Takeaway: It's time for DRI to pay attention.

We often articulate our view that EAT is one of the best managed companies in the restaurant space.  This morning’s press release and subsequent call merely adds conviction to this belief.  It was nothing short of an awesome quarter, as the company managed to surprise the street by beating revenues, EPS, and comp sales expectations.  Mind you, this performance comes amid a less than favorable macro backdrop and a three-month period in which we suspect the majority of casual dining companies struggled. 

The company’s ability to weather an adverse environment speaks volumes to the sound management and solidity of the business model.  What makes Brinker unique in a sense (at least compared to DRI and BLMN), is that they focus on doing one thing right – running the Chili’s brand as efficiently as possible.  This mindset is precisely what inspired the company to dwindle its portfolio down to two brands several years ago.  The casual dining industry has changed and management quickly realized the best way to deal with this fact, whether they liked it or not, was to adapt.  Accordingly, the company, management, and shareholders have been rewarded for this decision – the stock has nearly quadrupled since the beginning of 2009.  In many ways, Brinker should be viewed as the blueprint for success in the new age of casual dining.


This proves that when you have the right team in place, with the proper focus, your business can succeed when others don’t.  To this extent, we believe EAT has created a very efficient operating model and has the drivers in place (reimages, new kitchen equipment, tabletop media, Fresh Mex platform, delivery) to drive incremental efficiencies and gains over the long-term.  In addition, the company continues to fulfill its duty to shareholders by returning cash when they cannot justify reinvestment in the business. 


To be frank, the only issue we had with the quarter was declining traffic (-1.9%) at Chili’s.  Weather may have played a slight role in this, but we cannot ignore the fact that this comes on top of a -1.9% traffic decline in 2Q13.  This trend is obviously a red flag.  Management is aware of this issue and, when prompted, acknowledged that reversing this trend is a high priority.  We expect current initiatives to drive traffic over the long-term, but would certainly like to see this issue addressed sooner.  A more aggressive marketing strategy, implemented halfway through 2Q, could be a start.


What we liked in 2Q14 results:

  • Management maintained FY 2014 guidance.
  • Both revenues ($704.395mm) and adjusted EPS ($0.59) beat expectations by 84 bps and 134 bps, respectively.
  • Chili’s company-owned comp sales (+0.7%) beat expectations (-0.3%).
  • Maggiano’s comp sales (+0.9%) beat expectations (+0.6%), representing the 16th consecutive quarterly increase.
  • After tracking in line with the industry (Knapp Track) in 2HFY13, they began to take share in 1Q14 and accelerated that trend in 2Q14.
  • International portfolio, now at 291 restaurants after 7 openings in 2Q14, continues to grow.
  • Value scores are improving while, at the same time, operators are managing the business more efficiently.
  • Demonstrated the tremendous cost controls they have in place.
  • New kitchen equipment and server initiatives positively impacted labor costs.
  • Aggressively re-imaging restaurants, rolling out tabletop media, and building delivery which should, in our opinion, be able to drive incremental sales and traffic over the long-term.
  • The Fresh Mex platform has tested well and could drive traffic, stronger food scores and margin improvement due to the positive impact it will have on cost of sales.
  • YTD share repurchases of $93.1mm or 2.2mm shares, with $453mm still authorized.
  • $63mm of available cash on the balance sheet.

What we didn’t like in 2Q14 results:

  • Traffic at Chili’s was down -1.9% in 2Q14, after being down -1.9% in 2Q13.
  • Overall domestic franchise comp sales were down -0.7%.









Howard Penney

Managing Director


Takeaway: We are removing Greenhill & Co. (GHL) from Investing Ideas.

We are removing shares of Greenhill & Co. (GHL) after a strong run. Shares have reached the fair value level we argued for back when we added it to the Best Ideas list.


Greenhill was added to Investing Ideas on 11/22/13 and gained over 9% compared to a 2.8% return for the S&P 500.

For those investors who own GHL shares, and have a longer-term time horizon, we continue to see further upside potential over the intermediate to long-term as the M&A cycle renormalization continues, but we estimate that most of the short-term upside from improved M&A sentiment has now been priced in.





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Lots of Tweeting

This note was originally published January 22, 2014 at 07:58 in Morning Newsletter

“You have to earn your followers at the outset of your company… and you must value them every day.” -John Hamm 

The big picture

So I was tweeting yesterday and one of my followers tweeted that I’d just tweeted my 100,000th tweet. Fully loaded, with using the word tweet 6x in this opening paragraph of today’s rant, that’s a lot of tweeting.


Lots of Tweeting - tbanner


One of the main reasons why I have so many bloody tweets is that I do this thing called The #TweetShow. For those of you who have a day job, you probably don’t have time to watch it – but I’ll fire it up every day that I can at 3PM EST and tweet the US market close. I tweet once every 1-1.5 minutes. *Full Disclosure: Twitter has shut down my account, multiple times, for excessive throttling.


Throttling? Not to be confused with trading, high-frequency-tweeting the close is a new idea. From a positioning perspective, it’s my way of telling you what I think and when during the most important decision making hour of my day. It’s not for everyone (that’s why I do it). And I can’t say why so many people follow it, but I can say thank you to whoever tunes in.

Macro grind

From a financial media perspective, the alternative to listening to some tunes and watching my team and I of 30 analysts grind through tickers is listening to people who have never played the game tell you everything they know about it on TV.


As a disruptor in a profession in dire need of evolution, I definitely come up with my fair share of dumb ideas. But #TweetShow is not one of them. It’s turned into a much better feedback loop than anything I ever had running my hedge fund. You’d be amazed what crowd-sourcing a real-time stream of comments about all your positions does. I value the crowd’s feedback, every day.


