Come On Into The Water

“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

-John Maynard Keynes 


You’d think with all the Keynesian government people running the world today that they might from time to time consider some of Keynes thoughts about inflation. What you’d think a politician should do and what they actually do are often two different things. It’s sad; it’s unfortunate; and it’s all part of the Bubble in Politics.


If you combine a Big Bailout Keynesian spender with local inflation of the borrowing cost of money, you get a politician who has a serious problem. After all, politics are local. Finally, that’s what the Prime Minister of Greece is admitting in front of YouTube cameras worldwide this morning. He is tapping the EU and IMF for immediate help. In the Kubler-Ross Model of Five Stages of Grief, they call this the “Acceptance” stage.


My friend Todd Harrison, who runs Minyanville, has been using The Five Stages of Grief as a metaphor for the storytelling your local politicians and investment bankers alike gave you in May of 2008. It’s two years later and it’s almost May again. Like the Bear Stearns credit default swaps that were blowing out to the upside back then, politicians and levered long only managers alike want you to believe that Greece is just a “one-off event.”


This morning, Greece’s PM George Papandreou will remind the world of a long standing saying that we Hedgeyes have here in New Haven, CT: markets don’t lie; politicians do. Yesterday we saw credit default swaps in Greece rocket higher by 158 basis points to 644, and this morning you are seeing yields on 10-year Greek bonds spike to over 9%, which is a massive spread of 575 basis points relative to German bunds of the same duration.


No matter what European and Western politicians tell you about short term resolve, we want to remind you that these are the very early innings of a long and protracted sovereign debt default cycle. Borrowing an old Goldman 2007 saying, “it’s going to be global this time”, indeed.


In the face of attempting to fund long term debt obligations with marked-to-model short term government paper, we are also seeing global spikes in inflation. Yes, I realize that every portfolio manager in America who bought the 2007 top, crashed, then sold the 2009 low, wants to tell you that your 401k is still 30-40% underwater because we are going to “double dip.” I guess all I have to say about that is swim in these incompetent Street macro forecasting waters at your own risk. As Quint said in Jaws, “The cage goes into the water... you go into the water... the shark is in the water...”


My favorite central banker in the world sees these waters for what they are – dangerous. This morning, this is what Glenn Stevens at the Reserve Bank of Australia had to say about monetary policy: “Our task is now to manage a new economic upswing… this will be just as challenging, in its own way, as managing the downturn.”


Interestingly, this global macro man made this comment at the University of Southern Queensland, in Toowoomba, Australia. Maybe that’s how far away you need to be from the Greenspan Groupthink ideologies of Washington, DC to have read South Korea’s announcement for a +25% price hike for hot rolled coil (steel prices) by May 3rd for what it is – inflationary.


South Korea’s Posco is Asia’s 3rd largest steelmaker and they, like most manufacturers, must mark its prices to market so that they can earn a spread. In the good ole USA, Ben Bernanke has a different ideology on that. He price fixes the rate of return on my savings account at ZERO percent and makes that the marked-to-model borrowing cost of his cronies in the US banking system. Nice!


Bernanke continues to miss the inflation that he missed in 2008 that absolutely crushed the US Consumer. He is a good natured historian, so we can’t get upset about this anymore. When it comes to being a proactive risk manager of global interconnectedness, he is simply incompetent.


It’s actually quite amusing to watch some of the sell-side analysts who work for the banks that get paid the Piggy Banker Spread tag along with Bernanke’s compromised and conflicted message that he sees no inflation.


Yesterday’s Producer Price Index (PPI) report gives us one more chance to reiterate one of our three Q2 Macro themes - Inflation’s V-Bottom. In an intraday note to our macro subscribers yesterday, this is what Howard Penney wrote about the report:


“Stagnating consumer confidence figures suggest that most consumers don’t trust the direction the country is going in.  We are in agreement with that sentiment and think that most politicians lie and Washington’s free money man, Ben Bernanke, can’t see inflation.  Or, at least, he doesn’t want to -- until he has to.


