The restaurant space is seeing a rise in short interest despite activism and buyout rumors.


With a group of investment bankers working overtime to sell the company, CPKI’s second preannounced results for 2Q10 were a little better than the first.  The recent release detailing 2Q10 results showed improved EPS in a range of $0.15 to $0.17 (vs. prior guidance of $0.10 to $0.15 given on 6/21/10 - down from the original guidance of $0.24 to $0.26 communicated on 5/6/10).


2Q10 same-store sales came in at -5.9% (vs. prior guidance of -6.0% to -7.0%) and 3Q10 same-store sales through July 11th improved to -0.6%, according to management.  This significant sequential improvement is partly attributable to the fact that the company’s 2Q10 results were negatively impacted from lapping the strong results from last year’s Thank You Card Program which ran during 2Q09 and benefited comps by about 1.4%.  CPKI will be launching the program again during the third quarter on July 28.


Notably, CPKI was one of the restaurant stocks with the biggest increases in short interest over the past month.  Other notable increases in short interest ahead of earnings season are BWLD, EAT and RRGB. 


RRGB is being pressured by an “activist” as the fundamentals continue to be severely challenged for the company.  Pressing the short here is not a good bet from a risk/reward perspective. 


JMBA has seen short interest accelerate to the upside ahead of news detailed in The Wall Street Journal today.  An article titled, “McDonald’s Smoothie Launch May Juice Up Entire Category” discusses the launch of McDonald’s smoothies nationwide and the impact on the smoothie category.  Jamba Juice Chairman and CEO James White said, “their advertising will expand interest in the category”.


We will be releasing our restaurant Industry “sigma” positioning by the end of the day, but BWLD is currently operating in the quadrant we call “Trouble Brewing.”  I continue to believe that there are several issues that will plague the company for some time.


Over the past month, EAT saw the third biggest increase in short interest at 31.9%.  As a percentage of the float the absolute short is still low at 7%, but it’s up 1.68% in the last month.  Over the weekend, Barron’s described the CEO of DIN as a canny operator, but she is doing nothing of consequence to alter the operation within the four walls of the Applebee’s concept.  The company’s ability to do anything other than sell off stores is limited by the leveraged balance sheet.  This offers an ongoing market share opportunity for EAT.


Brinker is on the other side of the table with enough liquidity to buy back 20% of the equity value of the company and is making big strides to improve restaurant level margins and the overall guest experience.  Apparently, the market likes leverage more than cash!  Over the past month EAT is down 5.8% and DIN is up 2.6%.




Howard Penney

Managing Director


In preparation for MAR's Q2 earnings release we've put together some forward looking commentary from the company's Q1 and subsequent conferences.




  • “Well, we’ve just closed our period 5, which is largely coincident with the month of May, where we saw RevPAR up for our managed portfolio in the United States by about 9%, and for the first time in two years, we saw rate growth of one point.” 
  • “Now for our second quarter, which would include that period 5, but also period 4, which was largely the month of April; I apologize for the complexity around our calendar, which is historic. But also then one more period after that, we’ve now got two quarters in the books and our North American managed RevPAR is plus 7.3% and rate is zero. So the fourth period would have been down a little and the fifth period up. Those are good numbers, and obviously to us, give confirmation that the recovery is well underway in the lodging space and it sure feels a lot better than it did a year ago.”
  • “Well, right now we earn about 25% of our fees from outside the U.S. with Asia probably being about a third of that.”
  • “I’ve never bragged in the past about market concentration because I’ve never had it before with the dramatic decline in incentive fees that we’ve had in the last three years, but today we have a lot of market concentration in both New York, Washington and the Florida resorts. They probably account for two-thirds of our incentive fees. So the incentive fees today are very much driven by international hotels, international RevPAR, international unit additions, and then RevPAR growth in those particular markets.”



