The S&P 500 closed higher on Friday, but not enough to put any sector back to positive on TRADE or TREND. After opening sharply lower, the S&P 500 quickly turned higher for the day led by a rally in Financials (XLF) and Materials (XLB). Thursday evening’s Senate vote finally brought some clarity on the potential winners and losers from the pending financial regulation efforts, with the BKX leading the way up 3.98% on the day. Money-center banks outperformed with JPM up 5.9%, BAC up 4.5%, and investment banks also outperformed with GS up 3.3% and MS up 5.7%.


On the MACRO front, there was no major economic data released on Friday and there was little incremental news flow from Europe regarding its sovereign credit concerns.


On Friday, the euro rallied for the fourth straight day, but in early trading today it is giving up some of its recent gains. The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.21) and Sell Trade (1.25). Despite this brief reprieve for the euro, the issues in Europe continue to be a drag on sentiment.


The Materials (XLB) was the second best performing sector yesterday, rebounding from Thursday’s sharp decline. Notably, the S&P 500 Steel index closed up 3.2% on the day. On Friday, Copper prices rose 4%; the increase was attributed to Chinese optimism and improved imports numbers. The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.01) and Sell Trade (3.28). With the Chinese market up 3.5% overnight and Copper trading up 1%, the XLB outperformance will likely continue.


Precious metals were a decliner on Friday; Gold closed down 0.5% to $1,177, and off the record highs seen on May 12th. The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,182) and Sell Trade (1,215).


Overall, Technology (XLK) underperformed on Friday, but the SOX (+2.50%) outperformed on the day. The sector has seen been under pressure over the past month (down 10.8%), but positive earnings releases this week, and especially guidance upside capped by MRVL (+8.3%) provided the lift.


Over the short-term, elements of "flight to safety" in the U.S. dollar will help to contain short-term U.S. inflation.  In early trading, the DXY is currently trading up over 1%, although we suspect that the U.S. dollar has its own issues to face at some point in the intermediate term future. The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (84.23) and Sell Trade (86.97).


Equity futures are trading below fair value following Friday's bounce which came at the end of a volatile week for stocks. As we look at today’s setup, the range for the S&P 500 is 58 points - 18 points or 1.6% (1,070) downside and 40 points or 3.7% (1,128) upside. For the first second day, the Hedgeye Risk management models have 0/9 sectors on TRADE and 0/9 sectors positive on TREND. On the economic front, the April Chicago Fed Nat Activity Index and April Existing Home Sales will be reported today.


Oil is currently trading lower for the tenth straight day, as the Dollar index is surging. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (68.04) and Sell Trade (73.40). In credit markets, the TED spread is at 0.34 this morning and three-month LIBOR has ticked up to 0.496, suggesting that risk perception continues to grow in global markets.


Howard Penney

Managing Director














"I saw a couple fall out, and I had one in the back of my throat. I could feel it and coughed it out.”

-Duncan Keith


Whether on the ice or in the market, there is nothing that gets me smiling as much as winning does. After helping secure the Chicago Blackhawks first Stanley Cup Final birth since 1992 yesterday, Assistant Captain, Duncan Keith, was all smiles last night – minus the 7 teeth he lost during the game.


“They just stuck a bunch of needles in there and froze it all up. It feels a lot better when we win,” the selfless Olympic Gold Medalist from Winnipeg, Manitoba said. Gotta love having a 2-Way defenseman like that on your team!


This market went 2-Ways on Friday and created exactly what the game of buy low/sell high capitalism should create – winners and losers. After gapping down on the open, there was an epic intraday short squeeze into the market close, leaving reactive/undisciplined players missing a lot more than some teeth.


We don’t always get things right, but we have had the hot hand as of late and aren’t shy to show people the replay. This market needs some leadership. It’s time that we, the people of America, take both this country and stock market back. Many more of you are winning alongside us than ever before. For that, we are grateful.


Back to the replay - in anticipation of the San Jose team about to feel as much shame as the S&P futures trader who short sold SPX 1056 pre-open, we had a premonition about a snap back SP500 rally and wrote a note to our subscribers at 10:55AM EST titled “The Shark Tank.” Here’s an excerpt:


“The thick green line in the chart below is the line you should be laser-like focused on. That’s the long term TAIL line of support for the SP500 at 1070. And we need more price, volume, and volatility data than a 1.5 hour feeding by Squeezy The Shark to validate it.”

I’m going to give this 3 days. If the long term TAIL line of support can hold, the SP500 has no resistance up to the 1125 line. That would be a 5% squeeze that performance chasers and monkeys alike cannot afford to miss.”

