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US Market Performance: Week Ended July 18, 2008...

Index Performance:

Week Ended 7/18/08:
Dow Jones +3.6%, SP500 +1.7%, Nasdaq +2.00%, Russell2000 +2.7%

2008 Year To Date:
Dow Jones (13.3%), SP500 (14.1%), Nasdaq (13.9%), Russell2000 (9.5%)

Restaurant Transactions Over the past three years

How many companies on this list will need to raise equity or file bankruptcy in the next 12-18 months?
  • Some PE firms may have bitten off to much!

Where Did All the Free Access To Capital Go?

There was a great article yesterday by Bloomberg’s Jason Kelly and Pierre Paulden titled, “Blackstone Risks Hedge Funds’ Return as LBO Lending Evaporates.”

I have no edge on this deal in particular (or I wouldn’t be able to write about it!), but it appears that The Weather Channel LBO that we wrote about in a prior posting isn’t the lock that the buying consortium originally thought it to be. We’re not talking about a club deal with marginal players here either – General Electric, Bain Capital, and Blackstone.

Suffice to say, my long held view that Access to Capital Tightening as Cost of Capital increases continues to have far reaching effects. While some believe that this is a short term funding issue, and others brush it off as a “confidence thing”, I think this is structural and will have longer term effects than many would like to accept.

Per the article, the facts continue to play on our side of the thesis. “The $153.9 billion of announced buyouts this year is down more than 70 percent from the same point in 2007, according to data compiled by Bloomberg.”

What a difference a year has made to those depending on levered long investment models.
From www.weather.com

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Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Eye On Leadership

One word for Merrill's new CEO, John Thain: Accountability.

Part of being a good leader is accepting that ultimate responsibility for the organization rests on your shoulders. John Thain dropped that ball yesterday when he distanced himself from his own firm in the midst of the Merrill Lynch conference call.

Goldman Sachs analyst William Tanona posed the following question:

William Tanona
“I guess in terms of you guys were obviously a big underwriter in both cash and synthetic CDOs, what did you invest the underlying cash collateral in the synthetic CDOs and what type of instruments and how are those reported on the financial statements?”

John Thain
“First of all I take exception to the you guys comment. I did not create any of these CDOs...”

Here is the rest of the quote for context

“……..I think we -it’s probably specific on the deals because whenever there’s one of the synthetics there will be a whole series of requirements as to what the collateral has to look like--in general, when you create a synthetic it will have a whole bunch of criteria about what the collateral has to look like, it had to satisfy a whole series of rating agency test, it had all kinds of diversification requirements in it and I think it’s probably not going to be easy or probably not very useful to answer your question kind of generically because my guess is that it’ll be totally dependent on each individual security. So I think that each one would be different.”

Thain is a rich man. He is also another one of these vaunted Goldman Sachs men who have been given the benefit of the doubt in managing one of America’s most important financial institutions.

Thain has an opportunity to do things differently. I sincerely hope that yesterday’s conference call is does not manifest into a “Trend” and that accountability is part of his new leadership plan.

  • Andrew Barber
Merrill's New CEO - John Thain


In the North East, the Saturday NY Times delivery included a 9 coupon book in English and Spanish:

$3.49 20 piece McNuggets (3.99 in Manhattan)
$2 off southern style chicken extra value meal (only $1 in Manhattan)
$1 6 piece McNuggets (1.49 in Manhattan)
2 coupons -Buy 1 Big Mac or quarter pounder with cheese get one free
$2 off Angus third pounder extra value meal (only $1 in Manhattan)
2 coupons -Buy 1 bagel or McGriddles sandwich get one free
$1 off McSkillet Burrito

That is a lot of free food!

Restaurant Anthology – Part 2

We have recently commented on four major themes:
1. Recent trends in food and labor costs and their impact on margins
2. Use of promotions to drive traffic at the expense of margins
3. Companies levering up at the wrong time
4. All leading to a less than toxic Q2 earnings season
Although most of these themes do not sound all that encouraging, we have also outlined a couple of companies that are making the right capital allocation decisions and should see an improvement in underlying fundamental trends.
For more details regarding any of the following highlights, please refer to the relevant postings over the past two weeks, which are sorted by date on the portal.
  • Capital Efficiency
    My recent look at past restaurant bankruptcies led me to look at the casual dining sector’s current debt to EBITDA ratios and unfortunately, casual dining operators added leverage at the peak of the cycle.
  • DPZ: Looking at the overall industry, DPZ was not the only company to leverage its balance sheet at exactly the wrong time; they just took leverage to whole new level and the stock is down over 40% in the last 12 months as a result. The company’s business model generates cash, which should allow DPZ to pay down debt over time and start to reverse its current capital structure in the next 6-12 months. Additionally, overall pizza category trends have ticked up in 2Q08 so as the company’s top-line results improve going forward, investor concerns over leverage should dissipate – posted July 13.
  • Starbucks is currently taking the right steps to reverse the issues that stemmed from its excessive capital spending over the last three years. Although the company’s decision to slow U.S. growth and close underperforming stores is not yielding immediate results (as did MCD’s plan to win strategy in 2003), the current consumer environment is working against the company. SBUX is changing the things it can control, which will reward shareholders in the coming quarters– posted July 8.
  • TXRH recently announced that its board approved a $50 million increase in the company’s stock repurchase program. The company has not generated free cash flow since 2005 and its debt to EBITDA ratio has gone from 3.2% to 20.1% over the same timeframe. Because the company needs to fund its growth with incremental leverage, I do not understand the motivation for buying back shares if it will require the company to add even more leverage to its balance sheet – posted July 8.
  • Dave & Buster’s recently filed for an IPO that could raise as much as $170 million. Dave & Buster’s is another company that has a highly leveraged balance sheet, and requires significant reinvestment (which it does not have) in its existing store base to maintain the appeal of its concept. However, if the company does not deleverage its balance sheet, its growth will also be limited. This could be why the PE firms want out – posted July 15.
  • Less than Toxic 2Q Earnings Season
    Restaurant companies may see some upside to 2Q results from rebate checks, but the relief is only temporary. CPKI guided to slightly better 2Q results but did not adjust its full-year outlook. RT’s 4Q08 earnings beat consensus, but the company still expects same-store sales to be down low to mid single digits in FY09, including a 8%-9% decline in 1Q09. RRGB announced that its recent sales may trend to the low end of its previously guided assumption for the full year – posted July 9 and 10.