We are removing WEN from the Hedgeye Restaurants favorites list as a LONG and moving it down to the LONG Bench.  WEN is up 30% year-to-date and 42% over the past 12-months.  The WEN transformation is more than 50% complete and the stock reflects most of good news.  To that point, over the past two years, the EV/NTM EBITDA multiple has expanded from 9.15x to 13.71x, with the stock now trading at the upper end of its peer group valuation. 




Our bullish bias to WEN is based on the company’s willingness to transform the business model to a leaner, more efficient machine.  The news today is a further affirmation that this process is nearly complete.  As a whole, Wendy’s new operating model will deliver more predictable earnings growth, higher EBITDA margins, and higher earnings quality, while requiring less capital outlay.  By 2017, WEN will have completed the system optimization initiative, where the company will be generating 80% of its earnings stream from predictable, sustainable, rental and royalty income.  


All of this is now baked into the company’s valuation. 



  • The Board authorized a new share repurchase program for up to $1.4B of the company's common stock (30% of the company's market capitalization through the end of 2016)
  • The company intends to repurchase shares with existing cash on its balance sheet, cash flow from operations, net proceeds of $925MM from its recently completed securitization refinancing, expected after tax proceeds of $350MM from the third phase of its system optimization program and the after-tax proceeds of $50MM from the sale of its bakery operations
  • As part of the new authorization, the company will commence an $850MM share repurchase program today, including a modified "Dutch Auction" tender offer to repurchase up to $639MM of its common stock at a price range between $11.05 and $12.25 per share
  • The tender offer is part of an $850MM stock buyback program, which also includes a separate purchase of up to $211MM of the company's common stock from the Trian Group
  • The company expects to use the remaining $550MM of its $1.4B share repurchase authorization before the end of 2016, as funds become available from the company's system optimization initiative



  • The company reaffirmed that its business trends remain on track to achieve the 2015 outlook issued in its first-quarter earnings release on 6-May
  • WEN now expects 2015 Adjusted EBITDA of $375MM to $385MM vs prior $390MM to $400MM and consensus of $400.69MM.  In addition, 2015 Adjusted EPS is now $0.31 to $0.33 vs prior $0.33-$0.35 and consensus $0.34 (excluding $0.02 attributable to its bakery operations)


Same-Store Sales

  • Same-restaurant sales growth of 2.5 to 3.0% at Company-operated restaurants and company-operated restaurant margin of 16.5 to 17.0%






The company's expected restaurant count for its long-term outlook includes sale of 100 Canadian restaurants and the sale of 540 additional domestic by the middle of 2016.  The company's long-term outlook includes the expectation for average annual system-wide same-restaurant sales growth of 2.25 to 3.0% beginning in 2016







  • High single-digit Adjusted EPS growth in 2016
  • High teens Adjusted EPS growth in 2017
  • Accelerating to 20% beginning in 2018


  • Flattish Adjusted EBITDA in 2016
  • Low-single digit Adjusted EBITDA growth in 2017
  • High single-digit Adjusted EBITDA growth in 2018

The company also continues to expect to achieve the following system goals by the end of 2020:

  • Average unit sales volumes of $2.0M
  • Restaurant margins of 20%
  • A sales-to-investment ratio of 1.3 times for new restaurants

Cartoon of the Day: That Sinking Feeling

Cartoon of the Day: That Sinking Feeling - Growth cartoon 06.03.2015


Our macro team has been making the following contrarian case for some time:


#SlowerForLonger (Growth) = #LowerForLonger (Rates)



*If you're an individual investor looking for an accountable, non-consensus research provider you can trust ... click here.

Eurozone Sovereign Bond Yields Gone Wild?

In the new world of market expectations gripped on every central bank utterance, indeed markets are getting “wild”. 


The (in)ability of Greece to pay its debt obligations once again remains pronounced, with just about everyone in the dark about how a “deal” will come together.  We view this uncertainty as the biggest drag to the Eurozone equity market in recent weeks, and to boot mixed to weaker data points over the period.


So what’s our thinking on Greece?   A deal gets done!  Whether it has nails or not, we expect the Eurocrat mentality of #Extend&Pretend Greece’s fiscal burden on the Union to prevail.  After all, the Eurocrats are incentivized to play ball to keep Greece in the Union. And in addition, poll after poll shows the Greeks themselves don’t want to leave!


