If you thought 3 for 20 was cheap…


For those following EAT closely it’s no surprise that Chili’s same store sales are trending below that of the overall industry, as measured by Knapp Track.  In fiscal 4Q, Chili’s SSS could be down as much as 4%.  In this environment, top-line sales are critical to the implied health of the company.  When sales are not good the market punishes the equity, as it should.  For EAT we are reaching maximum bearishness. 


Given our Bear Market Macro theme, there is the potential that the market could get even uglier - that is out of my control.  What I can control is what I understand.  EAT recently closed the sale of OTB and now has enough cash and debt capacity to buy back 25% of the company.  While it will not happen tomorrow, it will happen over the intermediate term.  That is good enough for me.


News of Chili’s struggling top line has sent the stock down 20% over the past month, with the stock now trading at 6.1x EV/EBITDA.  Looking a little more closely, things are even cheaper that they appear on the surface.  Examining the different pieces of EAT’s assets, the current implied value of the Chili’s business alone is 2.5X cash flow.


When we get within a six month window of a potential catalyst we like to press our bets, and we are getting close to that time.  As the calendar turns on 2011, EAT will be in a great position to show improving trends.  The catalysts are:


(1)    Lapping the self-inflicted wounds of shrinking the menu.

(2)    Getting past the excessive discounting of 3 for 20.

(3)    Building momentum on the in-store margin initiatives.



The last catalyst is critical and has the biggest potential for an upside surprise relative to street expectations.  For now the stock is trapped in the bearish sentiment for typical bar & grill companies.


In the meantime, while we wait for the catalysts to play out, the company is a big, big, big buyer of stock. 




Howard Penney

Managing Director

Bear Market Macro: SP500 Levels, Refreshed...

We made two short sales on strength in the Hedgeye Virtual Portfolio this morning: Copper (JJC) and Citigroup (C).


While there was a fleeting hope that the US stock market could have a snappy bear market bounce this morning (the unemployment report wasn’t awful relative to expectations), the math in our quantitative models continues to say sell on strength.


In the chart below we outline how ugly this market is starting to look across all 3 of our core investment durations (TRADE, TREND, and TAIL). We call this a Bearish Formation (when all three durations confirm the same direction of price momentum, volume, and volatility).


Despite the SP500 having closed down for 4 consecutive days and for 8 out of the last 9, lower-lows of support continue to register in our models. This is bearish and speaks to the reality that consensus on US and global economic growth is not yet Bearish Enough.


Our next line of immediate term TRADE support is now 1005.



Keith R. McCullough
Chief Executive Officer


Bear Market Macro: SP500 Levels, Refreshed... - S P

R3: Fore!


July 2, 2010


Decelerating golf data for May highlights the volatility of monthly data while confirming pockets of regional strength.





As many plan to head out to the links over the holiday weekend, the latest update on golf rounds played (albeit on a lagged basis) provides a few noteworthy highlights. May data, courtesy of Golf Datatech, reveals a sharp sequential deceleration to -2.9% from +10.5% in April.  After posting positive growth in 7 of 8 regions last month, May reveals only three key areas of strength with New England (+8.2%) Mid-Atlantic (+4.1%) and South Atlantic (+3.6%) all posting positive numbers.  Recall that DKS has a notable presence on the East Coast.


While month to month results are clearly volatile (and weather sensitive), lackluster YTD results (-3%) remain unchanged.  As such, we suspect improved demand noted by retailers is likely to continue to be driven by share gains more than anything else.  On the wholesale side, golf participation-driven demand appears to remain lackluster.  Net, net aside from monthly volatility,  rounds played remains a headwind for the industry overall.





- Whether it’s in preparation for its IPO or just another growth vehicle, Prada has finally entered the world of e-commerce.  The multi-country site is more than just a placeholder, offering a full range of the company’s high priced handbags, leather goods, and accessories.  And of course what would ecommerce be without free shipping, this time with a threshold of $2,000.


- According to a BIGresearch survey, 16.2 percent of consumers will head to stores to buy new patriotic merchandise this year for July 4th, up from the 14.1 percent who shopped for apparel, decorations and accessories last year.   Even more eye opening is AAA forecast for a 17.1% increase in road travel over the holiday weekend.  Approximately 34.9 million people are expected to hit the roads and travel at least 50 miles from their homes.


-If you haven’t already seen the news out of Hollister’s “EPIC” flagship store in Soho, then here goes.  The store is closed, temporarily, due to bedbug infestation.  According to news and blog reports, employees began complaining about bedbug bites weeks ago but were originally ignored.  After the volume of complaints grew and spread to the customer base, management finally decided to close the store to exterminate.  Unfortunately, bedbugs thrive in a dark environment. For those who haven’t been, the store has no windows!  We’re officially crossing this location off of our store visit list.





