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PFCB – Taking the Right Steps in Today’s Environment

According to NPD data, the supper daypart, which represents 31% of eating out occasions, has declined the most, down 1% in the March-May 2008 time period relative to up 1% for both the morning meal and lunch dayparts. This help explains PFCB’s worse than expected same-store sales results in 2Q as dinner makes up 67% of revenues at the Bistro and 57% of revenues at Pei Wei. During 1Q08, the Bistro experienced positive daypart activity during the week at both dinner and lunch and positive weekend dinner trends. In 2Q08, dinner trends during the week turned negative, leaving dinners during the weekend as the only positive daypart.
  • PFCB’s same-store sales results were also impacted rather severely by the company’s geographic exposure to Arizona, California, Florida and Nevada, which accounted for 84% of the Bistro’s total comparable sales decline, and same-store sales declines in these four states worsened sequentially from 1Q08. Pei Wei experienced considerable weakness in its Phoenix, Las Vegas, Southern California and Dallas markets. These four regions represent 41% of the concept’s comparable units and were down more than 7% in the quarter after being down 6% in 1Q08.
  • Despite weakening top-line results, the company is taking the right steps to manage the parts of the business it can control. Although the company is facing higher commodity costs, management stated that it does not expect to increase prices at either of its concepts over the next 6 to 18 months as the risk to traffic trends and customers’ overall value perception is too great. With traffic down in the 6%-7% range at the Bistro and negative at Pei Wei, I would agree that raising prices in this economic environment would be detrimental to both concepts.
  • Additionally, the company announced that it is significantly slowing its new unit growth in FY09 and plans to open 12-14 Bistros (down from the expected 17 in FY08) and 6-10 Pei Wei restaurants (down from 25 in FY08). I would be happy to see the company stop its expansion of the Pei Wei concept all together until it can generate the necessary returns, but cutting the concept’s FY09 growth by more than 60% is a step in the right direction and management is focused on improving Pei Wei margins by 200-250 bps off of 2007 levels. I was surprised and encouraged to hear management say (in response to a question) that they are currently evaluating the existing Pei Wei locations and would consider closing some locations if they determine any sites don’t have the potential to get where they want them to get. Management was clear in saying, however, that no such units have been identified as of yet. As a result of this slowed FY09 development, capital expenditures are expected to come down in FY08 (now expecting to spend $80-$90 million versus prior guidance of $105 to $115 million), which will generate increased free cash flow in the current year. This capital spending number will come down even further in FY09.
  • As it relates to things management can control, the 70 bp YOY decline in labor expenses at the Bistro is somewhat concerning as such declines in labor expense can be a red flag for a company trying to protect margins at the expense of the customer experience. Management attributed the year-over-year decline to improved efficiency and scheduling in the back of the house and said that the magnitude of the decline is not necessarily sustainable, which is encouraging.

US Financials (XLF): Down Today, In An Up Tape

I talked about being net long for the market “Trade” this morning, but also said don’t chase Luskin and Gartman into the bear trap called Financials. The XLF closed down -0.13% today, and is starting to look as tired as Dick Fuld must be of trying to define what a “Level 3 Asset” is.

Provided that the XLF doesn’t close higher than 23.78, the negative “Trend” in this sector will remain firmly entrenched. The US Financial Industry needs a full makeover, not a 5 day rally. Sell high, Cover Low.
KM
(chart courtesy of stockcharts.com)

Hershey (HSY): Giving The Shorts Something to Think About...

This stock's sentiment reminds me of that which used to be Budweiser's (BUD). One day, someone with Euros changed that negativity, and you know where BUD is now. I know, I know - but The Hershey Trust "will never bend". Some hedge funds have fun IM’ing one another with their narrative fallacies.

HSY reported a better than bad quarter today, and closed up +5.4% on solid volume. Short interest is vibrant at 11% of the float. If you're short it, and you think you have a unique thesis, you don't anymore (or a catalyst, for that matter).

If the stock can hold today's gains, you can buy it using a $36.17 stop loss. You'll get paid a 3.2% dividend to wait this turnaround out in the meantime.

See Howard Penney's notes for more.
KM
(chart courtesy of StockCharts.com)

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Eye on Putin Power...

This picture is scary, for a lot of reasons. Putin may very well have gone too far too fast however. Now that natural gas and oil prices aren't bullet proof, his pedestal of would be global political power shakes.

