Gas prices have been extremely favorable on a YOY basis for restaurant companies this year.  During the first half of the year, gas prices were down 38% on average.  This YOY favorability has continued in 3Q, but gas prices have moved higher in the last month, up about 7%.  Looking at the chart below, this YOY cost benefit will start to moderate and could go away in the fourth quarter.  Gas prices typically decline after the peak summer driving season, but are not likely to decline as dramatically as they did from last summer’s historically high prices. 




From a restaurant demand perspective, consumers do not typically think in YOY terms.  Gas prices are up 7% in the last month and 14% in the last three months.  This will put increased pressure on consumers’ wallets and impact their decisions about eating out. 


To that end, we have seen this being played out in the most recent restaurant industry sales data released by Malcolm Knapp.  For the past 5 months we have seen a sequential decline in same-store sales trends for the Full Service restaurant companies. 


I would also note that a key Research Edge MACRO theme is the Q4 REFLATION ROTATION theme, where reported inflation will begin to show up in Q4.  Helping to contribute to that theory will be the price of gas consumers are paying by November.  Currently the national average for a gallon of gas is $2.64 relative to $2.65 on October 27, 2008 and $2.40 by November 3, 2008.      

No Crash Here: SP500 Levels, Refreshed...

So far, today’s intraday high in the SP500 is 990. Please forward that print to all the crash callers out there –  the 990 level in the SP500 is -2.2% off the 2009 YTD high, +9.6% higher than the 2008 year end close, and +46.4% higher than the capitulation closing low of March 9th.


The last 2-days of selling are what we simpleton macro folks call a correction, not a crash…


Calling crashes is, presumably, a behavioral response by the manic media and group-thinkers alike who missed calling the 2007-2008 US market crash. It is sad and it is silly, but don’t get upset about it – capitalize on it. Provided that the US Dollar remains broken across all durations, stay with the global macro program that’s worked since March. Buy red on US Dollar up days; sell green on US Dollar down days; rinse and repeat.


I have been, on balance, selling strength today. As is customarily my problem, I am sure I am making some sales too early. That’s my problem, not yours. Immediate term TRADE lines of resistance are at 999 and 1020 (dotted red lines). A close below 999 today puts immediate term downside TRADE support in play at 979. A close above 999, combined with a Burning Buck and the kind of global macro data we received out of Hong Kong and Germany today, and you’ll see another higher-YTD-high to sell into.




Keith R. McCullough
Chief Executive Officer


No Crash Here: SP500 Levels, Refreshed...  - a1



CKR reported period 7 and fiscal 2Q 2010 same-store sales results this morning.  Carl’s Jr. has struggled recently and reported period 7 comparable sales of -5.2%, representing 2-year average trends that were about even with the prior period.  On a quarterly basis, CKR’s top-line trends slowed on a sequential basis at both its Carl’s Jr. and Hardee’s concepts, as seen in the charts below. 






Judging by how CKR is trading up today, investors seem to be comforted by the fact that the company is guiding to 2Q restaurant level margins of 19.1%-19.4%, about even with last year’s 19.3% number.  This is impressive relative to the significant fall off in same-store sales growth, but as I keep saying, this is not a sustainable trend.  The company will not be able to maintain these margins if same-store sales continue to decline. 




Carl’s Jr. has recently underperformed its QSR peers, largely as a result of its more premium priced menu, which has failed to drive traffic in this tough economic environment.  Making things even more difficult for Carl’s Jr., MCD rolled out its new Angus burger in early July.  Although the timing is not right for another premium-priced QSR product, I have said that MCD’s new Angus product would put increased pressure on Carl’s Jr.’s sales as MCD is a formidable competitor with a large advertising budget.  MCD has not yet launched a national advertising campaign around its Angus burger, but we have seen coupons like the one below.




To that end, today, in a separate press release, CKR warns Carl’s Jr. and Hardee’s “consumers not to fall for the McHype.”  The entire press release is focused on McDonald’s new Angus offering.  “The Original Six Dollar Burger at Carl’s Jr. has 24 percent more meat than McDonald’s Third Pounders, yet costs the same - $3.99.  And at Hardee’s, the 100% Black Angus beef Original Thickburger has just as much meat as McDonald’s Angus burger, but costs 60 cents less. Those are the facts and that’s the value of our burgers.”  CKR is even offering a money-back guarantee beginning in mid-September that will give customers a refund if they don’t agree that CKR’s burgers are better than MCD’s Angus burgers. 


