The Big Picture

Rapid advances and declines have largely muted the overall commodities basket to-date in 2014, with the CRB Foodstuffs Index up 40 bps YoY.  However, the index ticked up 310 bps last week and a continuation of this trend would be bearish for all restaurant operators.


Commodity prices up YoY:

  • Coffee
  • Lean Hogs
  • Cheese Block
  • Live Cattle
  • Soybean
  • Milk
  • Natural Gas

Commodity prices down YoY:

  • Sugar
  • Gasoline at the Pump
  • Corn
  • Chicken Wings
  • Wheat
  • Rough Rice
  • Chicken Whole Breast


Notable trends:

Coffee prices continue their rapid rise, ticking up 5.5% over the past week.  They are now up 12.8% YoY.  First, it was torrential rains in Brazil’s coffee belt hurting the crop.  More recently, however, the Brazil crop has been hampered by a prolonged period of dry weather.  Analysts estimate the global market could be facing its first shortage in over four years.  Not only is this fundamentally bearish for coffee retailers, but it has also negatively affected sentiment within the space (see SBUX for example).  Takeaway – bearish for SBUX, DNKN, GMCR, KKD.


Pork and Beef prices continue to rip higher, up 5.1% and 4.0% over the past week.  They are now up 25.9% and 17.5% YoY, respectively.  Pork prices have come under pressure lately due to the spread of the porcine epidemic diarrhea virus, also known as PEDv, which results in a very high mortality rate for piglets.  Beef prices have been surging as cow herd sizes continue to decline.  Restaurant operators don’t expect much relief anytime soon, as it takes well over two years for a cattle herd to hit the market.  Takeaway – bearish for TXRH, RUTH, RRGB, BLMN, CMG, MCD, JACK, SONC, WEN and other operators with notable exposure.



Cheese Block and Milk prices are up 38.3% and 36.5% YoY.  While cheese block prices ticked up 4.2% over the past week, milk held flat.  CME cheese block prices are currently close to a decade high.  We will continue to monitor these trends closely.  Takeaway – bearish for CAKE, DPZ, PZZA and others.



Corn and Wheat prices continue to be the saving grace for many operators, effectively offsetting pressure from other commodity costs.  Both commodities are down 20.6% and 21.3% YoY, respectively.  Takeaway – bullish for everyone.



Chicken and Chicken Wing prices have also led several operators to offer new items and LTO’s as they seek to more prominently feature chicken on their menus.  Both commodities are down 9.7% and 29.4% YoY, respectively, and should help the margins of operators with notable exposure to this group.  Takeaway – bullish for PLKI, BWLD, YUM and others.



Gasoline at the Pump is down 8.8% YoY, but ticked up 1.1% over the past week.  Takeaway – while the YoY decline is a positive for the industry, last week’s move gives us reason to be cautious on our outlook.  We will continue to monitor this trend, as any sustained increase or decrease in gas prices could have a significant impact on the direction of discretionary spending and the consumer’s willingness to eat out.





















Howard Penney

Managing Director


FX War: Game On

Client Talking Points


That's right. Janet Yellen just loves that passive Burning Buck policy. The US Dollar continued lower as she spoke yesterday, reminding America and the world that she now has completely qualitative commentary of prices/employment and really just wants to price fix rates. Not good. Longer term #inflationary. The inverse correlation between the USD and S&P 500 is now -0.75 (USD vs Gold = -0.95). In other words, pay attention.


No... the Nikkei no likey the Burning Buck. Why? Simple. Because Japan is supposed to be burning yen. Check out the Yen which is up another +0.3% versus the US Dollar and the Nikkei is down for the third straight day to -8.8% year-to-date. The global currency war is on.


So all I did yesterday was buy Euros, Pounds, and German stocks. Those who understand #StrongCurrency will have less inflation (and more consumption growth). EUR/USD is ripping a new year-to-date high this morning at $1.38.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term. 


