We are short Municipal Bonds via the etf MUB, short High Yield Bonds via the etf HYG, and short Treasuries via the etf IEF
We have had our Hedgeyes on the action in the swaps markets over the last few days. Below we’ve attached five year charts for both 10-year swaps and 2-year swaps. These charts show that that swap markets are at an inflection point and, in fact, are turning negative. Last night, 10-year swaps were at -2.25 basis points and 2-year swaps were at -17.0 basis points.
According to Josh Steiner, our Financials Sector Head:
“Essentially, what’s going on here is that the cost of swapping floating rate obligations for fixed rate obligations has soared, which has put downward pressure on the fixed payer swap rate – so much so that the rate is now actually below that of comparable duration treasuries creating a negative spread (for the 10YR).”
This of course happens for a couple of reasons. First, it shows increasing anxiety around the Fed tightening. In effect, one would only pay a big premium to swap fixed rates for floating rates if you thought floating rates were about to get meaningfully more expensive. Secondly, and also per Josh:
“To a lesser extent it supports the idea that AA corporate credit is trading tighter and tighter to US sovereign credit, partly because the markets are starting to price in the downgrade of the US and partly because corporate balance sheets, especially for the financials, are much, much stronger now (i.e. they are holding significantly higher capital than at any time in the last several years with much of the credit risk already reflected).
The view that the Fed may raise rates sooner than expected from the swap markets has also been supported today by data points from the Treasury market. The Treasury Department today sold $45 billion in 5-year notes at 2.605%, which was a higher rate than anticipated. In addition, the buyers offered to purchase only 2.55x that amount being sold, which was the lowest level of demand in this auction since September 2009. Moreover, indirect bidders, a group which includes foreign central banks, bought only 39.6%, the lowest level since July.
We continue to be aggressively short this Rate Run Up.
Daryl G. Jones
Five-year chart of 10-yr swaps:
Five-year chart of 2-year swaps:
SBUX held its annual shareholder meeting this afternoon and although the tone of the meeting focused around the progress SBUX has made over the last year, CEO Howard Schultz began his presentation by saying “there is no finish line and we are not shouting victory.” He concluded by saying, “It’s only just begun.”
SBUX’s annual meeting is a big event. Today’s management presentation ended with a performance by Sheryl Crow, who admitted to being a Starbucks groupie (her babysitter is an ex-barista). Among all of the razzmatazz, I’d say the two most important takeaways stemmed from management’s comments about its initiation of a quarterly dividend and its current growth strategy.
Earlier today, SBUX announced that its Board approved its first ever quarterly dividend of $0.10 per share and a resumption of its share repurchase program. Management stated that this dividend and increased share repurchase authorization reflect the true health of the company and show the strength of the company’s balance sheet. Management refuted the idea that the initiation of the dividend is a sign that the company is no longer going to grow. Instead, the company said that this is far from the truth as SBUX still has significant room to grow given that the company currently has less than 4% and less than 1% of market share in the U.S. and International coffee markets, respectively.
Mr. Schultz outlined the company’s significant growth opportunities, but said SBUX will pursue a “radically reframed growth strategy.” The company will maintain its traditional growth vehicle by resuming growth of its U.S. store base while accelerating the growth of its International stores. The new growth will come from the company’s pursuit to make its coffee available in multiple platforms in multiple formats, primarily through expanding the CPG business, Seattle’s Best and Starbucks VIA. Specifically, Mr. Schultz thinks that both Seattle’s Best and VIA are multi-billion dollar global opportunities. VIA is currently sold in 10,000 outlets and the company thinks the brand can easily achieve 30,000 points of distribution. Internationally, SBUX sees big opportunity for VIA as 70%-80% of all coffee consumption is in the instant coffee category. SBUX just launched VIA in the U.K. about three weeks ago.
SBUX thinks it can fill a gap with Seattle’s Best by making premium coffee available to customers in more places. There are currently 560 Seattle’s Best cafes in the U.S. and the company plans to grow the concept through both new company-owned units and a franchise network. According to management, there is a deep pipeline of franchisee perspectives. This retail store growth will complement the brands growth through the CPG channel and through partnerships with other retailers, such as the recent announcement to roll out Seattle’s Best coffee in Burger King’s 7,000 units in the U.S.
