Taco Bell has a storied history of being a brand that is disruptive to the pricing structure of the industry. 


In 1Q10, the same-store sales performance (down 2%) at Taco Bell was the biggest disappointment.  I recently had breakfast with in NYC with Greg Creed, president of Taco Bell, and he commented that while the new products and marketing initiatives were working well, it did not offset the decline in the sales of drinks and combo meals.  In 1Q10, 40% of the decline in average check was due to lower drink sales. 


More importantly, the sales of its combo meals - peaked at 31% of all sales in 2008 - are now down to the “low 20’s” of sales.  What he would not tell me at breakfast was what he was going to do to fix what was causing the decline in same-store sales.  At the time he said they were testing a $2 combo meal, but there were no plans to roll it out nationally.  I guess now that has changed! 


While there is no official press release from YUM, there are media reports talking about the new combo meal and a quick stop by our local Taco Bell confirmed these reports (see picture below).  As was reported in USA Today, you get a taco or burrito, a medium soft drink, and a bag of Doritos chips - all for $2.  If you compare three items at MCD (a protein, a side dish and a drink), you end up paying $3. 


The interesting twist to this combo meal is the bag of Doritos.  At breakfast Greg mentioned a new partnership with Frito-Lay, but did not provide any details.  Since our meeting there has not been a press release about that either, but we can see where this may be going now they are including a bag of Doritos’s in a combo meal.  The new combo meal does not seem to be discounting any of the core items on the menu. 


I have no doubt that the YUM marketing machine will be going heavy and hard to get the news out on a $2 price point, which is sure to help Taco Bells’ declining sales trends.


YUM - TACO BELL'S NEW LOW        - 5 16 2010 9 36 46 PM


Howard Penney

Managing Director


In this High vs. Low Society that we live in, participation levels in the Supplemental Nutrition Assistance Program are soaring.  The higher end consumer, meanwhile, continues to come back strongly.


Since late 2009, Keith has referred periodically to the participation levels in the USDA’s Food Stamps Program.  Each time, it was noted that the percentage of the population participating in the program has increased drastically since Bernanke took the helm at the Federal Reserve.  February’s data shows that almost 40 million people, or one-in-eight Americans, received food stamps (chart 1, below).  While this is a staggering number, it could grow even without deterioration in the consumer; researchers are commenting that one-in-three people eligible for the program are not taking advantage of the benefits.


For context, in November 2008 we wrote a note entitled, “EYE ON POVERTY: FOOD STAMPS”, that discussed the number of participants in the program exceeding 30 million for the first time.  According to USDA forecasts, the number of participants will increase to 40.5 million by the end of this fiscal year, ended September, and will grow to 43.3 million in 2011.  New highs have been set, monthly, since December 2008.  Interestingly, as Director of Hedgeye’s Retail Team, Eric Levine pointed out in a recent note, the sequential growth in monthly Food Stamps Program participants is slowing for now (chart 2).  Levine points out that this is “marginally good news for those concerned about the state of the U.S. consumer”.  However, over the longer term, should our Q2 theme, Inflation’s V-Bottom play out and high unemployment levels persist, the situation could continue to deteriorate.  As unemployment benefits run out for some of America’s jobless, it seems clear that a larger proportion of eligible people will take advantage of the program.


At the end of the day, numbers don’t lie; people do.  Since March 2009 the S&P500, fuelled by the Fed-sponsored Piggy Banker Spread, has shot up almost 70% (taking into account recent market declines).  From March 2009 to February 2010, the number of people enrolled in the Food Stamps program increased 20%.  Our view on Inflation’s V-Bottom continues to be confirmed by the data (see the Early Look from May 11) and will only serve to exacerbate the situation lower and middle class families face with the stagnant employment outlook.  The employment outlook, along with mounting inflation, is taking a toll.  We have said it before; many of those on Main Street are not experiencing the “recovery” that has bolstered Wall Street.” 


