YUM continues to be our favorite LONG in the big cap QSR landscape as we believe the company is positioned to capitalize on a substantial long-term growth opportunity in China and other emerging markets.  We expect easy comps, notable margin expansion, and positive earnings momentum to drive performance throughout 2014.  The magnitude of this performance will depend heavily upon the trajectory of the recovery in China.  Management’s guidance of 40% operating profit growth in China may be aggressive, but we believe they have multiple levers at their disposal to reach at least 20% earnings growth in 2014.



China Concerns Are Overdone

Analysts sounded cautious on the 4Q13 earnings call and somewhat hesitant to believe YUM is positioned for a strong recovery in China in 2014.  Avian Flu and competitive concerns (local pressures facing the Pizza Hut business) have been weighing down expectations.  We believe these concerns are largely overdone. 


While it is difficult to gauge consumer psyche regarding recent Avian Flu episodes, management has not seen a notable negative impact in January.  The company has strengthened its supply chain and, through the recent I Commit initiative, made significant progress in rebuilding the trust of consumers in the KFC brand.  YUM will also continue to benefit from improved sales forecasting at KFC, labor scheduling, and service optimization in the region.  Given strong brand attribute stores and a strong start to January, we have little reason to believe comps will not accelerate meaningfully from 2013 levels.


After posting a weak comp in December, Pizza Hut casual dining has been a point of contention as fears of local, competitive pressures have mounted.  However, the brand still posted a +5% comp in 4Q and sales have rebounded thus far in 2014.  Pizza Hut casual dining continues to be a tremendous growth vehicle (strong economic model, two-year cash payback) for YUM as they look to accelerate unit growth in lower tier (better return) cities.  Pizza Hut home business (55% of the menu is Chinese food) represents another strong growth opportunity.


We believe the trends in sales and margins in China suggest the company has made significant progress restructuring the business, setting the stage for improved profitability in 2014.  Longer term, we believe China represents a material opportunity for YUM to capitalize on a growing consumer class that is expected to double from 300mm+ in 2012 to 600mm+ by 2020.



Taco Bell Is Underappreciated

While Pizza Hut and KFC delivered less than desirable comps in the U.S. in 4Q, the Taco Bell business (2/3 of U.S. operating profits) continues to be strong, posting a +1% comp in a sluggish sales environment.  This represents its 8th consecutive quarter of comp growth.  We expect this brand to continue taking share from competitors in 2014 and to drive incremental sales through product innovation and the rollout of the breakfast platform.  Restaurant level margins are approaching 20% and development is set to accelerate to 86 net new units in 2014, with the potential for 2,200 more units domestically.  Taco Bell is currently carrying the U.S. business but with the refranchising program nearly complete, we’d expect to see a stronger emphasis on turning around the domestic Pizza Hut and KFC businesses.



YRI is a Longer-Term Play

A lot of the recent sell-off can be attributed to emerging market concerns.  The overall performance of YUM’s YRI business, however, was encouraging.  Russia, Southeast Asia, Africa and Latin America continue to be pockets of strength and the company successfully entered four new emerging markets in 2013 (Tanzania, Ukraine, Argentina, Mongolia).  The YRI business (which will be consolidated with the U.S.) will be somewhat volatile – but that is to be expected.  YUM’s expansion into emerging markets is a material long-term growth opportunity, as the company positions itself to capitalize on a rapidly expanding consumer class.






Howard Penney

Managing Director



Takeaway: Below we rank our top read notes from January. Click the note title for access.


  1. 1/05/14 – SBUX: WHY WE ARE CAUTIOUS
  2. 1/13/14 – BLMN: A BLOOMIN’ MESS
  3. 1/16/14 – NEW BEST IDEA: SHORT CAKE
  7. 1/22/14 – DRI: NEWTON’S FIRST LAW
  9. 1/23/14 – MCD: REITERATING SHORT IN 2014
  10. 1/24/14 – LIFE INSIDE THE BOX

Feel free to contact us if you have any questions or would like to discuss any of our work in more detail.



Howard Penney

Managing Director


Lots of Tweeting

This note was originally published at 8am on January 22, 2014 for Hedgeye subscribers.

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

-John Hamm (in Unusually Excellent)


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.


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.


Back to the Global 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.


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


Lots of Tweeting - Virtual Portfolio

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Beats | Are | Working

Takeaway: Getting 4Q13 Earnings right has paid on balance more so than in previous quarters. So far. Stocks getting punished for misses especially.

Editor's note: This is an unlocked excerpt from Hedgeye Macro Analyst Christian Drake. You can follow him on Twitter @HedgeyeUSA

Beats | Are | Working - ben55

BETA or BEAT-MISS?  Relative to 3Q13 where Macro completely monopolized price action, "The Print" has had a moderately impactful influence on subsequent price performance thus far in 4Q.  Below we chart company Beats & Misses vs subsequent market adjusted 3-day performance. 

  • EPS:  Earnings performance has shown a stronger relationship with performance as 62% of companies beating EPS estimates subsequently outperformed the market by 4.1% on average while 38% went on to underperform the market by an average of -3.0%.  EPS misses have been sold heavily with 78% of companies missing EPS estimates subsequently underperformed the market by -5.4% on average.  

Beats | Are | Working - beats

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[video] Keith's Macro Notebook 2/4: JAPAN RUSSIA COMMODITIES

Something Is Really Wrong In Retail

Takeaway: Something is wrong here.

Something Is Really Wrong In Retail - retailchart

Takeaway from Hedgeye Retail Analyst Brian McGough: This is simply abysmal news for retail. We haven't seen a flat year-over-year reading like this in the ICSC-Chain Store Sales Index (an index of 80 chain store retailers) since February 2010. Now, you can call it weather, you can call it whatever you want. We keep it simple here at Hedgeye. We just call it terrible.

Something is wrong here. 

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