Amazon Acquires - is acquiring daily deal site, one of the pioneers in offering the one-day bargains that many online consumers seem to love. Amazon, which just about a year ago acquired in a deal valued at almost $900 million, isn’t saying much about its latest acquisition. But in a series of blog postings on, founder and CEO Matt Rutledge says his company looks forward to becoming an independent operating subsidiary of Amazon. Internet Retailer estimated web sales of $71.6 mm in 2009. <>

Hedgeye Retail’s Take:  A smart purchase for Amazon, which gives now allows the company to use its own inventory to fuel the Woot “offs”.  Given the cultlike following of Woot, we just hope they don’t over expose it.  The essence of Woot is one product per day, which it what truly makes it unique. 


Delta Apparel Acquires HPM Apparel - Delta Apparel Inc. has agreed to acquire HPM Apparel Inc., which markets U.S.-produced collegiate fashions to college bookstores under The Cotton Exchange brand. Robert Humphreys, Delta’s CEO, said the deal furthers the company’s efforts to tap into the college bookstore market, while also adding to its business with the military and other retail channels. “In addition, this business provides us additional U.S. screen print and embroidery capacity, further enhancing our speed to market initiatives,” he said. Delta said the deal would add about $25 mm in sales to the fiscal year ending July 2, 2011, while being slightly accretive to earnings. <>

Hedgeye Retail’s Take:  Simple bolt on acquisition which should drive some synergies.  However, this does little to differentiate the company’s core business away from commodity tees. 


LI-NING Unveils Rebranding Strategy - LI-NING unveiled a new logo and slogan Wednesday in a brand relaunch timed to coincide with the 20th anniversary of the founding of China's dominant domestic sporting goods apparel brand. <>

Hedgeye Retail’s Take:  We continue to believe that LI-NING and other Chinese sports brands will continue to raise the bar from a competitive standpoint rather than watch Nike and Adi walk into their marketplace.  Furthermore, we’re still waiting for LI-NING to enter the market here in the U.S.  Perhaps a re-branding is just what they’ve waited for before taking the brand stateside.


Uniqlo’s June Comp Decline Disappointing - Fast Retailing said Friday that Uniqlo’s same-store sales slumped 5.8% in June on slow sales of summer items and lower foot traffic. These figures exclude Uniqlo’s business outside Japan. The brand saw its same-store sales drop 16.4% in March and slide 12.4% in April. They recovered in May, gaining 3.1%. June demand for its stay-cool innerwear range, called Silky Dry for men and Sarafine for women, was high but some stores ran out of certain sizes and colors and missed out on sales to consumers. Uniqlo expects its inventory will work better in July and August, when consumers are in the market for t-shirts and shorts rather than underwear. <>

Hedgeye Retail’s Take:  After a very strong run, Uniqlo has on more than one occasion missed the mark on merchandising and inventory “under” management.  Making a bet that underwear would be a key summer item just seems flat out wrong and is clearly an example of complacency after the company had a hit on its hands with Heatech.


Bloomingdale's to Showcase New Brand Pippa - French Connection has developed a new brand, Pippa, and Bloomingdale’s will have the exclusive on the fall launch.  Pippa, described by officials as a collection of contemporary workwear essentials, will be at all Bloomingdale’s stores and in the second week of August, but shoppers will be able to preorder on in mid-July. Bloomingdale's feels strongly that creating an on-trend category for the young professional woman is going to resonate. <>

Hedgeye Retail’s Take:  Differentiation and exclusivity continue to dominate department store merchandising efforts, this time with a horrible brand name.  Pippa? Really?


Sephora Perfumery Chain Enters Brazil - The Sephora perfumery chain is about to enter Brazil, the world’s third-largest cosmetics market, and take its first step into South America following its parent LVMH Moët Hennessy Louis Vuitton’s purchase of 70% of the Rio de Janeiro-based online retailer Sacks. The Brazilian retailer offers more than 270 brands and boasts a customer portfolio of more than 830,000 clients, with four million unique visitors a month. <>

Hedgeye Retail’s Take:  Keep an eye on Brazil which for a long time now has been playing second fiddle to China and the Middle East in terms of emerging market growth.  The luxury market is booming in Brazil and we expect it will become a major target market for premium brands over the next several years. 


