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BKC - RIBS AT BKC… WHAT ARE THEY THINKING?

As a point of reference, MCD’s McRib was a complete failure.

 

If I’m wrong about this, I will eat BKC’s ribs every day for lunch for a week.  Nation’s Restaurant News reported that BKC is rolling out its new Fire-Grilled Ribs to major markets this week.  BKC management said on its most recent earnings call that the ribs would be introduced as an LTO and would help to strengthen the company’s premium offerings as an offset to the recent pressure on average check as a result of the $1 double cheeseburger.  Specifically, average check is down 5% since the introduction of the $1 double cheeseburger as value menu sales mix has moved to 20%, up from about 12%.  Although I understand the need to support average check, I do not think this high-ticket item that rivals casual-dining prices will prove successful.    

 

According to the article, the new bone-in ribs, which have been tested in various markets and use the chain’s new batch broilers are now in nearly all domestic Burger King units, and are priced at $7.99 as a six-piece combo meal in Dallas and $7.49 in Chicago. An eight-piece ribs meal is available in both markets for $8.99. The meals include French fries and a drink.

 

Many QSR chains are pursuing barbell pricing strategies, like BKC, by offering both value items priced at $1, as well as more profitable, higher-ticket sandwiches.  In 2008/09, we saw some consumers trading down to QSR from FSR, but that secular trend is over as casual-dining chains have responded by dropping prices to drive consumer traffic.  BKC’s batch broiling system may give it the ability to sell products like wings, but that does not mean the consumer is going to buy them. 

 

In the most recent quarter, Burger King’s same-store sales in U.S. and Canada worsened sequentially, which the company attributed to severe winter weather, a weak labor market and lower levels of guest spending due to value promotions, like the $1 double cheeseburger.  Comparable sales trends improved significantly in March and traffic turned positive, largely due to the $1 double cheeseburger promotion.  Those same consumers are not likely to come back and spend $8-$9 for ribs. 

 

Management commented that its average check improved sequentially through its fiscal third quarter following the February 22 nationwide launch of its premium Steakhouse XT burger line, which it said “continues to receive favorable consumer response.”  This premium burger line ranges in price of $3.99 to $4.49.  Its recent success does not leave me convinced that Burger King will also be able to sell products that are priced about $4 higher.

 

Only increasing my conviction that this higher ticket item will not drive traffic is Malcolm Knapp’s comment about recent casual dining trends:

 

“The 71.5% of households below an income of $70,000 are still not thawed yet which is why value is so critical and we are seeing pull backs in spending after an increase in purchases such as occurred in March.  The consumers are still reducing credit card debt outstanding and are trying to live on their monthly incomes.”

 

BKC - RIBS AT BKC… WHAT ARE THEY THINKING? - BKC ribs

 

Howard Penney

Managing Director


R3: RL: Crickets

R3: REQUIRED RETAIL READING

May 19, 2010

 

 

TODAY’S CALL OUT

 

Every quarter when RL reports, my inbox gets flooded with emails from bulls and bears alike looking for validation on their view. This morning after RL printed $1.13 vs the Street at $0.63, I had a couple of long-term bulls who reached out with the closest thing to a smile on their face that can come through electronically. On the bear side…crickets. With such a massive beat and short interest near 10% of the float on a quality global growth company, there’s not much for them to say.

 

One factor might be guidance. Back of the envelope math suggests – as usual – a hint of caution. But let’s face a couple facts. 1) Caution is warranted. Has anyone looked at Europe recently? Fortunately, RL’s growth focus for this year is in integrating its China business, layering on dot.com functionality to markets beyond the US, and in driving US wholesale AND retail – which have been in a tough spot for two years. Remember when Nike got to a point in about 2000 when two parts of the model compensated when one part of the model came under pressure?

 

Well…that’s RL today.

 

Taking a big step back, there are those who have REALLY believed the story all along as opposed to those who looked at pieces of this business in a vacuum, the irony here is that the factor that has not changed throughout all the global economic turmoil is the earnings power of this company. I said it before and I’ll say it again… by the end of this year, people will be eyeing $7 in earnings in earnings power.