Data Gone Gangbusters?  There was great market excitement yesterday when the Eurozone reported CPI at 0.3% in a preliminary MAY reading (Y/Y) vs 0.0% prior.  German CPI also saw a positive divergence, rising to 0.7% vs a prior 0.3%.


Sure, the Eurozone print is the first inflationary one in 6 months, and “deflation” could be in the rear view mirror. However, the figure is a long way from the ECB’s CPI target of 2.0%.  This is a signal to us that ECB head Mario Draghi’s foot will have to remain planted on the QE gas pedal.  


Eurozone Sovereign Bond Yields Gone Wild? - vvvv. CPI


The CPI data led to monster moves across most of the Eurozone sovereign bond market (German 10yr yield ramped from 0.49% to 0.71%, in a day!).  But is the move misplaced? Where’s the growth?


Eurozone Sovereign Bond Yields Gone Wild? - VVVV. yields

Eurozone Sovereign Bond Yields Gone Wild? - vvvv. Germany Yields


Dull Data!  Our call remains that we expect economic performance and data to be Slower-For-Longer on both US and Global growth.


Specific to the Eurozone, our proprietary GIP (growth, inflation, policy) model shows the Eurozone squarely in QUAD3 (= growth slowing as inflation accelerates) for the remainder of 2015.


In addition, today on the ECB call Draghi noted that his team’s economic staff projections remain largely unchanged from the March assessment. As we show below, the pace of economic activity is modest:

  • ECB MAY Eurozone GDP staff projections largely UNCH:  +1.5% in 2015 (UNCH), +1.9% in 2016 (UNCH), and +2.0% in 2017 (vs 2.1% estimate in MAR)
  • ECB MAY Eurozone CPI staff projections revised slightly higher:  0.3% in 2015 (vs 0.0% estimate in MAR),  +1.5% in 2016 (UNCH), and +1.8% in 2017 (UNCH)

Eurozone Sovereign Bond Yields Gone Wild? - vvv.gip


Further, a couple recent high frequency data points confirm that growth is modest to muted:

  • Manufacturing PMIs fell for the Eurozone (52.2 MAY vs 52.3 prior) and Germany (51.1 MAY vs 51.4 prior)
  • ECB Loans to Non-Financial Corporations and Households have improved, yet at a very slow rate and low level. Clearly the QE “channel” to the real economy has not materialized for Draghi.

Eurozone Sovereign Bond Yields Gone Wild? - vvvvv. PMIs

Eurozone Sovereign Bond Yields Gone Wild? - vvvv. Loans


Don’t Rule Out QE!  The games central bankers play should not be ignored. While we believe fundamentals matter to investors, we think Draghi’s ability to do “whatever it takes” to move inflation, and in concert equities, higher, he’ll do.


Therefore, we expect a rotation into Eurozone equities to hold up, especially as the Greek headlines fade following a “deal”. 


Below we show the pace of QE buying from the ECB. We expect the QE machine to ramp higher over the coming months (see recent buying in the chart below).  We got a preview of this a couple of weeks ago when ECB board member Benoit Coeure remarked that the Bank will frontload QE purchases in May and June and will backload in September if needed. 


Eurozone Sovereign Bond Yields Gone Wild? - vvvv. ECB QE


If you’re a believer in the QE game, we continue to like German equities over the intermediate term with the economy levered 47% to exports (a weaker EUR encourages exports). While the DAX remains bearish over the TRADE (immediate term), it remains bullish TREND (intermediate term). 


Eurozone Sovereign Bond Yields Gone Wild? - vvv.dax




Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

McGough: These Are the Two ‘Ugliest’ Looking Companies in Retail


In this brief excerpt from today's edition of The Macro Show, Hedgeye Retail Sector Head Brian McGough reveals the two retail companies he wouldn't touch with a 10-foot pole.

Retail Callouts (6/3): M, KSS, ASNA, ANN, GES, GIII, VRA

Takeaway: Dept Store Real Estate: M some optionality, KSS = not a real estate play. Now you know why ASNA is acquiring ANN.

M, KSS - Macy's Real Estate at Play?



Takeaway: For starters, M's real estate portfolio is far better than every other mid-tier operator in this space with an existing presence in ~80% of the 'A' malls in the US. Add to that the High Street locations (Herarld's Square, etc.) and its clear that the company has a pretty attractive owned real estate portfolio. Will the company monetize that? Hoguet did nothing on the last call to dispel the possibility of a real estate play.