  • “In January and February, North American REVPAR demonstrated solid improvement from recent trends, but March was even better.  For example, for the Marriott brand in North America, company-operated hotel REVPAR declined 8.5% in the first period, declined 3.1% in the second period, and rose 7.1% in the third period.  And Ritz-Carlton is ramping even better with their January down 2.4%, February up 7.6% and March, which is in our second fiscal quarter, up 15.7%.”
  • “For the Marriott brand, group business also showed dramatic improvement late in the quarter, largely due to better attendance. Group room nights increased 1% in the first quarter, but then increased 10% in period three. While corporate business remains soft, association meeting attendance took off. Association room nights increased 15% for the quarter and rose 50% in our third period.”
  • “Hotels are benefiting from stronger corporate transient business, increasing sales of suites, club level and other premium rooms and rising pricings at a few hotels. The recovery is clearly occurring faster than we anticipated.”
  • “Our booking window is extremely short, which makes forecasting particularly difficult. Hotel demand is highly correlated to the economy, albeit with some delay, and we still have concern about the economy as unemployment is high.”
  • “This year, I think the incentive management fee growth that we anticipate is going to largely be from hotels that are paying incentive fees now and we'll grow in what we earn from them with strengthening REVPAR, and house profits and the international growth, particularly including the unit growth that we've added outside the United States over the last number of years. The hotels that are not paying and are materially short of their owner’s priority in the U.S., again, that's going to be a little stickier. It’ll be a little longer coming back, but ultimately, we look forward to all of those rooms getting back to their fee contribution that they saw at the last peak.”
  • “We are not incentivizing people to take the financing. Thus our financing propensity is down in the low 40s, I believe, for the quarter. And that compares to a couple of years ago with as high as 75% to 80% when we did incentivize people.”
  • [Comment on guidance] “Year-over-year, it puts you at about, with incentive fees, up modestly say 5% to 10%.”

2Q 2010 Guidance:

  • “We expect REVPAR to remain strong. We believe system-wide hotels in North America will increase REVPAR by 4% to 6%. International hotels should increase system-wide REVPAR by 8% to 10% on a constant dollar basis. And worldwide REVPAR should grow by 5% to 7%.”
  • Total fee revenue of $275 million to $285 million”
  • “For the Timeshare business…, we expect …contract sales to total $175 million to $185 million and anticipate Timeshare sales and services, net of direct expenses, to total roughly $40 million to $45 million. Given this, Timeshare segment earnings should total $20 million to $25 million.”
  • “G&A expenses are expected to total approximately $150 million, a 10% increase over adjusted 2009 levels. In last year's second quarter, G&A benefited from a reversal of $8 million dollars in incentive compensation as we eliminated bonuses for executives for the year.
  • We expect …EPS at about $0.25 to $0.29 per share.”

2010 Guidance:

  • “We believe REVPAR for system-wide hotels in a North America will increase by 3% to 6% with higher pricing in sight. REVPAR for international hotels should increase by 4% to 7% on a constant dollar basis and global REVPAR should increase by 3% to 6% on a constant dollar basis.”
  • “With unit growth of 25,000 to 30,000 rooms in 2010… fee revenue could total $1.145 billion to $1.175 billion. This fee outlook is $55 million to $65 million higher than the guidance we provided in February.”
  • “Our Timeshare business is also expected to improve year-over-year, with stronger contract sales and higher closing efficiency. Realized prices of our North America one-week intervals are expected to move modestly higher year-over-year.”
  • “Our overhead remains well under control and we look forward to significant operating leverage as demand continues to improve. Over half of our Timeshare customers are paying cash for their one-week interval, so our 2010 securitization will likely be smaller than in years past. We expect to sell notes in 2010, although the timing and amounts of such deals will depend on our sales pace. At present, we would expect only one note sale in 2010, probably in the fourth quarter.”
  • “We expect the Timeshare business could generate $185 million to $195 million on the Timeshare sales and services net line in 2010, and $95 million to $105 million for Timeshare segment earnings.”
  • “We expect Marriott’s general and administrative and other expenses to increase to $650 million to $660 million in 2010. Compared to last quarter’s forecast, our higher G&A estimate is largely related to higher incentive compensation associated with a stronger operating result.”
  • We believe earnings per share total $0.95 to $1.05 in 2010. Our fully diluted share count in the first quarter was 373 million shares and we've assumed 378 million shares for our full year 2010 guidance. This increase in diluted shares is largely due to the impact of a rising stock price and to a lesser extent, to an increase in anticipated stock option exercises. We expect higher than normal exercises this year, due to the expiration of options on about 5 million shares in October 2010 and February 2011. As a result, we’re likely to see more Form 4 filings in this year, more than what is typical.”
  • “Excluding the impact on consolidated timeshare securitization, we expect to reduce debt by another $400 million to $500 million in 2010.”
  • “We are focused on selecting value-added investments to accelerate our growth. We expect to invest approximately $500 million for capital spending, loans and equity slivers in 2010.”
  • “EBITDA is expected to total approximately $985 million to $1.04 billion this year. The changing Timeshare accounting rules would have increased 2010 adjusted EBITDA by about $75 million. So even adjusting for this value, we're still expecting a modest increase in EBITDA in '10.”

