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And BWLD lost it….


According to senior management, all of the company-owned locations entering the comp base in the last four months are negative.  Importantly, all these are units that opened in 2008 and have trended down from their opening volumes, and are “continuing negative on a year-over-year basis as they enter their 16th month of operation when they become a part of our same-store sales calculation.” On top of that, they have identified about a dozen restaurants that are not meeting sales expectations.


What is the significance of 2008?  In that year capital spending was $67 million, up 63% year-over-year on top of 74% growth in 2007.  In order to deliver on the street’s expectation of such rapid growth in a short period of time, site selection had to be compromised and the company was not opening “A” sites.  This is what we call “sustainability.”  It’s never about whether or not concepts can grow, but it is the “sustainable” rate of growth that produces the highest return on incremental invested capital - ROIIC.


Unfortunately, a bad unit will always be a bad unit until it is not.  What is making bad site selection even worse is a more competitive landscape. 


Management also noted last night that the company has experienced a decline in its alcohol sales, which “we believe is a result of aggressive competition and advertising for our bar business, as competitors, both local and on a national level, are offering significant discounts for both food and alcohol.”


BWLD is positioned as a growth company and as such, has “growth” related costs running up and down the P&L.  Going forward, as same-store-sales remain under pressure, these costs will become more evident. 


As the saying goes, “in a drought when the water goes down in the lake you can see all the stumps.”  For BWLD, the only fix is to slow growth and cut costs.  Last night management gave us no reason to believe that these measures are forthcoming.  In an effort to explain the weakness in 1Q10 and April same-store sales trends, management stated, “And we estimate the effect of planned cannibalization as we built out company-owned markets to be about 40 basis points in first quarter and in April.”  Companies that are growing too fast expect cannibalization.  Once they start openly communicating it and trying to explain it away, it is typically a sign of pending disaster.  SBUX used to say that cannibalization was not a problem before it had to close about 800 units in the U.S.


As we see it, the fix is not in…..




BWLD has opened 86 new restaurants in the past 12 months, a 14.9% growth rate. 


1Q SSS were at 0.1% company and 0.7% franchise

  • Increased bar competition
  • Weather
  • Event fluctuation



  • Guest feedback is strong
  • Successful flat bread flips became a favorite and will be added to core menu
  • Began new LTO, the new Southwest Steak Slammer
    • Providing over a 25% increase in burger capacity
  • March madness deep fried pickles are doing well
  • TV campaign



  • Increased by 15.7% yoy
    • Company increased 15.5%
  • SSS increased 0.1% for the quarter
    • Price was 2%
  • AWS decreased 5.6% in the quarter
  • AWS volumes were less than 4Q
  • 1Q10 AWS was 70 bps less than SSS
  • 5 new restaurants
    • Initial weeks are outperforming average
  • Royalty and franchise fee grew 18%
    • Franchise locations has a 0.7% SSS increase
    • 57 additional units vs 2009 in operation


Company owned

  • 30.6% cost of sales
    • Increase in wing price, up 17%, is the net cost
    • Wings as % of sales were the same as last year
  • Labor
    • Efficiency and favorable insurance costs offset by workers comp
    • Benefit from lower utilities continued but was offset by higher credit card fees and benefit in prior year
    • Restaurant level cash flow was 24.7m/17.9% of restaurant sales vs 18.5% last year
  • D&A was 6.3%, up 60 bp from last year
    • Accelerated depreciation in 1Q for the additional quarters targeting to close in future quarters
  • G&A
    • 7.1% of revenue
    • 100 bps down
    • Lower cash incentive plan expenses


Opened 5 new locations versus 10 new a year ago

  • 1.1m in preopening expenses



  • Investment income totaled 185k for 1Q compared to 76k in 2009
  • 324m in assets
  • 221m stockholder’s equity
  • CFFO 24.7m for quarter