The PPI rose 6% year-over-year in March and was up 0.7% sequentially - more that the 0.5% consensus estimate on Bloomberg.  The PPI report recorded its largest annual gain since September 2008 and was up on the back of a 2.4% rise in food prices, its sixth straight monthly increase. The increase can be attributed to a 49.3% increase in prices for fresh and dry vegetables (meats and eggs also contributed to the increase in prices for finished consumer foods.)”


Now, we understand that Captain Sell-Sider doesn’t get paid as fat a margin on that Piggy Banker Spread if Ben Bernanke raise interest rates. That’s the joke about this entire inflation story. The stock market inflates every other day and “by a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”


If you are waking up in America this morning, and standing in the food stamp line like 11% of your countrymen, just look on the bright side. At least this isn’t Greece, yet… “come on into the water” and buy yourself some government paper.


My immediate term lines of support and resistance for the SP500 are now 1203 and 1214, respectively.


Best of luck out there today.



Come On Into The Water - vbottom



The Macau Metro Monitor, April 23rd, 2010



DSEC reported  the number of visitor and non-resident arrivals totaled 2,565,038 in March 2010. Visitors from Mainland China grew by 8.2% YoY to 1,057,395 (52.6% of total visitor arrivals), with 421,704 travelling to Macao under the Individual Visit Scheme, down by 5.8% from March 2009 (447,465).


The pattern of consolidation continues.  Down in the morning and up in the afternoon has been the pattern and it’s been most constructive with the Russell 2000 hitting a new high yesterday.  European sovereign concerns, some high-profile earnings disappointments in Technology (XLK) and Healthcare (XLV), along with lingering uncertainty surrounding a looming financial regulatory overhaul were the major headwinds. 


On the MACRO front, Greek funding concerns seemed to offer a more meaningful headwind for the risk trade early on.  Now Greece has formally called for the activation of a financial lifeline of as much as $60 billion in an unprecedented test of the euro’s stability and European political will.  Yesterday, an EU report showed that Greece's 2009 public deficit widened to 13.6% from the previous estimate of 12.7%, and could be revised even higher. In addition, Moody's downgraded Greece's sovereign debt to A3, and put it on review for a further possible downgrade.


Also on the MACRO front, housing-leveraged names outperformed again with the XHB up 3.8% yesterday and 7.9% over the past four days.  The economic calendar was the big driver of the move as existing home sales rose 6.8% month-over-month in March to a 5.35M annualized rate. The improvement in March helped reverse the declines seen in the prior two months. While the inventory of homes for sale rose 1.5% to 3.58M, supply still fell to 8 months from 8.5 months in February.


Lastly on the MACRO front, jobless claims for the most recent week, released yesterday, dropped 24,000 to 456,000 from 480.000 (revised down 4,000) in the prior week. This caused the rolling 4-week average to actually increase by 3k to 459.5k from 456.8k.


As our Financials analyst, Josh Steiner, commented yesterday “We hate to be the ones to take away the punchbowl, but consider this. As the charts below show, at 456,000, claims are at the same level they were at on 11/28/09 (457,000). In other words, claims have gone nowhere in almost five months. Compare this with the colossal improvement in claims from April 2009 through November 2009. In stark contrast to recent claims trends, the XLF has barreled higher some 17% over the last 4.5 months, with high-beta Financials rising by multiples of this.”


The broadest measure of support for the RESILIENCE trade can be seen in the consumer related sectors.  Yesterday the Consumer Discretionary (XLY) was the best performing sector closing up 1.8% on the day.  Over the past month, the XLY is also the best performing sector - up 8.9% versus the S&P 500 up 3.7%.   Some of the more upbeat results recently came out of the consumer discretionary space (NFLX +15.3%, CMG +14.2%, SBUX +7.3%, MAR +6.2%), while housing-leveraged names extended their rally on the back of a rebound in March existing home sales.  We took advantage of the consumer melt up and made a few sales.


