Bankruptcy Cycle Continues

Restaurant chains Bennigan’s and Steak & Ale, owned by privately held Metromedia Restaurant Group, filed for Chapter 7 bankruptcy protection yesterday and immediately closed the doors of about 200 restaurants. These closures do not include franchised locations. Yesterday’s bankruptcy filing follows the largest single restaurant bankruptcy earlier this year (Buffets Holdings, Inc.), and as I said before, the cycle is only just beginning as today’s consumption recession combined with increased costs is impacting operators across the industry.
  • Although all casual dining operators will benefit from this reduced capacity, Brinker’s Chili’s restaurants should be the biggest beneficiary as Bennigan’s was a direct competitor within the bar and grill segment. From a geographic exposure standpoint, both Bennigan’s and Steak & Ale’s most penetrated markets overlap with Chili’s locations. Specifically, 23% of Bennigan’s domestic restaurants (includes franchised locations) and 27% of Steak & Ale’s restaurants are in Texas. Chili’s has the most geographic exposure relative to its total number of stores to Texas (accounts for 17% of its restaurant base). Chili’s second biggest state is Florida where 11% of its restaurant base is located relative to Bennigan’s 18% and Steak & Ale’s 21% exposure.
  • Chili’s returns have been hurt recently by its own overly aggressive unit growth and by over capacity in the casual dining segment. EAT management had already taken steps to reverse its declining returns by slowing unit growth plans for FY08, FY09 and FY10. Now, excess capacity within the industry, particularly within the bar and grill segment, is starting to come down.
Restaurant Base Exposure to Bennigan's Most Penetrated States—% of Respective U.S. Restaurants
2008 bankruptcies do not include Bennigan’s and Steak & Ale

KSWS: 2Q Could Be A Good Set Up

Any bad news around KSWS’ 2Q should mask what I think is a solid 2-year margin/cash flow expansion call. This is one to keep on your screen.

Why the 2Q flag? Check out the chart below. Though KSWS has been losing share – it has been at a less severe rate for much of the past 12 months. What I find ironic, however, is that the share position peaked almost to the day of KSWS’ last quarterly conference call – when management presumably saw a light at the end of the tunnel for its business (even though this team never articulates it as such).

Since then, KSWS market share has regressed slightly. My sense is that this is, in part, as the company clears inventory of its more basic product (recall that low performance trend is rolling over) and prepping to get in the performance footwear game with its running shoe in the spring. Am I thrilled that KSWS will go head to head with Nike, Under Armour, New Balance and Asics? Hardly. But the numbers KSWS needs to crank its P&L are a rounding error to the market.

In the meantime, it is beginning to see its easiest revenue, margin, working capital and capex compares in years – at the same time it should start to harvest recent investments.

I like how this is shaping up.
Market share peaked almost to the day of the last conference call. Opportunity?

JNY: Retail Cycle 101

This name is textbook ‘things are less bad.’ But is the investment base in place to make it last?

Why is JNY up 15% today? For starters, JNY beat (lowered expectations) and it is the first time in more quarters than I can count where results did not result in a downward revision. That’s enough for a pop in this tape. But any other positive nuggets I can throw out regarding the quarter can best be summed up in the chart below. For everyone that has seen me put up these convoluted charts with squiggly lines, here a textbook example as to why they matter.

The Y axis represents sales growth less inventory growth. The X axis is the yy change in margin. Upper right (sales outstripping inventories and margins headed up) = good. Lower left (inventories too high, sales slow, and margins down) = bad.

Best in class retailers and brands can stay in that upper right quadrant for years. JNY, on the other hand, has not been there for 2 consecutive quarters since the Clinton administration. No joke. I like the fact that Wes Card (CEO) has taken up spending levels to make up for the sins of his predecessor. Perhaps that buoys brand momentum to a slight degree. But I still think that we need at least $100mm in added brand investment to help JNY regain relevance, and give the company any sense of stability. Unfortunately that $100mm equals about 300bp in margin, and JNY is running at about 5% today. That’s bad where I come from. Stuck between a boulder and a hard place.

Does this matter near-term? Probably not. One of JNY’s problems has been its retail business, where margins have gone from 10% to -5% over 7 years. This quarter went from -2 to +3% margin on a yy basis. This was simply due to controlling inventory and being less promotional. Is this sustainable? I’m not convinced it is. But with inventories being cleaner (which they are), JNY probably has a couple quarters to keep the retail margin expansion going.

If such is the case, and JNY flows this success through to the margin level instead of reinvesting in the emaciated brands, then this name could take a big turn for the worse as we head into ’09.
There's no better tool I can find than this chart for seeing management's effectiveness in triangulating the balance sheet with the P&L in different parts of the cycle. Let me know if you need more deets.

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Charting Oil: Breaking Down - Raise Rates, and Break Its Back

This is THE chart with the sensitive inverse relationship to my last note (rising US interest rates and the US Dollar). Crude Oil is in a bearish "Trade" position under the $127.20 line, and a bullish one above that.

If Bernanke raises rates he can break the back of the futures market, which continues to flag contango in expected prices. I don't see any credible support for crude oil until $102.65. C'mon big Ben, let's get on with it!


(chart courtesy of

Show Me A Stronger US$, I'll Show You A Stronger US Market

Now that Ben Bernanke's Fed has explicitly changed their rhetoric to a hawkish one, we need to see a rate hike. The US Dollar is starting to pick its head out of the mud again, and will be wack-a-moled if Bernanke doesn't deliver on this expectation.

As the US$ has strengthened in the last few weeks, commodities have sold off, and global stock markets have risen. My quantitative models have 72.67 as the critical line that needs to hold. Currently the US$ Index is trading up again today at 73.44. This is the driving factor behind an inflation sensitive stock market.

There is still a lot of hay to bail here. But the momentum "Trade" is finally at the US Dollar's back, rather than in its face.

(chart courtesy of
(chart courtesy of

VIX + Sentiment Math Get Short Term "Trade" Bullish Here...

Volatility (VIX) is trading down another -3.3% here, and if it can close below the 21.53 line, that's bullish, on balance for the US stock market. Conversely, a close and breakout above that line, would be bearish.

Sentiment has turned ragingly negative in recent weeks. If you don't believe me, believe the math. The Institional Investor weekly survey is as lop sided to the bear side of the trade as it has been all year. Bulls are at 30% and Bears ticked up again to 50% this week. The spread here is what I care about. From a contrarian point of view you want to be long the US stock market on a weekly data point like this.