Premonition obviously, we had not. This is math, not alchemy. An no, I don’t have all my teeth…


This morning the game of globally interconnected risk continues, and here are some things were seeing on the positive and negative side of our proactive risk management playbook:



  1. SP500 long term TAIL line of support (1070) held on a closing basis on Friday.
  2. Advance/Decline line 74% to the bullish side on Friday.
  3. SP500 Sector Risk Management Model flashed positive in all 9 Sectors.
  4. China’s stock market followed up on Friday’s strength this morning making for a 2 day move of +4.6% (leading indicator?).
  5. Taiwan and Australia, closed up +1.2% and +2%, respectively, broadening the rally in Asia.
  6. Brazil closed +3.6% Friday and, like China, needs to show some follow through this morning holding high-lows.
  7. Gold prices are bouncing this morning right at the immediate term TRADE line of support = 1182.
  8. Dr. Copper pops his head back above our long term TAIL line of support ($3.01/lb), combined with the rally in China = good.
  9. TED Spread expansion stops expanding this morning and holds flat d/d at 35bps wide.


  1. SP500 upside resistance remains across all immediate and intermediate durations with 1128 and 1144 being our TRADE and TREND lines of resistance.
  2. Range in our 3-day SP500 model remains bearish (too wide) at 125 SPX points of probability (top to bottom).
  3. Volatility (VIX) remains a raging bull with immediate term TRADE support/resistance now 33.04-45.43.
  4. SP500 Sector Risk Management Model still has all 9 sectors in bearish intermediate term TREND position.
  5. Japan was down again overnight and remains one of the big sovereign debt elephants in the globally interconnected room that worries Mr. Macro Market.
  6. European equity markets rally on hope (low volume) and continue to look awful across all 3 of our investment durations (TRADE, TREND, TAIL).
  7. WTI oil price remains broken across all 3 durations with the long term TAIL of resistance overhead at $75.63/barrel.
  8. Compression in the Piggy Banker Spread (Yield Spread) continued week/week down to 245bps this morning vs. 267bps last Monday.
  9. The Euro rallied right up to where it should have but makes another lower-high at $1.25 and is selling off again (our downside target remains $1.21).

Managing risk doesn’t happen in the vacuum of certainty. Sometimes you take a puck to the head. There are plenty of bullish and bearish data points across your screens this morning and the goal of this game remains getting the timing right.


What risks are priced in and on what duration? What is the proactive plan on market strength or weakness? What risk management levels do you have confidence in and what are your macro calendar catalysts?


No one ever said managing globally interconnected risk is easy, but I can tell you this – you need to play this game 2-ways.


Best of luck out there this week,



2-Ways - Pic of the Day


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The Economic Data calendar for the week of the 24th of May through the 28th 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.





Starbucks driving traffic through new social media initiative.


Starbucks has launched a new discounting initiative through the popular application Foursquare that could potentially increase the ROI on promotional activity.  For those of you that are unfamiliar with the application, foursquare enables users to “check in” at locations via their mobile device.  This allows foursquare members let friends know where they are and share information.  Additionally, members can accumulate points with each check in and become a virtual mayor of a given location if they check in at a location more than anyone else.   Please email with any further questions, our social media guru, Daryl Jones, will be happy to help.


This is relevant for Starbucks in that their new drive rewards the virtual mayor of each Starbucks store with deep discounts - $1 off a “however-you-want-it Frappucino”.  Location-based loyalty programs will likely become more and more commonplace; this type of promotion focuses on best customers and their ability to spread the word about a service or product.  In the case of Starbucks, this is a meaningful discount and may serve to drive some additional traffic and brand awareness.  The company is clearly thinking of innovative ways to drive their top line.





From the beginning, the RRGB advertising strategy has had severe limitations.


Advertising is a drug and RRGB is a clear case in point of that fact.  Without advertising and LTOs, RRGB would not be able to increase its customer counts.  (See chart below)  Now that they have gone down that road they can’t go back.  Well I guess they can, but they are not going to. 


The significant increase in traffic when using LTOs has trained the consumer to only come back when they have a coupon and rendered the margins of the concept too high.


There is no reason to get in front of this story or buy the dip.  In fact, it looks to be a “fade the strength” candidate (just like BWLD).


If you want to read management story telling about how this is all good news continue reading….