SHORTING CMG - Now this is a world class short squeeze! Howard Penney thinks that headwinds start to develop in the quarterly earnings in the next 3-6 months. We'll short it for the immediate term TRADE up here. KM


SHORTING XLY - Today is another capitulation day for the short the consumer crowd. We are long names like SBUX, NKE, and FL, so we understand the pain some of the shorts are feeling. We'll hedge their fears up here, for a TRADE. KM


BUYING CIT - Josh Steiner and I have been waiting for the stock to correct and now it has. Josh has come full circle on this name as any analyst with an objective process should. KM


SELLING PSS - While McGough still likes the long term TAIL for PSS, it’s simply overbought here. We'll sell high and look to buy it back on a down day. KM


SELLING WFMI - We'd like to thank JPM for making a call on this the day after we got long. Levine likes their call, and I'll sell into it here. KM


The Financials (XLF) outperformed yesterday, with credit takeaways from the regional banks helping to underpin a positive sentiment.  In addition, overall takeaways from 1Q earnings seemed fairly consistent with the trends seen thus far during earnings season, including declining provisions and NCOs, slowing NPA formation and more upbeat management commentary.


The Chinese market continues to weaken of late, down 0.53% last night, and is now down 8.96% year-to-date.  The weakness in China and a stronger dollar has slowed the REFLATION trade.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy Trade (80.96) and sell Trade (81.70).  We have no position in the VIX currently and it remains broken on all three Hedgeye durations.  The Hedgeye Risk Management models have levels for the VIX is: buy Trade (14.65) and sell Trade (16.85). 


Yesterday, Healthcare (XLV) was the worst performing sector for a second day in a row.  The sector has been dragged down over the last two days on concerns that the impact of healthcare reform has been bigger than expected for the companies that have reported thus far. Yesterday, BAX declined 13.3% as it became the latest company to lower guidance on healthcare reform, though the company also cited continued plasma market pressures.


Oil is trading above $84 after reports that Greece will request financial aid.  The Hedgeye Risk Management models have levels for the OIL is: buy Trade (83.74) and sell Trade (87.14). 


In early trading Gold may extend losses tracking a firm dollar overseas?  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,130) and Sell Trade (1,163).


In early trading, copper is trading slightly higher on the bullish news from Germany.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.51) and Sell Trade (3.63).


In early trading, equity futures are trading mixed to fair value having pared earlier losses as Greece formally asks for financial help from the EU as it tries to solve its acute funding needs.  As we look at today’s set up, the range for the S&P 500 is 37 points or 0.4% (1,203) downside and 0.5% (1,214) upside. 


Today’s MACRO calendar:

  • Mar Durable Goods
  • Mar New Home Sales
  • G20 meets in Washington to discuss global economy

Howard Penney

Managing Director














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IGT was probably good enough. We'll have more on the quarter soon. For now, here are our "notes" from the release and transcript.


"Our second quarter results demonstrate real sequential progress at IGT.  An improvement in replacement units shipped, an increase in gaming operations yields and a decline in SG&A all reflect IGT's continued efforts to navigate our business through an operating environment which remains challenging."

- CEO Patti Hart



  • Gaming operations "revenues decreased primarily due to a lower installed base and the continued shift toward lower-yielding machines. Approximately $5.0 million of the decrease in revenues in the current quarter was attributed to property closures and the reduction of electronic charitable bingo terminals being operated in Alabama."
  • Reduced expenses, primarily depreciation and royalties, positively impacted [gaming operations] gross margins, which improved to 62% from 59% in the same quarter last year
  • Product revenues: North America revenues declines were largely driven by fewer new openings. International revenues increased 65% for the quarter, primarily due to the opening of Resorts World Sentosa in Singapore, improved sales in Europe, and favorable foreign currency exchange. Consolidated gross margin on product sales for the quarter was 46% compared to 48% in the prior year quarter, primarily due to higher obsolescence, including write-downs related to the closure of our Japan operations.
    • Excluding the write-down, international margins would have been 45% vs. 43%
  • As of March 31, 2010, IGT had approximately $85.5 million in development financing notes, $9.2 million in fixed assets, and $7.2 million in accounts receivables associated with their customers in Alabama.


