Cracker-Barrel is, in my view, the most susceptible of all restaurant concepts to the demand destruction that is caused by elevated gasoline prices.
Cracker Barrel is a struggling concept and the outlook is not looking very positive for the company as gasoline prices head higher and management struggles to generate traffic. Over the past four years, only three times has CBRL reported positive traffic growth. It has become a familiar refrain for management there to discuss the need to build traffic.
First and foremost, the “Seat-to-Eat” initiative has been a disappointment to say the least. Despite implementation across 70% of the company’s stores, it would be difficult to call the impact of the program anything but negative. There has been no meaningful impact on traffic from “Seat-to-Eat” and management’s reluctance to disclose any granularity on that topic during the last earnings call is telling. While the initiative has been much-hyped by management in terms of its scope (29 different operational changes) and significance, at this point I think the cost of retraining 68,000 employees as part of the program may outweigh the benefit, if there ever is one, from “Seat-to-Eat”. In my experience (admittedly, zero years as a restaurant operator), it has generally turned out that initiatives that are not consumer facing generally take longer to impact the diner’s experience. While long-term back-of-the-house efficiencies may materialize from the initiative, I fail to see how this will drive traffic of the magnitude CBRL needs. As Benjamin Franklin said, “Never confuse motion with action.”
Secondly, the vast majority of CBRL’s restaurants are located along interstate highways; a mere 90 of the company’s 597 stores are located near “tourist destinations” or are considered “off-interstate” stores. As such, CBRL is highly vulnerable to fluctuations in gasoline prices. The company’s traffic problem, which has been a problem even with the price of gasoline at its most benign, is greatly compounded when gasoline prices are at current levels and above. Referencing management commentary during the most recent spike in gasoline prices is ample evidence of this; time and again in 2008, gasoline prices were cited as a key top-line headwind. The chart below shows that CBRL’s traffic trend is tightly linked to vehicle miles driven data as measured by the Department of Transportation.
While gasoline prices are dipping precipitously today, on the back of a Goldman Sachs report calling for a pullback in oil prices, generally expectations have been for elevated gasoline prices throughout the summer months. If that were to be the case, it would materially impact CBRL’s traffic during an important time of year.
Positions in Europe: Long British Pound (FXB); Short Spain (EWP)
Not unlike numerous global economies we’re following, the prospect of inflation rising spells growth slowing - here Germany is no exception to the rule. Today’s economic sentiment survey from ZEW that attempts to predict the economic climate six months out registered 7.6 in April versus expectations of 11.3 and 14.1 in March (see chart below). The significant drop follows two previous months of slowing, and we contend is a reflection of the mean reversion trade Germany must transition through after at least a year and a half of white-hot fundamentals. Despite the marginal change, we remain bullish on Germany from an intermediate term perspective.
--------Here’s Additional German Data That Looks Less Good On The Margin--------
CPI rose to 2.3% in March Y/Y versus 2.2% in February
Manufacturing PMI slowed to 60.9 in March vs 62.7 in February
Services PMI data appears “toppy” at 60.1 in March vs 58.6 in February, and is bumping up against the heavy and historically significant 60 resistant line. We’re calling for the April number to roll over
--------While Positive German Fundamentals Remain Glaring---------
Unemployment Rate 7.1% MAR vs 7.3% FEB
-The unemployment change for March was -55K MAR to 3.01 Million (the lowest level since June 1992), beating expectations of -25K
Factory Orders 20.1% FEB Y/Y vs 16.5% JAN
2.4% FEB M/M vs 3.1% JAN
Industrial Production 14.8% FEB Y/Y vs 12.7% JAN
2.4% FEB M/M vs 3.1% JAN
Exports 2.7% FEB M/M vs -1.0% JAN
Imports 3.7% FEB M/M vs 2.3% JAN
Trade Balance €12.1B FEB vs €10.1B JAN
We are not currently invested in Germany in the Hedgeye Virtual Portfolio as we’re cautious that the DAX is trading just above its TREND line, an important inflection level in our models. We see a similar set-up with the UK’s FTSE (see chart below). However, at the right price we like Germany and Europe’s other fiscally sober nations like Sweden and the Netherlands.