Las Vegas Sands has transformed into that rare stock that should appeal to “Growth,” “Value”, and “Dividend/Cash Flow” investors alike.  The stock now yields higher than the S&P 500 (43% sequential quarterly dividend increase), and the company is buying back $200 million + in stock a quarter, yet still retains a pristine balance sheet.  The significant capital deployment opportunities can be funded out of annual free cash flow of nearly $4 billion. Management has indicated they are willing to raise leverage 1.5x which would still keep them well below industry average and if directed toward dividends, would result in a yield of over 6%.  And we haven’t gotten to the $10-14 billion in mall assets that could be monetized. We know of no other stocks in consumer land that provide this combination of cash flow, growth, cash return to shareholders, and value levers.


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road


Dollar Down, Rates Down is the best path to economic misery @KeithMcCullough


"I don’t see evidence at this point in major sectors of asset-price misalignment, at least at the level that would threaten financial stability."

- Janet Yellen


Freddie Mac just reported a record annual profit of $48.7 billion for 2013 powered by a strong rebound in U.S. home prices and a series of legal and accounting benefits that reversed earlier losses. Freddie will pay $10.4 billion to the U.S. Treasury after it posted an $8.6 billion Q4 profit, the ninth-straight quarter in which the company has been profitable. The bulk of those gains were due to either one-time benefits or to home-price gains that are likely to moderate.

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Retail Callouts (2/28): GPS, DECK, PIR, JOSB/MW, AdiBok

Takeaway: GPS’ ugly beat. DECK forecast accuracy is horrendous. PIR shows perils of no presence. JOSB scaring off MW could cost 1/3 of mkt cap



GPS - 4Q Earnings


Takeaway: Let's put this GPS 'beat' in context. They levered SG&A on a 3% revenue decline. On one hand, give 'em credit for controlling costs. But on the other, that hardly bolsters our confidence that the company is investing in driving the top line going forward.  Gross margin was down -277bps. Ugly. Operating margin -133bps. EPS -7%. Oh, and by the way, inventories were up 10% on a 3% revenue decline. #terrible. That brings us to the SIGMA chart below. The massive move to the lower right is absolutely uncharacteristic of a stock at a 10-year high.


Retail Callouts (2/28): GPS, DECK, PIR, JOSB/MW, AdiBok - chart1 2 28


DECK - 4Q Earnings


Takeaway: This one is puzzling. By the look of the quarter, and the SIGMA chart below, you'd think that DECK was sitting pretty. But the stock is down double digits on the print, which is largely the result of a weak 1Q guide. But the thing with DECK is that the company ALWAYS guides down. It's what they do. We don't condone it, but it's a reality. Either a) the company is simply uber-conservative, or b) it's internal forecasting accuracy is horrendous. We'd like to think it's conservatism, but our sense is that DECK has a problem with forecast accuracy. The trouble with this stock now is that we just passed the seasonal period where its core product, UGG, does best. Now people have to wait another nine months for anything to get excited about.


Retail Callouts (2/28): GPS, DECK, PIR, JOSB/MW, AdiBok - chart2 2 28


PIR - Pier 1 Imports, Inc. Updates Fourth Quarter and Full Year Fiscal 2014 Sales and Earnings Per Share Guidance



  • “'Since our holiday sales update on January 9th we have continued to experience significant disruption from adverse weather in many of our major markets. This has resulted in considerably softer store traffic, as well as some temporary store closings, which further pressured fourth quarter sales and merchandise margin...We saw another sequential increase in e-Commerce sales, which reached 5% of total sales in the quarter, while traffic to the site increased to 1.9 million visitors per week. For the full year, e-Commerce will contribute approximately 4% to fiscal 2014 total sales – putting us readily on track to reach our targeted contribution of 10% of total sales by the end of fiscal 2016.'”