Mr. Schultz is convinced these new avenues of growth will complement SBUX’s retail business growth. And, he predicted that over the next 2 years, “a different kind of Starbucks will emerge.”
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UA is starting to look interesting again. Today we saw two sell-side downgrades based on Valuation, and I got pinged with two separate emails about concern that apparel will hit a wall as footwear launches. I’ll never flat-out ignore valuation. But if you want to put on a short based on valuation for a company that is going to beat numbers, print accelerating top line growth at a time when growth for retail is in question, and give further evidence that the company will double in size – again – over three years, then be my guest.
I think the most interesting call out here is that ‘UA will hit a wall like Nike did when it was young.’ Something tells me that the people chirping about that thesis aren’t actually diving into the margin characteristics over the past 30-years for Nike, and comparing UA’s progression. If they did, then this would be a tough argument to make.
Check out the chart below. It shows Nike’s revenue growth over a 20-year period starting in the early 80s, and the margin level realized (or implemented) to achieve such growth. The bottom line is that EVERY time Nike hit a so-called ‘wall’ – such as at the initial volatilitility in building a shoe biz in the US (when a ‘sneaker culture did not exist at the time), the end of its US footwear growth burst in the late-1980s, and growing too fast in US apparel by the late 1990s – it was preceeded by a prolonged period of over-earning on the margin line. There’s no way an early cycle company in this business should be printing 15-18% EBIT margins.
To that end, can ANYONE show me ANY evidence that UA overearned at any point in time? Compare it to early Nike, compare it to ‘fad-ish’ trends where the companies don’t reinvest enough to have a sustainable infrastructure from which to grow, and then compare it best of breed companies in other consumer spaces. Seriously, UA’s behavior as it relates to capital deployment has been textbook as a baseline for success. The Street could care less about this analysis over the near-term. But we care – it usually presents great opportunities to buy great businesses when the market is freaking out for the wrong reasons.
I don’t know if I’d call UA ‘hated’, but the sentiment has definitely deteriorated. Today’s downgrades have the percent of Buy ratings down to 20%. We like that. UA is quickly making its way back towards the top of our queue.
I have been following DRI since its spin out from General Mills in May 1995. As Matt Stroud can attest to, I have had my differences with DRI and its direction over the years. All that said, I have never seen the company so in sync with the times and concepts running as planned.
I have been following DRI since its spin-off from General Mills in May 1995. As DRI’s Vice President of Investor Relations Matt Stroud can attest to, I have had my differences with DRI and the company’s direction over the years. All that said, I have never seen the company so in sync with the times and its concepts running so in line with plans.
Going into the quarter, I said there should be few surprises when DRI reports fiscal 3Q10 numbers as the company had preannounced earnings and raised full-year guidance in mid February. Sales and earnings results, however, surprised to the upside and the company again raised its full-year EPS guidance to +8% to +10% (from +5% to +8%).
Top-line trends improved sequentially across all of DRI’s concepts even when you account for all of the holiday timing and severe weather impact. Management attributed the better than expected performance to less severe winter weather in the second half of February and a strong response to Red Lobster’s Lobsterfest promotion, which started two weeks earlier this year. As we noted following the company’s preannouncement, the biggest sequential improvement came at LongHorn where 2-year average trends improved about 400 bps, excluding the Thanksgiving and weather impact in both years. Management stated that customers responded well to the new signature filet dishes at LongHorn, which were similar to last year, but included more compelling culinary offerings supported by more compelling ads.
Management sounded upbeat about current industry trends and more importantly, about the company’s ability to continue to gain market share. Specifically, the company cited that according to Malcolm Knapp, industry same-store sales have improved sequentially in the last two quarters with guest counts improving 40 bps during the fiscal third quarter and average check improving 130 bps. Management acknowledged that some of this improvement can be justified by easier comparisons, but it continues “to believe that the fundamentals in full service restaurants are improving.” The fact that average check only declined 20 bps YOY in the quarter also suggests “that the deep discounts so prevalent over the last four quarters at many of our competitors have eased significantly.”