Overall, German fundamentals and business trends continue to look positive. Exports are expanding, employment has improved, and factory orders and business confidence have come in strong over recent months. Yet, rising inflation is a risk to consider, as is mean reversion from some of the white-hot data. Over the intermediate term, we continue to believe that Germany will be the region’s growth engine (GDP is expected to grow 2.5% this year) and think Germany may also be a defensive play as the region remains mired in sovereign debt contagion.
We expect that EUR-USD to make gains given the ECB’s hawkish stance on inflation and recent 25bps interest rate hike, especially as US policy continues to debauch the greenback.
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POSITION: Short SPY
This is the 4th consecutive down day for the SP500, virtually every sell-side strategist is cutting their US GDP Growth estimates, and the market is now down for the month-to-date. These shouldn’t be surprises. So don’t freak-out here – this is where you get paid to manage risk.
One of the hallmarks to effective risk management isn’t having it in you to short things when they are up – it’s to cover them when they are down. We did that on March 16th and I think it’s a good idea to do that again right here and now. Don’t worry about your cost basis – the market doesn’t care about your cost basis. Worry about what isn’t happening yet - the bounce.
Short Covering Opportunities aren’t raging bull calls to action. In this case I see every opportunity for the SP500 to bounce to another lower-long-term-high and lower-immediate-term high up at 1329. Then you start making sales again.
If 1310 breaks and the VIX breaks out above $18.26 (intermediate-term TREND line resistance), this call to cover shorts will likely be a bad one. Don’t dismiss that the world’s reserve currency has gone no bid. This game of gaming The Bernank is going to be volatile.
Keith R. McCullough
Chief Executive Officer
R3: REQUIRED RETAIL READING
April 12, 2011
- After looking to sell Gold Toe-Moretz for more than a year, the $350mm takeout by Gildan appears to have come at the 11th hour for Blackstone. Reports suggest that as of last year the company had debt of $345mm. While the deal price was well below suggested interest at $450mm, the deal importantly enables Blackstone to pay off its lenders. After negotiating its third wavier with creditors just weeks ago, details of the deal reveal just how close this one was.
- Joes Jeans provided the latest insight into the premium denim market on its earnings call noting a pickup in spring and summer sell-throughs compared to the end of 2010. In addition, the company highlighted continued demand for both skinny jean variations as well as new super-stretch fabric. On the contrary, the legging trend appears to have clearly come and gone resulting in negative sales growth in the quarter (-9%), excluding leggings sales were up +4%.
- Expect to hear more about Crailar in the coming months as a leading alternative to cotton and one that Hanesbrands will be introducing around Q3 in up to as much as 20% of certain products. Produced by Naturally Advanced Technologies, the new fiber is derived from flax seed byproduct. With only 200 acres planted set to be harvested this spring, supply is likely to be the gaiting factor to Crailar’s adoption rate as apparel manufacturers continue to seek cotton alternatives.
OUR TAKE ON OVERNIGHT NEWS
Wal-Mart Merchandise Goes Back to Basics - Wal-Mart Stores Inc. will launch a promotional campaign next month called "It's Back," to tell core customers the discounter is restoring merchandise it removed from store shelves in a flubbed renovation effort. Starting in May, Wal-Mart shoppers in the U.S. will see signs in stores heralding the return of fishing tackle, bolts of fabric and other "heritage" merchandise that Wal-Mart reduced or cut out altogether as it attempted to spruce up its stores to appeal to more well-heeled shoppers. That strategy failed, and the Bentonville, Ark., retail giant now is pursuing a back-to-basics strategy to reverse the company's fortunes after seven consecutive quarters of sales declines at U.S. stores open at least a year. "Some of these products were very important to our customers, particularly in rural areas, and they let us know they wanted them back," said Duncan Mac Naughton, the former chief merchandising officer of Wal-Mart's Canadian business, who was put in charge of U.S. merchandising in January. "We heard them, and they are going to notice a difference soon." <WallstreetJournal>
Hedgeye Retail’s Take: This is really not new, as the ‘back to basics’ theme has been well-telegraphed. But make no mistake, 7% of all retail sales transactions occur at a Wal-Mart. They’re heading ‘back to basics’ and driving prices incrementally lower at a time when costs are inflating. The implications for Wal-Mart’s supply chain and competitive set are obvious.