 

Oh, and by the way, I still come up with numbers for the upcoming year that are at least 15% ahead of where RL’s guidance is initially coming out.

 

We’ll be back with details on our numbers after the call.

 

R3: RL: Crickets - RL SIGMA

 

 

LEVINE’S LOW DOWN 

 

- Despite a modest increase in average ticket at Home Depot, the turn in big ticket items (defined as $900 and above) has yet to occur. While broader results indicate an improvement in consumer spending, lagging sales at the high-end is a telling sign that reservation among consumers persists.

 

- At a time when Target stores are rolling out a new open layout with 30% more space for its electronics and video games department, WMT highlighted on yesterday’s call that video games and gaming hardware were below expectations across all gaming brands due to fewer new releases and lack on innovation in gaming systems.

 

- After opening its first stores in new west coast markets just this past fall, DKS CEO Ed Stack commented that the sporting goods retailer would face what he expects to be an increasingly competitive environment in the coming year both in terms of store growth and pricing by targeting 40% of new store openings in new markets.

 

- In what appears to be a win-win, Quicksilver completed the purchase of stock options back from non-executive employees with an exercise price greater than $7.71 (50%+ above yesterday’s close) and that were issued prior to October 19, 2008 for fewer new options at a $5.08 exercise price - yesterday’s close. With more than 91% of eligible options tendered, employees appeared to agree that ‘one in the hand’ is truly better than 2 in the bush.

 

 

MORNING NEWS 

 

UK Retail Sales Fall in April - UK retail sales values fell 2.3% on a like-for-like basis from April 2009, when sales had picked up 4.6%, boosted then by Easter falling in April 2009 but March 2008. Retail footfall in April fell below its year-earlier level, hit by Easter timing and the volcanic ash cloud which prevented tourists from travel. Sterling's weakness continued to attract overseas visitors, especially from western Europe, China and the Middle East. Chinese visitors in particular were much more numerous than a year ago. Food sales fell back, largely reflecting Easter timing. Non-food was also affected by the earlier Easter, but also by pre-election uncertainty and consumer caution, which favoured essentials and replacements over discretionary items. Clothing and footwear slowed and homewares fell back below year-earlier levels, despite some further discounts and promotions.  <brc.org.uk>

 

Pakistan Textile Mills on 2 Day Strike - The All Pakistan Textile Mills Association went on a two-day strike Tuesday to protest the imposition on May 13 of a 15 percent export tariff on locally produced yarn for 60 days. The government stressed the duty was helping improve the availability and cool the price of yarn in the domestic market for the benefit of knitting mills. Yarn and products of blended yarn that have been imported is exempt from this duty. With less than 90 days left until the new cotton crop comes in, and with India banning its cotton exports on April 19, Pakistani yarn mills are left scrambling to fulfill orders. Yarn mills had been doing a robust business exporting yarn to Chinese mills after China had a shortfall in cotton production last year. This created shortages in the domestic yarn market and caused the price of yarn to double in a year. <wwd.com/business-news>

 

SKX Launches Backpacks and Bags - Skechers will launch a branded line of backpacks and bags for fall ’10. The Manhattan Beach, Calif.-based company signed a licensing agreement with Global Design Concepts to design, produce and distribute Skechers-branded backpacks, messenger and tote bags for men, women and children. Skechers bags will be available in department, specialty, sporting goods and general athletic footwear stores throughout the U.S. and Canada. The footwear company also has partnered with licensees to produce children’s apparel, sunglasses, legwear, medical scrubs and leather accessories. <wwd.com/footwear-news>

 

Best Buy Co. Launches CinemaNow - BBY will start its planned online service selling movies and television shows this month, jumping into a market that includes Apple Inc.’s iTunes and Amazon.com Inc. The service, called CinemaNow, allows BBY to tie Web-delivered entertainment to electronic devices sold in its stores as demand for physical DVDs declines. The service will start with a la carte, on-demand purchases and may later become a subscription service like Netflix Inc. Movie rentals will cost $2.99 to $3.99 as part of the service and videos will cost $9.99 to $19.99 for digital purchase.  <bloomberg.com/news>

 