The picture below comes from the two day visit Chavez is having in Russia this week. Yesterday he was lobbying Putin and Medvedev to form a "strategic alliance" with Venezuela. Chavez went on record saying "if Russia's armed forces want to be present in Venezuela, they will be given a warm welcome."

See our earlier post today on Russia's stock market breaking down for more.

Because geopolitical risks are ignored, certainly does not mean they cease to exist. That’s why one of my investment themes remains keeping an “Eye On Putin Power.”
KM
AP Picture From This Week

DIFFERENT PAULSON; STRONGER LEADER - THE MARKET NEEDS HIM

While I have been focused on Hank Paulsen’s reactive interpretation of providing the market leadership, John Paulson, who manages the $33B hedge fund Paulson & Co., has been busy coming up with proactive solutions.

Along with Peter Thiel at Clarium and Phil Falcone at Harbinger, Paulson is providing some light for an industry that is entering its dark cycle of rationalizing over supply. According to Bloomberg’s Saijel Kishan, “the money manager whose wagers against the U.S. housing market helped him earn an estimated $3.7 billion last year, is starting a hedge fund to provide capital to financial firms hurt by mortgage writedowns.”

Finally – a leader stepping up to take on risk and be held accountable to his investors for it.
Leadership is earned, not appointed. Let the healthy cleansing of US financial industry begin.
KM
New York Times Pictured Paulson In A March Article titled "Winners Amid Gloom and Doom".

Changes to the MCD business model and guidance

Commodity costs increasing

08Q1 - In 2008, U.S. beef costs are expected to be relatively flat and chicken costs are expected to rise about 5% to 6%. In Europe, beef costs are expected to be up 3% to 4%, while chicken costs are expected to increase approximately 6% to 8%.

08Q2 - In 2008, U.S. beef costs are expected to be up 8% to 9% and chicken costs are expected to rise about 5% to 6%. In Europe, beef costs are expected to be up 8% to 9%, while chicken costs are expected to increase approximately 7% to 8%.
Lower Tax rate

08Q1 – MCD expects the effective income tax rate for the full-year 2008 to be approximately 30% to 32%, although some volatility may be experienced between the quarters in the normal course of business.

08Q2 – MCD expects the effective income tax rate for the full-year 2008 to be approximately 29% to 31%, although some volatility may be experienced between the quarters in the normal course of business.
No Change to G&A trends

08Q1 – MCD expects full-year 2008 selling, general & administrative expenses to decline, in constant currencies, although fluctuations may be experienced between the quarters due to items such as the 2008 biennial Worldwide Owner/Operator Convention, the 2008 Beijing Summer Olympics and the August 2007 sale of the Company’s businesses in Latin America.

08Q2 – MCD expects full-year 2008 selling, general & administrative expenses to decline, in constant currencies, although fluctuations may be experienced between the quarters due to items such as the 2008 biennial Worldwide Owner/Operator Convention, the 2008 Beijing Summer Olympics and the August 2007 sale of the Company’s businesses in Latin America.

No Chang in Capital Spending

08Q1 – MCD expects capital expenditures for 2008 to be approximately $2 billion. About half of this amount will be reinvested in existing restaurants while the rest will primarily be used to open 1,000 restaurants (950 traditional and 50 satellites). The Company expects net additions of about 600 restaurants (700 net traditional additions and 100 net satellite closings). These restaurant numbers include new unit openings in affiliate and developmental license markets, such as Japan and those in Latin America, where the Company invests no capital.

08Q2 – MCD expects capital expenditures for 2008 to be approximately $2 billion. About half of this amount will be reinvested in existing restaurants while the rest will primarily be used to open 1,000 restaurants (950 traditional and 50 satellites). The Company expects net additions of about 600 restaurants (700 net traditional additions and 100 net satellite closings). These restaurant numbers include new unit openings in affiliate and developmental license markets, such as Japan and those in Latin America, where the Company invests no capital.

No Change in the cash returned to Shareholders

08Q1 - For 2007 through 2009, MCD expects to return $15 billion to $17 billion to shareholders through share repurchases and dividends, subject to business and market conditions. For the full year 2007 and the first quarter 2008 combined, the Company returned $8.2 billion to shareholders.

08Q2 - For 2007 through 2009, MCD expects to return $15 billion to $17 billion to shareholders through share repurchases and dividends, subject to business and market conditions. For the full year 2007 and first half of 2008 combined, the Company returned $9.4 billion to shareholders.

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