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Barring a couple of names in QSR, volume is slowing.  Regardless, stocks keep going up!


Looking at the table below, it is clear to see which stocks have been performing well: almost all of them.  The most consistent performers over the past few days, from a price and volume perspective, have been PNRA, CMG, RUTH (outside of yesterday), PZZA, and CBRL. 


In terms of commodities, the PNRA story has been helped by declining wheat and corn prices.  It seems that those trends may be reversing lately; we will be monitoring these trends closely.


TALES OF THE TAPE - commodity 4.6


In terms of upgrades/downgrades, there has been plenty of activity in the last 24 hours. 

  • This morning, CMG was upgraded to neutral from underperform. Yesterday the stock was up 2.4% on strong volume.  While CMG, at 12%, has almost twice the short interest of the average QSR stock, it is up 38.6% year-to-date. CMG is trading at 26.4x NTM EPS and 11.7x EV/EBITDA as compared to 8.6x for the QSR group. 
  • Also this morning, SBUX was upgraded to BUY from HOLD.  The stock was flat yesterday. 
  • DRI was upgraded to outperform from neutral.  Yesterday the stock was down on weak volume.
  • CPKI was upgraded to neutral from underperform following a flat day of trading yesterday.
  • Papa John's was upgraded to BUY from HOLD.  The upgrade cites better sales trends and an improved outlook for the price of cheese.


TALES OF THE TAPE - stock 4.6


Howard Penney

Managing Director

R3: Accelerating Sales (and Gas)



    April 7, 2010


    While we’ve seen rising gas prices act as a “tax” on the consumer historically, it appears this relationship isn’t holding as true right now with trends at the pump echoing an acceleration in recent sales trends. 




    This morning we received two additional earnings reports from retailers with a disproportionate number of stores located in rural areas.  Both FDO and TSCO (pre-announcement) shed additional light on what is clearly an accelerating trend in sales and profits.  Without rehashing the subtleties of each P&L, we believe it’s worth taking a step back and asking a simple question.  Why all of a sudden is momentum at retail strengthening, across a broad range of channels, demographics, and product offerings?  Clearly traffic is improving and yes, year over year comparisons have something to do with this.  But two-year trends are also accelerating, which suggests overall demand is truly improving.  Pent-up demand, a slightly improved employment picture (i.e. less fear), and a favorable year over year tax credit environment (especially for those on the lower end of the income spectrum) are all likely contributors to the recent uptick. 


    However, we can’t ignore the other side of the demand equation- gas prices.  While sales have been accelerating over the past few months, gas prices have also been on the rise.  All of sudden, at least in the near-term, it appears that this has had little, if any, impact on consumer demand.  Perhaps the marginally improving employment picture trumps all other factors, but it’s hard to ignore what the impact could be if gas prices continue on the same trajectory as the year progresses.  After all, this is a double tax on the consumer.  First, at the pump and secondly, at the store- where prices are likely to rise as retailers and wholesalers will be passing on cost increases.


    R3: Accelerating Sales (and Gas) - DG FDO and Gas




  • Keep an eye out for online start-up, Fashion Stake. The website allows consumers to directly fund fashion designers after browsing online collections. In return for buying a stake in a collection, customers receive credits for purchasing clothing. According the site’s homepage, the company motto is “democratize fashion”.

  • According to Edison Research, for the first time the internet has surpassed TV as the most “essential” medium. When forced to choose between TV or internet, but not both, 49% of respondents were in favor of internet vs. 48% for TV. Interestingly, in 2001 72% of respondents were in favor of TV vs. 26% for the internet.

  • Crocs recently launched its first TV commercial featuring the company’s proprietary Croslite material and character. The new “Share the Love” campaign focuses on the key attributes of the company’s shoes- feather-light, odor-resistant, and form-to-fit. The new marketing campaign is the first to focus on the brand and its key attributes since the company dissolved its AVP sponsorship.