Trends and details

  • First 4 weeks
    • -2.4% franchise SSS
  • Expected food and alcohol costs benefit slightly less than 2% for company restaurants
  • 2 restaurants in 2Q but 4 closures
  • Opening 11 franchise units this year
  • Price of chicken wings expected to be $1.58 vs $1.69 last year
  • Leverage on labor line is expected
  • Expect operating expenses to be higher than last year
  • G&A expected to be 11.5m excluding stock based comp


Same store sales

  • 1Q same-store sales and April same-store sales  are soft
  • Sizeable week-to-week fluctuations
  • Weather had a 50bp impact
  • Planned cannibalization was ~40bp in first quarter and April
  • Nearly all of company locations entering the comp group, are negative
  • About a dozen restaurants are not meeting expectations


Ways to drive sales

  • Launching new wing flavors
  • Return of margarita mayhem



  • Facebook and other social media
    • Coupons on website and Facebook page



  • Remodel 12 company locations in 2Q and another 7 in 3Q
  • Franchisees remodeling 12 this year



Q: Quantify new unit impact on comp base and alcohol sales, please.

A: Opening strong is our emphasis.  Comp base enters after 16 months and can be lapping honeymoon period.  Should be able to look at how we’re operating in closing months before they enter comp group.  Looking at 1Q of 2010 and 1Q2009, and every quarter really, there’s probably about 1% of SSS impact related to weather or cannibalization or underperfomance of stores

Same-store alcohol sales are down.


Q:  Looking at 20% earnings growth costs.  Extrapolating wing costs, what comp do you need?

A: We have other levers that we can pull but are not sure this far out what comps we will need. Moderate wing costs are a component and we are seeing decline in that market. If the market help where it is we would be under the $1.58 we were assuming.


Q: Looking to take price in new menu?  Costs?

A:  Haven’t decided.  If we kept it where it is now it would be just under 2%.  Boneless wings are locked in for the rest of the year.  Beef and pork are locked for the whole year.


Q: Even given the first 2 months of the quarter, your bias is that you can expand earnings at company owned stores?

A: That was on costs…


Q: G&A, anticipating faster growth in next quarter? Investments?

A: More headcount…back out the stock comp number…when you’re comparing cash G&A related items in 1Q it was 10.7m dollars and that was flat to last year.  Looking at change from 4Q it went down 0.2m.  11.5m is guidance for 2Q. 


Q: One specific region or locations that are getting hit harder?  Newer markets? Midwest? Who is the competition taking away alcohol?

A: Seeing a decline in alcohol same-store sales across markets


Q: On new stores entering the comp base negative…is that something you typically see?  How are those stores measuring up on ROIC?

A: Overall we’re pleased that 18% cash flow on the overall group is still working but we’d like less dip from high weeks.


Q: Which promotions do you think will most help SSS?

How did NCAA additional media go?

A:  March was a positive month, media helped.  Will be looking at about 7 restaurants that are not meeting expectations.  Company is going to emphasize BWLD as a place for happy hour, after work, late night. 


Q: More details on the general remodel costs? Also, where can you get leverage on the labor line?

A: Typical remodel costs 400k.  Remodeled one in the first quarter that was trending negative; after the remodel it was back to flat same store sales. 


Q:  What are the common characteristics of your 12 underperforming stores?

A: There is no specific market that has those restaurants and there are always 12 underperforming stores at any time.


Q: Can you comment on the day part mix?  Is it across the board? All day parts? Geographies? Alcohol? Can you also comment on Easter?

A: Easter was in April in ’09 and ’10.  Nothing stands out as significant from a day parts standpoint.  There is no day part either; it’s kind of across the board and partly because of calendar and restaurants coming into the comp group.  The only thing is that last year Easter fell after the NCAA tournament was over so this year the combination of the two wasn’t as positive.


Q: On the marketing front, do you think it can move the needle as much as it has in the past?

A: TV moves the needle.  We knew we were going to be on TV, on national, FOX Sports in June, when the calendar was signed at the start of the year. 