Anthropologie Eliminates European Managing Director - James Bidwell, managing director Anthropologie Europe, has left the company as part of an international restructuring. The company said it is undergoing a global restructuring “to better leverage internal resources in order to be closer to the customer, achieve greater efficiencies and to prepare for future international expansion.” The announcement comes on the heels of record first-quarter earnings for parent company Urban Outfitters Inc., which operates the Anthropologie, Free People, Leifsdottir, Terrain and Urban Outfitters brands. Glen Senk, chief executive officer of Urban Outfitters Inc., said he was bullish about international expansion. “I used to think international sales could be 25% of our business,” he said. “We could find out over time that it’s 50% . We no longer view ourselves as a North American retailer. The European business is becoming increasingly important to the company.”  <wwd.com/retail-news>

 

Ski Season Occupancy Up 1.4% - Year-over-year occupancy for the ski season was up 1.4% and the average nightly rate down 5.8% for the 2009-10 snowsports season at more than a dozen western mountain resort destinations, according to the Mountain Travel Research Program. <sportsonesource.com>

 


US STRATEGY - CHANGE

We live in a moment of history where change is so speeded up that we begin to see the present only when it is already disappearing.

       -  R.D. Laing

 

Stocks finished lower on Tuesday after the Germany Chancellor said she would introduce a temporary ban on naked short selling and naked CDS on European sovereign debt.  In early trading today, European and Asian indices are trading sharply lower on the news.  As we look at today’s set up the range for the S&P 500 is 38 points or 1.6% (1,103) downside and 1.8% (1141) upside. 

 

Chancellor Merkel added pressure to the markets after saying "the euro is at risk" and the current situation is Europe's "biggest test" in decades adding that there is currently an "existential test" for the euro and that “a failure of the euro means a failure of Europe”.  Apparently this is not the consensus in Europe.  Speaking to journalists in Paris, French Finance Minster Christine Lagarde said France has no plans to ban the use of any specific financial instruments designed to speculate on sovereign debt. France already has a ban on naked short sales in equities in place since September 2008.

 

As we stated yesterday in a note to clients “The obvious question is: what will this do to the CDS market for European sovereign debt?  That is, if the market is no longer two ways . . . will there be a market for CDS? And if there is no market for CDS, or ability for large institutions to buy insurance, will they buy European sovereign debt at the same prices or in the same amounts?

 

Take the market’s reaction for what it is – the wrong type of regulation.  Naked short sellers or CDS buyers don’t take markets down, fundamentals do.  Or in this case, perhaps, fundamentally misaligned government-implemented market regulations do.”

 

After the close last night, the ABC confidence index rose to -44 in the week ending May 16, up 3 points from a week earlier.   Apparently, consumers get more confident when the price at the pump goes down. 

 

With the sharp decline in Oil and Copper, the RECOVERY trade is seeing increasing scrutiny from heightened austerity measures and the potential cracks in EU stability.  Importantly, as the politicians perpetuate the problem contagion concerns will continue.  Yesterday, the increased contagion concerns and the increased likelihood of financial reform legislation took its toll on the Financials (XLF), Consumer Discretionary (XLY) and Materials (XLB).

 

The Hedgeye models only have three sectors positive on TREND - Consumer staples (XLP), Consumer Discretionary (XLY) and Industrials (XLI).  From a fundamental stand point the Consumer Discretionary (XLY) looks to be most vulnerable.  Yesterday, Retail also came under pressure as better-than-expected April quarter earnings once again failed to stem concerns about a lack of catalysts to sustain the momentum in the group. The S&P Retail Index declined 2.5%, as decliners included ANF (5.9%), SKS (4.3%), DKS (3.4%), TJX (3.5%) and HD (2.4%).  The S&P Retail Index is up 8% year-to-date on signs of a broad consumer recovery, but recently retailers have rolled over with some disappointing April same-store sales trends and worries that Q2 may mark a near-term peak for the RECOVERY trade. 

 

The U.S. dollar is showing continued strength against most currencies although it is trading slightly down against the euro this morning.  Reports suggest that profit-taking in the dollar has caused this support in the euro. 