     R3: Accelerating Sales (and Gas) - Calendar





    Millenials Feel Better, Plan to Buy More Apparel - Despite a 9.7% unemployment rate, the job picture for young adults is showing signs of improving, prompting recession fatigued Millennials (ages 18 to 32) and Generation-Xers (ages 33 to 45) to seek a “survival reward,” such as replacing a worn pair of pants or piece of furniture, said Irma Zandl, president of The Zandl Group. People are starting to say they’re getting good jobs, it’s a marked improvement from the last two years. The job climate and economic environment are not back to the way it was but there is still an “uplifting effect” taking hold on the psyche of some consumers, possibly stirred by the creation of 162,000 jobs last month — the most in three years. According to a Zogby Interactive Survey of 4,218 adults conducted in mid-March for WWD, 13% of the public plans to spend more overall this year than in 2009. About 16% of young adults polled by Zogby International said clothing was gaining importance on their shopping lists, compared with just 6% of American adults in general.  <wwd.com/business-news>


     R3: Accelerating Sales (and Gas) - By the Numbers


    Retail Rents Stabilize/Rise in Manhattan - Retail rents are rising in select Manhattan neighborhoods and space availability is tightening, according to Cushman & Wakefield Inc. Only one of the seven retail Manhattan submarkets, or neighborhoods, tracked by Cushman & Wakefield experienced a quarterly increase in space availability. Four had a decrease and two remained stable. Average asking rents for ground floor space increased in five of the submarkets. In SoHo, asking rents increased $11 compared with the first quarter of 2009 and now average $269 a square foot. Times Square asking $647 from $610 with unchanged availability, Third Ave asking $242 from $235 last year with availability down, Madison Ave ask is cheaper at $827 vs. $834 last year. <wwd.com/business-news>


    British Retail Inflation for March - Overall shop price inflation slowed in March to 1.2% from 1.7% in February. Food inflation slowed marginally to 1.2% in March from 1.3% in February. Non-food inflation slowed to 1.3% in March from 1.9% in February. Food inflation has fallen to its lowest for over three years and overall shop price inflation is the lowest since November. Non-food inflation fell for the first time since VAT returned to 17.5%. Falling shop price inflation is particularly welcome relief for consumers as they face sharp rises in other living costs, such as fuel.  <brc.org.uk>


    US & India Talk Trade - The U.S. and India have clashed over agriculture subsidies within the context of the stalled Doha Round of global trade talks aimed at lowering tariffs and other barriers to trade. The U.S. also asked the WTO to rule on whether some Indian textile and apparel products still qualify for export subsidies. The WTO said last month a range of products have reached a qualifying threshold of 3.25% share of world trade for two consecutive years and would require India to phase out any export subsidies on them. India is a major trading partner for the U.S. and a top 10 supplier of apparel and textiles. The U.S. imported $4.6 billion worth of apparel, textiles and home furnishings from India in 2009.  <wwd.com/business-news>


    India Apparel Exports Fall in January - Indian apparel exports fell by around 14% in January as weak demand still plagues the sector, according to estimates from the Apparel Export Promotion Council (AEPC). <fashionnetasia.com>


     R3: Accelerating Sales (and Gas) - Apparel Imports Table


    US & Brazil Discuss Cotton Subsidies - The U.S. and Brazil reached an agreement Tuesday that will delay sanctions set to start today on millions of dollars of U.S. exports and seek a permanent negotiated resolution in their long-running dispute over cotton subsidies. The WTO authorized Brazil to impose sanctions last September because the U.S. failed to end cotton subsidies the WTO said were in breach of global trade rules. The WTO issued a series of findings between 2005 and 2008 that said U.S. cotton subsidies violated its regulations because they give U.S. growers an unfair advantage by allowing them to sell at a lower price than their competitors. The list of products that would have been hit with retaliatory tariffs included raw cotton, woven fabric, men’s and boys’ cotton pants and shorts, women’s and girls’ cotton pants and shorts, some jewelry and some beauty care categories. The list of goods targeted was valued at $591 million, according to Brazil. <wwd.com/business-news>


    Import Cargo to Grow 8% in April - Import cargo volume at the nation’s major retail container ports is expected to be up 8% in April compared with the same month a year ago, and solid increases are expected to continue through the summer as the U.S. economy improves, according to the monthly Global Port Tracker report released by the National Retail Federation and Hackett Associates. <http://www.sportsonesource.com/>