Highlighting management’s conviction in its ability to drive EPS higher, management said we are operating at or slightly above peak margins and “we’ve got new targets for peaks at this point.” In response to a question, the company was very specific in its answer that its prior EBIT margin peak was 10.3% and that margins can go higher. I would agree that Darden is well positioned to grow its margin going forward as the company continues to layer on its “transformational savings” initiatives. A return to positive same-store sales growth will enable the company to achieve new peaks faster as evidenced by the third quarter when EBIT margin grew about 90 bps YOY to 10.8%, excluding the $0.04 charge related to the company’s decision to adjust gift card redemption assumptions, with blended comparable sales positive for the first time in 7 quarters. A return to positive same-store sales growth will also help to protect margins from the costs associated with DRI’s plans to accelerate new unit growth going forward.
Underpinning management’s bullish tone was the company’s fiscal 4Q10 blended same-store sales guidance of about -1% (FY guidance of -2.5%), which received a lot of focus on the earnings call. Management reiterated that this assumed sequential slowdown does not reflect current trends in March but rather is based on the company’s belief that although the industry is showing signs of improvement, it remains fragile. To me, this translates into “we are being somewhat conservative.” It is important to remember that the company is facing a more difficult comparison in the fourth quarter, particularly at Red Lobster, so although a -1% represents a slowdown from 3Q on a 1-year basis; it implies only a slight decline in 2-year trends, excluding the holiday timing and weather impact in both years. Even if trends continue to improve sequentially, we cannot expect the same magnitude of improvement that was reported in 3Q10. I would expect 2-year trends to continue to get better across all of the concepts in 4Q10, except maybe Red Lobster (again due to tougher compares, the same cannot be said for 1-year trends), which will face some added pressure from the earlier Lent in FY10 and the earlier start to its Lobster Fest promotion which helped fiscal 3Q10. Management did specify that it did not want to comment on current promotions in the pipeline for Red Lobster so DRI could surprise me again in the fourth quarter (as it did in 3Q).
DRI is facing tougher top-line and EBIT margin compares in the fourth quarter so we are not likely to get a repeat of the strong 3Q results. That being said, DRI is one of the best positioned restaurant companies going forward. And, as I said last week, I think EBIT margin and return on incremental invested capital are moving higher in fiscal 2011.
Notes from Darden’s fiscal 3Q10 earnings call:
- Blended SSS increased 1.3%
- Exceeded guidance
- Positive impact of 80 bps due to Thanksgiving shift moving to second quarter from third quarter in FY09
- Excluding this impact, blended SSS rose 0.5%
- More severe winter weather adversely affected blended SSS by ~60 bps
- Varied by brand
- LH was impacted more than OG or RL
- Margin shifts
- Good sales momentum
- Industry SSS ex Darden are estimated to be down 4.3% for quarter. Nearly 500 bps outperformance
- New unit growth vs. SSS outperformance– market share increasing
- Increased 1.5%
- 0.9% excluding Thanksgiving
- SSS +0.9%
- 0.1% increase excluding Thanksgiving
- SSS 1.9% for the quarter
- Excluding Thanksgiving it would have been 0.7%
- SSS decreased -1.9%,
- Excluding Thanksgiving it would have been down -4.7%
- Impacted by weather by about 230 bps
- SSS decreased 0.6%
- Declined -2.2% excluding Thanksgiving
Overall food and beverage lower than last year
- Reduced food costs
- Expecting additional benefits in 4Q (less so than 3Q)
- Up YOY due to unemployment insurance taxes, benefits, bonuses
- Offset slightly by decreased turnover
- Higher again in 4Q (but improvement relative to 3Q)
Restaurant expenses 54 bps lower yoy
- Lower utilities
- No favorability in 4Q as last year’s reduced energy costs are lapped
- Bonuses, benefit, media
EPS reduced 4 cents by gift card redemption policy change (recorded as a reduction to sales)
- YTD tax rate is ~25%, annual effective rate expected to be the same
- Blended SSS FY to decline 2.5%, better than previously anticipated, with more favorable food costs
- +8 to +10% EPS growth in FY2010
- Industry trends improved for the second consecutive quarter
- Guest counts improved 40 bps, average check improved 130 bps
- Implied industry check only down 20 bps compared to last year
- Data suggesting that discounting has eased significantly
- Continue to believe that fundamentals in full service restaurants are improving
- Weary of using deep discounts given concerns about long term business model, brand, growth prospects
- Olive Garden achieved SSS growth of 1.5% during 3Q
- During the second quarter of FY10, SSS for Olive Garden was ~-1% adjusted
- Less advertising than prior year
- 3Q SSS growth of +0.9%
- Accounting for holiday and weather, adjusted was lower but still positive vs. last year
- During the second quarter, comparable adjusted SSS result was -7%, also an improvement
- $29.99 seafood dinner for two
- Earlier introduction of Lobsterfest
- SSS growth was 1.9% during 3Q, adjusted is essentially the same
- Promotions were similar than last year but were more compelling dishes with more compelling advertising
- Gift cards
Operating margins increased at the 3 main concepts
Three projects targeting expenditure areas are on track to meet or exceed the cost reduction targets set in the past:
- Automation of supply chain
- Centralization of facilities support
- Transformation of in-restaurant operating practices to reduce usage of water, energy, and cleaning supplies
Darden is well positioned
- Good teams
Q: Red Lobster, three course dinner for two, and whether that sort of value is continuing through the year?