Q: On accelerated depreciation, will you be through most of that by the end of the second quarter?  Or are we going to continue to see that through the rest of this year?

A: We will be through that by the end of the second quarter.


Q: Looking at future development trends, should we assume that absolute number of stores maybe stay similar or slow down in ’11 and ’12 and beyond?

A: At a certain point there is a law of large numbers.  2011 will be similar but we will have to reexamine for 2012. 


Q: Can you give us your capital expenditure outlook for the year?  How much of that will be due to maintenance and then refurbishment of stores?  Can you also comment a but on what you’re seeing in the lease environment as these stores come up from renewal?  Are you able to lock down more attractive lease costs?

A: That is our goal with lease costs.  For new store openings, it’s averaging 1.8m when you blend in either end caps or free –standing locations.  For maintenance capex, as well as remodels, refreshes, that stuff, it goes to about 20m total


Howard Penney
Managing Director


PFCB – First Look

I said yesterday that PFCB had tried to set expectations low for 1Q10, and there was a reason for it.  Earnings came in at $0.38 per share relative to the street’s $0.49 per share estimate and my $0.50 per share estimate.  Same-store sales, on the other hand, beat expectations coming in -2.7% at the Bistro and +2.2% at Pei Wei, slightly better than my -3.0% and +2.0% estimates, respectively, and easily beating the street’s -4.1% and +1.8% estimates, respectively. 


The current trend in top-line numbers is the more important indicator of PFCB’s momentum going forward.  Even with this better-than-expected result, the Bistro continues to underperform the industry benchmark as measured by Malcolm Knapp.  That being said, 2-year average trends improved 150 bps sequentially from last quarter, which is a good sign considering both the weather factor and the negative impact from the shift of the high volume week between Christmas and New Year’s Eve, which fell in 4Q09 as a result of the 53rd week in FY09.


What drove the EPS disconnect?


The $0.12 per share earnings miss relative to my estimate was surprising in light of the better same-store sales trends.  The discrepancy between the two in my model stemmed primarily from the Bistro.  Management’s full year guidance assumed flat restaurant level margin, “primarily due to expectations of favorable cost of sales offsetting the anticipated impact of deleverage of certain fixed operating costs and higher planned marketing spend.” 


The upside in my model relative to the reported numbers fell in the COGS, labor and operating (includes marketing spending) lines at the Bistro.  I was modeling slight YOY favorability on the COGS line as a percentage of sales at the Bistro, which came in up 40 bps YOY.  On the labor line, I was modeling +100 bps YOY relative to the reported +150 bp increase at the Bistro and the reported 100 bp increase on the operating line (including higher expected marketing expense in FY10) was higher than the +20 bps I was modeling (assumed a similar increase to 4Q09 on a 2-year average basis despite better same-store sales growth).  Although the company guided to increased marketing expense, management had stated that the bigger YOY increase would come at Pei Wei.  Specifically, management said for FY10 the “incremental marketing spend puts pressure on the operating expenses, about 50 basis points at Pei Wei, 20 basis points at the Bistro.”


For reference, a $0.10 earnings miss at PFCB translates into only about a $2.3 million miss on the net income line so it does not take much incremental spending to move the needle on EPS.  PFCB could easily have spent $1 million more on marketing.  Being that that the company, along with Unilever, launched its new PF Chang’s Home Menu frozen food product this quarter, I would not be surprised to learn the company had to spend behind the launch during the quarter.  It is important to remember that management has not yet disclosed too many details about its licensing agreement with Unilever except to say that the new venture would not require any capital investment from PFCB.



Howard Penney

Managing Director


No real surprises, although the numbers and guidance look a little disappointing relative to MAR but we can explain that.



Results look pretty much in-line with our numbers. Property level EBITDA was almost spot on with what we expected but there were a number of other items that reduced Adjusted EBITDA (to be honest – we don’t even know what they are).  RevPAR guidance is a lot lower than MAR’s, and we suspect that’s partly due to the fact that they have little international exposure and maybe a bit more group business, which lags.