The fact that CKR is making such a big deal about MCD’s Angus burger makes me believe that the company is feeling increased pressure from this new product.  CKR also stated that it will be introducing a new product tomorrow at its Carl’s Jr. restaurants, The Big Carl, which it calls a counterpunch to MCD’s iconic burger, the Big Mac.  It is one thing to go after a competitor, but it is another to go after that competitor by name, particularly when that competitor is McDonald’s.  MCD can and will beat CKR at the advertising game if it so chooses.  In the near-term, CKR may get some attention from its mudslinging tactics as everyone enjoys a good corporate battle!  And, the money-back guarantee may increase trial at Carl's Jr., but in the end, MCD will likely win the battle as you can never underestimate the company's marketing muscle.




Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

Pop, Pop, Bang! German Sentiment Popping

Research Edge Position: Long Germany (EWG)


The ZEW Center for European Economic Research reported today that its August index of Investor and Analyst Expectations rose to 56.1 from a pullback in July to 39.5. This increase for the index, which aims to predict economic health six months ahead, is bolstered by ZEW’s gauge of the Current Economic Situation, which rose to -77.2 from -89.3 in July. (See Chart Below)


The data supports our bullish fundamental outlook on Germany. We believe that Germany’s recent CPI and PPI figures represent a healthy (short term) deflationary environment that benefits both consumers and producers due to the purchasing power associated with imported commodity price declines (bolstered by a strengthening Euro); particularly  cheaper energy costs.  Interestingly, today’s CPI data from the UK for July registered unchanged at  +1.8% Y/Y  -a sequential divergence from Germany’s consumer deflation, which, along with the Eurozone average, stands at -0.7% annually. Our bearish outlook on the UK remains as we believe inflation is getting ahead of growth.


The recent German Q2 GDP release at 0.3% Q/Q has certainly helped to improve sentiment, as the public begins to believe that the recession is passing (or at least that the worst is behind them). Although all economic data is ultimately rear-view, with both Germany and France exiting recession from a technical level, look for countries across the EU to benefit from increased demand and confidence from consumers in the Eurozone’s largest economies. 


Matthew Hedrick



Pop, Pop, Bang! German Sentiment Popping - a1


Chart of The Day: Deflation's Daddy

On the heels of last week’s deflationary US Consumer Price report (-2.1% y/y for July), we just got one of the most deflationary Producer Price reports ever. Yes, by our math, ever, is a long time…


July’s PPI print came in at an eye opening negative -6.8% y/y.


When we talk about the dynamics of y/y price deflation in Q3 versus what we expect to see in Q4, this is the point. Most people forget that last year’s PPI compares are some of the hardest ever. Look at the 2 year snapshot of this picture, then consider it in the context of the 60 years of PPI data that Andrew Barber compiled with our macro team in the chart below.


So, there are three very important points to take away here:


  1. From a Cost of Goods Sold perspective (for some producers) Q309 Earnings are going to be even more impressive than Q209
  2. Deflating costs at a faster pace than y/y revenue growth = economic leverage
  3. This all ends mid-September


Why mid-September? That’s when you are going to get the August PPI report, and that should mark the low in deflationary reports. From there, you’ll see what we have coined Reflation’s Rotation into Q4. This simply means y/y Q3 price deflation will morph into y/y Q4 price inflation.


If you’re short this market right here – you’re short a lot of things that I wouldn’t be short until September. Duration mismatch (thesis versus timing) is really dangerous for a short seller – take it from a short seller who has learned this lesson the hard way.


Deflation is Bernanke’s Daddy. Until Daddy’s music stops, Bernanke will keep hearing the voices of a Depression. Until that stops, he won’t signal a rate hike. Until he signals a rate hike, the Reflation trade will live on…



Keith R. McCullough
Chief Executive Officer


Chart of The Day: Deflation's Daddy  - a1




18 AUGUST 2009




  • HD results appear to have fared better than Lowe’s, with domestic results trending better on both an absolute and sequential basis.  While transactions were up 0.3% and showed a sequential acceleration from 1Q, the average ticketed decelerated slightly and declined 9.3% in 2Q.  The overall US comp decline of -6.9% was measurably better than LOW’s and sequentially better than 1Q results, which were - 8.6%.  On the surface it appears that there are some slight share shifts underway.