 

The Euro is showing a little support near our Hedgeye Risk Management’s $1.21-$1.22 level of intermediate support following a meaningful selloff overnight.  The decline has largely been viewed as a reaction to Germany’s decision to ban naked short selling in CDS.  

 

Three month LIBOR has ticked up slightly to 0.465.  Yesterday, the TED spread narrowed and the Euro strengthened.  Today, the TED spread has widened to 0.3025 from 0.297 and the Euro has declined further on the news from Germany.  The inverse correlation between the TED spread and the euro has tightened further to -0.95.  This tells us that the euro is still front-and-center of investors’ global risk outlook.  Gold has declined from last night’s $1,219.70 to $1,206 at the time of writing. 

 

On the MACRO calendar we have:

  • MBA Mortgage Applications
  • April CPI
  • DOE Crude Oil Inventories
  • FOMC Minutes
Howard Penney
Managing Director

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THE M3: SINGAPORE CASINO LEVIES; MAY#S, FEWER PROPERTY TRANSACTIONS, SJM BONDS; CPI RISES

The Macau Metro Monitor, May 19th, 2010


CASINO ENTRY LEVIES AMOUNT TO $70M AsiaOne News, Strait Times

Casino entry levy collected by the two casino operators in Singapore have amounted to about $70 million as of May 10, said Minister for Community Development, Youth and Sports (MCYS) Dr Vivian Balakrishnan.  He also said that it would be premature to draw conclusions on casino patronage and its attendant social impact from the entry levy data as it is still early days. Furthermore, Minister of State for Manpower, Lee Yi Shyan said that the two IRs now employ some 16,000 workers, with local hires accounting for 70%.

 

MAY NUMBERS LIKELY OFF THE CHARTS Intelligence Macau

IM consultants walked the floors the last two nights in Macau and asked at the front desk of a few hotels. On Monday, several in the vicinity of StarWorld, including the VIP-dedicated 550-room hotel itself, were sold out.  Mass gaming floors, including those at Wynn and Grand Lisboa, were heaving.  Keep in mind this is a perfect month of the year: Golden Week starts it off, and there is no public holiday in June to wait for, unlike the situation last month, when some gamers held back from visiting in anticipation of Golden Week.  MOP17-18bn is not improbable.

 

PROPERTY: FEWER TRANSACTIONS, HIGHER PRICES macaubusiness.com

A total of 6,386 building units were bought and sold at MOP10.02 billion in the first quarter of 2010 according to Stamp Duty records, down by 3.1% and 5.6% respectively quarter-to-quarter.

 

The majority (3,884 units) were residential units amounting to MOP7.94 billion, down by 14.6% and 10% respectively over the previous quarter, of which 3,106 units were situated in the Macau Peninsula and 768 in Taipa.  The average transaction price of residential units rose by 4.7% quarter-to-quarter to MOP26,845 per square metre of usable area.

 

SJM TO LOWER CONVERSION PRICE OF BONDS TO HK$5.24 VS. HK$5.35 WSJ

SJM Holdings said Tuesday it will lower the conversion price for its HK$2 billion worth of convertible bonds to HK$5.24 per share from HK$5.35 per share, effective June 1.  The company said it decided to lower the conversion price after proposing a final dividend of HK$0.09 a share for the year ended December 2009, which will be subject to shareholders' approval on May 31.  In September, SJM said it would issue HK$2 billion worth of six-year convertible bonds, and was planning to use the proceeds to supplement its capital for developing its Macau operations, and for general working capital.  None of the bonds has been converted into shares, the company said..


CONSUMER PRICE INDEX FOR APRIL 2010
DSEC

The Composite CPI (103.68) for April 2010 increased by 2.56% YoY, attributable to the price increases of Food & Non-Alcoholic Beverages and Transport.  The Composite CPI for April 2010 increased by 0.65% MoM.


Doppelgänger Capitalists

“In a capitalist society, all human relationships are voluntary.  Men are free to cooperate or not, to deal with one another or not, as their own individual judgements, convictions and interests dictate."

