SONC - A capital offense in the restaurant industry!

Sonic reported EPS today that leave more questions than answers!

Sonics management noted that part of the declining performance at partner drive-ins was due to the consumer rejecting the aggressive price increases taken last year. On top of that, management reduced labor in the stores as they were trying to manage margins. Trying to manage to Wall Street's expectations is extremely difficult, and sometimes, decisions are made that can have severe repercussions on the business model.
  • Here are two things we know from the quarter SONC just reported. (1) It can't raise prices, so with inflation rampant, margins are coming down. (2) SONC needs to add labor to the stores to improve service levels, putting further pressure on margins. Things continue to deteriorate for SONC. - Here is a quick look at the guidance time line: after its 2Q, the company forecasted 15%-17% FY08 EPS growth (but still 18% long-term growth). On May 9, when the company preannounced its 3Q results, management lowered its FY08 EPS expectations to 9%-12% growth. Today the company is looking for 4-6% growth. The science of guidance!
  • SONC also slightly lowered its development schedule from 2Q when they were saying they would open 180-200 drive-ins system-wide in FY08. The company is now expecting to open 175-185. To help improve the trend in same-store sales, the company increased the number of franchise retrofits it expects to complete by fiscal year end to more than 700 (versus its prior expectation of 600-700). A phrase used often at Research Edge is when a company pulls the goalie to make the quarter. In short, this means that the company cuts SG&A so it can make the number. For SONC, the company has been pulling the goalies for years and there is nothing left. In 2001, SONC's SG&A as percentage of sales was just over 9%, today it's hovering around 7%. SONC is the model of efficiency when you compare its level of SG&A spending relative to sales to that of its competition. Given what we have learned about management's quest to maintain margins in the current quarter by cutting labor at the expense of customer service, I'm thinking that maybe the company has gone too far.

Ugly Chart of The Day: Jobs vs Menswear

Anyone watching Bloomberg today saw the same story discussed half a dozen times - that we're not even close to the end of job cuts on Wall Street. I analyzed the relationship between men's clothing sales and Wall Street employment, and the trend into '09 is frightening. Consider the following...

1) Numbers for job losses being thrown around are now in the 150-175k range. We can look at Wall Street-related jobs in NYC (I'm not being geo-centric, it's the only data we could find) and see that the recent peak was in 3Q07 at 134k jobs. Now we're down to 122k. If I assume that 150k jobs are lost, and that 30% of these are in NYC, we're looking at 50k jobs lost from peak to trough. Unfortunately, that still suggests that we need to issue another 30-35k pink slips.

2) I did this analysis not to be a downer for those of living in the new York area, but to show the relationship between Wall Street employment and menswear sales. The chart below is one of those 'it speaks for itself' charts. Bottom line = if these job cut forecasts are correct, then we could see another 300-400bp deceleration in menswear sales.

3) Taking a historical perspective, the biggest Financial Employment hit NYC has ever seen was circa 9/11 - which should not come as a surprise to anyone. But even then, we saw a 40k hit to jobs. At that point in time we saw menswear sales go negative - but only for a short time period. My strong view is that this was the heart of the period where sourcing tailwinds and deflationary input costs gave the industry solid fuel to stimulate unit demand. That factor is gone now big time.

4) This is yet another factor that keeps me on the sidelines with PHV, as nearly half of cash flow is men's dress shirts and accessories. It makes me pause and reflect on RL as well - though I think RL has enough juice in its tank to harvest recent investments that it will offset an ugly cyclical trend.

WYNN: A Long Strange Round Trip

Stocks don't lie, people do. And oh boy have I had to endure plenty of Wall Street hedge fund analysts and managers tell me how wrong I was being short this one.

WYNN got marked at $172.90/share into month end of October 2007, and has since been cut in half. My Partner, Todd Jordan, still gets heat from hedge funds for being negative on it. Maybe that's what happens when you're right. WYNN underperformed again today, closing down another -2%.

This stock remains broken on virtually every factor in my model other than short interest (short interest is building, and that's positive for the bulls).

I see some support at $84.01. Maybe cover some there.
(chart courtesy of

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HPQ: Revisiting the Short...

On 5/28 I wrote a follow up note titled "They Can't Hope This One Any Higher", and it looks like they couldn't.

Today HPQ underperformed the market again, trading down another -1% to $45.04. The stock is technically broken, and the entire Street remains long the same bullish narrative that this deal for EDS is gravy.

*Full Disclosure: I have covered my short position, and plan on re-shorting it again on an up day.

(Chart courtesy of

Pinnacle (PNK): Buying More...

On 6/11 I introduced the timing of my 1st tranche of buying PNK in my fund. Fortunately, my process forces me to buy things in thirds. Process is born out of hard lessons learned. Bottoms in stocks are processes, not points.

PNK was down -8% today, to $10.75. Down eight percent is not bad when I look at a stock price that's down almost -70% from its 2007 high!

There is no doubt in my mind that PM's who got this one wrong are blowing it out into Q2 end performance reporting. Short interest is approaching 1/3 of the float, so the shorts are leaning on it here too.

I'll be buying more.

*Full Disclosure: I now own PNK in my fund.

(Chart courtesy of

Shuffle Master (SHFL): Buying some...

The stock is down -83% from where some of the "smart" hedge fund guys would pitch it to me as a long at "idea dinners" in 2006, and at 20% of the float, short interest continues to build to a level where the same hedge fund community now thinks "its a short to zero".

Additionally, 78% of the sell side's ratings on SHFL are now Hold/Underweight/Sell. In September of 06', according to Factset, 75% of the ratings were Buy + OverWeight!

My Partner, Todd Jordan, has edge here, and we don't think it's a zero. Buying it in the $5.91-$6.26 range is where I'd get more aggressive, but I bought 1/3 of a position in my fund today.

(Chart courtesy of

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