Retail Callouts (2/28): GPS, DECK, PIR, JOSB/MW, AdiBok - chart4 2 28


Takeaway: PIR is no stranger to disappointing. One of the problems it faces is that e-commerce is only 6% of total sales. Stack that up against someone line Restoration Hardware at 47%, or Williams-Sonoma at 46%, and it puts considerable risk on the business when store traffic is under pressure due to factors like weather.


JOSB , MW - Jos. A. Bank Board Rejects $63.50 Per Share Tender Offer; Agrees to Meet With The Men's Wearhouse-Willing to Consider a Higher Price



  • "The letter...states that its Board of Directors, after careful consideration and discussions with its financial and legal advisors, has unanimously rejected The Men's Wearhouse Inc.'s $63.50 per share unsolicited offer as inadequate, after giving effect to the Eddie Bauer acquisition and related issuer tender offer, and not in the best interests of Jos. A. Bank stockholders. The Board recommends that the Company's stockholders reject the Offer and not tender their shares into the Offer."
  • "The Jos. A. Bank Board continues to believe that significant value will be created for shareholders in its proposed acquisition of Eddie Bauer and the related issuer tender offer...It further stated that the financing for the Jos. A. Bank acquisition of Everest is proceeding on track, and that the Company expects to market and place the high yield bonds promptly. The bridge loan committed to by Goldman Sachs remains fully committed and, subject to its terms and conditions, will be available to Jos. A. Bank to finance the Everest transaction."


Takeaway:  JOSB's biggest risk here is that it succeeds in its effort to thwart MW's proposed acquisition. If MW walks, which is entirely possible, then JOSB loses a third of its market cap overnight.


ADDYY - Media Bank: Reebok Teams With Miranda Kerr... Rocky's New Champ



  • "Reebok launched a campaign with supermodel Miranda Kerr on Tuesday to promote Skyscape, its new active-and-casual women’s shoe."
  • "The Skyscape collection is available beginning April 1 at Shoe Carnival, Rack Room, Kohl’s, Shoe Show and on Reebok’s website."


Retail Callouts (2/28): GPS, DECK, PIR, JOSB/MW, AdiBok - chart3 2 28



Leading the headlines:  hotel earnings, gaming in MA, and as always, developments in Asia and on line gaming.




  • Nevada Gaming Revenue Report for Jan 2014 
  • OEH – 4Q13 earnings, 10 am call

Tuesday, March 4

  • CONEXPO-CON/AGG – Las Vegas thru Friday           

Wednesday, March 5

  • BYD – 4Q13 earnings, after market close, 5pm conf call


PENN - received prelim approval for MA's 1st slots parlor license. PENN proposed to renovate and expand the Plainridge Racecourse as part of a $225m project in Plainville.  The site would feature 1,250 slots, a Doug Flutie-themed sports pub, an upscale restaurant and four different food court options. The site will also have 1,620 parking spaces.  The slots license will cost $25m, and the slot parlor will pay a 49% state tax on gambling revenue.  

Takeaway:   The Massachusetts Gaming Commission will meet today at 9:30 a.m. and is expected to award the PENN the Slot License at that time.  PENN's stock popped 5% on yesterday's news.  We calculate a NPV for the project of $0.65-$0.95 per share or 5-7% of Wednesday's close. 


LVS - Sands Casino Bethlehem President Robert DeSalvio resigned late Wednesday.  DeSalvio was President since the casino opened in 2009.  LVS spokesman Ron Reese said DeSalvio’s resignation was not related to an apparent internet hacking of the casino’s local web-page which shut down the parent company’s websites for six days and also compromising the Bethlehem casino employees personal information.

Takeaway:  Bethlehem has become mostly irrelevant to the LVS story and we continue to expect management to pursue a sale of this property.


1680.HK Macau Legend - The chairman and controlling shareholder of casino operator Macau Legend Development Ltd, David Chow Kam Fai, increased his stake in the company by nearly US$6.5 million to 30.22% this week.  