Revenue comments:

  • RevPAR was a little better than we expected – by 1.8% (but that’s not a “comparable” number). Comparable RevPAR was down 2.3%.
  • Hotel revenue was basically in-line with our estimate – room revenue was $5MM better but other revenues were $6MM weaker.  
  • Cost comments – basically Room, F&B, Hotel departmental were a little lower than we expected but “other property level” costs increased more - so net-net property level costs were exactly in-line with our estimate.

We will have more details with our post call "notes".

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Bad, Bad Risk

“And the giant beside him about to fall, they will try to make you crawl.”

-Sly Stone


There all kinds of risk.  Good risk, medium risk, and bad risk. (Some investment bankers even say no risk.) Bad risk is also the name of a song by the U.S. funk band Sly and the Family Stone.  Growing up in the era of psychedelic drugs and music, it is likely that Sly Stone knew a few things about bad risk.


As Risk Master Brother McCullough is discussing on Bloomberg this morning, we are waking up to some funky news. Suffice it to say, in the world of global investing , potential sovereign debt defaults be some Bad, Bad Risk


Greek credit default swaps have been blowing out for the last few weeks and yesterday the culmination was a downgrade of Greek and Portuguese sovereign debt, the former to junk bond status.  That be bad.


As is often the case in global macro risk management, geopolitics matter.  In 1998, the United States and a few other nations came to the rescue of Mexico in her inability to roll over short term loans.  Sho’nuff, the United States actually made a profit of some $500MM on this bailout.  Ironically, the architect of this bailout was Treasury Secretary Robert Rubin.


Even the most eminent of Perceived Experts, like Brother Rubin, make funk predictions.   As it relates to sovereign debt defaults, we’ve quoted former Secretary Treasury Robert Rubin from a presentation he gave at Yale Law School last year in which he said, “he did not forsee any sovereign debt defaults.”  Now to be fair to Brother Rubin, in the same lecture he indicated that a Greek Philosophy class he took in his freshman year at Haw-havd was the underpinning of his risk management philosophy.  No math, brother?


(We’d just be piling on Goldman if we mentioned that Brother Rubin was also the former CEO of Goldman Sachs and that Goldman had a very substantial long position in Mexican bonds, and thanks to his bailout they got out whole.  But no need to kick a firm when it’s down!)


The simple math associated with Greece suggests that risk is accelerating. This morning the spread between Greek bonds and their German counterparts is 800 basis points (8%!). That be wide!  In addition, and we’ve highlighted this in the chart below, Greek credit default swaps continue to blow out.  By our last measure, they were at 842 basis points.  That would be funky, if it weren’t dang expensive insurance. 


Yesterday, S&P downgraded our Greek Brothers to junk status.  The implications of this go far beyond one country.  This is the first time any nation in the Eurozone has been downgraded to junk since the introduction of the Euro in 1999.  Incidentally, Greek debt is now on par with the economic stalwarts of Azerbajian and Egypt.  According to S&P, in a restructuring Greek debt could be worth as little a 30 percent of face value. Dang!


The question is: When is Germany going to get down with it? It is time to put some stank on it in the Eurozone!


This morning Sister Merkel, also known as the Chancellor of Germany, is going to be giving a statement regarding Greece at 10:45 a.m. eastern.  Mark that one in your Outlook calendar.  This will be a catalyst for the market.  And while it is earnings season . . . at the moment Macro Matters more than the EPS miss of Buffalo Wild Wings. Ain’t that the truth?


While it was an easy decision for the United States to bail out Mexico in 1998 (setting Goldman’s long exposure aside), it is a much more nuanced decision for Sister Merkel in regards to Greece.  As our European Analyst Matt Hedrick wrote yesterday:


“ While we believe Germany’s “contribution” is inevitable, what we’re currently seeing from Merkel is political posturing. On May 9th, Germany’s largest state by population and the industrial heartland, North Rhine-Westphalia (NRW), holds a state election.  Merkel’s Christian Democratic Party (CDU) along with her coalition partners the Free Democrats (FDP) need a win to retain the majority in the Bundesrat (upper house of parliament), which is critical for her party to carry out scheduled reforms, including tax cuts and health care reform. 


