Why new households won't create a housing demand boom

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Wendy’s/Arby’s reported a disappointing quarter this morning.  Significant upside remains with the sale of Arby’s being the most important catalyst to this effect.


Wendy’s/Arby’s reported a poor quarter this morning.  Consolidated EPS came in at $0.01 ex-items versus consensus $0.02.  System-wide comps for Wendy’s came in flat versus consensus at +0.3%.  Arby’s North America system comps came in at +5.5% versus expectations of +2.1%.  1Q restaurant operating margins at Wendy’s and Arby’s were +13.4% and +10.6% versus consensus of 14.6% and 11.5%, respectively.  Arby’s has been on the block since January so, accordingly, much of the focus coming into the quarter was on the performance of Wendy’s.  MCD printing a strong first quarter was possibly a hint that comps could be disappointing and they were: Wendy’s company-owned comparable restaurant sales, in the first quarter, contracted -0.9% year-over-year.   Consensus was looking for +0.4%.  As the chart below indicates, Wendy’s company-owned comparable-restaurant sales still registered a sequential improvement in two-year average trends from 4Q10 and April is comping at +0.5%. 





April 2010 saw Wendy’s company-owned comparable restaurant sales decline 0.50% which, given the overall 2Q comp, implies that there was a significant fall-off over the following two-months in terms of comparable restaurant sales.  With this in mind, I would expect 2Q11 to come in closer to +2.5% to 3%.  Management reiterated FY11 guidance of +1% to +3% comparable sales growth at company-owned Wendy's restaurants.


Restaurant margins were a pressing concern coming into the quarter and the results showed that beef costs severely impacted margins at both WEN concepts.  As I wrote above, restaurant margins missed by 120 basis points and 90 basis points at Wendy’s and Arby’s, respectively.  At Wendy’s, the 200 basis-point year-over-year decline in margins was attributable to incremental advertising to introduce Wendy’s new breakfast in new markets and 80 basis points due to higher commodity costs. 


The overall commodity basket is now forecasted to grow 5-6% in 2011 due to an increase in beef costs of 20%.  In March, the company had guided to total commodity inflation for 2011 of 2-3% on the back of beef cost inflation of 10-15%.  Along with this revision, management has revised its EBITDA estimate for 2011 to be in the $330-340 million range versus the previous range of $345-355 million.  While management has stressed that 2011 represents a “transition” year for the company, it is clear that WEN is going to suffer more than most through the inflationary environment in 2011. 





Looking forward, two things stand out.  The first is the outlook for Wendy’s and the second is the sale of Arby’s – a move I have advocated ever since the acquisition (which I opposed).  Wendy’s is introducing Dave’s Hot ‘n’ Juicy cheeseburgers in the second half of the year.  Currently in seven test markets, WEN has high hopes for this launch as they see significant increases in hamburger unit sales.   Overall for 2011, I expect the commodity environment to pose a strong headwind for the company but the increased focus on the core menu, complimented by an increased focus on Wendy’s following the sale of Arby’s, should bring about significant progress at Wendy’s.


The sale of Arby’s was a welcome progression in my eyes and one of the main factors that convinced me that management means business in this particular turnaround effort.  The primary benefit of a sale would be management’s undivided attention being dedicated to Wendy’s.  Secondarily, the sale would deleverage the company’s balance sheet.  The $200 million of capitalized lease obligations on Arby’s balance sheet would be off the company’s books and this, along with the cash proceeds from the sale, would afford the company increased financial flexibility going forward. 


The 300 basis point upward revision in commodity inflation expectations is weighing on earnings potential for the year but the overall transition to a more focused and profitable company seems on track.  As Wendy’s new menu items continue to gain traction, management becomes more focused on operations at one concept, and the company has a healthy balance sheet to enable it to invest in the brand, I expect WEN to be a top-performing QSR stock over the next couple of years.



Howard Penney

Managing Director


Underperforming the regionals.