  • Gaming operations was $51.70 average yield
  • Product sales:
    • Domestic shipments: replacements were 4,100. They are encouraged by the uptick in replacement demand
    • Increase in MLD: 51% of NA shipments in the quarter and led to higher prices, expect MLD's to continue to increase as a % of total mix
    • International benefited from increases in systems revenue for non-box sales
    • Going forward they expect 48-50% product sale margins
  • Operating expenses:
    • Excluding one time charges, their operating margins would have been 24% vs. 17% last year
    • SG&A declined 12% excluding bad debt, due to lower legal and compliance fees
      • no more BYI lawsuits
      • Still guiding to $95-100MM
    • Total D&A was $58MM - including game operations. The decrease was due to lower D&A on their WAP and Mexico games.  It should increase as they refresh their install base
    • $30MM of non-cash interest or $0.06 for FY2010 and $0.08 for FY2011
    • Tax rate was impacted by one time items - would have been 38%.  Going forward expect 37-39% tax rate
  • Balance sheet
    • Made a lot of progress with their WC cash flow
    • Saw their lowest inventory balance in 30 quarters (although i bet part of that is just due to low volumes)
  • Capex was $63MM this quarter.  Guidance of $65-75MM of Capex, although they continue to trend at the lower end of that range
  • Alabama bill to vote on electronic bingo games was not passed in the House
  • Gaming operations yields increased sequentially (as it should seasonally).  Mega Jackpots yields increased 11% sequentially.  Deployed 149 Amazing Race games and 93 Top Dollar games
  • New Products:
    • Wheel of Fortune - new center stage game, and Wheel of Fortune multi-play and WoF secret spins is coming out later this year
    • SB window solution for legacy games for 8960 footprint
    • Released 21conversion games for their legacy spinning reels
    • Sold 4017units under the Buy 1 AVP get 2 conversion kits program ("Dynamix" aka buy an AVP game and get 2 free conversion kits for other games)
  • Have 3,200 games in their backlog (participation), 2153 of which are for their top 3 games (Sex in the City, Amazing Race and Top Dollar)
  • Are encouraged by the performance of SB at Aria
    • Have had a number of successful trials internationals
    • Are in negotiations on 2 NA opportunities and several other Tier one opportunities
      • Cosmo?
    • Have closed 3 new advantage customers and are in talks with 5 more
  • Remain extremely focused on FCF generation
  • Central system provider for IL will be announced shortly. Expect to start shipping in the first quarter of FY2011
    • Expect a market of 35,000-40,000 units ( we expect a smaller market)
  • Remain cautiously optimistic to increased operator budgets allocated to slots
  • Adjusted their guidance to reflect risk of losing Alabama - new guidance is $0.77-$0.85 cents from $0.75-$0.85


  • Market share? 35-40% on replacements based on their internal estimates
  • Excluding Alabama, what would yields have been?
    • Saw a seasonal uptick but attribute part of that to their new products - Sex in the City and Amazing Race and also saw that in the WAP product
    • I personally think that looking at yields sequentially is not useful due to seasonality
    • And yes Alabama positively impacted yields since those games do about $24/day
  • Some of their backlog is due to jurisdictional approval of the games and some of that is due to waiting for a customer delivery date
  • Domestic ASP of $14.3k - due to Dynamix package (ie discounting)
    • Special pricing is ongoing - was initially through end of Feb and was extended by 3 months
    • Competitors are not responding with comparable deals
  • SG&A? They are budgeting for more but it's been coming in lower because of the variable compensation component
  • Customers want to replace units but it's a capital budget issue. They are focusing on how to help customers refresh their older games within their limited capital budgets. They are also focused on placing their new Jackpot games given the budget constraints
    • It's a strategic move to keep floor share
  • Italy- timing seems to have moved out given the multiple systems providers. Think that there may be shipments by the end of the calendar year.
  • "Other expense": Interest expense was $39MM, $1MM of other income, $15.7MM of interest income
  • They got 24-25% of Marina Bay Sands shipments
  • What will conversion kits sales do if replacements come back next year?
    • Unclear...maybe on legacy units.
  • Don't know when the entire floor of Aria will be SB - no hard stop date, expect by the end of IGT's FY year (Sept 2010)