Recent polls suggest that Merkel’s opposition, the alliance of the Social Democrats-Greens, has a slight advantage. With government spending a hot topic in the election, Merkel must show that she’s not writing a blank check to the Greeks, and will continue to drive a hard line.”


Like any astute geo-political, analyst Brother Hedrick has ascertained an important point, even in the face of a spiraling economic crisis in the Eurozone, politics still matter. To summarize this in the wise words of Sly Stone: “And the giant him about to fall, they will try to make you crawl.”  Now that’s a groovy realization.


Last month we did an in-depth presentation of sovereign debt and the risks associated with potential defaults.  The conclusions of this historical analysis was simply that defaults or restructurings are rarely one-off issues, and certain nations, not surprisingly Greece, tend to be leading indicators.


Rumors yesterday out of Europe suggested that Europe would convene a “Greek Aid” summit on May 10th.  By that time, Sister Merkel’s elections will be one day behind her.  If that date don’t speak the truth . . .


Keep groovin’


Daryl G. Jones

Managing Director


Bad, Bad Risk - merk



Last I checked, making money is not a sin and yesterday’s political grandstanding proved that most politicians in Washington’s are economically illiterate.  If you are a market participant you now know that Senators don’t know what they don’t know.  This is a disgrace to Washington and the best trade coming out of yesterday’s hearings is to be short treasuries. 


The S&P 500 came under pressure on Tuesday, suffering their biggest one-day pullbacks since February 4th. The RISK AVERSION trade was in full force and a big negative on the market as the VIX shot up 31.7% on the day.


The biggest MACRO driver was the focus on European sovereign credit concerns after S&P downgraded its ratings on both Greece and Portugal. We’re seeing confirmation of our 2Q10 theme of Sovereign Debt Dichotomy via rising CDS spreads, higher yield spreads, and weakness in equity markets from the PIIGS.


Treasuries rallied sharply yesterday on the back of European sovereign credit concerns. In addition, the dollar index was up 0.82%.


Despite another largely upbeat day for corporate earnings and events, regulatory fears also remained on the front-burner today, leading to another outsized selloff in the financials.  After falling more than 3% on Monday, the banking group remained for sale yesterday with BKX down another 3.1%.  The money-center names were among the laggards with C (down 5.9%), JPM (down 3.4%) and BAC (down 3.2%) showing weakness.  Ironically, GS was up 0.7%.  The stock managed to bounce as executives testified before the Senate's Permanent Subcommittee on Investigations.  The mortgage insurers were among the worst performers in the sector, while AIG (16%) sold off on a downgrade at KBW.


Some of the trades done in the Hedgeye virtual portfolio;


COVERING XLY - We shorted Consumer Discretionary when it was overbought. The Sector ETF is down -2.4% here and no longer overbought - covering red. KM


COVERING GIL - Stock is down more than the market here but holding an immediate term TRADE line of support at $28.61. Covering here and will revisit at a different time/price. KM


COVERING SPY - Apparently this market can go down, indeed. Covering our short position in the SP500 here as it is immediate term oversold. KM


SELLING CIT - Josh Steiner made the right call being long ahead of this morning's EPS report. We'll book the gain here on the news. We remain bullish on the intermediate term TREND, from a price. KM


On the MACRO front, The Conference Board consumer confidence index jumped to 57.9 in April from 52.3 in March, the highest level since September of 2008.  However, Consumer Discretionary XLY declined 2.9% and failed to garner support from the better-than-expected data.  Housing-related names were among some of the worst performers today with the XHB (4.2%) on the day. Yesterday, the S&P Case-Shiller 20-city composite home price index fell 0.1% m/m in February, snapping a string of eight consecutive monthly increases.