    Pakistan Textile Export Target to be Missed by $1.5 bn - Pakistan's textile export target of $10.5 bn set for 2009-10 is likely to be missed by $1.5 bn due to yarn shortage, increase in electricity and gas tariff and unscheduled load shedding. <fashionnetasia.com>


    Easter and March Retail Sales - An early Easter might have gotten shoppers into the stores last month, but it was a solid reaction to spring merchandise that got them to amp up their spending in March. Easy year-ago comparisons will also help translate last month’s result into a fruitful beginning to spring for retailers reporting comparable-store sales on Thursday. March 2009 represented the low point of consumer spending. SpendingPulse, an information service provided by MasterCard Advisors that estimates total U.S. retail sales by cash, check or credit card, said specialty apparel sales are expected to be up 5.2% for the month, thanks to strong sales gains of 9.3%, 7% and 4.2% in men’s apparel, footwear and women’s apparel, respectively. Department store sales, however, are anticipated to slip 3.2%. Luxury sales provide a better sign of health and are projected to jump 22.7%. <wwd.com/business-news>


     R3: Accelerating Sales (and Gas) - ICSC Chain Sales Index


    Canadian Sporting Good Company Forzani Sees Mixed Quarterly Results - The Forzani Group Ltd. (FGL) said its net earnings fell 5.4% on a 2.1% decline in revenues for the quarter ended Jan. 31, 2010. The retailer said unseasonably warm weather hurt sales of snowsports gear at Canada’s largest sporting goods retailers during the quarter, but that overall retail system sales were up 14.5% in the first eight weeks of the current quarter. The three largest categories (alpine ski, snowboard and outerwear) accounted for an overall same-store retail system sales decline of 8.1%. <http://www.sportsonesource.com/>


    Snow Sports Market Grew this Season - Snow Sports market sales reached $2.7 bn in February with a 3% gain in dollars sold compared with August through February last season, according to the SIA Retail Audit. Warmer weather in states north of the Mason-Dixon Line, less snow in the Rockies and wetter and colder weather in the south have contributed to shifting sales patterns this season. <http://www.sportsonesource.com/>


    Macy's Marketing Campaign - Macy’s has been serving up fashion advice via a series of “irreverent” celebrity-studded Web videos. The department store has tapped style gurus like Martha Stewart, Donald Trump, Clinton Kelly, and Rachel Roy to guide consumers through real life challenges—like what to wear when meeting your ex-boyfriend for coffee. (Agencies JWT, New York, and Mediaedge:cia handled creative and media buying duties, respectively.) The goal, said Martine Reardon, Macy’s marketing evp, is to give consumers the confidence and style tips they need to “put it all together.” The effort, she said, stemmed from research that showed consumers wanted more than just “fashion advice from Macy’s.”  <brandweek.com>


    PSUN Names Senior VP of Retail - Pacific Sunwear of California Inc. has named Paula Lentini as senior vice president of retail to oversee the company’s almost 900 stores. The position had been vacant since last year. Lentini, former vice president of retail sales and operations for T-Mobile USA, will be responsible for operations, real estate, construction and loss prevention. Lentini also worked at Gap Inc., where she spent seven years as a zone vice president, as well as Victoria’s Secret Stores, Ann Taylor and Macy’s. <wwd.com/business-news>


    Facebook Users Influence Their Friends’ Shopping - 68% of consumers with Facebook accounts say a positive referral from a Facebook friend would make them more likely to buy from or visit a retailer, research and consulting firm Morpace Inc says in new study. <http://www.internetretailer.com/>


    Target Buy Back - Target said on Tuesday that a subsidiary is buying back $900 mm in notes. The indirect wholly owned subsidiary is Target Receivables Corp., whose Delaware statutory trust called Target Credit Card Owner Trust 2005-1 issued floating rate Class A asset-backed notes. The trust is offering to buy back the notes, which have a principal amount of $900 million. <wwd.com/business-news>





The S&P 500 finished modestly higher on Tuesday.  The MACRO data points are few and far between ahead of earnings season next week and the issues that Greece faces are becoming less of a MACRO concern for the markets. 