UA: Mgmt Change Makes More Sense Than You Think

No one likes to see a high multiple name like UA have a high profile mgmt change before the quarter (unless they’re short it). We don’t like the timing either. But the bigger picture context makes a ton of sense. McCreight did what he was charged to do. He’s getting paid big. And Plank wants back in.


We’re disappointed to see that Dave McCreight has left Under Armour, as a) he was a valuable part of the building and integration of new regime of management at UA, b) he was effective in his role, c) management transition in a high growth/high multiple company sparks a perception v. reality argument that I’ rather did not exist, and d) and quite frankly, we simply like the guy. 


But all that said, he made it no secret (nor did CEO Kevin Plank) that primary purpose was to build the right organizational structure and assemble the right team. He has achieved these goals, and is being paid very handsomely for doing so. It’s no accident that it’s been almost exactly 2-years since McCreight was hired. Per his employment agreement, 50% of his restricted stock vests after 1-year, 25% after year 2, and 12.5% each after year 3 and 4. This was valued at $4mm on grant date, and we’re now looking at a price 33% higher. As far as how the math works out, he gets his full $4mm in 2-years vs. 4. On top of that, there’s $3mm in stock options, but those vest equally over 4-years and have a ‘stay’ feature for 1-year where hurdles need to be met and kept for 1-year thereafter. Our sense is that UA likely was generous with waving many of these restrictions.  The bottom line is that the guy did his job, and is likely walking away with between $5.5 and $8mm in cash. Not bad.


So that explains precise timing. But what about the bigger picture?

McCreight’s departure is function of UA’s structural shift towards a business unit organization – period. Over the last 10-months, the company has brought in Gene McCarthy to spearhead Footwear (8/09), Henry Stafford to head Apparel (4/10), and John Rogers to lead the E-Commerce effort (5/10), all under David’s leadership.  The reality is that Plank saw that the organization needed more firepower and that he could not do it himself. But guess what? Now it’s there. Keep in mind that Plank is only 38 years old. I can’t even count the number of times that Phil Knight at Nike came and went (in title) throughout the course of his years at Nike. This smells to me like it’s much of the same. And No, I’m not worried about it.


Is this an advance warning of something bad coming down the pike? I don’t think so. Sales look good. Product flow is picking up, and the brand is hot as ever. The bottom line is that UA continues to transition through its growth curve as well as any other company I’ve seen.


If people assume the worst here and this punitive market takes this high growth/multiple stock out behind the barn and shoots it, then it’s setting up to be a gift.



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The Macau Metro Monitor, July 13th, 2010



150 foreign workers from the Galaxy Macau construction site claimed that the contractor owes them around MOP2MM in overtime pay.  DSAL has ordered Galaxy Macau’s contractor to reimburse the outstanding pay before this Friday.


China has denied any changes to lending restrictions.  The China Banking Regulatory Commission said that there had been no policy changes or revisions to mortgage requirements for second and subsequent home purchases despite media reports that suggested first-tier cities have resumed lending to buyers of third homes.


Also, according to a statement, The Ministry of Housing and Urban-Rural Development urged local governments to strictly comply with lending policies designed to curb speculative investment in property.  The ministry acknowledged that "positive changes had emerged in the property market" and repeated it would increase the supply of affordable homes.



The Macau Consumer Confidence Index dropped 1.77% QoQ and 0.17% YoY in Q2 2010.  The survey found inflationary pressures affecting living standards.  Confidence in the local economy dropped 2.96 points, but still above the optimism level of 100. “Employment situation” also reported a decline of 3.92 to 93.37, suggesting job pressures remain. 