CAKE reported stronger than expected earnings of $0.31 per share versus the street’s $0.25 per share estimate and management’s guidance of $0.23-$0.25 per share.  Same-store sales turned positive in the quarter at both Cheesecake Factory and the Grand Lux Café with blended same-store sales coming in +2.8% (better than management’s guidance of flat to +1%, including a 1% expected benefit from increased gift card redemptions).  This better comparable sales result implies a 370 bp acceleration in sequential 2-year average trends from the prior quarter, which the company attributed to continued improvements in traffic trends.  Operating margin improved about 250 bps YOY during the quarter.


Management does not provide guidance until the conference call, but based on these better than expected results, it would seem that the current full-year outlook for $1.16-$1.24 per share in earnings and -1% to flat same-store sales growth is going higher.  Based on the 1Q10 earnings beat, we would expect FY10 EPS guidance to move to at least $1.22-$1.30 (the street is already at $1.27).


The stock is initially indicating lower….Remember when less bad was good.  Based on 1Q10 earnings to date, the new question is how good is good?



Howard Penney

Managing Director


Keith just shorted CMG in the portfolio.  Read on for his quantitative levels and a note outlining my thoughts on the name.


The chart below shows Keith's quantitative view on CMG at its closing price. 




Chipotle joined the party after the close yesterday.  The outlook for the company is strong and price action is reflecting that.  Longer term, there are many factors to consider.


Yesterday’s earnings were, as is the standard this quarter, above expectations for Chipotle.  The comparable sales increase for 1Q of +4.3% was mainly driven by traffic; there has been no price taken in the past twelve months.  Looking at the top-line, the outlook is strong.  On a year-over-year basis, the next few quarters should not be difficult for sales and management said as much on the earnings call, raising their guidance for comparable store sales for the year, “based on improved traffic trends, we’re raising our comp guidance from flat to an expected comp increase of mid single-digits for the full year.”




What will really be interesting will be how margins play out going forward.  Specifically, regarding commodity inflation, management stated that inflation outlook for the year is relatively benign and the company only has a few small items contracted for the remainder of the year such as rice, soy oil, corn, and tortillas.  Historically the cheese has been locked in but, in line with the company’s high standards for ingredients, it is now moving supply to more pasture-raised dairy.   The spot market in cheese was also, to management, “more attractive”.  Judging by data from the Bureau of Labor Statistics, the outlook for PPI index for cheese is less-than-benign.  At current levels, year-over-year inflation in PPI for “Natural, processed, and imitation cheese” would be 7.4% year-over-year, on average, over the next six months.  The move by CMG to buy on the spot market increases the potential for quarter-to-quarter volatility. 


In terms of the interaction between grain prices and margins, the chart below shows Restaurant Operating Margins, the CRB Grains Futures Sub-Index, and the CRB Livestock Futures Sub Index.  It is clear that the deflationary period of late 2008 and 2009 has helped Chipotle to achieve a higher level of operating margin.  In the past quarter, the uptick in sales clearly aided leverage over fixed costs.  Whether the company can prudently manage costs in the inflationary periods that we believe are ahead, will be a highly pertinent factor in the intermediate term.




In terms of Return on Incremental Invested Capital, Chipotle is at elevated levels.  As they continue into new markets, geographies, and different types of stores, it will also be important to monitor this metric.








