which partially focused on employment trends and what it means for the markets. Employment trends have been improving considerably since early 2011, with jobless claims and non-farm payroll (NFP) and household survey employment improving significantly since then. While data might be accelerating at a lesser rate, it has yet to totally roll over and decline since then. Small business is hiring and employment growth overall is improving.


You can listen to Hedgeye CEO Keith McCullough discussing employment trends and view the related slides from our presentation in the video posted above.

real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

Morning Reads From Our Sector Heads

Keith McCullough (CEO):


Twitter: Great Investor Tool That Won’t Make You Money (via Yahoo! Finance)


Rob Campagnino (Consumer Staples):


Herbalife Unlikely to Get Auditor Before Investor Meeting (via Bloomberg)


Is Pepsi better off without Pepsi? (via Quartz)


Matthew Hedrick (Europe):


Financial transaction tax contravenes G20 agreements, warn global markets bodies (via The Telegraph)


Kevin Kaiser (Energy):


Baker Hughes Announces First Quarter Results (via Baker Hughes)


Schlumberger Announces First-Quarter 2013 Results (via Schlumberger)


Howard Penney (Restaurants):


The McDonald’s Dollar Menu is Popular, But Can it Be Profitable? (via WSJ)




KMB - Tough Quarter to Poke Holes In

KMB is on the tape with Q1 EPS of $1.48, well ahead of consensus of $1.33.  The company’s better than expected result was almost entirely flowed through to full year guidance that now stands at $5.60 to $5.75 (+$0.10 at the high and low end versus prior).  The first quarter represented the toughest revenue comp on both a reported basis (+4.2%) and constant currency (+6.0%) as well as a difficult gross margin comparison (+246 bps).   Reported revenue increased +1.5% while constant currency organic revenue increased 3.0% as gross margins improved 146 bps.

What we liked:

  • Big beat and flow through on full-year guidance
  • Solid performance against difficult comparisons on revenue and gross margins
  • Superb operating leverage with +15.6% EBIT growth on 1.5% sales growth
  • Company overcame $35 million of commodity inflation in the quarter
  • Well-managed balance sheet as accounts receivables (+1.7% year over year) and inventories (+0.4%) increased in line with sales growth

What we didn’t like:

  • FCF growth (+2.1%) lagged EBIT growth (+15.6%)largely due to an increase in capital spending
  • $115 million in year over year EBIT growth continues to be primarily driven by cost savings ($85 million in the quarter)
  • Substantial portion of year over year EBIT growth driven by delta in strategic marketing spending - +$45 million in Q1 2012 and “down slightly” in Q1 2013
  • Valuation, which admittedly isn’t a catalyst and certainly matters less when estimates are going higher

Comparisons ease through the balance of 2013 on the top line as gross margin comps remain difficult for the next two quarters.  However, the company decreased strategic marketing sequentially through 2012 so the significant benefit the company saw by decreasing marketing in Q1 2013 will become less impactful as 2013 progresses.    However, the decline in the commodity complex should provide some margin benefit as we move through 2013, which is tough to fight.  In addition, we recognize that we are fighting sentiment and money flows, but we also recognize that valuation matters at some point and we will keep KMB on our least preferred list.


Call with questions,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst


CMG reported EPS of $2.35 ($2.45 including tax refund) up 19% on a 13.4% increase in revenues and 1% in same store sales. The big upside to estimates ($0.20) came from G&A savings (lapping 1x costs & lower stock comp expenses) and $0.10 in tax credits.  


Sales Trends


The comp was driven by traffic of +0.7% and a 0.3% increase in average check (mix was negative due to fewer drink sales).  Same-store sales were impacted by two fewer trading days, compared to last year, as the restaurants were closed on Easter and due to leap day in 2012. As a result the underlying same-store sales were closer to 3%.  On a two-year basis, same-store sales declined from 7.5% in 4Q12 to 6.9% in 1Q13.  Management maintained the flat to low-single digit same store sales guidance for 2013.  The forward looking commentary on sales trends in April did not provide much insight into overall industry trends.





Margin Trends


Overall food costs came in slightly better than expected.  Food costs were 33% in 1Q13, up 80 bps YoY, but sequentially food costs were down 50bps from 4Q12 due to lower avocado and dairy costs.  CMG was surprisingly able to leverage some labor on a 1% same store sales.  Labor costs were 23.6%, down 10bps YoY.  The leverage was driven by higher menu prices and some labor efficiencies.  Overall, restaurant-level margins declined 100bps YoY.



Sales Drivers


Looking ahead, CMG plans to continue rolling out catering (should help mix) as well as spend on enhanced traffic-driving

and brand building marketing initiatives.  The street is modeling to 4% for 2013, which is above management guidance and an acceleration from the current 3% implied run rate. 





Overall, CMG’s fundamentals remain unchanged.  Restaurant-level margins will likely trend lower on low single-digit same-store sales.   Catering will not be a big driver of same-store sales in 2013 and we see the company reluctance to take addition price is telling and they are concerned about their ability to take price.  The $700 million in cash and debt few balance sheet is a potential weapon that would make me nervous if I was short this stock.   


The company’s growth rate, margin structure, returns profile and cash position are all supportive of the 30x P/E multiple.   We would like to see the stock come in from the current levels to get long.



Howard Penney

Managing Director


Rory Green

Senior Analyst

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.