Today, RUTH reported that 3Q09 same-store sales growth declined 24%.  The chart below is just plain ugly, but I am not posting it to show just how abysmal the company’s trends are, but instead, to make a comment about the upscale segment of restaurants in general.  Management stated that it has held market share through the first nine months of the year relative to Malcolm Knapp’s upscale dining index.  A company cannot maintain share with year-to-date same-store sales down 22% unless that segment is at risk of going away.   If there is any truth to this statement, fine dining restaurants are in real danger. 


I do not quite understand why MRT traded up today following this news.  MRT is scheduled to report 3Q09 numbers next week.  The company’s 2Q09 same-store sales growth declined 26.1% so the company is in a similar position to RUTH from a demand standpoint.



Week Ahead

The Economic Data calendar for the week is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.  


Week Ahead - Final week ahead Nov 2


Early Look

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The Big 3 Same-Store Sales chart below does not tell the whole story.  It does show that Burger King has lost a considerable amount of market share over the last five quarters to McDonald’s and more recently, Wendy’s.  We all know now that Wendy’s 3Q08 value launch of its Double-Stack Cheeseburger, the Crispy Chicken Sandwich and the Junior Bacon Cheeseburger for $0.99 each helped the company to gain market share, largely from BKC.  But, that was a year ago and what matters now is where we go from here. 


Wendy’s same-store sales turned positive in September 2008 when it introduced these three $0.99 sandwiches to its menu so the company lapped these improved results in the last month of 3Q09 and YOY comparisons are even more difficult come 4Q09 (facing a +3.6% comparison).  The chart below includes our flat 3Q09 same-store sales estimate for Wendy’s.  Although the company stated that comparables sales growth was up 2% in July, I am expecting the quarterly number to come in below that as a result of the more difficult YOY comparison in September. 


BKC rolled out its $1 double cheeseburger nationally on October 19.  Although the company did not comment too much on how the product has performed in the last two weeks, management did say yesterday on its fiscal first quarter 2010 earnings call that the markets that supported the new product with media plans during the first quarter (about 25% of U.S. restaurants) generated traffic growth.  With the $1 double cheeseburger now in 100% of the U.S. restaurants, BKC could gain some traffic momentum if the test market results correctly reflect what this product can do on a national basis.  As for McDonald’s, we already know that October same-store sales are trending flat to negative.  As I always say, it is zero sum game so if Burger King begins to get traction with its $1 double cheeseburger, someone else will lose.  We could see a market share shift among the big 3 in the coming months.  I am not saying Burger King will move ahead of both McDonald’s and Wendy’s, but it could steal some marginal share. 


Burger King’s potential traffic gains will not come without expense, however.  Management stated yesterday that in the markets that had already rolled out the $1 double cheeseburger, the company experienced both traffic growth and profit dollar growth, but lower YOY gross margin.  Specifically, management stated, “margins in the tests were impacted somewhere around 100 to 150 basis points, but GP dollars obviously were up. As we said, what we've seen so far continues to mirror what we saw in the test.”


BKC’s consolidated restaurant margins improved nearly 50 bps during the first quarter while EBIT margins declined.  In the first quarter, company restaurant margins in the U.S. and Canada benefited from a 210 basis point improvement in food, paper and product costs and the non-recurrence of startup charges related to the acquisition of 72 restaurants in the prior year.  I would expect margins to be under increased pressure in the second quarter with restaurant margins turning negative as well.  The company is not only lapping a more difficult restaurant-level margin comparison but the higher mix of sales coming from the $1 double cheeseburger and other value items in the quarter will likely offset the expected YOY commodity cost favorability in the U.S. and Canada. 


There are a lot of moving parts on a YOY basis relative to margins and a lot will depend on just how much the increased traffic from the value menu items hurts average check and margins.  Commodity costs in the U.S. and Canada should continue to be favorable in 2Q but become less favorable on a YOY basis in 2H10. 


Restaurant margins outside the U.S. and Canada were a drag on consolidated results in the first quarter from higher commodity costs and the negative impact of currency translation on cross-border purchases in the UK and Mexico.  Currency translation should turn positive in the second quarter and is expected to have a positive impact on earnings on a full-year basis. 


From an operating margin standpoint, higher than expected SG&A expenses in the first quarter (+8.6% YOY) hurt results, but the company is forecasting that it will still only be up about 3% for the full year so this pressure should moderate in the coming quarters.  D&A, on the other hand, was down 2% in the first quarter and is expected to be up 10%-15% for the full year. 


So there are a lot of positive and negative offsets coming in 2Q relative to 1Q, but as I said earlier, I am expecting margins to decline in the current quarter.  We could see Burger King gain some top-line momentum and in this environment, getting people in the restaurant seems to matter most to investor sentiment and stock price performance.