Retail Callouts (6/3): M, KSS, ASNA, ANN, GES, GIII, VRA - 6 3 chart1

But, that seems like a near term solution being floated by investors who don't see a whole lot to get excited about in the base business. M paid ~$300mm in rent (1% of revenue) last year  -- assuming that the company pays $3/sq. ft. for it's leased DC space that implies $5.50/ft. for its leased/ground leased properties that are not capitalized. Assuming an identical rate for the 90.5mm sq. ft. of owned real estate (which is probably too low given  that lease terms will be marked to market for any sale leaseback transaction) we would see a minimum of 170 bps of added margin pressure from rent alone.


As for the crown jewel in the portfolio -- it is not the Saks 5th Avenue location which was valued at $3.7bil just a few months ago. Herald Square is about 3x the size of that building but its designation as a National Historic Landmark makes it far less attractive for anybody looking at a potential redevelopment. Just yesterday the 78k sq. ft. Old Navy door across the street which has a footing that could support a 300,000 sq. ft. mixed use property was acquired by Vornado for $355mm, a 41% premium to the price struck 12mnths ago. If we discount the transaction value for the Historic Landmark status we get to a valuation of about $1.3bil ($600/sq. ft. x 2.17mm sq. ft.). Add that to the existing 88mm of owned sq. ft. at near 'A' mall cap rates and rent/sq. ft. of around $7 and we get to an aggregate valuation in the $9.5-$12bil range.

Retail Callouts (6/3): M, KSS, ASNA, ANN, GES, GIII, VRA - 6 3 chart2 

Lastly, we think it's important to draw a distinction between M and KSS. Unlike M, KSS has limited mall exposure (virtually 0 'A' Mall exposure) and operates mostly in strip centers -- there are over 7,000 in this country. It's hard to argue an attractive valuation especially when you consider the holes being opened up by the consolidation of the office supply stores, Best Buy, etc. Where M has beach front property, especially in its 'A' mall locations, KSS would be the equivalent of a 2hr drive inland.



SIGMAs for Retailers Reporting in the Past 24 Hrs


ASNA, ANN - If you didn't know why ASNA is buying ANN, now you know. It's results were not good. But that won't matter now that it's crown jewel is Ann Taylor instead of Lane Bryant, Dress Barn, or Justice.  Seriously...what is this company becoming?

Retail Callouts (6/3): M, KSS, ASNA, ANN, GES, GIII, VRA - 6 3 chart3


GES - 1Q16

Retail Callouts (6/3): M, KSS, ASNA, ANN, GES, GIII, VRA - 6 3 chart4


GIII - 1Q16

Retail Callouts (6/3): M, KSS, ASNA, ANN, GES, GIII, VRA - 6 3 chart5


VRA - 1Q16

Retail Callouts (6/3): M, KSS, ASNA, ANN, GES, GIII, VRA - 6 3 chart6




Toys 'R' Us Hires New CEO With A Rich IPO Resume In David Brandon



VRA - Vera Bradley Names Theresa Palermo EVP, Chief Marketing Officer



True Religion promotes interim VP to CEO



Jo-Ann Fabric among first retailers to partner with Pinterest’s new Buyable Pins



USTR: TPP to Lower Tariffs on U.S. Exports



TGT - Target Takes Tartan to the Limit






Takeaway: Lucky LVS but market trends still negative


LVS held at a higher VIP hold percentage in May than even April, itself a lucky month for the Sands properties.  For the first time in a long time, we’ll have to adjust our quarterly LVS estimate higher, although a volume related increase would’ve been preferred by the LVS bulls I’m sure.  Wynn and Galaxy, on the other hand, weren’t so lucky.


The average hold for the market was normal. Less than a week of Galaxy’s Phase 2 were in May’s numbers so June will be an important month in determining whether the market has grown or not as result of new supply. We suspect Phase 2 provided a little bit of a boost to the market.


While VIP volumes remain weak YoY, they seem to have stabilized sequentially to some extent. The same can be said about the overall mass revenues and the trade in Macau stocks looks higher over the very near term.  However, we continue to believe the high margin base mass segment is in worse shape than the Street expects and will pressure margins for the operators in 2015 and 2016.  Upcoming gains in Macau stock prices may be short lived as we anticipate another round of 2015 and 2016 estimate cuts.


Please see our detailed note:


We will be hosting a call on Friday morning at 1pm to discuss our Macau outlook and analysis and to provide an in-depth look into EBITDA sensitivity by operator amid room and table supply increases. Please contact your Hedgeye salesperson for more details.