 Very pleased with the sales in the first seven weeks of the first quarter
 Opened three new company restaurants
 Two new franchise restaurants were opened
 Expecting 2010 investment per restaurant to be $1.9m vs $2.5m per restaurant three years ago


 Impact from weather was approximately 140 bps
 Average weekly sales for comparable units were $55,896 vs 58,079 in 1Q09
 AWS for non comp units were $56,560 vs $55,245 in 1Q09
 Guest satisfaction scores remain high
 New “certified designated trainers” program in all restaurants
 Increasing motivation
 Improving guest experience
 14 restaurant openings  all received with high volumes


Spring time LTO began in February with Chophouse Burger and Southwest Grilled Chicken salad at $5.99 each
 Supported by national cable TV over a 5 week period
 1Q10 guest counts were down 6.8% in first 7 weeks of quarter vs 7.3% in same period ‘09
 During the next 7 weeks, includes 4 weeks of TV, guest counts improved to +5.8% (12.6% delta)
 Last 3 weeks of quarter guest counts still up 4.6%
 During first 7 weeks of quarter, SSS were down 7.8%, next 6 weeks saw SSS of +2% (9.8% delta)
 Last 3 weeks of the quarter SSS were up 2%
 The LTO and TV initiatives generated enough returns to more than break even (even allowing for $1.2m funded on behalf of franchisees.
Other marketing
 Brand awareness increased in the quarter
 Summer LTO promotion kicks off June 14th with two new items
Gift cards
 Gift card sales were up 54% or $1.5m vs prior
Focusing on new product development
 New menus in restaurants by May 24th
 Adding a dozen new items
 Patty melt, tested well in spring
 New burger,  New pastas
 Lower priced appetizers
 No price increases in this new menu
Very excited about upcoming summer LTO promotion and other new initiatives for the balance of the year


Restaurant sales increased 0.3%
 Comparable restaurant sales decreased 2.3%
 106 US comp restaurants reported a 2.1% decrease
 SSS results for US and Canadian systems showed significant improvement
1Q ROP was 18.2% vs 19.4% 2009
 Decrease was from increased labor cost (130 bps) and higher occupancy cost
 Occupancy cost was due to deleveraging from lower volume
 Decreased productivity hurt labor
 Offset by food line 20 bps benefit
 Hamburger pricing ran below '09 levels
Late in the quarter, beef prices increased
Adjusted outlook for beef to deflation of 0.5% to 1% (from prior guidance of deflation of 2% to 2.5%)
Lower price point from LTO had a 50 bps negative impact on COGS
Produce hurt COGS by 25 bps
Decreased supply due to weather
Continuing impact into 2Q


Other miscellaneous items
Spring LTO campaign cost 6.6m and was funded by company including a $1.2 million or $0.06 EPS paid by company to fund a franchisee portion of the spring media investment
Preopening costs stayed level on a per unit basis year-over-year
CFFO was $23.9, exceeded Capex of $9.2m
Recorded other revenue from gift card breakage from the first time
Recognized if there is no legal obligation to remit cost of gift card to holder of unredeemed gift card that has a low chance of being redeemed
Breakage of gift cards expected to be 200k to 250k per quarter
Balance Sheet
$30.9m in cash
Debt balance of $170.2m
$113.3m borrowed under $150 term loan
Paid down debt $21.2m in 1Q and continuing to make repayments in 2Q
In compliance with all debt covenants.  Debt to EBITDA is just below 2:1, as of April 18th, 2010.


Effective tax rate in 2010 expected to be 17%
Taking into account results from 1Q and trends for media campaigns and weather
Expecting deflation but changing outlook to -0.5% to flat
Some G&A savings
Gift card breakage was not included in guidance given in February
188k of pretax income is $0.01 in EPS
Revenues of 872-880m
$1.10 to $1.33 in EPS for 2010
Flat to up 1% SSS for 2010
1% SSS =~$0.21 EPS
$18.1m for TV vs 2.3m for TV in 2009
Expect  $3.3m in Q2, expect $3.4m in Q3, and $2.3m in Q4
Capex will be approx 35m to 40m
Funded out of cash flow
Debt payments of $18.7 million are scheduled on term loan, funded out of FCF less capex
Left over FCF will be used to pay down revolver


Q: The guidance of $1.10 to $1.30 includes the $0.19 benefit?
A: Yes.


Q: You started the LTOs in mid September, is that the explanation for labor delevering?
A: Labor was under pressure generally compared to our expectation. Weather didn’t help.  It’s a productivity issue.  It’s a combination of staffing up also. Fixed components of labor line also being delivered.


