At first glance the quality of the quarter is suspect and P8 same-store sales for Carl’s Jr. continue to decelerate on a 2-year basis.


As expected lower food costs saved the day for CKE, but two items highlight the challenges the company faced in making the numbers in the quarter – (1) a lower tax rate and (2) At Carl’s Jr. there was an adjustment to workers compensation expense that benefited labor costs, mitigating the decline in store level margins.


We will have more after we have a chance to talk to the company.


CKR also reported same-store sales for period 8.  While the absolute decline was the best in five months at the Carl’s Jr. concept, on a two-year average basis the numbers slipped 1.1% sequentially.  Hardee’s remained flat sequentially on a 2-year average basis at -0.1%.






KR: Tough To Win On Price Alone

Keith’s TREND/TRADE model suggests more risk than reward. The fundamental story sounds the same.


After listening to Kroger’s conference call yesterday and discussing the finer points with Keith, we’ve come to the conclusion that this is a classic value trap with “hope” pinned solely on inflation (or less deflation).  So long as market share continues to shift away to discounters, dollar stores, and warehouse clubs and flexibility with union labor costs is inherently limited, visibility on margin expansion remains unclear to us. 


Key points from management’s 2Q recap point to another quarter of headwinds for KR (and likely SWY, SVU) with:


  • Deflation having a greater negative impact on sales and margins.  Now spreading to areas away from dairy and perishables and into most grocery categories.  Perishable deflation deeper than anticipated.
  • A pick-up in national brand sales which adversely impacted mix (this is likely due to intense price competition and vendor support which is allowing consumers to trade back into branded goods simply based on lower prices).
  • Sharp increase in customers using food stamps.
  • Intensified competition on price during the quarter.


Bottom line, it appears that the environment is getting worse here on the margin for the grocers .  This is mostly due to the industry pulling the trigger on price at a time when it was originally expected that deflation would reverse.  Investors who are long these names are banking on inflation.  In my mind, it takes a lot more than that to drive traffic back from the non-traditional competition. 


KR: Tough To Win On Price Alone - KR chart



(Swine) Flu Season Already?

At the risk of being alarmist, we are pointing out the following graphics on (Swine) Flu with caution.  In no way is the Research Edge Retail team pretending to be CDC workers or doctors, but we would be foolish to ignore such eye opening trends.  The charts below tell the story, although we can say with certainty the media isn’t shying away from what may become the most talked about national topic in the coming weeks and months.   As evidence as to how consensus the concerns are, do a quick Google News search for “Flu” and you’ll find around 75mm hits, with about 39mm of them related to H1N1 specifically, and about symptoms, prevention, and the effectiveness of wearing surgical masks.


(Swine) Flu Season Already? - flu chart


We’ll leave it to you to decide if you want to stay home, avoid public places, and use Purell every five minutes.  However, we’re fairly sure if the Flu virus continues to permeate the rest of the U.S with the speed and breadth as we have observed in recent weeks in the South, then there will be implications for consumer spending in both quantity, category and channel.  


 (Swine) Flu Season Already? - flu map


So, how should we think about the potential impact of Swine Flu fear and/or actual symptoms impacting a large portion of the U.S population?  The obvious answer is to think about which retailers may benefit from this pandemic, which include CVS, WAG, and RAD. For those thinking about which companies may suffer most, mall-based retailing could take the biggest hit as consumers look to avoid highly populated public areas.  For the extremists,,, FedEx, and UPS all could benefit from cocooning.


We don’t have all the answers and we’re not into “playing” names at the expense of human suffering, but this is a trend worth watching.  For now we’re digging to see if any impact is materializing in the South as the brown states have reached “widespread” levels of Flu activity.  And for those who haven’t bookmarked now is a good time.



Eric Levine


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Money Call of the Day

Here's a glimpse at the Research Highlights Rebecca Runkle (Tech), Tom Tobin (Healthcare) and Brian McGough (Retail) had on their minds this morning.




by Rebecca Runkle and Team

O! that way madness lies, let me shun that.”  William Shakespeare


I read with great amusement and an equal amount of shock the Street Account summary of your Mad Money comments from last night.


Buying – ADBE - Buying back the bullish position that Runkle has had this year on Adobe. Stock is down -7% and I like to buy them when red. Runkle's intraday note to follow on her Tech portal!

Other names we like are MOT and YHOO, but price matters.





by Tom Tobin and Team


Judging by the pummeling Managed Care took on decent volume, and out long position in UNH, I had that somebody-knows-something feeling most of the day, so I am expecting the worst when Sen. Baucus is releases his bill this afternoon describing his version of Health Reform.  The good news, from people who have seen the advanced copy or spoken to an insider, the Public Plan is not included, replaced instead with a co-op. 

AMGN, QGEN and UNH are our favorite names in Healthcare.


