WEN: Middling Q, But that's Not the Story Here

Wendy’s remains on the Investment Ideas list as a long.


Wendy’s reported 4Q14 results this morning, delivering a top line miss ($502mm vs $509 est.) and in-line EPS of $0.10.  Comps were a little light (1.9% vs 2.4% est.), but that’s not the story here.


In the release, management announced recapitalization plans and its intent to sell ~500 additional company restaurants to franchisees by the mid-2016, effectively bringing down the company-owned mix from 15% to 5%.  This extended system optimization is expected to raise $400-475 million in cash and considerably reduce future capital expenditures, while the leveraged recapitalization (up to 5-6x net debt/2014 adj. EBITDA) will allow the company to return substantial cash to shareholders primarily through share repurchases and, to a lesser extent, dividends.


In addition to the aforementioned, the company laid out 2020 goals for the system which include:

  • 1,000 new restaurants (excluding closures)
  • 20% restaurant margins
  • $2.0 million AUVs
  • 60% of restaurants reimaged


2020 is far out, but that's not the point.  The company is heading the right direction by investing in the appropriate strategic initiatives while becoming a leaner, more shareholder friendly company.  Asset-light models (PLKI, KKD, DIN, DNKN, etc.) are fetching premium valuations on the public market – and for good reason. 


Given the growing, steady stream of royalty income, along with lower G&A and capital expenditure requirements, Wendy’s expects to generate at least $200 million of free cash flow in 2017 and $250 million in 2015.  Considering the transformation underway, we believe Wendy’s presents one of the most attractive long-term investments in the restaurant.  


Financial highlights from the quarter include:

  • Company-operated same-store sales growth of +1.9%
  • Franchise same-store sales growth of +1.6%
  • N.A. company-operated margins of 16.8% (+50 bps y/y)
  • G&A expenses of $60.1 million (-22% y/y)
  • Adj. EBITDA of $107.1 million (+20.3% y/y)
  • Operating profit of $51.7 million (+78% y/y)
  • Net Income of $23.3 million, down from $33.1 million a year ago
  • EPS of $0.10, down from $0.11 a year ago


More to follow.

February 3, 2015

On Tuesday's edition of RTA Live, Hedgeye CEO Keith McCullough breaks down the Real-Time Alerts positions as of 10:00AM ET and answers subscriber questions on $CTO, housing, Japan, and more.

LEISURE LETTER (02/03/2015)




  • Feb 3: WYNN 4Q CC
    • ; pw: 57961245
  • Feb 12: MPEL 4Q CC
    • (1866) ; pw: MPEL
  • Feb 17: MGM 4Q CC
    • ; pw: 8870181

headline story

January Macau revenues - fell 17% YoY but hold was high. Junket volume fell 36%, VIP revenues dropped 17% (adjusted for premium mass reclass: -25%), and Mass revenues tumbled 18% (adjusted for premium mass reclass: -6%).  Galaxy was the winner in January with GGR share of 22.5%, up 1.9% bps MoM while while SJM was the biggest loser with market share falling to 21.9%, its lowest share since Sept 2014.

Takeaway: The headline number was bad, but the details were even worse.  Please see our detailed analysis in a separate note, MACAU JANUARY DETAIL.


MGM China - announced what it describes as a “discretionary bonus payout” for all non-management team members. The bonus, equivalent to one month’s salary and to be paid this month, was “in recognition of the Golden Lion Team’s steadfast efforts and success in the past year,” said the firm

Article HERE

Takeaway: MGM's 1st labor cost increase for 2015. Will there be more?


Paradise - said it had “successfully deployed” 78 of its Live Multi Game (LMG) terminals at SJM's Grand Lisboa casino-hotel in Macau. 

Article HERE

Takeaway: ETGs was a rare growth spot in 2014 for Macau 

RCL - Royal Caribbean's Grandeur of the Seas returned home to Baltimore a day early after a number of passengers became sick on the cruise with what is believed to be Norovirus. Royal Caribbean spokesperson Cynthia Martinez said 193 guests (9.91%) and nine crew members (1.15%) experienced the illness. The ship will undergo a ship-wide cleaning and disinfection after the guests disembark.  The terminal will also be sanitized.

Article HERE

Takeaway:  Well 2015 almost made it through Wave with Norovirus.

RCL – Cruise lines are starting to see declines from one of their most important revenue streams, shore excursions. That was one of the admissions made by newly named Royal Caribbean International President Michael Bayley at a forum for agents onboard the Freedom of the Seas.  

Article HERE

Takeaway: Some agents blame low commissions on the shore excursions We think it's also due to more competition.


CCL - As part of Cunard’s, ‘Our birthday. Your present,’ celebrations surrounding the brand’s 175th anniversary year, passengers will receive additional complimentary on board spending money on selected sailings in 2015. Passengers who book a Cunard cruise before February 28,  2015 will receive between $120 and $1,595 complimentary on board spending money per person when booking with a Cunard Fare - double the amount originally offered when the offer started in December.

Article HERE


North America

DC scratch-off- Washington DC will start selling scratch-off lottery tickets. A spokesman for the city’s CFO said Friday that the city has entered into new contracts with two of the three North American companies that print instant tickets. The first new tickets will go on sale on Wednesday.

Article HERE

Takeaway: SGMS was probably one of the two contractors.