Q: Commodity costs, you’re modeling beef up year-over-year now?
A: Yes. Took it from deflation of 2% or 2.5% to -0.5% to -1%.


Q: Impact of advertising on comps…is it as natural as Jan and Feb being hit by weather, was that part of it?
A: We did see some weather impact that we saw in February but we also saw an impact in early March.  That was the difference for the remainder of the quarter. 


Q: First 4 weeks number…did you have any store closures? Days of operation lost?
A: No, only one store closing at the end of month and there were no other closures.  Even in Nashville we stayed open when others haven’t.


Q: Did your original guidance of $1.27 to $1.45 guidance assume any gift card breakage benefit?
A: No.


Q: In terms of the bounceback promotion, what kind of benefit did you see in terms of holding onto that traffic?
A: It hasn't been materially impactful.


Q: Participation rate? Low 10%?
A: It’s 5% or 5.5%, we didn't start it until after the promo was ended and the product was off promo.


Q: Salads are 8% of sales, and salad is an LTO, what are you thinking about salad mix going forward?
A: Driving value beyond burgers. It has helped awareness but not impacted mix.


Q: Did TV drive a lot of new customers?
A: Seen a little of both. Some new customers and some frequency but don’t have most up to date information – 6 month lag on credit card data.


Q: On revenue guidance, in the first quarter you saw sequential improvement in sales, also taking into account the weather impact and the TV program continuing, I’m surprised that you’re taking such a haircut in revenue guidance for the full year.
A: take down of SSS was weather (40 bps) and 2% reduction of SSS. Really it’s based on the pattern of the lift during media and the post media lack of retention.
When we think about the projection, we’ve had no national LTO promotion until this one. Tested regionally in 10 markets.   The effects of more difficult markets like California were not in those test promotions and those markets continue to post difficulties relative to other markets. 


Q: What kind of mix on the LTO items?
A: Very similar to in the fall. 10% overall.  More of a 40% chicken sandwich, 60% burger and it was similar this time too with 40% salad and 60% burger.


Q:  Is the post advertising period (the three weeks after) making you suppress expectations?
A: It was not quite as robust as what we were modeling originally.  Projecting that into the summer and fall.


Q: Average weekly sales numbers or gross sales before discounts, is that before couponing?
A: that’s the discount we give for team member meals or birthday burgers.  It has been running at 3% for a long time.


Q: Restaurant margins, with the LTO products, you could have done worse on food…why were food costs better year-over-year?
A: Deflation we expected and pressure from produce and promo (50 bps negatively) and benefit from hamburger and other costs. 


Q: It looks like you have a slight decrease in your ad budget this year, overall and in TV. Could you explain how it’s changed from the first quarter? Are you going for less impressions or gatting better pricing?
A: 15.6 company and between 16 and 17 million. Not a significant difference between the two.


Q: Can you still hit breakeven for SSS? On the media spending?
A: 1Q when compared with pre-media trend, and the lift we saw from media, was more than enough to pay for $6.6m invested in Q1. Confident on media mix going forward. 


Q: Was the mix for $7.99 the same as the $5.99 offers? Was it low and is that why you went back to $6.99?
A: The patty melt was introduced at $7.99 as a normal product…will go back to normal pricing with new menu next week.


Q: Sales guidance…we’re down 2% plus and 1% plus quarter to date…easier comparisons going forward. Going to spend on advertising? What am I missing?

A: Q4 comps will be more difficult. We go over that in Q4 this year. California and Arizona are still challenging markets and those are big markets. 


Q: That shows up in the 1Q and QTD numbers.

A: We used 4Q numbers to model original guidance…


Q: What’s your assumption for beef from here?

A: Probably year over year for Q2 to Q4 we’ll see somewhere around a 7% increase above 2009.


Q: $5.99 items advertised externally only…are you having your core guests use that price point?
A: Tough to tell, there is no way to accurately track.


Q: You discussed the align and engage program, was there incremental year-over-year G&A or restaurant operating cost and if so how should we model that for the rest of the year?
A: It won’t be material.


Q: When are you planning on rolling out royalty program?
A: Still monitoring it in test stores.


Q: Non comping units…on the units that opened in 1H09, what are you seeing there?
A: Not quite as strong…averaged 110k a week


Q: Lower guidance for the year…other than the lower comp and food costs, is there anything else causing you to lower?
A: No those are the two major buckets


Q: Retention of guests after lto, what were your expectations?
A: Not going to get that granular but the October lto testing was higher than what we’re seeing in 2010.  Seeing difficulty in CA and NV.



Howard Penney

Managing Director


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