A: Very pleased with the seafood dinner for two promotion. Periodically give guests the affordability they look for without damaging brand or business model. We will continue to use promotions like that on a periodic basis.
Q: After 18 months of mid single digit SSS at LH, jumped back to positive comps. Advertising spend?
A: Did not add incremental advertising or coupons but better product and advertising of that product.
Q: Commentary on March trends?
A: Less about what’s going on in March, we’re in an environment that’s still choppy. Fragile enough that you may get some setbacks but yet to see them in March.
Q: Could give a little bit more detail as far as your implied guidance of the sequential slowdown in comps. Is that expecting a slowdown in the back half and being prudently conservative for the shift in the little bit of shift in Lent and other things in lobster fest or are you already seeing that type of a slowdown now? For same store sales.
A: We’re doing our math based on prior year comparisons, a little more difficult for industry. Nevertheless we do expect it to improve. Expecting ourselves to outperform the industry. Longhorn has outperformed for some time now.
Q: 4 cents for gift card redemptions…was that all in G&A? Capex outlook?
A: On gift card, that all represents a sales deduction. No impact on SSS performance calculation.
Capex guidance from analyst call stands.
Q: Labor costs were up 110 bps on positive comps. Other companies showing labor leverage on negative comps. Any initiatives pushing that up? Healthcare bill impact?
A: Front line labor is being slightly leveraged but unemployment taxes and group insurance and other such costs are impacting. While SSS has grown, guest counts aren’t positive enough to get real leverage out of labor line.
Healthcare bill could still be changed. We’ll study it in its final form. It’s much like other cost challenges we face, going to take time to understand implications. Most of the provisions would come in 2014. 2HFY13. Medical plans at DRI do not exclude preexisting conditions.
Q: Looking at FY11, with unit growth and comps staying constant, might we see earnings about 10-15%?
A: not prepared to talk about FY2011. Will do in June. Long term targets at analyst day were 10-15%. Required all of the things we discussed to drive the top line.
Seeing strong growth in earnings and “we’ve got a new target for peak margins”
Q: Capital Grille? What’s happening at higher end?
A: Broad sales improvement across all geographies in central business and suburban areas. Larger gains on Monday through Thursday nights, driven by business and entertainment. Guest counts are still growing. Some negative check in Capital Grille because of lower wine expenditures. Trade down in alcohol.
Q: Peak margins?
A: More that we can build AUVs the better. Historically if you go back a few years ago, that's how we were driving most of our business and we didn't have high unit growth vis-a-vis the industry. We have a model that's much better mixed that we, between the restaurant sales growth and unit growth. So the art of the possible if you will is looking at those two components and seeing how you can grow your business between those measures. Also we've talked about the transformative cost initiatives that we have out there. To the degree we don't incur an increasing cost environment can be converted to lower pricing, which can help drive unit volumes and/or some combination of improving margins and driving earnings directly that way in addition to the growing average unit volumes. Can exceed 10.3%
Q: Pricing strategy? What are your thoughts on taking pricing? Cycling price you took spring summer last year.
A: we try to be as consistent as we can. Short term spikes or declines in cost. If you look over the long term, 2-3% is where we tend to be.
Q: Looking at comps to be down 2% in 4Q? Any nuances?
A: More like down 1%. Moved 13th week back into quarterly computation, not dramatic but adds pressure. Looking at 4Q, lapping far tougher comps. Lobsterfest Lenten promotion has moved 2 weeks out of 4Q and into 3Q. Expecting we will outperform industry performance but the consumer is in a fragile state right now. Need to see household economics strengthen. Need to see more employment.