BKC - DON'T COUNT THEM OUT! - BKC Company Rest Margins


"The government should not tell the BOJ what to do but the BOJ instead needs to take the government's stance into consideration.”

-Japanese Finance Minister Hirohisa Fujii



Position: Short Japan via EWJ


Globally, central bankers are beginning to phase out emergency liquidity measures that were implemented beginning last fall.  While only two of the G20 countries have started raising rates, Norway and Australia, other nations are beginning to follow suit.  Japan followed suit today.


Bank of Japan policy makers met today and discussed the merits of ending their three programs aimed at easing credit.  Specifically, the Japanese implemented a commercial paper buying program, a corporate bond buying program, and unlimited collateral backed lending to banks to offset the credit crisis.  Reports today suggest that the first two programs will likely be ended at year end, with the lending program set to expire in March.  Kirin Holdings, a Japanese brewer, raised $1.1BN yesterday in bonds to support the company’s acquisition of Australian Brewer Lion Nathan, which suggests the corporate bond markets are open for business and support the decision to end corporate bond buying.


The immediate impact of this action is being seen this morning with the Yen up against all but one of the 16 most-traded currencies.  This objectivity in fiscal policy is being noted by currency markets, as is the quote above from Japanese Finance Minister Fujii.  Obviously a primary issues with the U.S. dollar is a concern over the politicization of the Fed and the Japanese, even if in verbiage only, seem to be aggressively defending the independence of their central bank.


I had a coffee with a client in New Haven yesterday and he asked me what I thought it would take to strengthen the U.S. dollar- certainly the Japanese Yen is speaking to that this morning.  Specific policy action, or an indication of policy action to come, that reverses the current loose monetary policy tract in the U.S. will be required.


Longer term, Japanese interest rate of 0.1% will likely remain in place, and continues to provide an overhang on its currency and potential investment in Japan.  As a supporting fact, the Japanese government reported today that consumer prices, excluding fresh food, slid 2.3% today, which continues to provide support for a low interest rate in the mind of the Bank of Japan to offset deflationary pressures.  This is also the seventh straight month of sliding consumer prices in Japan.


Despite this seemingly rational fiscal policy move by Japanese central bankers, we continue to have a negative bias on Japan.  We are of the view that the new leadership of the Democratic Party of Japan is suspect on the economic front.  In addition, as wrote in our ETF summary on the Early Look today:


“We view Japan 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.”




Daryl G. Jones
Managing Director


Eurozone Swings

Research Edge Position: Long Germany (EWG)


With our pulse on the European patient we’ve still yet to see any dramatic moves in fundamentals across the Eurozone. That said, European markets traded down significantly over the last week and a half—particularly on missed European Q3 earnings and bearish US-centric data—before popping back up yesterday and closing back down today, suggesting that yesterday’s expansionary US Q3 GDP report was the key positive catalyst.  From a macro set-up across the region, unemployment and inflation could tip the balance, but have remained steady:  a mild deflationary environment in the Eurozone (-0.3% in September year-over-year) has aided purchasing power of households, and unemployment has crawled up to 9.6% over the last months, but is far from any freak-out levels.  (For more on unemployment see “Jobless Recovery in Europe” on 10/08).


This week brought a few bullish and bearish data points to call out:


Yesterday’s employment data from Germany (although rear-view) actually showed a decline in the unemployment rate, a surprise to us as we forecasted a slow ramp in joblessness beginning in Q4 as government incentivized part-time work and stimulus spending wane.  In fact, September saw an increase of 269K jobs, or 0.7%, over the previous month, a bullish data point, yet one we’ve taken with caution due to the seasonality reflected in the end of summer break and the beginning of the new training year in Germany.  


German retail sales fell 0.5% in September month-over-month (adjusted for inflation and seasonal swings) , the second straight down month, or fell 3.9% year-over-year, said the Federal Statistical Office today.


Finally, the European Commission reported that Eurozone confidence improved—albeit on small sequential rises—across multiple subsectors, including Economic, Consumer, Services, Industrial, and Construction, while retail confidence remained unchanged. The improvement in consumer confidence across the region runs counter to separate country-level consumer confidence surveys out earlier this week from Germany (Gfk) and Italy (Isae) that turned down.


We see darker clouds ahead in 2010 when unemployment picks up, which should dampen consumer and business confidence and could erode gains in production and consumption. We continue to see uneven performance across the region and will look to limit our exposure by positioning ourselves on the long and short sides.  Within the Eurozone we continue to like Germany (although the DAX recently broke its TRADE line), on the long side. Other headwinds that we’ll have on our screens include a strengthening Euro and the impact of the ECB withdrawing stimulus measures, which ECB council member Axel Weber said this week. Stay tuned.  


Matthew Hedrick