The NBA and GSI Commerce Extend E-Commerce Agreement to 2017 - GSI Commerce Inc. signed an extension of its multiyear e-commerce agreement with the National Basketball Association (NBA) to 2017. Since partnering with GSI in 2007, the NBA's online sales have grown each year.  <>

Hedgeye Retail’s Take:  If there’s one client that isn’t going to take their e-commerce in house, it’s the NBA.  This remains a win-win for both parties.


PVH and Ike Behar Apparel Grow Partnership - Ike Behar Apparel & Design has extended its licensing agreement with Phillips-Van Heusen to include ready-to-wear dress shirts, beginning January 2011. For 10 years, the two have been partners. The Insignia Division of PVH's dress furnishings group has been producing neckwear for the Ike Behar brand. <>

Hedgeye Retail’s Take:  Formerly a higher-end dress shirt brand, it now appears that the company is heading downscale a bit with this ready-to-wear effort.  We would expect to see distribution for Behar to expand as well, beyond Saks and Neiman’s along with this new line.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.67%


The Macau Metro Monitor, July 2nd, 2010



According to the Gaming Inspection and Coordination Bureau (GICB), June GGR rose 65% YoY but fell 20% MoM.  Analysts attribute the relatively soft number to World Cup gambling, as it takes away from gambling in casinos.  June revenue totaled MOP13.642 billion (US$1.705 billion) compared with the MOP17.1 billion recorded in May.


According to IM,  SJM kept its market share lead at 30%; Sands China had 21%; Wynn had 17%; MPEL had 13%; Galaxy had 10.7%; and MGM remained in last place at 7.5%.  IM says July is always stronger than June, though usually not quite as strong as May, and August is one of the best months of the year for both mass and VIP.



IM believes 2Q EBITDA will be off the charts particularly for Wynn Macau and Sands China as they take the biggest percentage of revenue gains to their bottom lines.  IM also believes 3Q will be stronger than 2Q (because of August results), with the 4Q being the strongest (biggest Golden Week of the year and December spending).


IM says SJM and Galaxy's third party casinos have the best revenue-share deals for junkets. If a commission war does break out between the concessionaires and the junkets, IM believes Wynn and Sands would be least impacted as they continue to expand their direct VIP business, which is more dependent on product (Encore and Plaza) and less on rebates.


In addition, IM thinks the bottom three operators will do well in the coming months.  CoD will post solid numbers despite its lawsuit on reclaiming US$35m from its former junket consolidator at Altira.  Galaxy will continue to grow RC volume until Galaxy Macau opens in March 2011, when it will need to adjust its mass-marketing strategy.  MGM will throw everything but its credit-conservativism (and perhaps even that) at the market as it prepares for its IPO.


NON-GAMING, ANYONE? Intelligence Macau

By moving Robuchon a Galera from the old Lisboa to Grand Lisboa's 9th and 10th floors, Grand Lisboa hopes its non-gaming facilities would drive traffic.  IM sees 3Q EBITDA gains from this transition.  Meanwhile, CoD is planning a 20,000 cubic meters nightclub and a Hard Rock Cafe, and the Venetian may be unveiling some new nightclubs.



The Urban Redevelopment Authority (URA) released preliminary estimates that showed private residential property for 2Q rose 5.2%, compared with 5.6% in 1Q.  Based on the estimated price index of private residential property, prices rose from 175.0 points in 1Q to 184.1 points in 2Q.




The data points in Global MACRO have turned decidedly negative, putting pressure on the US equity prices; China’s PMI, US jobless claims, US ISM and the US housing market.  The S&P 500 closed lower on Thursday by 0.3%, making 8 of the last 9 days down-days for the market.


Yesterday’s Jobless claims were 472,000 vs. consensus 455,000; prior week revised to 452,000 from 459K - the 4-week average is the highest since March 6th of 466,750.  Continuing claims were reported at 4.616M vs. consensus 4.52M; prior week revised to 4.573M from 4.548M.  June ISM was 56.2 vs. consensus 59.0. 


We are bearish in our outlook for housing and home prices; this is being expressed in out 3Q10 theme of Housing Headwinds.  Yesterday’s May Pending Home Sales declined 30.0% month-to-month versus consensus of a decline of 11.8%.  Pending homes sales for May declined 15.6% year-over-year.


Despite the decidedly negative trends for the consumer, the only two sectors in the green yesterday were consumer related - Consumer Discretionary (XLY up 0.8%) and Consumer Staples (XLP up 0.2%).  The S&P Retail and Restaurant indices were up 1.1%, each. 


