BKC - Lacking the marketing MOJO

Keith keeps hitting me up wanting to short BKC. I keep thinking; where is the down side shorting a franchised business model trading at 12.2x NTM EPS? That is of course the earnings numbers are too high! It's hard to get back the marketing MOJO once it's gone!

Right now Business week running a story on BKC "Burger King's Big Misstep" - CEO John Chidsey wrested control of marketing from his franchisees; now he's losing business to McDonald's

As a point of reference I also had this on the portal a month ago - 4/20:

Last week Burger King said its EPS results were negatively impacted by significant traffic declines in the month of March, resulting in lower than expected margins.

Importantly, Germany (BKC's second largest company-owned market) and Mexico (the only company-owned market in Latin America) experienced the largest declines in traffic. The same trends hold true in the US and Canada, where same-store sales were 1.6%. With 3%+ pricing, the decline in traffic is significant.

In the mature QSR market, a successful advertising strategy is critical to driving incremental customers into the stores. Rarely, will a QSR company or stock do well without a successful advertising campaign. Over the past few years the resurgence of the "King" as a marketing icon was critical to Burger King's success.

From an advertising standpoint, Burger King has recently made two critical missteps with its edgy advertising tactics. First, critics are up in arms about the suggestive new SpongeBob "square butt'' commercial that juxtaposes a beloved children's character with sexy women dancing suggestively. Why would the company take a children's cartoon character, SpongeBob, and combine it with the backs of well-toned female dancers, wearing SpongeBob's brown pants with phone books in them to make them "square butts"; all set to the tune of Sir Mix-a-Lot's 90's hit, "Baby Got Back"?

Today, I learned that Burger King had to apologize to Mexico after Mexico's ambassador to Spain alleged that the company's new Texican Whopper advertisement released in Europe demeans his country's national flag.

Burger King's advertising issues are nothing compared to poor Domino's. I think it will be very difficult for anybody to order a sandwich or a pizza from Domino's without imagining a curl of cheese being stuck first in the cook's nose, or worse thinking about an employee hawking a loogie into your Cheesy Bread! At Burger King, the judgment of some of those in the marketing department needs to be questioned.


Oil’s River Card


RESEARCH EDGE POSITION: We are "bullish of" oil and are currently long the XLE, SPDR Energy etf


In our note on crude oil from yesterday we wrote:


"The price of oil appears to be signaling one of two things:  either demand will at some point in the near future accelerate or that there is a geo-political event on the horizon that will reduce supply."


This morning, the river card was revealed in the way of an announcement from the Islamic Republic of Iran.  According to a newswire article:


"The defence minister (Mohammad Mostafa Najjar) told me today that we launched a Sejil-2 missile, which is a two-stage missile and it has reached the intended target," Ahmadinejad said.


The missile was launched from here in Semnan," he added to cheers from the crowd.


I was told that the missile is able to go beyond the atmosphere then come back and hit its target. It works on solid fuel," he added, without specifying the missile's range."


According to other reports, this was Iran's second test of the Sajjil-2 missile, with the first test occurring approximately 8-months ago.  This missile purportedly has the ability to reach targets 2,000 kilometers away with great accuracy.  A quick google map search indicates that the walking distance from Jerusalem to Tehran is 1,559 kilometers and presumably the missile distance is as close.


Now we certainly do not want to be alarmists and this is a test comparable to the one the Iranians performed 8-months, so it's not an example of new technology.  That said, the timing of the test is noteworthy in that it comes only two days after President Obama met with Israeli Prime Minister Netanyahu.  While President Obama was not willing to be nailed down on an artificial deadline, he did note the following  after the meeting:


"Foreclosing a range of steps, including much stronger international sanctions, in assuring that Iran understands that we are serious.""


While Obama does seem to be continuing to pursue a diplomatic approach to Iran, this statement had the appearances of a tougher tone with the Iranians.  Recall that one of President Obama's first major foreign policy moves was an address to the Iranian people on March 20th in which he called for "a new beginning" of engagement with Iran.


As a prospective client emailed us today, the missile test appears to be a "message to Obama", which was a play off the popular Police song, "Message in a Bottle", whose lyrics are as follows:


"I send an SOS to
I send an SOS to
I hope that someone gets my...
I hope that someone gets my...
I hope that someone gets my...
Message in a bottle... Message in a bottle..."


While we don't know for sure if Iranian President Ahmadinejad is a Police fan, he does seem to be sending a message to both Obama and the World.  The immediate reaction to this missile test was that Italian foreign minister Franco Frattini cancelled a planned trip to Iran, primarily because Ahamadinejad wanted to meet in Semnan, instead of Tehran.


