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BKC downplayed the potential traffic impact from removing the dollar double cheeseburger off the menu in mid-April at an investor conference today.  Just last week, JACK’s CEO Linda Lang stated that she thinks the industry will see some immediate relief on the discounting front when BKC removes the dollar double cheeseburger from its menu.  MCD raised the price on its dollar double cheeseburger in December 2008 in response to rising commodity costs.  During the first full quarter after the change, MCD reported that over 50% of customers stayed with the double cheeseburger at about $0.20 more.  During 1Q09, the Dollar Menu dropped to 10% of sales, from the typical 13%-14% range, which helped margins without hurting traffic. 


BKC could experience the same margin benefit from raising the price on its double cheeseburger in April.  One major difference between the MCD and BKC situations is that MCD had the dollar double cheeseburger on its menu for some time prior to raising the price whereas BKC had just gone national with its dollar double cheeseburger in October.  On its last earnings call, BKC stated that the dollar double cheeseburger promotion largely drove the sequential quarterly improvement in same-store sales, leading to positive traffic growth and gross profit dollars in the U.S. YOY.  It might be harder for BKC to maintain this positive traffic momentum when this promotion goes away.


Notes from today’s management presentation:


Strong global presence

  • 90% franchised
  • US and Canada is 2/3 in terms of sales and profitability
  • Growing across the world
    • Setting new highs in restaurants every month
  • 80% of unit growth is coming from outside of US and Canada
  • Stable base of new restaurant count  in NA

 Appealing brand

  • Business generates good cash flow
  • Unit economics are sounds

 Growing brand profitably

  • Driving ARS growth
  • Innovation around building business
    • Menu mix
    • Enhancing value
    • Dollar double cheeseburger moved the needle

 Running great restaurants

  • Satisfaction scores are at record levels
  • Leveraging assets, systems and analysis tools, to drive profitability
    • P&L benchmarking
    • Four corner pricing model

 Investing wisely

  • Biggest opportunity is image, improving image
  • Investment in system
    • Franchisees and company have spent a lot on POS systems etc.
    • Remodeled 140 restaurants with company money in the last three years and returns continue to impress

Franchise relations

  • Aligning people with the strategy
  • Continuing to work with franchisees



  • Unemployment
  • Consumer slowdown
  • Uncertainty

 BKC focus

  • Cost containment
  • Development
    • Great time to get after quality sites
  • Improving comparable sales and traffic
    • Competing better with competitors



  • Restaurant count growing – over 12k
  • Comps down worldwide
  • ARS are stable
    • In US and Canada there has been significant improvement over last few years

 US and Canada

  • 24% increase in US and Canada system ARS to 1.24M from 1.0M in FY2004
    • ARS goal is $1.5M
  • Completed 2 years of net restaurant growth
  • Reimaging program yielding solid ROI
  • Portfolio management
  • Operational efficiencies continue to be incorporated in company system

 Robust product pipeline

  • Flame broiled taste
  • Quality
  • Size at affordable prices

 Continuing growth

  • More competitive hours – 7 of top 10 franchisees operate 24 hour restaurants, company units adopting same policy
  • CRM’s continue to be a focus
  • Development and reimaging
    • Reflags have posed interesting opportunities to expand into new markets
  • Remodels can see 15% in sales uplift
  • Analytics driving operational excellence

 Long Term Financial Targets (unchanged)

  • Comp sales up to 2% or 3%
  • Average annual net restaurant growth of 3% or 4%
  • Average annual revenue growth of 6% to 7%
  • Average annual EBITDA growth of 10% to 12%
  • Average annual EPS growth of 15%



Q: Relationships with franchisees, how did it impact your P&L?

A: Did not impact BKC’s P&L, affected momentum of getting things done. Have executed what was intended but not as quickly as was initially desired.  The company has been on a campaign to be more effective communicating with franchisees.


Q: Impact of a jobless recovery on your business?

A: A jobless recovery makes it a longer term play for BKC, not a shorter term play.  Unemployment rate is very important for BKC.

Come the fall, BKC will be leading with a lot of breakfast activity and coffee products. If the unemployment situation doesn’t continue to improve, it will be a tough 2010, but things seem stable enough right now to do it.


Q: Any indications of economic recovery? How concerned are you with replacing $1 double cheeseburger?

A: Haven’t seen change in industry negative traffic trend that was seen over the past four or five months.  BKC not expecting an enormous amount of improved stability until negative trend changes. 