Sears to Roll Out Beauty to Key Stores - Sears is getting serious about beauty. The retailer said Monday it plans to reenter the beauty arena with full-fledged departments in 100 of its busier stores over the next several months. And while department store beauty is a competitive world, Sears’ move comes just in time according to a number of industry observers who assert the market is ripe for presenting drugstore-type beauty brands in mall anchors. The new beauty departments began rolling out in March, said one supplier carried within the store-in-store concept; initially the rollout had been planned for January. The beauty centers stock established drugstore beauty brands such as L’Oréal, Cover Girl, Maybelline, Revlon and Physicians Formula, as well as skin care, fragrance and nail care items. But there are also masstige-type brands such as Ahava, Lumene, Dermalogica, Burt’s Bees and StriVectin, said industry sources. <WWD>
Hedgeye Retail’s Take: Known more for its appliances than cosmetics, the strategy is notable here. We’ve seen some department stores reduce cosmetics counters and staff in recent months, but this is more direct move towards self-serve drugstore type product. In addition to announcing a collaboration with the Kardashian sisters among other fashion upgrades in recent months, Sears is clearly ramping efforts to drive the women’s business.
Reebok Reorganizes Marketing Functions - Reebok announced a major restructuring of its global brand marketing group, developing strategic business units to manage the company's categories, according to an internal memo obtained by SportsOneSource. Michelle Moorehead was named to the new role of head of brand strategy and marketing operations, Martina Jahrbacher was promoted to head of women's sport SBU, and Chris Froio was appointed head of fitness. Most recently, Moorehead spent two years in a general management role leading the Nike Kids business. Reebok indicated that in the coming months it will be forming a Kids SBU and hiring someone to oversee that part the business. The person leading the Kids SBU will report directly to Moorehead. Moorehead also spent three years as vice president, strategy and performance management for Target Corp. She also worked as a consultant for McKinsey & Co., where she led projects across a variety of functions and industries with a primary focus on strategy, marketing and e-commerce in retail industries. <SportsOneSource>
Hedgeye Retail’s Take: This is a big job for Moorehead. Past stints in strat planning at Target, Nike, and then over to the Kids Brand side at Nike is definitely a nice trajectors. But head of brand strategy and marketing operations for all of Reebok? Not insurmountable, but definitely a big step.
PacSun Unveils New Ad Campaign - Pacific Sunwear of California Inc. is amplifying its turnaround efforts with advertising might. The struggling Anaheim, Calif.-based company is taking to television, the Web, mobile phones, print publications and in-store displays with “Dress Irresponsibly,” a new ad campaign spotlighting branded merchandise available at PacSun from the likes of Fox, Hurley, Billabong and Volcom to connect with young customers by raising awareness of its fashion offerings. The campaign marks a transformation of PacSun’s marketing strategy from relying principally on in-store content to an expansive multimedia buy in order to recharge PacSun, which has been dragged down by same-store sales declines (negative 7 percent in the fourth quarter last year, the most recent reported) and a sales per square foot slide from $350 in fiscal year 2007 to $258 in 2010. “By showcasing the best brands…we are furthering PacSun’s 30-year leadership position with our core enthusiasts and at the same time bringing in new customers to our world of authentic California lifestyle,” said PacSun chief executive officer Gary Schoenfeld. “ ‘Dress Irresponsibly’ is about enjoying life, friends and embracing one’s own sense of style.” <WWD>
Hedgeye Retail’s Take: At least PSUN is spending their way into a potential solution instead of simply cutting costs. Who knows if this will work, but we’ll give credit where it’s due.