Leading the market higher yesterday was the RISK trade, replacing the REFLATION trade of the past two days.  Yesterday the VIX declined 4.6% and continues to be broken on all three durations.  The Hedgeye Risk Management models have levels for the Volatility Index (VIX) at: buy TRADE (16.23) and sell TRADE (17.74).  We are currently long the VXX.


Along that theme, the Financials were the best performing sector yesterday.  Leading the XLF higher were the banks, with the BKX +2.4%; up for a fourth straight day.  The KBW regional index was up 3.4%, up only three straight days.  The minutes from the FOMC meeting provided support to the XLF, as there was nothing in the release that hinted at any shift in the central bank's thinking that interest rates will need to remain low for an "extended and exceptional" period.


With the dollar up yesterday and the CRB index down, both the materials and energy sectors were fairly resilient, especially in light of the outperformance over the past week.   The Dollar index closed at 81.387, up 0.36% on the day.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (80.70) and sell TRADE (82.24).


Yesterday Oil climbed above $87 for the first time since October 2008 on accelerating momentum in the global economy.  The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (83.56) and Sell TRADE (88.22). 


In early trading, gold is unchanged as it's trading near a one-month high, and looking to head higher as concern about Europe’s recovery hinders the RISK trade.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,116) and Sell TRADE (1,143).


Copper is trading at its highest level since August 2008 and is slightly lower today on a stronger dollar.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.53) and Sell TRADE (3.70).


In early trading, equity futures are trading modestly below fair value in a continuation to yesterday's late afternoon pullback.  As we look at today’s set up the range for the S&P 500 is 17 points or 1.3% (1,174) downside and 0.1% (1,191) upside. 


Today's MACRO highlights are:

  • MBA Mortgage applications - Refis drop 17% w/w
  • DOE Crude Oil Inventories
  • February consumer credit


Howard Penney

Managing Director













Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.51%
  • SHORT SIGNALS 78.32%

Momentum and Hope

“Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.”

 -George Soros


Price momentum is a powerful force and our decision to be short the S&P 500 stands in defiance of current price momentum and the trends in the fundamentals.  As we said yesterday, fear has been replaced by hope, and the arguments for being bullish are now worn-out and vulnerable to a deceleration in the momentum.


With the S&P trading at 1189, up 75% from the March 2009 lows, is market price momentum discounting the obvious that the economy has “recovered”?  Today, betting on the unexpected reflects a seemingly more conservative outlook that the economy is not yet out of the woods as there are some trends that can’t be maintained or policy makers will have serious issues to deal with.     


Take for example the recent ISM numbers.  The recent push higher in the S&P 500 was helped by the ISM index, which rose 3.1 points last month to 59.6. The March reading was just 1.8 points less than its previous high, reached in May 2004, and 1.5 points above a high in November 1999.  Are things so white hot that we will continue to see an acceleration in April?


How about the price of oil?!  Yesterday, oil prices bid up to an 18-month high and this is a positive for the REFLATION trade because global demand for oil will strengthen as the economy improves.  Wasn’t it in 2008 that oil was on its way to $140, forcing consumers to cut back on driving and eating out because it cost more to fill up their tanks?  Aren’t higher oil prices inflationary and a tax on the economy, rather than a stimulant?


I guess none of this matters because employment in March grew by the most in three years, representing a turning point for the labor market that will help broaden the U.S. economy. 


None of this matters to Ben S. Bernanke & Co. because he is still looking for “evidence of a sustained rebound” and his staffers reduced their 2010 and 2011 inflation forecasts excluding food and energy!  I know I need to skip a meal now and then, but I still need to drive to work.


With those thoughts in mind and knowing that the S&P is at 1189, up 6.7% year-to-date and up 46% over the past 12 months:

  • Fear has been replaced by hope.
  • In the upcoming earnings season, EPS surprises are now the “norm” and “expected” and no longer a “surprise.”
  • The Financials are in a bullish formation because the government can’t afford to raise rates.
  • The rally is now about accelerating momentum in the economy.
  • Copper and oil prices are up 88% and 37% year-over-year, respectively, and there is no inflation according to FED officials.