Takeaway:  While we don't follow the company, we find it noteworthy when an insider with sizable holdings acquires additional shares.  Stay tuned.


FOXWOODS - Proposed $750MM casino in Fall Rivers, MA. Next step would be a community referendum.  Also seeking that southeastern Mass license is KG Urban in New Bedford and the Mashpee Wampanoag in Taunton. Regulators plan to issue the license in November.

Takeaway:  New markets could be an emerging theme for slot suppliers like IGT, BYI, and SGMS but we're still 3 years away at best.


HST – Fitch raised the credit credit rating to BBB- from BB+, now investment grade rated.

Takeaway:  HST senior management did a good job at communicating the delivering strategy with investors – it is good to see the tacit acknowledgement and confirmation from Fitch.


OEH - announced better than expected 4Q13 results lead by European RevPAR +11%, North America +6% and Rest of the World +10%.  Adjusted EBITDA increased 12% in 4Q and 17% for the year.

Takeaway:  Worldwide Luxury continues to enjoy a strong tailwind.  Europe still improving.


RCL - Will transfer the Rhapsody of the Seas in the summer of 2015 from Alaska to Europe to offer its first Black Sea itineraries.  Replacing Rhapsody in Alaska for the 2015 season will be the slightly larger Jewel of the Seas, which will join Radiance of the Seas in that market.

Takeaway:  RCL continues to increase presence into the European market




Package Tour/Hotel Data DSEC 

Visitor arrivals in package tour totaled 745,000 in January 2014, -2% YoY, attributable to the decrease in visitors from the Republic of Korea and Mainland China.  Visitors from Taiwan (57,000); Hong Kong (39,000) and Thailand (13,000) registered YoY increase, whereas those from Mainland China (560,000), the Republic of Korea (33,000) and Japan (11,000) recorded decrease.  The average length of stay of guests held stable as January 2013, at 1.4 nights.  5-star hotel occu at 83%.

Takeaway:  Decline not a concern since these are not big gamblers. January GGR was disappointing, however, but made up for by a 30%+ February.


Illinois Senate exploring internet gaming -  The Illinois Executive Senate Committee held a hearing Wednesday to discuss the pros and cons of online gambling.  Recall, Illinois was the first state in the US to offer the sale of lottery tickets over the internet after it received a favorable response from its request of the US Department of Justice to clarify its stance on the Wire Act.

Takeaway:  Illinois legislators continue to eye gambling expansion in the state.  A bill has yet to be introduced in this session that includes internet gaming.  The expansion of gaming will likely become a platform issue for the Gubernatorial election in November.  As such, the outcome of any gaming expansion in Illinois is also dependent on who gets elected Governor.  If a pro-gaming candidate gets elected, we could very well see an expansion of gaming to include new licenses, slots at race tracks, and slots machines at airports.


Las Vegas – named one of Elite Eight city finalist to host the 1026 Republican National Convention.  

Takeaway:   We give the early handicap to Las Vegas as 3:2 favorite.


Sanya, Hainan, China –  Rosewood Hotels & Resorts announced the company will open a property in Sanya in 2017.  Sanya will be the company’s third property in China following Rosewood Beijing (opening Spring 2014) and Rosewood Chongqing (opening 2015). 

Takeaway:  We were never a believer in gaming's imminent expansion to Sanya given the development prospects now coming out of the ground in Cotai.  However, we find development of business and commerce via the International Finance Forum noteworthy.  


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.


Chinese banks raise mortgage rates on funding squeeze:  According to Reuters, a private survey by CRIC, showed banks have raised mortgage rates for first-time homebuyers as a result of tighter liquidity. The survey said nearly 90% of 69 bank branches in 22 Chinese cities have stopped offering preferential mortgage rates to first-home buyers, with some increasing the rates 5-10% above the benchmark rate. That compared to 21% of bank branches that offered discount mortgage rates in the survey conducted in December.

Takeaway:  If true, this could be a headwind for the Mass gaming segment in Macau. 

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