  • Lowe’s disappointing same store sales decline of 9.5% for 2Q warrants a look below surface. Most notable was the performance of tickets over $500 (traditionally indicative of larger, more discretionary products) which declined 16% in the quarter. This decline had a disproportionate impact on the average transaction size in the quarter, which accounted for 8.6% of the total decline. Interestingly, same store sales for transactions under $50 were slightly positive. Overall customer count for the quarter was down 0.9%. Management stated that while demand appears to be weakening based on the results, the underlying trend has not shifted dramatically since 1Q. Management believes it underestimated the positive impact last year from the stimulus package, which made comparisons more difficult than anticipated. Regardless of the reason for weaker comps, the results clearly highlight the volatility that still exists in the consumer’s spending patterns. As a result of a more conservative outlook, LOW has decided to cut back its store growth plans until the environment stabilizes.


  • While not traditionally thought of as a Back to School category, CVS is looking to capitalize on healthcare services applicable to students heading back to the classroom. The company is using its MinuteClinic to introduce new services including acne care, sports and college physicals, as well as treatment for minor skin irritations common to students (i.e Lice). So far we have not seen any cross promotions between general merchandise and these services, although it may only be a matter of time before “one stop” shopping takes on an entirely new meaning.


  • Read the fine print… Usually Dick’s online promotional campaigns feature a special “after hours sale” so when we saw the weeklong 20% off BTS ad this morning, it raised a red flag.  But… if you read the fine print you will see that there is really little included in the sale but Danskin women’s apparel tops, Jansport backpacks, and New Balance running shoes.  Looking back to past year’s BTS ad campaigns, Dick’s actually had more items on sale.  We’re always careful not to read into these anecdotes too much, but it does suggest that Dick’s inventories could be tighter than some expect.  In Q2 08, DKS’s inventories grew at twice the rate of sales while in Q1 09 inventories were flat with 5% sales growth. 





-Survey says 47.8% of BTS shoppers were influenced by sales and coupons - According to a survey conducted by the National Retail Federation and BIGresearch released on Tuesday, of those shoppers who have already begun their back-to-school shopping, 47.8% were influenced by sales and coupons. 62.2% of American families who still have shopping left to do said they will head to a discount store. This should bode well for Wal-Mart Stores and Target, but with shoppers waiting longer to make purchases, those benefits might not be realized until September. As of Aug. 11, only 41.6% of American families had completed their back-to-school shopping, according to the survey. This shift into later back-to-school purchases took a toll on some of the retailers that reported second-quarter earnings last week like Macy's and J.C. Penney. Other than the discounters, when it comes to price plays, Aeropostale and Wet Seal are winners. <>


-Cautious consumer spending dampens online sales - Online retail sales in the second quarter were down 4.5% to $30.8 billion from Q2 last year, the Department of Commerce reports. By comparison, total retail sales fell 10.6%, driven by falling gas prices and plummeting car sales. <>


-Japanese department stores' July sales fell 11.7%, registering their 17th consecutive month of decline - The Japan Department Stores Association said Tuesday that apparel sales of the country’s 272 stores fell 15.6% during the month. The continued weakness of the Japanese economy and a longer than usual rainy season bit into business, especially for swimwear and other summer items, the association said. Earlier this month, Fast Retailing Co. Ltd. attributed a 4.2% decline in July comps to the negative impact of the extended rainy season and an unusually cool summer. Department store sales of men’s wear lost 16.7%, while those of women’s wear shed 15.6%.  <>


-Buy U.K. Supermarkets to Tap Food Price Inflation, Says ICAP Analysts  - ICAP Securities say investors should buy U.K. food retailers, including Tesco Plc and WM Morrison Supermarkets Plc, and sell food manufacturers, to take advantage of “high and rising” inflation starting next year.  <>


-U.K. Inflation Unexpectedly Stays at 1.8% as Computer Game, DVD Costs Rise - The U.K. inflation rate unexpectedly held at 1.8 percent in July as the cost of computer games, DVDs and alcohol rose, a sign the economy is staving off deflation as the recession eases. <>


-South Korean Department-Store Sales Rise for a Fifth Month on Luxury Goods - Sales at South Korea’s major department stores rose for a fifth consecutive month in July as consumers bought more luxury goods and accessories amid signs the economy is picking up.  <>