See Tom Tobin’s portal for more details 





by Brian McGough and Team


There were some interesting callouts from yesterday’s retail sales release (noted below), but based on the tone of questions I get in my inbox on this topic, I think there’s a big lack of understanding about the size and importance of much of this data.

First off, let’s keep in mind that Personal Consumption is about $10 trillion. Retail sales are only $3.7 trillion. Chain store sales are about $500 billion, and yes that number continues to shrink as more retailers opt out of reporting monthly numbers to the National Retail Federation. 


Not only is the gap between these three components massive, but let’s look at how the spreads therein have changed over time. As it relates to retail sales vs. consumption, there are ebbs and flows, but both the long and intermediate-term trends are headed lower. The more interesting trend is the importance of chain store sales, which were only 16% of total retail last year, but are now down to 7.8% after Wal*Mart stopped reporting. This number is shrinking, and will continue to do so.

See Brian McGough portal for the call outs on the government numbers…  


UA continues to one of our favorite long-term names

Adult Supervision: SP500 Levels, Refreshed...

Got a Risk Manager? Plenty of hedge funds all of a sudden need one, on the short side that is…


I get called a lot of things, but one of them is not someone who routinely gets run over on the short side. That’s what we’re seeing again today. Dollar down = everything REFLATION straight up. Where does it stop? Well, this morning I gave you 1068 in the SP500 (that’s where I made 3 short sales intraday), and now I am going to move to 1074 for tomorrow (dotted red line). With the likes of Kenny the Cat Fisher back on TV espousing his perpetually bullish case, only God knows where this will all end…


For now, the long term doesn’t matter. Immediate term TRADE support bumps up once again to a higher-low (bullish). If the bears can’t find a catalyst to crack that 1037 line (dotted green), they’ll be crying “ma-ma” right into September’s quarter end.


When shorting stocks, Adult Supervision is required.



Keith R. McCullough
Chief Executive Officer


Adult Supervision: SP500 Levels, Refreshed...  - a1

UNH: Baucus on the tape, Industry Friendly Proposal

As we said on our recent MACRO strategy call healthcare is our favorite sector.  Following that call we wanted to share with you a very important post that our healthcare Managing Director Tom Tobin just published on Senator Baucus' new Healthcare proposal:



It's not time to jump up and down if you're long Managed Care like we are or press the short.  The legislative process has a long lead time, even from here, combined with consensus growth that looks meager and multiples well off the lows.  The Baucus bipartisan proposal is finally here, with no Republican support, representing a milestone, but not the end of the process.

With Baucus finally getting his proposal on the tape, and many interested parties (Rockefeller on the Left/Center, Sen. Enzi on the Right) against it, there is what we called this morning a Steel Cage Match going on in DC which seems better understood as a way to assess blame than pass legislation. 

220+ pages is a lot to get through and I am sure I missed something, but all I really cared about was the language around the Co-op, the alternative to the Public Plan.  Specifically, how will a co-op set its prices it pays for services?  Adopting Medicaid or Medicare list prices would be a disaster for the Managed Care Industry.  Layering a margin on top of less than market prices, and passing the premium through a tax free model would make the Co-op premium cheaper by a wide margin. From looking through the document, there is no language about how the Co-op will set prices paid for services.  This makes setting up a provider network of hospitals and physicians extremely difficult in a business as local as Healthcare.  You can't just parachute into a market and set up shop with no members to show the provider and no providers to show the members. That is, unless you are willing to spend a great deal of your own, or other people's money.


UNH is having a solid day so far, but has been unable to recover the losses from yesterday and make a new high.  Trading in the upper half of its range since July, when it became increasingly clear that the opposition was getting its act together and President Obama's approval rating began to slide, Baucus's proposal was perhaps an open secret.  The short position is minimal, and while employment appears to have a shot at getting better, the slow-growth or no-growth recovery seems like consensus. 


UNH: Baucus on the tape, Industry Friendly Proposal - TT1.1


However, I can identify a number of factors supporting the long case here and higher numbers through 2010. 

  1. Health Reform neutral to positive (no plan at all, or Co-op a weak competitor with new tax credit supported enrollment)
  2. Inflation pushing investment income yields higher
  3. Accelerating Premium Growth (anecdotal, PPI trends, PCE trends, company statements)
  4. Age Mix of enrollment reversing and dampening cost trend (see "Fire the Young..." post)
  5. Higher than consensus GDP in Q4
  6. Inflation hitting purchasing power of the consumer, putting pressure on cost trend


Here's the link to the Baucus proposal...


Intrade quote telling me consensus is for no Public Plan, putting the focus back on fundamentals and Macro, or putting the Tail risk in it re-emerging, but I doubt it.


UNH: Baucus on the tape, Industry Friendly Proposal - TT1.2


Thomas Tobin

Managing Director


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.