Treasuries were mixed with the long-end outperforming in a continued flattening of the curve.  The 10-year traded below 2.90%, before rising again to 2.94% at the end of the day.  The dollar index closed dramatically lower, closing down 1.5% at $84.60.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (83.56) and Sell Trade (86.52).  The VIX moved lower by 4.9% - the Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (30.46) and Sell Trade (36.16). 


With a sharp decline in the Dollar index, it’s worth noting the big spike in the Euro - the Euro traded up 1.5%, closing at 1.2439.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.22) and Sell Trade (1.25).


The three worst performing sectors were Materials (XLB down 0.6%), Healthcare (XLV down 0.9%), and Financials (XLF down 0.9%).   Health insurers CI and WLP were lower on concerns around healthcare reform risk.


This has been a disastrous week for copper, down 4.9% over the last five trading days.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.84) and Sell Trade (2.97).


Yesterday gold saw its biggest decline in two months (April 16).  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,207) and Sell Trade (1,265). 


Oil has declined 5% over the last five days, on slowing global growth.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (72.88) and Sell Trade (75.14).  


As we look at today’s set up for the S&P 500, the range is 57 points or 1.5% (1,012) downside and 4.1% (1,069) upside.   Equity futures are trading mixed ahead of the jobs number.    


Howard Penney













An American Business

“Being ignorant is not so much a shame, as being unwilling to learn.

-Benjamin Franklin


After finishing “Founding Brothers” by Joseph J. Ellis, I just started digging into “Benjamin Franklin - An American Life” by Walter Isaacson. Being a Canadian hockey player these days can feel golden at times, but not when I’m staring at the mountain that is my reading pile of American history.


On June 23rd I titled my Early Look “Rigorously Frugal” in reference to how the Founding Fathers of America considered government spending. By immersing myself in Franklin’s American story, one thing has already become crystal clear – on a relative basis to Thomas Jefferson, Benjamin Franklin lived frugally.


What I love about Franklin is that he wasn’t twirled up in the trees with the squirrel hunters espousing theories. He was a doer. If we had him running a portfolio in these globally interconnected times, I think he would find a way to do quite well. The man never stopped learning.


Ahead of our 4th of July weekend, here are 3 more Franklin quotes that I think fit our financial times:

  1. “We are all born ignorant, but one must work hard to remain stupid.”
  2. “A penny save is a penny earned.”
  3. “By failing to prepare, you are preparing to fail.”

As a practical matter, I think a lot of Americans are already moving down the right path when it comes to preparing their personal balance sheets for the inevitable. While the US government literally does the opposite of these 3 Franklin quotes, Americans are proving to do what they’ve always done – evolve.


On the first point, dropping Americans 401ks to 201ks and then fear mongering them from the mountain tops of political life did exactly what professional politicians preached – it scared the hell out of the American people. Whether it be from a mortgage application or a US equity fund flow perspective, Americans are proving that they haven’t remained “stupid” enough to make the same mistake twice. They aren’t buying houses or stocks.


On the second score, while the savings rate in this country has its own problems in terms of how it’s calculated, there is no doubt that the direction of cash in savings accounts of fiscally conservative Americans is going one way – up. Earlier this week we saw the US savings rate bump back up to 4%. Everything starts with a penny saved (after buying our Gold position back yesterday, our allocation to cash in the Hedgeye Asset Allocation Model is now 58%).


On the final point, whether it was preparing for a slowdown in Chinese or US economic growth, a lot of our clients were proactively prepared for the swoons that we’ve recently seen in global equities. As of last night’s close, China and the US are down -27.3% and -7.9% YTD, respectively. Those who were unwilling to learn that there is a global interconnectedness to fiat currencies and the Debtor Nations that create them are learning now.


Yesterday we had our largest audience ever for a quarterly Macro Themes conference call. As Big Alberta (Daryl Jones) and I broke bread with our American teammates for dinner last night in New Haven, there was a sense of graciousness that I have not yet felt in my investing life. We are grateful for our clients giving us the opportunity to build a new American business. Without their confidence in us, we wouldn’t have been able to build while we learn.


I realize that sometimes I sound overly doomsday’ish when I write about the state of this American union – and to be clear, I remain bearish on all that has become the Officialdom of Perceived Wisdoms in Washington’s economic department – but I am also humbled and proud to have the opportunity to be industrious and frugal in building this American business. I may not make the money I used to make working on Wall Street, but I am certainly happier.


My immediate term support and resistance levels for the SP500 are now 1012 and 1069, respectively.


Enjoy America’s 4th of July with your families and friends,



Keith R. McCullough
Chief Executive Officer


An American Business - ben

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