In terms of dollar double cheeseburger, in April, the buck double will be a single slice of cheese with two patties, supported by advertising. The double cheeseburger will be available for more than $1.  Media weight behind the buck double will hopefully add to the appeal.  Customers like the product with less cheese better…that’s coming in mid to late April.

In testing the buck double for guest appeal, we believe that the traffic impact will not be negative.  Not able to test that in the midst of a higher dollar double cheeseburger, of course, but we are confident that the product will do well.


Q: Accelerating remodel program?

A: Generally speaking, most of the estate is tired, you have to do exterior and interior. We’ve perfected the decision making process of which units to remodel when and at the pace currently being set it would take 10 years. Need to find more capital to accelerate.  Franchisees are not required to do it but they are doing it, they see the returns.

Want to raise the minimal standard for the system also.  The brand five or six years ago did a lot of shabby remodels and that has come home to roost.


Howard Penney

Managing Director

FOMC pandering: Trader Vik Likes It!

Vikram Pandit may or may not know this but execs on the trading floor of Morgan Stanley used to call him “Trader Vik.”  No, that wasn’t a compliment. Eventually Pandit delivered on his nickname’s promise by blowing up his hedge fund, Old Lane.


All that said, with today’s news from Ben Bernanke that American savers will continue to earn ZERO rate of return on their savings accounts while the US Government feeds the pig, now even Trader Vik can make money!


Today, the FOMC has decided to keep interest rates at ZERO for an “exceptional and extended” period of time. This politicization of the short end of the yield curve will continue to feed the Piggy Banker Spread (the spread that Vik’s government owned Citigroup gets to chow down on as they borrow short from the government and lend long to the citizenry).


If you don’t like the conflicts and the compromises associated with the smile on this man’s face, too bad. This is a Washington controlled America and, for now, we have to see this for what it is.


I have immediate term resistance for the pain trade in the SP500 up at 1162; immediate term support is now 1143.



Keith R. McCullough
Chief Executive Officer


FOMC pandering: Trader Vik Likes It!   - Trader Vik

PSS: Let the (WMT) Resets Begin

We’re starting to see broader evidence of Wal-Mart shift its focus away from footwear, which is positive for PSS on the margin. Back in July ’09 we highlighted the emergence of this theme, though evidence has been slow to come. In our ongoing analysis of Wal-Mart and its impact on everything else retail, we’ve been noticing enough tweaks to the assortment recently such that we thought it was time to break out the digital camera. Yes, the pictures below are from only one store, and there can be an endless number of variables impacting that specific store at that specific time on that specific day. But the step up we’ve seen in activity at Wal-Mart to change up its shoe department has been enough such that we think the pictures below tell a directionally accurate story.


When we look at quantifying the impact… Wal*Mart did $305bn in the US last year. About 11% of that was apparel, footwear, and accessories. Only about 100bps-200bps was driven by footwear, which suggests about $5bn annually.


The table below shows the store overlap between Wal-Mart and Payless. A quarter of Payless stores have a Wal*Mart within a mile radius. 43% have a WMT within 5 miles.


Let’s say Wal*Mart scales down footwear to 1% of sales over 3 years as it cycles through its remodel process. That suggests over $2bn is up for grabs. If I take it a step further and assume that 38% is within reach (within a 3-mile radius), then that’s $760mm. If PSS grabs only 10% of that, it would be a 2% comp alone. At a 30% incremental margin, we’re talking $0.23 per share. That’s off a base of $1.28 last year.



PSS: Let the (WMT) Resets Begin - PSS WMT 6 3 10


PSS: Let the (WMT) Resets Begin - PSS WMT 1 3 10


PSS: Let the (WMT) Resets Begin - PSS WMT 2 3 10


PSS: Let the (WMT) Resets Begin - PSS WMT 3 3 10


PSS: Let the (WMT) Resets Begin - PSS WMT 4 3 10


PSS: Let the (WMT) Resets Begin - PSS WMT 5 3 10



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NKE: Tiger Adds to The Mo Mo

Shortly after 11am, it hit the tape that Tiger will be returning to professional golf by playing in The Masters next month.  One can argue that the $0.20ps that the stock jumped since then is in reaction to the news. We’d step back and ask the broader question as to who had the inside information and bought the stock accordingly pushing the stock from $64 to $71?