TURBOJET, CHU KONG TO MISS FERRY DEADLINE Macau Daily Times, Intelligence Macau

According to a spokesperson for the Maritime Administration, three route permits, Turbojet's routes from the Outer Harbor to Zhuhai and Dongguan, and Chu Kong's route between Pac On terminal and Zhuahi, have been revoked due to "a failure to be operational before the ferry deadline."  Meanwhile, Sands China's CotaiJet beat the deadline and will launch services between Hong Kong and Macau Outer Harbour Terminal. 


Meanwhile, IM doesn't see much impact from the opening of the Pac On Ferry Terminal some time in 2012, as the biggest entry point to Macau is still Gongbei, an arrival point that the Venetian dominates.


Visitor arrivals in package tours climbed 132.9% YoY to 569,803 in May 2010, as visitors in package tours for May 2009 was adversely affected by the human swine influenza pandemic.  Visitors from Mainland China (422,204); Japan (22,645); Taiwan, China (21,293); and Hong Kong (20,368) rose substantially by 168.0%, 85.9%, 38.1% and 14.5% respectively.  650,849 guests checked into hotels and guest-houses in May 2010, up 46.3% YoY.  Occupancy increased 18.6%YoY to 77.9%.



MasterCard said its cardholders, both Singapore-based and foreign, spent $633.8 million from May 28 to June 26, a 23% YoY growth.


Heading into yesterday’s close the US market was mixed on extremely light volume.  The S&P 500 closed up one point to close at 1078, while the Russell 2000 closed down 1.2%, to close at 621.  The RISK trade continues to fade despite optimism over corporate earnings and waning concerns over budget deficits in Europe.   


After the close, Alcoa beat recently lowered EPS estimates and commented that demand will remain strong in 2H10.  The news out of Europe is also supportive of higher equity prices as Greece sold bills today at a yield lower than it pays the European Union for emergency loans, although Moody’s cut Portugal’s credit rating on the nation’s growing debt burden and “weak” economic outlook.


Yesterday, strength was seen primarily in Technology (XLK), on the back of Software stocks and a 1.1% rise in the SOX ahead of earnings from INTC +1.6% and AMD +0.3%, which report on Tuesday and Thursday, respectively.  Yesterday, MSFT rose 2.3% on a sell-side upgrade, while AAPL declined 1.0% on the negative Consumer Reports commentary on the iPhone 4.


 Yesterday, Treasuries were mixed and the VIX declined for the seventh day in a row. The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (23.73) and Sell Trade (29.15).


The dollar index traded up 0.3% on the fading RISK trade.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (83.10) and Sell Trade (85.67).


Despite waning debt concerns in Europe, the euro declined slightly on Monday and looking to trade lower for the third day in a row.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.23) and Sell Trade (1.28).


Yesterday’s weakness was centered in commodities and commodity-related stocks.  The three worst performing sectors yesterday were Materials (XLB), Industrials (XLI) and Energy (XLE).  In addition, Oil, Copper and Gold declined yesterday; Natural Gas outperformed but still declined. 


Copper prices fell for the first time in six days after a report showed imports fell in China.  Shipments of copper and products into China declined 17% earlier to 328,231 metric tons in June.   Imports have now fallen for three straight months.  The S&P Metal & Mining Index declined 2.6% and coal stocks were down 1.6%.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.86) and Sell Trade (3.07).


The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,184) and Sell Trade (1,226). 


Crude oil dropped for the first time in four days as the dollar strengthened against the euro; yesterday Oil fell 1.5% to close at 75.28.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (71.36) and Sell Trade (77.58).  


As we look at today’s set up for the S&P 500, the range is 44 points or 2.9% (1,048) downside and 1.2% (1,092) upside.   Equity futures are trading above fair value, supported by AA earnings trends.  The MACRO calendar heats up toward the end of the week.    


Howard Penney













Touch of Genius

“Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius - and a lot of courage - to move in the opposite direction.”