From an investment perspective, the idea of geo-political risk was reintroduced full force back into the price of oil today and oil is trading up ~2.5%, which of course is on the back of a ~35%+ move in the year-to-date, despite negative "fundamentals"...


Iran is very relevant in terms of the global oil market.  According to the most recent data, Iran ranks third in the world with ~136 billion barrels of total reserves (second excluding Canada's non-traditional reserves), which is ~10% of the world's reserves.  Iran is the world's fourth largest producer and OPEC's second largest, after Saudia Arabia.  


Increased tensions with Iran rightfully support a bullish case for oil.


Daryl G. Jones
Managing Director

UA: Compression Delta Remains on Upswing

I don't live and breathe by any of these weekly sports apparel and footwear numbers, but I need to point out a consistent trend for UA. Since its bottom during the week of March 9th, the delta in UA's compression apparel biz has been getting steadily better. While there are much more notable factors that I think matter here (footwear, Int'l, etc..) the Street is so hyper-focused on UA's supposed inability to grow anymore in this perceived 'core' business. The datapoints are going against the bears.


UA: Compression Delta Remains on Upswing - 5 20 2009 12 08 20 PM


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The Chart That Not Only Smells Like A Rat; It's A Rat...


This is the intraday chart that I cited in this morning's Early Look. For your viewing displeasure, we shine a flash light on the portion of the Bank of America (BAC) chart's volume and price action that should sadden any American investor to the core. After the close, BAC unloaded 1.25B shares of stock in order to raise $13.25 billion dollars.


The said leaders of this country are overseeing the compromise of the American Financial System's credibility, real time.


Timmy Geithner,


Your political smirk insinuates that post your made-up rules to a made-up test, that all is well in the land of nod. The US Dollar being marked-to-market on its lows today should provided you a stiff reminder that being the Secretary of the US Treasury has other responsibilities other than just pandering to your boys club of conflicted bankers.


While I have been bullish on America and her stock market for the last 3 months, I have started selling aggressively today. This BAC chart is one of the main reasons why.


Shame on the rats who trade on inside information. They are un-American.



Keith R. McCullough
Chief Executive Officer


The Chart That Not Only Smells Like A Rat; It's A Rat...  - bac


Japan: Re-shorting A Sunken Ship


Finding a bottom is not the same thing as recovering.


RESEARCH EDGE POSITION: Short Japan via the EWJ etf...


Japanese GDP data released overnight was very ugly and very anticlimactic. Q1 GDP numbers released by the cabinet office registered at an all time low, with a period decline of -4%, or -15.2% on an annualized basis. With the complete collapse of the North American export market in the trailing 5 quarters, this contraction was a foregone conclusion for most observers (in fact the number was a significantly better than most reported forecasts). The Nikkei traded up on Yen declines driven in part by the data.


If you have read our work on Japan in the past, you know that we view the Land of the Rising Sun as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.


Tactically, we trade Japanese equities in reaction to currency moves as Yen devaluation is the only short term positive catalyst there that we have identified. For us to change our longer term view on the Japanese economy, we would need to see clear evidence that the US and EU markets are rebounding to prior consumption levels (unlikely) or that new export lines are being developed and exploited in emerging Asian consumer markets -particularly China.


As the Japanese economy scrapes bottom and the governing parties scramble impotently to find solutions, the mood of the public has proven remarkably resilient. Consumer confidence levels in April registering at the fourth consecutive sequential improvement. Perhaps Japanese consumers have become accustomed to stagnation. We'll short complacency in the face of misunderstood Japanese tail risk.


Andrew Barber



Japan: Re-shorting A Sunken Ship - japan1

TGT: Clean Beat. Quick Read...

Quick look here.  Looks like a clean $0.09 beat, coming in at $0.69 vs. Street at $0.60.  Remember TGT raised expectations with April sales from $0.52.   Core retail performance key here, with gross margins flat (despite sizeable mix shift from consumables) and slight sg&a leverage on a negative 3.7% comp.  It may have taken TGT a bit longer to exhibit controls and discipline vs. WMT and others but the results are bearing fruit here.  Overall EBIT % was flat y/y in core retail. 


Credit looked to be in line with expectations, but a huge drag y/y and the key reason why EPS are still down y/y.  Things don't appear to be getting worse which is key. 


Call at 10:30 here.  This is a big beat for a big company.  Makes me wonder (again) why the board needs to be shaken up...


Eric Levine

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