  • CZR reported net revenues of $2,179MM (down 0.4% YoY) and Adjusted Property EBITDA of $469MM (down 2.6% YoY)
  • "First-quarter net revenues decreased....due to reduced visitation by our rated players and the temporary closures of our four properties in the Illinois/Indiana region as a result of weather conditions and flooding, the effects of which were partially offset by the full-quarter impact of Planet Hollywood revenues in first quarter 2011."
  • "Streamlining marketing efforts was a first-quarter focal point. Following an increase in marketing spend during the first half of 2010, Caesars Entertainment began the gradual process of refocusing its customer reinvestment late last year. Year-over-year marketing spend was lower in the first quarter of 2011 than in the year-earlier quarter."
  • "We achieved significant progress in operating efficiencies, guest service and development activities in the first quarter.  Our efforts to reduce expenses led to margin improvements in certain Midwestern properties."
  • "On the growth front, Caesars Entertainment is pursuing development opportunities where we believe significant value can be created. We announced an alliance with Suffolk Downs racetrack in Boston that would expand our distribution should gaming be legalized in Massachusetts. In Las Vegas, strengthening market fundamentals prompted the decision to complete the Octavius tower at Caesars Palace and begin work on the LINQ retail, dining and entertainment project. Financing associated with the Octavius and LINQ projects was completed subsequent to the end of the quarter."
  • "We expect the LINQ and Octavius projects to increase visitation to our properties on the Las Vegas Strip"
  • "Finally, we believe strongly that the recent federal indictments of illegal online poker operators should convince Congress to allow American citizens to play online poker and to allow American companies to compete in a multi-billion-dollar industry.  By acting now to legalize a game enjoyed by millions of adult citizens, Congress can clarify ambiguous federal laws, generate tax revenues for federal and state governments and bring thousands of jobs to this country."
  • "Trips by rated players decreased 8.0 percent from the year-ago quarter, while spend per rated-player trip increased 3.7 percent. These results are indicators of a still weak economy in certain regions in which we operate. Cash average daily room rates saw an increase of 5.8 percent while occupancy percentage increased 3.8 percentage points."
  • Las Vegas Region:
    • "Visitation by our rated players rose 8.7%"
    • "Amount spent per rated-player trip increased 1.0%"
    • "Hotel revenues increased 17.4%... as our cash average daily room rates increased 7.6% and occupancy percentage rose 4.4%"
  • Atlantic City Region:
    •  "Visitation by our rated players decreased 5.8%"
    • "Amount spent per rated-player trip decreased 1.6%"
    • "Hotel revenues decreased 2.4%... as our cash average daily room rates decreased 5.4% while occupancy percentage generally remained flat."
  • "For the remainder of our United States markets, visitation by our rated players for the first quarter 2011 decreased 13.6 percent, while spend per rated-player trip increased 4.4 percent."
  • "Recent flooding of the Ohio and Mississippi Rivers has caused closures of certain of the Company's facilities."
    • "Horseshoe Southern Indiana reopened May 4, 2011 after flood-related closures, while Horseshoe Tunica, Tunica Roadhouse, Harrah's Tunica and Harrah's Metropolis are currently closed due to the flood waters."
    • "In 2010, the five properties contributed approximately 9.4 percent and 8.8 percent, respectively, of the Company's Net Revenues and Property EBITDA. We believe that the financial impact of these closures will be immaterial to our 2011 overall results of operations after taking into account our insurance coverage; however, the timing of the receipt of insurance proceeds is currently unknown."
  • "During the quarter ended March 31, 2011, the Company realized cost savings of $66.2 million and has estimated cost savings yet to be realized of $157.4 as of that date."