-Albert Einstein


A lot of political courage it would take to get this global deficit and debtor nation under control Sir Einstein; a lot of courage indeed…


Fortunately, as the US citizenry braces for American Austerity, we are starting to see the early stages of political courage emerge. In the aftermath of President Obama’s “Debt and Deficit Commission” warning him of a “fiscal cancer that could destroy the country from within”, popular websites like Drudge are carrying this as their top story this morning (Drudge Report’s “Debt Like Cancer” at #1


As the Fiat Fools of the Krugman Empire attempt to make our deficit and debt problems “more complex and more violent”, a Touch of Genius that has always been America’s resolve seems to be finding its way into the daily dialogue of Washington’s Officialdom. This is progress. After 5 consecutive down weeks for the US Dollar, apparently Mr. Macro Market has the world’s attention.


Recognizing risks and TRENDs as they emerge on the margin is the art of global macro. While it’s politically convenient for the perpetual bull market machine to say that “no one saw the sovereign debt crisis coming 6 months ago”, readers of this daily diatribe know better. Our call 6 months ago was the same for the Euro as it is for the US Dollar now. The currencies of countries with burgeoning deficit and debt to GDP ratios are leading indicators for their domestic stock markets.


Fundamentally, our Hedgeyes here in New Haven are chaos theorists. We believe that there is a deep simplicity that governs the global ecosystem and that it manifests itself in high correlations and r-squares. Our daily risk management task is to recognize when immediate term TRADEs (3 weeks or less) are going to become intermediate term TRENDs (3 months or more). Then we call these out as quarterly Macro Themes.


Our Q3 Macro Theme of American Austerity has already hit the tipping point of political consensus. With mid-term elections pending and no recovery in US employment in sight, we don’t think that it is politically palatable for Bernanke and Geithner to take Paul Krugman’s word for it. In the last week we have heard leaks coming out of both the Fed and Treasury that another “bigger, more complex” stimulus is not going to be put on the table. God Bless America for that.


The alternative is that we literally become the Japanese experiment which, by the way, still doesn’t seem to be going too well. In the last 3 days, here’s the news that’s come out of the island nation gone lost decade(s):

  1. After being in office for less than a month, newly appointed Japanese Prime Minister Naoto Kan has already lost support of the upper house.
  2. Japanese equities have lost ground relative to global equities, closing down on both days this week, moving the Nikkei to -9.6% YTD.
  3. Japan’s Public Pension Fund (which holds 12% of all JGBs) sold more government bonds than it bought last month for the 1st time in 9 years.

You see, unlike the USA who levered up their citizenry with the American Mortgage Dream, Japan has opted to suck down the savings base of their people in order to continue to fund their Great Bureaucracy. As baby boomers get older, they have less savings to give and now the Japanese well is running dry. Sound familiar?


Both Japan and Europe have already trekked the road to perdition that the Big Keynesians in America want us to travel. While hope is not an investment process, I do see glimmers of it now that America is learning more than just fear-mongering lessons about great depressions. Americans don’t want to be Japan or Spain.


If American Austerity starts to take hold, it won’t be a bed of roses for all things in your portfolio. The United States of America runs an over-consumption economy that dares the citizenry to lever themselves up and go buy a house or car. That needs to stop. It’s time for some frugality.


Short term pain for long term gain is something that the Chinese, Brazilians, and Australians seem completely in agreement with. To a degree, some European countries that are far more mature than America are getting this too.


The UK is one of those countries that is starting to look interesting to us on the long side – not so much from an equity market perspective yet, but certainly from a currency perspective. Remember, our baseline macro model currently sees currencies as the lead indicator for a country’s budget and balance sheet health.


We bought the British Pound (FXB) in the Hedgeye Asset Allocation Model yesterday taking our allocation to international currencies to the highest of all our asset classes other than cash. We have an 18% allocation to international currencies with a 15% position in the Chinese Yuan and a 3% position in the British Pound.


Until Professional Politicians in the US start to implement the kind of austerity measures that PM David Cameron and Chancellor of the Exchequer, George Osborne, have, we’re going to maintain our short position in the US Dollar (UUP) and US Equities (SPY) against our Chinese (CYB), Singaporean (EWS), and British (FXB) longs.


My immediate term support and resistance levels for the SP500 are now 1048 and 1092, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Touch of Genius - japan

Early Look

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