-New Era Cap Co. Inc., a global headwear and apparel maker acquired privately held apparel manufacturer 5th & Ocean for -  A spokeswoman for New Era said management at Miami-based 5th & Ocean “will remain fully intact,” and that “no restructuring has been decided on yet.”  “The resources and knowledge that New Era brings assures that 5th & Ocean will continue to be the fashion leader in licensed apparel and will continue to provide superior speed-to-market,” said 5th & Ocean ceo Alex Leiter.  New Era, an 89-year-old vendor based in Buffalo, N.Y., said working with 5th & Ocean, a company also known for its Major League Baseball apparel, would enhance the launch of its “New Era Presents Tradition” collection, which supports historically black colleges and universities. Victoria’s Secret Pink and Dallas Cowboys merchandising also have merchandising relationships with 5th & Ocean.   <>


-New president and CEO of Nike's Umbro decided - Jim Allaker, vice president and general manager of Nike U.K. and Ireland, has been promoted to president and chief executive officer of Nike’s Umbro brand. Marc Van Pappelendam, most recently vice president and general manager of Nike Eastern and Central Europe, will succeed Allaker in the U.K.-Ireland post. Allaker succeeds Matthew Cook, who has left the firm. Cook became president and ceo of Umbro in March 2008 following Nike’s acquisition of the U.K.-based soccer brand for $565 million. <>


-Sears and Kmart utilize holidays savings Christmas Club card early - Sears and Kmart are encouraging consumers that there is “no time like the present” to start saving for the holidays with a combined push, launching today (Monday), that touts the retailers’ new Christmas Club card. The program lets consumers store funds on the retailers’ designated holiday card, to be used for Christmas spending. A minimum of five dollars is required to activate the card, and consumers may add additional money either online or in-store. Consumers have till Oct. 31 to activate the card, and Sears and Kmart will offer an additional three percent—to be applied towards the final card value—at the end of the promotion on Nov. 14. At the height of their popularity, Christmas Club cards allowed customers to withdraw and apply a specific amount towards a holiday savings account from their weekly earnings.  With holiday retail sales accounting for as much as 20 to 30 percent of a retailer’s annual revenue, Sears and Kmart are trying to combat a weak consumer-spending environment. The effort spans across TV, online and in-store, including point-of-purchase, and coaxes consumers to save. <>


-Hanes has launched a T-shirt design competition offering the chance to combine creativity with passion for a most worthy cause - Susan G. Komen for the Cure . Through Oct. 26, 2009, participants can enter Passionately Pink-inspired T-shirt designs with messages of hope, love and support for the chance to win a weekly drawing for a $100 Hanes gift card. In addition, a grand-prize winner will receive a $250 Hanes gift card and a screen-printed copy of the winning T-shirt design. Hanes will also make a $5,000 donation in the grand-prize winner's name to the winner's choice of Susan G. Komen for the Cure local Affiliate or Komen Global Headquarters. <>


-Columbia Sportswear ventures into e-commerce with new site - Manufacturer Columbia Sportswear revamps its site to sell directly to consumers while supporting retailers with referrals and digital content. <>


-Crocs and Australia Unlimited settle differences - The long-running legal dispute between shoemakers Crocs, Inc. and Kent, Wash.-based Australia Unlimited, Inc. is over. Crocs and Australia Unlimited, maker of the NothinZ lightweight ergonomic clog, agreed to settle all outstanding litigation between the parties by filing for dismissal of all claims and counterclaims.   <>


-Arcandor AG’s days are numbered - The bankrupt German department store, catalogue and travel group said Wednesday it will end its search for an anchor investor for the group on Saturday and instead focus on finding individual investors for its Karstadt department store and Primondo catalogue divisions. Arcandor filed for insolvency, the German equivalent of Chapter 11, on June 9, and proceedings are due to open in September. Despite increasing speculation, Arcandor consistently has stated its intention to keep the group intact. <>


-Asics Corporation posted a 16.0% decrease in revenues for the quarter - Gross margins contracted about 140 basis points, SG&A expenses, which declined 3.2% for the quarter, expanded 460 basis points. Inventories at quarter-end were down roughly 2.5%. <>


-JEWELRY NAMES FOR SALE - Consor Intellectual Asset Management said it has been retained to find a buyer for the intellectual property assets of two now-defunct jewelry chains, Friedman’s Jewelers and Crescent Jewelers. In addition to the nameplates, other assets in the intellectual property portfolio includes Web site names and addresses and the registered trademark “Say It With Diamonds.”  <>