  • Active in seeking to grow their business internationally - focused on licensing and management projects using their CZR's brand especially in Asia
  • Total rewards marketplace will allow their members to use their points online
  • CZR portfolio has grown through acquisitions of other brands and therefore they had a decentralized management system. Their reorganization will allow them to centralize a lot of functions in an effort to save costs and become more efficient.
  • Despite a decline in trips per customer, they have seen an increase per visit and more cost efficiencies
  • Completed the purchase of $108MM of CMBS notes
  • $20.8BN of face value of debt at the end of the quarter
  • Their RevPAR increase in Vegas was generated without introducing resort fees
  • Rated trips from lodgers were flat but non-lodger trips declined 6% in AC.
  • Las Vegas is showing continued strength and feel confident that they will continue to see increased YoY results through the balance of 2011
  • The movement of the brands online represents the next big phase of growth for CZR's



  • Rated play is 75-80% of their total play - which is consistent with a quarter ago
  • No change in their no resort fee strategy in Las Vegas
  • Doesn't think that promotional spend has changed dramatically for them and the market in general - they are just trying to be more effective in their promotional strategy
    • The promotional and marketing expenses where a large part of their cost savings - $40MM or so annually of savings in promotional is a good estimate for the year.  They began their cost cutting effort in earnest in 3Q2010.
  • This will be the last quarter where they have the benefit of the YoY comp in Vegas with PH.  Ex PH they would have been flat in Vegas.
  • They feel really good about the way business has been building in Vegas. PH continues to ramp.
  • No material hold impact across their entire portfolio
  • Weather impact - less than $10MM in the Q
  • Market share losses?
    • They are ok with the market share numbers - especially in Midwest. More concerned about EBITDA share and keeping their more profitable customers.
  • Better guests are spending a little more and those gaming dollars are generated a little more efficiently.  Had been a little unfavorable in the past.  Have turned the spiget down or off on unprofitable or marginal business.  Vast majority of their declines in trips are from the unprofitable or marginal guest. They are really more focused on that higher end player. 
  • Gas prices: thinks it's more meaningful for the marginal guests.  They are not enthusiastic about higher gas prices, but so far so good - no impact.
  • Capex: $350-380MM (ex LINK) ... 75% of that is maintenance projects. CMBS property capex is $40MM. $100MM of LINK capex will occur this year - mostly on Octavius Tower
  • The performance of the Vegas portfolio was rather uniform. No real difference between the high and low end properties.  PH continues to ramp though.
  • CMBS paydown in the quarter? Felt that the yield reduction was attractive
  • Same Store property RevPAR in LV was ~9%
  • They charter about 5,000 flights a year from markets where there aren't existing flights to get gamers into some of their markets. They have cut this back a little due to higher fuel prices and weaker consumer spend.  While they cut it back a little, they would like to increase it over time.
  • The so called promotional environment has many layers and so it's not accurate to make blanket statements to characterize the environment. They look at changes and cuts at the micro level.
  • Expect that their operating expenses can continue to come down - especially with the reorganization under way

Shorting Thai: Back For Seconds

Conclusion: The confluence of slowing growth, accelerating inflation, and interconnected risk surrounding Thailand’s domestic politics within the construct of a bearish Global Macro backdrop have us bearish on Thai equities with an asymmetric risk/reward setup.


Position: Short Thai Equities (THD).


Yesterday, for the second time YTD, we shorted Thai equities in the Virtual Portfolio. After having covered the bottom in the SET on February 10, we’ve waited for our price on the re-entry side, as well as for our bearish catalyst(s) to be closer in duration. As a refresher, those catalysts are: 

  • Growth is Slowing;
  • Inflation is Accelerating; and
  • Interconnected Risk is Compounding. 

We’ll quickly rehash our thesis on all three below; additionally, we encourage you to check out our January 27 note titled, “Shorting Thai” for further depth.


Growth is Slowing: In recent months, the Street has revised down their forecasts for Thailand’s 1Q11 and 2Q11 GDP growth to within an average of 10bps of our own bearish estimates, which we outlined back at the start of the year. Though usually we like to fade lagging sell side revisions, Bloomberg Consensus Forecasts for Thailand’s 3Q11 and 4Q11 GDP are still 150-200bps to high and we expect further downward revisions as Thailand’s high frequency economic data continues to come in below expectations and indicating a slowdown the underlying momentum of the economy.