-          Ayn Rand

 

After the market close yesterday, Keith and I were chatting about the German government’s decision to prohibit short selling on certain financial institutions and European Union sovereign debt with credit default swaps.   Despite having a good friend Michael Blum who is German, who also happens to be our Chief Operating Officer, I actually know very little German.  That said, the one word I do know is apropos for the decision yesterday by the German government . . . Doppelgänger.

 

For those of you who don’t know, courtesy of our buds at Wikipedia, the definition of Doppelgänger is as follows:

 

“In the vernacular, the word "doppelgänger" has come to refer (as in German) to any double or look-alike of a person. The word is also used to describe the sensation of having glimpsed at oneself in peripheral vision, in a position where there is no chance that it could have been a reflection. They are generally regarded as harbingers of bad luck.”

 

Obviously Keith and I are stock market operators, so we take this attack on free markets implemented by the German government particularly personal.  While trust in governments is at generational lows (we have to look no further than the victory of fringe candidate Rand Paul in Kentucky last night to verify that),  one would have hoped that governments such as Germany’s, who historically have been great advocates of free markets, would simply do the right thing, rather than institute a “harbinger of bad luck.”

 

Not surprisingly, Europe is selling off hard this morning with most markets down between - 2.5 and -3% on the back of this German policy.  I wonder what vision the Doppelgänger Capitalists see in the mirror this morning?  While blaming short sellers, speculators, stock market operators, and American banks is convenient, it is not the truth.  In fact, fundamentals don’t lie, regulators and governments do.  The issues in Europe can be blamed solely on  government officials, or as we call them, Fiat Fools, who piled debt upon on debt.

 

In the attached chart, we have highlighted the performance of the XLF, the S&P financial sector ETF, from the date of the SEC’s ban on short selling financials on September 18th, 2008.  The XLF peaked the next day at $22.38 and finally troughed almost 6 months later at $6.26, a decline of 72%.  The SEC’s stated goal with this ban was to “protect the integrity and quality of the securities market and strengthen investor confidence.”  In hindsight, I’m not sure the ban worked out so well...

 

Coincident with the new German short selling ban, we held a conference call yesterday for some of our top clients that asked the question: Bearish Enough on Spain? As I walked though our thesis, the answer becomes quite obvious, investors are likely not bearish enough on Spain.  I presented a realistic case scenario in which Spain is tripping the wires of 90% debt-to-GDP and 10% deficit-to-GDP in the next 18 – 24 months. (If you would like a copy of those slides and replay of the call, email us at .)

 

While this is becoming increasingly less the case, an issue that many analysts have when analyzing sovereigns is taking what these Fiat Fools say at face value.  As it relates to Spain, it is advisable to do almost the exact opposite.  On March 7, 2008, Prime Minister Zapatero predicted that, “Spain will achieve full employment. I want to be definite.”

 

As we discussed yesterday, Spain’s current unemployment rate is 20.05%, which is worse than Iraq and East Timor.  If you didn’t know, now you know . . . Countries Miss the Numbers.  If you don’t believe us that Spain may miss the numbers on their austerity plan, then believe the markets (they are still somewhat free after all) because they are signaling such.

 

To that point, yesterday Spain came perilously close to its first debt auction failure.   Spain had planned to issue 8 billion euro of short term notes, but the auction failed to attract that amount of bids, so the sale was reduced by 20%.  This is somewhat concerning ahead of Spain’s 10-year auction today and just days after the ECB “rescue” package was unveiled.

 

Usually I’m the Happy Go Lucky Risk Manager at Hedgeye and Keith is the Grumpy Risk Manager who gets up too early, so I apologize if this note had a slightly more somber tone to it than my prior missives.  But quite honestly, I’m concerned.  This quote from Chancellor Merkel yesterday only underscores my concern:

 

“The lack of rules and limits can make behavior in financial markets driven purely by the profit motive destructive and lead to an existential threat to financial stability in Europe and even the world. The market alone won’t correct these mistakes.”

 

Yes, you read that correctly . . . markets and the profit motive are an existential threat to financial stability.

 

To me, her statement reads as a frontal assault on free market capitalism as we know it.  And that should worry us all.

 

God speed,

 

Daryl G. Jones

Managing Director

 

Doppelgänger Capitalists - XLF



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