Hawaii Joins the Online Tax Fight - Hawaii lawmakers are trying to collect taxes owed on items sold over the Internet. The Honolulu Star-Advertiser reported Monday that a bill pending in the House would give online retailers like Amazon.com a choice of either paying a 4 percent general excise tax on sales from state consumers, or handing over customer information so tax collectors can track down the money owed. Consumers are supposed to pay a 4 percent use tax on out-of-state purchases, but few customers do so, and the state has no practical way to enforce the law. Hawaii could be losing an estimated $30 million in online sales taxes. <GreenfieldReporter>
Hedgeye Retail’s Take: This continues to gain momentum, and the pressure will lead to an inevitable on-line tax. It’s just a matter of time.
Strategies that Encourage Engagement on Facebook - Companies that post content on their Facebook pages outside normal business hours see engagement rates that are 20% higher than average, according to new data from Facebook marketing software company Buddy Media. Buddy Media analyzed the Facebook posts and engagement rates for more than 200 clients over the course of two weeks in January and February 2010. The agency measured engagement by looking at comments and “likes,” and factored in fanbase size. According to Buddy Media, 60% of posts were published between 10am and 4pm. However, many Facebook users prefer to log on to the site before or after work, and their engagement with company posts is higher during those times. By timing content to post when consumers are poised to be on Facebook, companies have a greater chance of being seen in a fan’s newsfeed. Additionally, the study found that engagement rates are 18% higher on Thursday and Friday than the other days of the week. <Emarketer>
Hedgeye Retail’s Take: Counter-intuitive from a business perspective, but an important detail in connecting with the consumer. The real call out here is the simple reminder that shorter is better per the stats below.
HauteLook Lures Members with Facebook Ads - There is a sharp difference between ads on Facebook and those on Google, says Greg Bettinelli, HauteLook’s senior vice president, marketing. Search engine ads respond to a customer’s intent—for instance, serving up a “Kate Spade Handbags” ad when a consumer searches for a “Kate Spade Green Purse”—while Facebook ads are more about discovery. “People aren’t looking for something specific on Facebook,” he says. “That means you have to find a way to be relevant to them.” For HauteLook, No. 191 in the Internet Retailer Top 500 Guide, that means serving up interesting content in each ad, such as inviting consumers to a private sale that takes place on the social network. And because of Facebook’s vast amount of data, provided by consumers supplying their demographic information and preferences for specific retailers, products and activities, a marketer can market with precision to particular consumer groups. <InternetRetailer>
Hedgeye Retail’s Take: Same store sales are a key metric for any business, but so are new client wins – a brick and mortar adage for a key difference in online advertising. While Google’s search feature may provide smaller companies more bang for the buck, Facebook enables more mature companies an avenue to drive new business albeit at what we would expect to be at a lower hit rate.
IGT may have weathered the storm better than BYI and WMS.
What does the big guide downs by WMS and BYI mean for IGT? Probably not as much as people think. Lower earnings at BYI was concentrated in the systems business and a company specific mix shift. On the surface, the WMS
pre-announcement looks like it would have direct implications for IGT’s quarter. The WMS miss versus our expectations was almost entirely due to lower products sales and lower product gross margins.
So why won’t IGT punt the quarter as well? Well, we do expect a slight miss – we are at $0.19 versus the Street at $0.20 as we wrote about in our 4/6/11 IGT earnings preview. While we are constructive on the long-term outlook for all the suppliers, we’ve favored IGT over the near term for a few reasons that may be playing out.
First, our view is that over the near-term, WMS was a market share loser while IGT and BYI were likely gainers. BYI’s miss was not related to product sales but WMS was, so we may have been right. Further, during our trip to Vegas in late March, we didn’t get any indication that replacement demand had subsided in any way for IGT. Thus, market share losses could’ve contributed to the WMS guide down. Second, we’ve maintained that IGT has more margins levers to pull which we clearly saw in the company’s FQ1 and guidance.
Does this mean we feel rock solid confident in IGT’s FQ2? Not really but we do believe investors are seeing a worse picture as painted by WMS and BYI than reality. IGT is off almost 7% from its recent high on April 6th, and that is before today’s likely drop. A slight miss or better next week will likely be a big boost for the stock.
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