Shorting Thai: Back For Seconds - 1


Shorting Thai: Back For Seconds - 2


Shorting Thai: Back For Seconds - 3


Inflation is Accelerating: We continue to flag this as the backbone of our bearish intermediate-term thesis on Thai equities. Simply put, from both an economic perspective (slower growth) and a policy perspective (higher interest rates), we think inflation will come to be the bane of many-a-Thai-bulls’ collective existence. From our daily analysis of buy-side sentiment, those who like Thai equities continue to believe that underlying growth momentum is strong enough to overcome a pickup in inflation, which we obviously disagree with (55% of Thailand’s economy is consumer spending).


As we pointed out in our note from Friday titled, “Elections in SE Asia: Consternation’s on the Ballot”, we believe the early timing of the July 3 election (seven months ahead of schedule) suggests the ruling party believes sooner rather than later is the best time to test the electoral waters. We think that’s because they see what we see – higher rates of inflation on the horizon and higher interest rates in the near future. The central bank agrees, saying recently that the anticipated removal of State subsidies on diesel is likely to add +100bps to the YoY growth rate of Headline CPI and +50bps to the YoY growth rate of Core CPI (currently at 15 and 30-month highs, respectively). Not ironically, July is when funding for the State Oil Fund is expected to run out. Lastly, Bloomberg Consensus is only expecting two +25bps rate hikes through the end of 2011. Should Thai inflation trend according to our expectations, we find this optimistic forecast to be well short of the action we are likely to see out of the Bank of Thailand.


Shorting Thai: Back For Seconds - 4


Shorting Thai: Back For Seconds - 5


Interconnected Risk is Compounding: Perhaps the greatest risk we see in holding Thai equities on the long side is the geopolitical risk that is likely to hang over the market over the next 2-3 months due to the upcoming elections. Irrespective of outcome, we expect to see a return to the social unrest which gripped the streets of Bangkok in April/May of last year and helped precipitate a peak-to-trough decline of (-11.2%) in the benchmark Stock Exchange of Thailand Index.


Careful analysis of the situation reveals that protests of this magnitude (nearly 100 deaths) are potentially a probable scenario and that they could potentially exceed last year’s riots in scope. The results of recent polls conducted by both of the main opposition parties have each expecting to win a majority of the 500 open seats in the Thai House of Representatives. Even Vejjajiva’s own campaign coordinator concludes that “it’s a very tight race”, saying recently, “One time we are down; one time we are up. We can’t tell.”


The largest takeaway from this polling gridlock is twofold: 1) the Thai electorate is torn and supporters of the Puea Thai (red-shirts) are indeed mobilized; and 2) supporters of either party will be both heartbroken and outraged by what is likely to be a close defeat. Should the Democrats (yellow-shirts) manage to win, we expect the red-shirts to once again take to the streets in protest. On the flip side, should the red-shirts win, we are likely to see a second coup – either military or judicial – as both the armed forces and political elite of Thailand continue to strongly back the current ruling coalition. Such an occurrence is highly likely to result in a second round of protests as red-shirts take to the streets in outrage.


An additional downside risk to consider – from an admittedly US-centric analysis perspective – would be a breakout in the VIX, as that would be an additional headwind to international investor exposure to EM equities within the context of Thai’s own fundamental issues – just as it was last year during the Sovereign Debt Dichotomy scare. With the Debt Ceiling Debate kicking off in full swing alongside the end of QE2, we expect a similar breakout in volatility to dampen demand for risky assets in the coming months. Keep in mind last year’s April/May weakness in the SET was aided by a $2B foreign institutional investor outflow during the period. We expect to see similar results this time around as a function of the upcoming geopolitical consternation within Thailand.


Lastly, from a mean reversion perspective alone, Thai equities look particularly vulnerable having climbed +39.5% in the past year – good for the fourth highest return among all equity markets globally. Overnight, the SET closed up +1.22% to within 0.3% of its TRADE line of resistance at 1,089. From there we see an asymmetric risk/reward setup with (-5.2%) of downside to the intermediate-term TREND line of 1,029.


Darius Dale



Shorting Thai: Back For Seconds - 6

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