China China broadened its graft probe into the financial sector today. Bank of Beijing Co Ltd board director Lu Haijun is under investigation for serious disciplinary violations, the bank said, the latest high-ranking banker to fall under scrutiny as China's anti-corruption drive turns to the finance sector. Chinese President Xi Jinping has warned that the problem of official graft is serious enough to threaten the Communist Party's legitimacy and has vowed to go after powerful "tigers" as well as lowly "flies".

Article HERE 


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.

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Takeaway: January held high and VIP volumes remain depressed.


Macau gross gaming revenues (GGR) declined 17% YoY in January. While in line with our last forecast, January performed below our expectation at the beginning of the month. Gaming volumes deteriorated from Q4, seasonally adjusted. In other words, Macau trends worsened to start the year. Worse, extrapolating and seasonally adjusting the recent 3 month trend (October to December), February could be down 35% YoY and that would NOT be indicative of further deterioration of the underlying metrics. Optically, February will look very bad.


Please see our detailed note:

Keith's Macro Notebook 2/3: USD | Oil | Europe


Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


Takeaway: In today's Macro Playbook, we detail our decision to add crude oil to our list of top short ideas, in lieu of the Japanese yen (FXY).


Long Ideas/Overweight Recommendations

  1. Consumer Staples Select Sector SPDR Fund (XLP)
  2. iShares U.S. Home Construction ETF (ITB)
  3. SPDR Gold Shares (GLD)
  4. PowerShares DB U.S. Dollar Index Bullish Fund (UUP)
  5. iShares 20+ Year Treasury Bond ETF (TLT)
  1. LONG BENCH: Vanguard REIT ETF (VNQ), Utilities Select Sector SPDR Fund (XLU), Vanguard Extended Duration Treasury ETF (EDV), Healthcare Select Sector SPDR Fund (XLV)

Short Ideas/Underweight Recommendations

  1. Industrial Select Sector SPDR Fund (XLI)
  2. iShares MSCI Emerging Markets ETF (EEM)
  3. SPDR Barclays High Yield Bond ETF (JNK)
  4. iPath S&P GSCI Crude Oil Total Return ETN (OIL)
  5. SPDR S&P Regional Banking ETF (KRE)
  1. SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)



Highlighting the Shortable Bear Market Bounce in Oil: Today we are adding the iPath S&P GSCI Crude Oil Total Return ETN (OIL) to our top five global macro short ideas, replacing the Japanese yen (FXY) which should remain range bound for at least two more months.


Recall that the securities highlighted above represent our intermediate-term investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework.


GIP Model:



GIP Model Backtest Results (which form the basis of our long/short biases that are ultimately confirmed/disconfirmed by the market):



***It’s worth restating that we wouldn’t necessarily be long or short each of these securities at every price; our Real-Time Alerts platform best summarizes our conviction (or lack thereof) in each idea in the most immediate of terms.***


The purpose of refreshing and reviewing our list of thematic investment conclusions on a daily basis is to communicate our investment biases to those of you who are less transactional – either because of size constraints in the process of getting in/out of positions OR because of the higher costs associated with a higher frequency of transactions. Ideally, one would only be long securities on the days they go up in price and short those securities on the days they go down in price, but that’s obviously easier said than done – especially in the context of institutional mandates to remain fully invested.


Moving along, we still see downside in the price of crude oil over the intermediate term and our core quantitative screens support that investment conclusion:


  • WTI remains bearish TREND and TAIL with immediate-term upside to $51.31 in the context of this counter-TREND correlation risk move due to the U.S. dollar arresting its ascent
  • The OIL ETF has a Volatility-Adjusted Multi-Duration Momentum Indicator reading of -0.58x; in the context of a pervasive trend of negative beta at the primary asset class level, we find this consolidation in both price and volatility to be very shortable









Source: Bloomberg


#Quad4 continues to get priced into the preponderance of global financial markets on a trending basis, so until that changes, we will remain generally bearish on commodities (sans gold) – crude oil in particular. While well off the highs, the net speculative length of +324k contacts remains the largest net long position in the history of the futures and options markets.





Source: Bloomberg


All told, while not nearly as crowded as it once was, crude oil remains a crowded long and we would avoid “bottom fishing” in this asset class until you can connect the dots on a material pullback in the U.S. dollar beyond the immediate-term.


***CLICK HERE to download the full TACRM presentation.***



Global #Deflation: Amidst a backdrop of secular stagnation across developed economies, we continue to think cyclical forces (namely #StrongDollar driven commodity price deflation) will drag down reported inflation readings globally over the intermediate term. That is likely to weigh heavily upon long-term interest rates in the developed world, underpinning our bullish outlook for U.S. Treasury bonds.


The Hedgeye Macro Playbook (1/29)


#Quad414: After DEC and Q4 (2014) data slows, in Q1 of 2015 we think growth in the US is likely to accelerate from 4Q, aided by base effects and a broad-based pickup in real discretionary income. We do not, however, think such a pickup is sustainable, as we foresee another #Quad4 setup for the 2nd quarter. Risk managing these turns at the sector and style factor level will be the key to generating alpha in the U.S. equity market in 1H15.


Rearview Report:  Income & Spending Diverge in December (2/2)


Long #Housing?: The collective impact of rising rates, severe weather, waning investor interest, decelerating HPI, and tighter credit capsized housing in 2014.  2015 is setting up as the obverse with demand improving, the credit box opening and 2nd derivative price and volume trends beginning to inflect positively against progressively easier comps. We'll review the current dynamics and discuss whether the stage is set for a transition from under to outperformance for the complex.


EARLY LOOK: USA Inc. (1/30)


Best of luck out there,




Darius Dale

Associate: Macro Team


About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.

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