Regardless, this is good for Nike – from both a business standpoint and as it relates to price momentum. Keep in mind a few things…NKE is one of the few sponsors that did not drop Tiger like a bad habit over the past four months. Did it restructure his agreement to take down up-front risk in the event that he either prolonged his return or fails to perform upon his return? Probably. But they stuck with him. Interestingly, Tiger gear has been selling well as if nothing ever happened, and the golf market overall has definitely shown signs of picking back up after a long bottom. Though public perception is still very touchy at best, they’ll have much more in their back pocket to market him upon his return.


Is it any shocker that this was announced a day before Nike’s EPS? Probably not. In fact, we’d argue that given the 11.4% run in the stock over 4 weeks, it HAS TO pony up some solid numbers on results. The good news is that we think it will. We’re modeling $1.00 vs. the Street at $0.89. The biggest variance is on the top line, where we’re coming in at 8% versus the Street at 3.5%. Much of this is World Cup-related, which we do not think is appropriately accounted for in most models. 


If we’re off anywhere, it would likely be sales coming in 2-3% lighter, with that product showing up as higher inventories – again – due to World Cup. With Keith’s models suggesting that the stock is approaching a near-term overbought line of $71.17, we think that any result close to the consensus would jolt near-term enthusiasm, and give investors a shot at what we believe will be perhaps the best multi-year growth story in consumer/retail.


For our recent Back Book on Nike, please contact .


- Brian McGough



NKE: Tiger Adds to The Mo Mo - NKE 07 10 chart 3



NKE: Tiger Adds to The Mo Mo - NKE 04 07 chart 2



NKE: Tiger Adds to The Mo Mo - NKE 00 04 Chart 1


Will They Pin It? SP500 Levels, Refreshed...

The pain trade in this market will remain up until all overly bearish short sellers are pinned-up at the highs.


Where will those highs be? In the immediate term, my answer is somewhere in the area code of 1161-1163 (see chart below).


What could pin the SP500 up at that line?

  1. The Fed pandering to the carry trade again in their FOMC statement today (or the expectation that they pander prior to the decision).
  2. Continued price momentum supported by TRADE and TREND lines of support at 1111 and 1143, respectively.
  3. Fear of being squeezed.

Fear? Yes, fear can be more powerful than greed. Some pundits have started to say that this market is going up because the mutual fund community is being complacent. I don’t see that in any of our quant models, behavioral surveys, or our daily feedback mechanism (our exclusive network). I do, however, see fear in the short selling community - fear of being squeezed.


Since the Greek freak-out lows of February 8th, the SP500 has had an explosive move to the upside of +9.4%. This came immediately after an -8% drop in the SP500 from January 19th to February 8th. Some hedge funds got whipped around those lines. If you don’t think they fear an SP500 breakout from here, you’ve never really been short a market. Monthly and quarterly performance pressures matter.


My game plan from here is now fairly straightforward. I plan on shorting the SP500 again north of 1161. In anticipation of this potential pinning of the market, I have already proactively cut a lot of losses on the short side. I now have 17 longs and 8 shorts in the Virtual Portfolio versus my long/short ratio being roughly balanced in February.



Keith R. McCullough
Chief Executive Officer


Will They Pin It? SP500 Levels, Refreshed...  - sp12


Macau gaming revenues almost reached HK$7 billion though the middle of March. While slower sequential growth, up 50% for the full month would be a good result.



We think Macau total gaming revenues were just under HK$7 billion through March 15th.  Revenues are on track for a HK$14 billion month which would be an increase of over 50% from March 2009.  This is sequentially slower growth than February (+70%) and January (+63%).  However, HK$14 billion is a very good number.  Note the monthly trends below


MACAU STRENGTH CONTINUES - macau monthly march estimate


Yesterday’s sharp sell-off was driven in part by fear of more regulation ahead of the Macau CEO’s address which ended a few hours ago.  Nothing major was announced, however.  Relief here combined with the strong month-to-date numbers is resulting in the bounce back in the stocks today.


Some may be concerned about Wynn's Cotai development given the Macau CEO's comments about slowing development.  However, in the press conference after his speech, Chui was quoted as saying "Apart from those we have agreed in principle in the past, in construction and those already approved, we will regulate (approval of the building of new casinos) in the future."  This appears to us to be a little less forceful, as it allows for projects that have been approved, as opposed to just development already started, and simply states that new approvals will be regulated, not that they will be prohibited.


The only somewhat disconcerting part of the speech was related to restrictions on foreign labor, which will apparently be tightened.  We don't believe the Macauese government would jeopardize LVS's construction of Lots 5/6 but inadequate labor could delay the project further.

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