Proud that during the toughest times, company has maintained standards and service.  As the economy improves, more people visiting Chipotle

  • First European restaurant is opening in London
  • Found good local ingredients
  • Taking a fresh look at many aspects of the brand

New advertising

  • Pointing out where CMG’s food comes from
  • High quality, building awareness will build loyalty

One area of focus is the team

  • High performing people culture
    • Difficult to articulate but clear that the culture is a factor in driving sales, margins, earnings
    • Hiring elite managers and providing incentives for managers to perform and reach “restauranteur” level
    • Helping managers understand their role in the overall vision in changing the way people think about fast food
    • Special people culture and people are helping the company achieve the goal



New units

  • 700k average development cost for 5 new untis this quarter
  • They are performing well initially
  • On par with traditional new restaurants despite lower opening and investment costs
  • New “A” model units have appeal for CMG
    • Same experience
    • Lower costs

“A” model

  • Providing the best customer experience possible
  • Growing CMG responsibly
  • Increasing shareholder value

1Q results

  • Tough consumer environment is improving somewhat
  • Efforts have paid off, new and existing customers coming back more frequently
  • Unemployment still high, cautious for 2010
  • We won’t stray from strategy
    • People
    • Quality
    • Growing
    • Did all this while strengthening business model


Highlights for quarter

  • Revenue increased 15.6% to $409.7m
  • Diluted EPS of $1.19 (vs $0.96 est)
  • Comp store sales increased 4.3%
  • Restaurant level operating margin was 26.1%
    • Increase of 260 bps
    • Labor efficiencies and comps drove margin expansion
    • Food costs dropped 80 bps
      • Rice, avocados, cheese
      • Net income was $37.8 million, increase of 49.1%
      • Diluted earnings per share was $1.19, increase of 52.6%
      • Other operating costs decreased
        • Lower promotional and insurance expenses
        • G&A declined due in part to increase in stock based comp
        • Opening 20 new restaurants in quarter



  • Raising guidance for comps from flat to up mid-single digit
  • 2H food inflation
    • Increased commodity costs and consumer demand
    • Little or no labor leverage going further
    • Marketing at 1.8% for the full year
    • No G&A leverage for the rest of 2010
      • Holding conference…22m for 2010
      • Opening 120-130 new units in 2010. 25% of those will be “A” models
      • Better positioned than ever to add to shareholder value




Q: Store productivity …thoughput in busier markets…can you update us on throughput?


A: We took our eye off this ball over the past couple of years.  Throughput fell off coming into the recession.  TCs were lower. Especially at peak hours, less business customers at lunch.  They fell more than they should have, though.  Over the past couple of years we’ve scheduled better, labor-wise. 



Q: Can you talk about comps through quarter and this present quarter so far?


A: In February we were starting to see momentum building in traffic but weather hit that trend in traffic turning.  We’re cautious with guidance because this is a new found trend, unemployment is still high, and consumer confidence has improved but not that much.  What we saw in March has continued into April.

Once weather is bad we get a couple of over performance for a couple of days when it clears up so we don’t think weather was overly material.



Q: Will commodity inflation in 2H make you consider taking pricing?


A: Seems manageable based on what we know today.  Not anticipating taking any price. Seeing food inflation in low single digit range.  For the year, wouldn’t expect menu price increases.  If things change, we can, but won’t rush.



Q: Growth outlook?


A: in terms of development outlook, two years ago, 70% of restaurants were new developments.  Last year it fell off and now it’s around a third.  No pick up in new developments yet. There is a substantial lead time.  The “A” model strategy tends to go into tier 2 locations and existing real estate.  We’re feeling positive about the “A” model strategy.  Looking to find as many good locations as we can in 2011 and beyond.  This year after the 3Q release we’ll have more concrete details on 2011 unit growth.



Q: Anything in human resources that would make you hesitate in the growth? Or is it real estate?


A: HR is not a problem.  We have a good ratio of leaders to stores. Restauranteur growth has been steady. 



Q: What kind of competition are you seeing in premium convenient segment and where are you taking market from?