The Materials sector (XLB) was the worst performing sector yesterday, weighed down by the RECOVERY trade and the accompanying rally in the dollar. The industrial metals stocks were among the notable laggards in the sector, with the NYSE Arca Steel Index down 5.3%.  Gold stocks held up better on the day, with some support from the flight-to-quality gains in the underlying commodity.


The Healthcare (XLV) was the best relative performer yesterday with a renewed focus on some of the more defensive sectors.  The XLV underperformed as of late on concerns about the larger-than-expected impact on guidance from healthcare reform.  


Yesterday, copper traded down 4.6% to a one-month low on recovery concerns. 


In early trading, equity futures are trading below fair value in a continuation of yesterday's broad based declines sparked by S&P's rating downgrade for Portugal and Greece.  


Today’s MACRO events: 

  • MBA Mortgage Applications
  • DOE Crude Oil Inventories
  • FOMC Rate Decision

Howard Penney
Managing Director


In preparation for WYNN's Q1 earnings, we've aggregated some forward looking commentary from the company's Q4 release and conference call.



Q1 should be a strong quarter for WYNN, but given the run in the stock it may not matter.  We're above the Street in revenues but in-line for EBITDA this quarter due to a low hold percentage - and the associated margin impact - despite record VIP volumes.  While we think that Wynn Encore will have solid performance, we think that perhaps the Street is ahead of themselves in modeling margins for the backhalf of 2010.  Below is a "YouTube" from last quarter's call and some our thoughts.



  • "Although I don't make forward-looking statements as a rule, we're tracking substantially ahead of that the first two months of the year....and incidentally, we're not holding high, we're holding low..at 2.8"
    • The market was indeed on fire in 1Q2010 and Wynn did perform well...although they did suffer from weak hold - we estimate 2.6% on VIP since March hold was a pathetic 2.3%
    • Our Macau 1Q2010 estimates are as follows:
      • RC of $20.6BN, VIP win % of 2.6%, and VIP win of $536MM
      • Mass win of $117MM, Slot win of $50MM
      • Net revenue of $555MM and EBITDA of $144MM
  • Vegas: "I don't see any major change in the future. I don't see it getting worse per se"
  • "We're about to refurbish our rooms in Wynn because they're five years old. It puts more pressure on our competition because our service levels and the targeted attractiveness of our facilities gets more and more effective. Nothing left to do but the basics better."
  • "The danger that you described is real. I mean, rates stay down in Las Vegas, how long do rates stay down in Las Vegas before they become the norm? You asked me that question, and I say to you, I don't know. But what should I do? Have empty rooms?"
  • "We had a very big Baccarat year last year in Las Vegas in spite of everything else."
  • "If you're talking about strictly convention booking, you can say that '10 is better than '09, and you can say you see a trend of increased bookings. It is totally irresponsible and naive for anybody to say based upon this slight trend we project this infinitely into the future and give you some rosy baloney story about what's going to happen in '11."
  • "How about for the Southeast Asia customer percentage?" [of total customers to WYNN Macau]
    • "It's less than 5%."


  • "The workforce in Macau is totally delicious."
  • "We're more of a Chinese company than American company today as we're having this call. I love it. Thank God for being outside the United States today."
  • "I love the idea that they're going to start five and six because it's a Sheraton, they're lower-end products.  And that's lots of folks.  And then they, Sheldon, built all those ferry boats.  I think that's good too.  And he was subsidizing everybody else on Cotai by those ferry boats and it's also worked out well for him.  That's all great stuff, it all happened and what I'm looking forward to is opening the nicest place in that neighborhood and skimming off the top end of the business just like we did downtown in Las Vegas on the Strip, in Atlantic City and we're doing it now in Macau. That's our stick, we do that. We love overdeveloped markets, it's where we thrive."
  • "Would I build Encore if I had to do it today, no, I'd keep my money."

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