TELLING FOOD STAMPS DATA - 5 11 2010 9 44 59 AM


TELLING FOOD STAMPS DATA - 5 11 2010 1 21 39 PM


Howard Penney

Managing Director

The Week Ahead

The Economic Data calendar for the week of the 17th of May through the 21st is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - c1

The Week Ahead - c2

Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Apparel Margins: Underlying Cross-Currents

Apparel Margins: Underlying Cross-Currents


Talk about weather, penned up demand, and pretty looking products all you want. The margin structure for Apparel retail just went through a statistical abnormality. Be careful what you own, folks.


It’s tough to miss the fact that consumer discretionary was the worst performing sector yesterday, and it’s not exactly knocking the cover off the ball today either. Chalk it up to market beta, or whatever you want. But don’t forget that there are fundamental headwinds that parts of Consumer discretionary will start to bump against starting, well… now.


Take apparel, for example. We don’t think enough people watch the spread between the prices consumers are paying for apparel vs. the cost of the goods coming in from Asia. The growth spread between these two items has a direct impact on the pot ‘o money that retailers have available to pad margins, and drive unit demand.  Consider this; using a mere 147 month benchmark, 8 of the past 12 have been 2 standard deviations above the mean. Yes, a statistical anomaly.


It’s a good thing that this does not have any margin implications. (That was a failed attempt at sarcasm).


Check out the second chart below. The relationship between apparel industry margins and this cost spread is pretty tight, to say the least.  Is this doomsday? No. Companies that are proactively preparing and have been investing in growth when times were tough will benefit now. That’s NKE, RL, PSS and UA. We also like BBBY and FL.  Those that have benefitted by the luck of the draw and have mirrored/leveraged Industry margin trends are gonna have a tougher go at it. That’s JNY, CRI, JCP, M, ROST, DG and FDO.


Apparel Margins: Underlying Cross-Currents - Apparel Margin Kitty


Apparel Margins: Underlying Cross-Currents - Spread and Margins


U.S. Government Maturities . . . A Major Pain In the Balance Sheet

Yesterday’s U.S. budget update has got a lot of investors thinking about the U.S.’s balance sheet issues. To recap, April’s contribution to fiscal 2010’s federal budget deficit was a staggering $82.69B – roughly 4x the April 2009 deficit of $20.91B. This most recent sign of the times is especially telling considering that there’s been a budgetary surplus in 43 of the past 56 Aprils (certainly a function of the April 15th income tax deadline). All told, this marks the 19th consecutive month of monthly deficits.


The U.S. must rollover 40% of its debt by 2012, which includes issuances of prior years as well as planned and unforeseen intra-year issuance. That number amounts to roughly $3.4 trillion dollars (including estimates) of refinancing needed over the next 2.5 years! In fact, according to Michael Pento of Delta Global Advisors, the U.S. Treasury auctioned $8.8T in debt during fiscal 2009 – more than 100% of all publicly traded debt! The chart below shows the Treasury maturity schedule from now through 2020. The budget deficit is added to give a sense of roughly the minimum amount of treasury issuance needed each year. These numbers are, of course subject to change based on treasury issuance in the coming years, but as of today, the U.S. public debt maturity schedule is outlined in the chart below.


We will be hosting an upcoming call on the fiscal future of the United States debt where we present our downside budget scenario, but for the time being keep this chart front and center as you think of whether the United States can keep her AAA rating longer term.


Darius Dale



U.S. Government Maturities . . . A Major Pain In the Balance Sheet - 1


April Retail Sales rose 0.4% headline, 0.4% ex-autos and 0.4% ex-autos and gasoline.


Ex auto’s were in line with expectations but headline was 0.2% above and ex-autos and gasoline was 0.1% above (March was revised higher).


Building materials rose by 6.9% after a 7.8% rise in March, motor vehicles/parts rose by 0.5% and gas station sales were up 0.5%.


BUT if you take out building materials, autos and gasoline sales (a core figure), retail sales were DOWN 0.3%.  Sales in clothing, sporting goods, general merchandise, furniture, electronics and in food/beverages all fell.


Thus, on the surface, sales look good but the core figure of ex-autos, gasoline and building materials fell for the first time since Dec ‘09.


Howard Penney
Managing Director

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