A: It seems like all the news has been positive recently. Seems like consumer is out spending again.  We did the best we could while consumers were more timid, and made sure they had the best experience possible. 



Q: London team set up?


A: It will be consistent with how it was done in Toronto.  Restaurant employees are the only people working there…in London there will be a restauranteur opening the restaurant.  There will be two other restauranteurs at the same level that will help with sourcing, hiring, training.  That’s unusual but given the success of Toronto, we feel that it is the way forward in London.  Germany and France are on longer term radar screen.  Sending more talent to London initially.  We think it will be easier to find natural food in Europe – there is no RBGH diary in Europe, whereas in the US we have to look for food with integrity. 


Sourcing…everything will be cooked from scratch in that restaurant.  Going to be able to buy from small suppliers if needed. 


The design in London was approached as a chance to do something new – quite like the new ones in NYC. 



Q: Clarify marking spend and let us know how broad it will be. How many markets will use radio?


A: Rolling out in 30 major markets.  About half of those will have a strong campaign.  Marking came in at 1.1% for quarter because new marketing campaign is being rolled out now.  Should see marketing budget at 1.75% for year.  Marketing now is radio, billboards…radio just started so don’t know what the effect is as yet.  Marketing is designed to highlight food with integrity but making message clearer to raise awareness of food with awareness and taste.



Q: Kids’ menu?


A: rolled out in some markets…plan on rolling out the rest of the country throughout the year. June 1st will see another tranche.  The teams need to be trained adequately.  2% to 3% of transactions are for kids in the markets so far, without any marketing so far, it has ticked up.  Kids menu is priced slightly higher.



Q: Is some of that business incremental?


A: That’s tricky to see right now.



Q: What is your read on restaurant margin differential between “A” model and traditional?


A: It’s really early, we don’t know what the difference would be.  If you’re talking about comparable volume, they have opened at typical volume.  IF that continues, “A” models will be higher for sure.  Too early to tell at this point.  Sometime next year we’ll being to open “A” models in new and developing markets.  We don’t like new market margins for traditional units.  We anticipate “A” models performing better in this respect in new and developing markets.



Q: How do we stand on development of the new units? Backend weighted? Can you tell us where the 25% of “A” models in existing markets will be going in?


A: 120 to 130 this year. Heavily weighted towards 2H.  “A” models will be opening throughout that time. 4 next quarter and 12 in the next, 8 in the next, perhaps.   They’re going into proven markets…where we’ve been for a long time.  Most markets are proven markets.  Denver, DC, Dallas, Houston, Chicago, Phoenix…reduced risk of not having success.



Q: Marketing expense…1.8% of sales is for full year…is that evenly going to be expense now for quarters or did 2Q have a few weeks where it wasn’t jacked up?


A: Can’t commit to it being even for the remainder. Remaining flexible.  If it were even it would be around 2%. 



Q: Average Check?


A: Check was stable.  It was perhaps slightly up.  Nothing material.  Driven by the group size being a little bigger. More group sales, more fax orders, more online. Generally higher check. 



Q: Marketing…a year ago the new menu test…is any of the new advertising spend aimed towards educating the guest or is that for the restauranteurs and employees to do now?


A: There are aspects we like, the kids meal is a success in markets so far.  Trying to organize the markets in different ways. 



Q: Commodity – what was deflation in 1Q? What items are you seeing moving up? What do you have contracted for the year?


A: 80 bps deflation, net. Rice contracted through three quarters, soy, corn, tortillas for full year. That’s it. Not able to lock in much of ingredients. Cheese has been historically locked but we’re changing that, moving towards pasture raised dairy. Spot market was more attractive for cheese also.



Q: Are the stores you opening in the downturn ramping? Comment geographically?


A: comp is broadbased. Only spot that was lagging a bit was Texas, who entered the recession late.  Also returning to the comp trends that we saw before recession – new restaurants are comping well and older markets are positive. Comp guidance assumes no menu price increase.



Howard Penney

Managing Director

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