Q: Change in redemptions more based around holiday gift cards or finding gift card in the drawer? YoY comp?
A: A lot get redeemed quickly, in 90 days. Long development period. Into the second year or past. Does reflect what’s been happening recently but consumers are digging deep. Sales through third parties.
Q: Peak margin…do you need G&A and labor leverage to run that level? What comp do you need to get north of 10.3% margin?
A: On the G&A line, we invest in getting more cost efficient. G&A line investment may show up as benefit in other lines.
Make investment to drive AUV and cut costs.
New unit growth does give leverage and SSS in existing restaurants leverage all of the lines. Most of the leverage comes in ROP expense, D&A and Labor.
Q: Gift cards, assuming adjustment in redemption was worth 40/50 bps...is it reasonable to expect no adjustment going forward?
A: Seen change in consumer, change in mix, barring major changes in those, we’ve got every adjustment needed. Nothing we’d anticipate. Outstanding gift cards have been adjusted for.
Q: Increased D&A, can you comment on that and how it’s affected? Remodel program? Benefit on other lines?
A: That’s more reflective of a year’s worth of SSS decline, AUV down, more a result of sales leveraging impact that’s going on there. Many of the units coming online recently were in the works two years ago so there is a higher investment base involved.
Q: Mix…did gift card push at LH help mix? Marketing was up on quarter but not at LH? Where was it?
A: Mix at Longhorn driven by higher interest in signature dishes. Gaining traction developing popular dishes.
Didn’t increase advertising dollars at LH.
Q: Any guidance on full year interest expense?
A: No, more incorporated in guidance. Enjoying high FCF, no draw against revolver. Helping interest expense on a y-o-y basis.
Q: Improving CD environment, adding units, talk about real estate environment? Any change in rents?
A: Have seen a shift in real estate environment in a couple of areas. Able to attain better locations than in the past. Our locations attract traffic.
Across the country, building costs are down 10%. Few new developments being constructed, but rents are coming down in the 5% range because of all the challenges with existing tenants
The Macau Metro Monitor, March 23rd, 2010
POLICY ADDRESS 2010-- ECONOMY AND FINANCE: MAXIMUM 5,500 GAMING TABLES BY 2013 Macau Daily Times
On the last day of the economy and finance policy debate at the Legislative Assembly, Secretary Tam stated that Macau has nearly 5,000 table games, and the government has decided that the number will not be allowed to go beyond 5,500 in the next three years in keeping with the goal "moderate growth" of table games in the range of 3-4% for the foreseeable future. “It shows that the gaming industry has entered a stable period compared to the previous years when the gaming tables reported a one-fold increase between 2005 and 2006,” the Secretary said. From 2007 to 2009, gaming tables grew ny 9% from 4,375 to 4,770.
Tam also said that "all the pending applications [to open new casinos before 2013] have already been stopped but those which have been approved will be able to continue [their expansion plans]." The Secretary did not mention specific properties. He pointed out that it is difficult for a city to “maintain an edge” in the competition between casinos, since “people can always build a bigger and more luxurious casino than yours in other places....It is hoped that the gaming operators won’t solely pursue development in their own business and an increase in the gaming tables. Macau’s future economic development is heading towards a world leisure and tourism hub and I hope that the gaming companies can contribute to this goal while achieving individual success at the same time,” he said.
Lawmaker Chan Chak Mo asked Secretary Tam what the legal basis is for rejecting operators to open more gaming tables and whether the move will lead to lawsuits against the government. The Secretary ensured the lawmaker that there is a legal basis and each new gaming table requires a government approval. “The government has the legal power to control the expansion of the gaming industry.”
When asked about the latest progress of the plan to move slot machine establishments from residential areas, the Secretary revealed that the government has the idea of creating a “betting zone” but did not give further details.
On a separate issue, Francis Tam Pak Yuen estimated that in the first half of 2010 Macau may report a double-digit increase in Gross Domestic Product. As for the second half of this year, he said it will depend on the global economic climate, but adding the SAR government is confident that a “stable growth” could be maintained overall. “The ultimate goal of developing the economy has always been to enhance people’s quality of life,” he added.
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