Three years ago I called Twitter “The New Tape.” And the point I was trying to make there was that 10-15 years ago (when I was learning this game), I’d watch the tape (tickers, news, bid/ask, etc.) as I was making decisions. Now I watch my custom tweet-stream. From a #behavioral perspective, the contra-indicators (tweeters) I follow are as critical as the news-flow itself.


One of my contra-indicators for the last 3-4 years has been Nouriel Roubini. While I’m sure he is a rock-star and all, I can’t for the life of me understand why he is tweeting me pics of himself with his shirt undone to mid-chest with a bunch of failed economists from #Davos this morning.


I have an academic channel on Twitter (it’s a contra-stream) than includes:

  1. Nouriel Roubini
  2. Mohamed El-Erian
  3. David Blanchflower

… and many more.


But instead of journos drooling over the idea of having them endow us with their non-market-practitioner intellect, let’s just look at these 3 characters for who they have become since the “great depression” freak-out thing, or whatever they are calling it now.

  1. Roubini just went bullish on growth (after growth shocked he and mostly every economist @Davos to the upside last year)
  2. El-Erian just left working with Gross (after he got the “new normal” thing of 1-1.5% growth and long bonds forever = #wrong)
  3. Blanchflower just tweeted something else that I don’t understand

Blanch is a beauty. He fits my contra-stream profile perfectly. He’s the professor of Keynesian economics @Dartmouth who swore (2-3 yrs ago) that austerity (read, fiscal conservatism and a stronger currency) would spell the end of economies and life itself in the UK.


In other news…

  1. UK unemployment drops to a 4.5 yr low (biggest drop since 1997) of 7.1% versus 7.4% last
  2. UK Services and Manufacturing PMI readings are tracking at 15-18 year highs
  3. UK’s currency (British Pound) is up another +0.4% to $1.65 vs USD this morning

Now, maybe our economic model is for dummies, but it’s better than theirs. As a refresher, here’s how our GIP (Growth, Inflation, Policy) model works:

  1. POLICY: on the margin, fiscal conservatism and less monetary stimuli strengthen a country’s currency
  2. INFLATION: it’s local (priced in local currency) and it falls when purchasing power (currency) strengthens
  3. GROWTH: real (inflation adjusted) consumption growth (and confidence) are perpetuated by #StrongCurrency

In other words, instead of an elegant sounding linear academic theory, our process is more like Mucker’s PIG than anything else. We start with POLICY, then move onto making INFLATION and GROWTH calls from there.


The other big thing about respect being earned on Twitter (instead of allocated to guys who made a bear market call we made 6 years ago, and haven’t made the right call since), is that there is an obviousness to consensus.


Last year our call was the #DeflatingTheInflation via #StrongDollar = US #GrowthAccelerating. Now our call is for US #InflationAccelerating and consumption #GrowthSlowing. And I’m smiling because no one on my contra-stream tweeted that yet.

  • CASH: 28

Our levels

Our immediate-term Risk Ranges are now as follows (our top 12 macro ranges are in our Daily Trading Ranges product):


SPX 1826-1855

Shanghai Comp 1991-2069

Pound 1.63-1.65

Natural Gas 4.28-4.55

Gold 1223-1267


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Lots of Tweeting - Chart of the Day

Bullish UK Charts

We received more positive economic data out of the UK this morning, in line with our Q4 2013 and Q1 2014 macro themes of #EuroBulls and #GrowthDivergences, respectively, that forecast a bullish outlook for UK equities and the British Pound.

  • The ILO Unemployment Rate ticked down to 7.1% in NOV vs 7.4% in OCT and expectations of 7.3%.
  • BOE Minutes released showed a 9-0 decision to keep the benchmark rate unchanged and the asset purchase target unchanged.

UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which we expect should provide further strength to the equity market and currency. The decline in the unemployment rate represents the largest decline in almost 5 years! Additionally we’re seeing CPI also moderated, down 10bps to 2.0% in DEC Y/Y in the last reading – we expect this cut to boost business and consumer confidence and increase purchasing power and consumption.


Bullish UK Charts - vv. unemployment


Bullish UK Charts - vv. cpi


While the FTSE (etf EWU) is approaching immediate term TRADE overbought level, it’s trading well above its intermediate term TREND level of support.


Bullish UK Charts - vv. ftse


On the currency side, we remain bullish on the British Pound versus the US Dollar (etf FXB), a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve). This was confirmed once again by the Minutes released today, which continues to stoke the Pound. The Bank said there was no need to raise rates even if the unemployment rate hits 7% in the near future.


The British Pound is holding its Bullish Formation, which we expect will continue to be supported by prudent monetary policy from the BOE and strengthening economic fundamentals.


Bullish UK Charts - vv. pound 


Matthew Hedrick


Tough Game Coach! $COH

Takeaway: Either they're being conservative (not) or there's a bigger problem at hand (likely).

Editor's note: This is an excerpt from Hedgeye Retail Analyst Brian McGough's morning research. To learn more about our range of subscriber services click here.

Tough Game Coach! $COH - coach


Coach has been one of our top shorts, and we knew numbers had to come down. But admittedly, we did not pinpoint this EPS print as the event.


There were so many callouts in this quarter we almost don't know where to begin. a) sales down 3%, b) inventories up 12%, c) gross margins down 300bp, d) EPS miss by 5%, e) take down margin guidance -- finally -- to 26-27%. It still needs to come down, e) take down sales guidance as well -- which is interesting in that it's logical to think that they need to pick either margin, or top line.


Tough Game Coach! $COH - bri1 

Either they're being conservative (not) or there's a bigger problem at hand (likely). The lack of leadership is still concerning. But not as concerning as its trajectory in the SIGMA chart above. 

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