Extreme Discounting - But Who's Got Jack's Back?

Jack in the Box (JBX) put out a press release saying that the company will give away two free tacos to any customer who presents a valid gas receipt on June 26th. JBX's Chief Marketing Officer said, The rising price of fuel is really putting the pinch on consumers. Giving away free tacos is our way of letting guests know that Jack's got their back in these tough economic times. This promotion does not require any other purchases so although it may bring people into the restaurants, it might fail to drive a high level of incremental sales.

I have written extensively about the role discounting has played in driving traffic for restaurant companies and the subsequent impact on margins. Specifically, I have the highlighted the issues around MCD's Dollar Menu. Recent NPD data shows how prevalent restaurant discounting has become.

For the February to April 2008 time period, MCD's traffic has grown 3% YOY. Transactions on deal have increased 10% while non-deal transactions were flat, and 60% of the incremental deal traffic was driven by the Dollar Menu. In that same time frame, Subway has experience a 65% increase in its deal traffic while non-deal traffic has declined 8%. This is not only a QSR phenomenon, however, as T.G.I. Friday's also saw its transactions on deal increase 17% (Yesterday, we posted a chart showing the impact this increased focus on value combined with rising commodity costs is having on casual dining margins).

Charting the FTSE: Finally Oversold!

Apologies in advance for our constant reminder of our market "SELL" call from mid May, but this is what we have to endure to "prove" to the buy side that we make and/or save people money.

A picture is worth a thousand words, and the chart below shows the swift -12% drop in the London Financial Times Index since May 19th.

My downside oversold target for the FTSE is 5605, and we're seeing that tested here this morning. If you're net short European equities, I'd be covering positions into the close and getting neutral, at a bare minimum.


(chart courtesy of

Pakistan's Government Had Enough of the Pain Trade!

For those of you who still think "it's global this time" and that free market capitalism is breaking out all over the world, think again...

That bullish narrative only exists when stock markets are going up, globally, not down. Pakistan has been one of those swooning markets, which went down 30% in a straight line since mid April of 2008.

Today, the Pakistani government said enough is enough and opted to enforce communist like market controls. This helped give the Karachi Index its biggest up day in 6 years, closing +8.6% on the day!

The new rules of the game go something like this:
1. the limit down move the market can have in one day is now -1% (it used to be -5%)
2. a "stabilization" fund was established with 30 billion rupees (that's $450M in buying power)

This is NOT capitalism. This form of intervention is plain scary.

(Chart courtesy of


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A Bad Idea Exposed

Well, it looks like going up against Nike and Urban/Anthropology by endorsing the likes of Stephon Marbury and Sarah Jessica Parker, paying up for expensive big-box leases, and selling product at prices rivaling Wal*Mart's in an inflating cost environment was not such a good idea after all.

Steve and Barry's started down the high quality/low price retailer path back in 1985. But it ramped up its growth trajectory in - you guessed it - 2005-2007 (up to 250 stores). I'm all for the high quality/low price model -- but there are some spots where it simply does not work. Footwear retail is one of them. Humor me and take a moment to look at my posting from last night on Whitehall's Chapter 11 filing. This period was a statistical anomaly as it relates to the sheer lack of bankruptcies. Steve and Barry's did not file, but it reportedly (WWD) lost key designers several weeks back, and now is looking for a $30mm capital infusion. This is not smelling like it is headed in the right direction.

I should note that there is virtually no receivables exposure here for any major brands given the private label and licensed nature of S&B's product. I'm inclined to think that the biggest constituent on the hook will be the REITs who will have to find a home for the 50k-100k box size to the extent that S&B were to downsize. If S&B went away entirely, that'd be a nice little kicker for Payless.

UA: Brand vs Company vs Stock

I've been back and forth on UA. Footwear is solid, but apparel rolling. I believe in growth, but not margins. Fundamentally, I think I've nailed it. But collaborating with my Partners has me less beared-up on the stock.

At Research Edge, we're all about empowering our clients with both our process and insight to optimize timing and sizing of a position to maximize Alpha. A massively important part of this process is our morning meeting, which - by a long shot -- is the most thought-provoking forum I have ever had the honor of being part of.

This morning I laid out my recent conflicting fundamental thoughts on Under Armour - and how such solid performance and execution I am seeing in the footwear business, is being offset by far greater promotional spend in apparel than I think is perceived to be the case (even after the company's earnings guide down earlier this year).

That's when my Partner Keith McCullough chimed in with something that sounded like this... The stock acts like death, but short interest is mountainous, and the average hedge fund's short thesis is as stale as a 3 month old loaf of bread. At $27.28 it's oversold, and worth a shot on the long side, provided that you have a catalyst that is better than toxic. The last big volume days for UA were on the up days of the week of May 12th. Sharp and fast squeezing of a consensus short position.

Pardon me for sounding cocky, but I think I can rip apart a business model, and identify what margin and capital structure is needed to achieve a given level of top line growth as good as just about anybody. As good as I think I am in this regard, my team here at Research Edge collectively crushes just about any standard I can conjure up. It is when I can draw upon insight from my Partners here at Research Edge to make 1+1=3.

My thoughts on UA the brand and the business model remain unchanged. But after the 10 minute collaborative valuation/trading discussion, I walked out of our morning meeting more upbeat near-term on the stock.

Yes, A Bankruptcy Cycle Exists

Whitehall Jewelers filed Chapter 11 today in yet another reminder to the investment community that a bankruptcy cycle does, in fact, exist. I'm amazed at how short the Street's memories are. People seem to be looking back to the past three years when it was safe to own over-levered, junky consumer names, and think/know that there would ultimately be a strategic or financial bid at some price.

Maybe that was a safe bet in 2005 and 2006 - and even the first half of 2007. But this was a rather unique period. Let's put on our historical hats on for a moment. Looking back all the way to 1934 (when FDIC data first became available) there was at least one (and usually multiple) financial institution bankruptcy filing in every single year, except - you guessed it - 2005 and 2006.

Now that's ticking up again, and yes, these are the same institutions that lend to businesses and consumers alike. As such, retailers like Linens'n'Things, Sharper Image, Goody's, and now Whitehall are paying the price. I cannot possibly imagine that the buck stops here.

Hang on folks, there's more to come...

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