-YMI EXPANDS APPAREL - Junior denim brand YMI will expand to activewear, tops and dresses for the holiday selling season under a license with HMS LLC. This marks the first licensing deal for Los Angeles-based YMI, which sells its jeans to retailers including J.C. Penney, Belk and Dillard’s. HMS is best known for producing clothing for Ed Hardy and Christian Audigier. YMI estimated that retail prices for its new offerings will range from $17 to $30 for tops, $25 to $60 for dresses and $25 to $75 for activewear such as jogging suits. <>


-MADDEN DROPS EBAY SUIT - Steven Madden Ltd. has dropped a trademark lawsuit against eBay Inc. The firm brought the complaint against the online auction house in U.S. District Court in Manhattan on July 21, accusing the e-commerce giant of trademark infringement because unauthorized watches made by its former licensee, Vestal, were allegedly for sale on the site. However, court records show the footwear and accessories firm agreed to a voluntary dismissal of the suit on Aug. 5.  <>


-This month’s Bangkok International Fashion Fair had many of the characteristics of a typical Thai street fair, save one: Sales - Orders were slow to nonexistent during the 24th edition of the trade event, reflecting the wait-and-see condition of the world economy and the evolving character of Southeast Asia’s largest garment-industry event. The show was open to buyers on Thursday and Friday and to the general public on Saturday and Sunday.  Attendance was up 40% over last year trade visitors from Asia, the U.S., Western Europe and the Middle East were more inclined toward networking than buying. As Thailand’s $18 billion textile and garment industry evolves, it’s being pulled in two directions. Government officials are keen for Thailand to shed its cheap, copycat-producing reputation and offer higher-quality goods. Yet buyers, especially in the current climate, are hunting for bargains to protect their margins.  “We cannot compete with [China] in terms of volume or price, nor do we want to,” said Piramol Charoenpao, deputy director general of Thailand’s Department of Export Promotion, organizer of the Fashion Fair. “We want to be known as a niche producer of quality goods — yarn to finished garments.”  But that’s not necessarily what buyers are after.  <>


-Lands' End is increasing its product line beyond apparel - Lands' End Business Outfitters, a trusted partner for providing high quality branded apparel to companies of all sizes, is increasing its product line beyond branded apparel to now include a wide variety of promotional products. Recent research showed that nearly every company looking to build its brand uses promotional gifts in a variety of categories, specifically drinkware, bags and totes, and writing/desktop instruments. "Lands' End Business Outfitters is expanding our product offering to better serve our customers by providing a single, reliable source of branded products, from polo shirts to drinkware," said John Maher, vice president of Lands' End Business Outfitters. "We have selected items for our collection that are not only useful but also tasteful, professional  and, in many cases, sustainable." The new product line includes items such as drinkware, pens and desk accessories, screen print tee shirts, totes and travel gear and accessories, flashlights, and golf equipment. Each category has an eco-friendly product option for customers. The eco-friendly collection is made from post-consumer, previously used and post-manufacturing materials along with sustainable resources such as cotton and bamboo.  <>


-The 2nd largest online specialty retailer for intimate apparel offers new website - Bare Necessities, the second largest Internet specialty retailer for intimate apparel, announced the launch of a new lingerie retail website, will offer risqué and sexy lingerie such as babydolls, bustiers, teddies, garters, costumes and more, from brands such as Leg Avenue, Shirley of Hollywood, Dreamgirl and Escante. will also feature sexy plus size lingerie, and more provocative fabrications such as leather, lace, vinyl and sheer fabrics.  The Bare Necessities flagship site,, features the basic bras, lingerie, swimwear and underwear that women wear every day, and is second only to Victoria's Secret among specialty lingerie retailers in online sales volume, according to the 2009 Internet Retailer Top 500 Guide to Retail Websites. meanwhile will offer a more provocative assortment of lingerie that will be completely different from the assortment offered on will be a completely separate website from, but will leverage the fulfillment, technology, merchandising and customer service infrastructure that Bare Necessities has built over the past 11 years.   <>







UA: David McCreight, President, sold 25,351shs (~$606k) less than 20% of total common holdings.    

  • Note: Upon joining the company in July 2008, Mr. McCreight received a restricted stock award with a fair value of $4mm to vest over four installments; 50% after Y1; 25% after Y2; and 12.5% after Y3 & Y4. With the first $2mm of his award vesting as of August 1, 2009, Mr. McCreight sold roughly 25% of his award earlier this week. Also of note is that  he agreed to not sell, for one additional year, the shares that vest after the first year.


BOOT: Joe Schneider, President & CEO, purchased 5,437shs (~$54k) less than 3% of total common holdings.

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.