We are also reminded today that the poster child for everything leveraged, Greece, is down 1.4% on the news that it will revise its 2009 budget deficit to around 12.9% of GDP from 12.7%.  But don’t worry, even with the downward revision, Greece will achieve its target to cut the deficit to 8.7% this year and there is no need for additional budget cutting measures.   


The hard part to understand is what represents the unexpected.  As I sit here this morning, it seems that the unexpected will be driven by the fact that policy makers in Washington can’t see (or don’t want to see) what the consumer feels.


Function in Disaster; Finish in style


Howard Penney

Managing Director


Momentum and Hope - HE Inflation Index EL


The UK’s got Talent?

“From now until polling day I will travel the length and breadth of Britain with one clear message: Britain is now on the way to economic recovery. And now is not the time to put it at risk.”

–Gordon Brown


The quote above comes from the Labour Party’s official website, and is noteworthy insomuch as it appears Brown’s only real chance of winning the General Election (which he called today for May 6th) is to convince the people to stay the course his government has set out to revive the ailing economy. In contrast to Brown is the much younger conservative David Cameron who, like US President Obama, is promising a change of guard and policy to fix what he’s named “broken Britain”. 


While Brown and Cameron don’t differ substantially over social issues, on the economic front Cameron has firmly stated that the Tories would cut spending now to address the country’s record budget deficit and federal debt, while Brown and Co. say they won’t reduce spending until at least 2011 to prevent a “double-dip” recession. Brown has anchored his call on the economic improvement he’s seen in recent months, noting the technical end of recession with an upward revision of GDP to 0.4% in Q4 quarter-over-quarter (a “victory” of sorts after the UK lagged peers like Germany and France who saw quarterly GDP expansion in Q2 ’09), unemployment holding steady around 7.8% over the last months (ILO), and CPI that has abated to 3% Y/Y (target = 2%).  


Suffice it to say, Brown’s economic creds don’t stack up to “victory” in our book, but maybe stale is the new normal.


Already political experts forecast the strong possibility of a hung parliament or one that lacks a majority, in which case Brown’s best hope would likely be to form a coalition (last seen in 1964) with Nick Clegg and the Liberal Democrats.  As Brown and Cameron ramp up their respective campaign tours, recent polls suggest inconclusive results:


The Sun/YouGov Poll sees the Tories leading Labour with a 10% spread, (or 41% to 31%), an increase over the last weeks, while the more liberal Guardian/ICM Survey shows the Conservatives with a 4% lead over Labour, or 37% to 33%, with Labour enjoying a forward push over the past week.


In the coming days we’ll have more out on the implications of this election. For now, the UK has not yet voted!


Matthew Hedrick



The UK’s got Talent? - Cameron and Brown



IGT's declining slot ship share has been a major topic of discussion for some time. Less talked about is participation revenue share, and how much more room there is for IGT to fall.



A frequently asked question in this space is whether IGT can maintain its severely depleted ship share, now hovering around 35%.  A more important question may be how IGT is going to maintain its participation revenue share of 65% among the Big Three (it's probably around 60% in total)?  The answer is probably the same as it was for ship share 6 years ago when it was 60%:  it won’t.  What is amazing is that it was actually 90% six years ago.  Certainly, IGT's new participation games seem to be getting warm reception.  However, holding participation share significantly above its ship share may be difficult to maintain over the long-term.  See the chart below and note IGT’s steady decline that doesn’t look like it will abate. 


PARTICIPATION SHARE UP FOR GRABS? - Participation Games  revenue 6


Due to its superior content, WMS is the most likely thief of IGT's participation share.  Moreover, up until now, WMS hasn't participated in the Class II market which will boost their market share going forward.  BYI could also be in a solid position since IGT is overly reliant on the Wheel games (See our 11/27/09 post, HOW LONG WILL THE WHEEL KEEP TURNING?) and BYI has developed a whole new wheel product line since the IGT's wheel patent was ruled invalid.  However, our long-term bet would remain with WMS.

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