On July 20th, I published a list of 13 restaurant transactions over the past three years asking the question; how many companies on this list will need to raise equity or file bankruptcy in the next 12-18 months? Today, the WSJ highlighted some of the companies on the list.

According to the WSJ, the parent of Uno Chicago Grill will skip a bond payment on Friday as it tries to negotiate more financial breathing room. The issues at Uno are a common theme in restaurant land – UNO is being squeezed by declining customer counts, rising food costs and an overleveraged balance sheet. Not surprisingly, Uno was acquired in a leveraged-buyout in January 2005 by Centre Partners and management. Uno Chief Financial Officer Louie Psallidas commented that "We are not in any imminent danger of filing for bankruptcy."

The article also cited Chevy’s Fresh Mex, Perkins and Marie Callender's chains are also in talks with their lenders. Additionally, Real Mex Restaurants Inc., which owns the Chevys, El Torito Grill, Acapulco Mexican restaurants and other regional chains is also struggling. Real Mex and its subsidiaries is one of the largest operators of full-service Mexican restaurants in the country with about 200 restaurants. Another positive data point for EAT?

Real Mex was acquired in August 2006 for $359 million by private-equity firm Sun Capital Partners. Perkins & Marie Callender's Inc., the parent company of the two namesake chains are owned by private-equity fund Castle Harlan.

On top of all this, Bennigan's, Steak and Ale, Vicorp Restaurants Inc.'s, Bakers Square and Village Inn chains have filed for liquidation or bankruptcy protection.
The Chart we published on July 20th

LIZ: It's Time For A Sit-Down

LIZ’ 2Q was lousy in almost every way. Even though the co came in ahead of my estimate and consensus, it narrowed FY guidance and picked a bad market day to do so. In other words, the market is telling me today that I need to eat some crow. There were a few bright spots that the market completely looked through today. But I need a little sit-down with management to make sure that LIZ is not missing them either.

I’ve made no secret that have been liking LIZ more and more in the mid/low teens. My Partner Keith McCullough cautioned me on the timing of the call given his near-term view (based on quantitative models) that it was headed to $12. Well, today it hit 12.50. Lesson learned… Respect timing.

Enough excuses. Let’s evaluate the model as it exists today. My view has been based not on strength in the business, brands, or industry positioning. But simply that this company was so poorly run for so long, and with a 40%+ SG&A ratio has among the biggest cost levers to pull in the business – by a long shot. The board has changed incentive targets for ’09 to be the breakout earnings year, and my view is that we’re at a point where either a) CEO’s (on the job for 1.5 yrs) recent investments start paying off in the form of profitable growth, b) growth does not come, so LIZ pulls back on costs and prints higher margin, or c) new CEO becomes ‘old’ CEO.

Believe it or not, we’re actually making progress in climbing the decision tree.

A) We know that growth is not working. Period. Now we move on to the next branch.

B) Pull back on spending and print higher margins? I definitely heard management move forward here to some degree. Inventory in the quarter was –26%, and more importantly, LIZ cut its capex budget by 7% for this year, and will cut store growth (Lucky, Juicy, Kate Spade) by 50% in ‘09.

What this basically told me is that LIZ is thinking “maybe we really don’t have the right to grow after all. Let’s fix the capital base we already have in place, increase debt paydown, and focus on margins.” Granted, I’d rather see growth plans come down by 100%. But it’s a start. Hindsight shows that most ‘Big Ideas’ for mature retailers over time have stemmed from this type of action.

The flip side is that the company is hiring people left and right. As much as it seems to get the ‘capital allocation focus’ on its balance sheet, there seems to be a complete disconnect on the P&L.

What’s the earnings power? Take capex down by 50%, close 25% of retail stores, write off another half of the core brand, and get rid of Mexx. Even if at a fire sale price. We’re seeing a bid at some price on mid-upper tier assets as evidenced by Li & Fung buying Van Zeeland today. That gets me to near $3 in EPS power on a reduced capital base.

The problem is that the plan I just articulated does not synch with management’s plan as outlined this morning. One of us has gotta give.

The bottom line is that the timeline for getting to the next branch on the decision tree is extremely close. I’m not talking 3-4 quarters. I’m talking 1. Time is running out for this team. Either capex comes down further and we see more discipline on the P&L, or the Board needs to cut bait on this team.

The market will not be patient here, and though I rarely bow to the broader tape -- in this case I agree.

US Consumer Confidence Retrenching To Its Lows

This morning's weekly ABC/Washington Post Consumer confidence reading came in lighter again (week over week) for the 2nd consecutive week. At -50, the reading is revisiting it’s all time lows.

What's most interesting about this retrenchment is that it is occurring in the face of declining gas prices and a "Trade" up in the US stock market.

When people on Main Street are losing their jobs, at an accelerating pace, maybe that trumps Wall Street's perpetually bullish narrative.

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GIL: '09 Question Mark

GIL's quarter was in line with pre-announcement -- so nothing to comment there above and beyond what I said last night. But the simple fact that the company said it should see a positive mix shift in '09 and would continue to rationalize its sock business, yet it cannot provide guidance for '09 as it needs to take up prices for the year to offset (yet-to-be-procured/hedged) cotton and energy costs. This is the first time in GIL's recent history where factors like this are part of the equation. It had ample visibility under its old model -- but not the new one. I still think sales are slowing, GM% is rolling, SG&A ratio is headed higher, and the Street's 140bp EBIT margin improvement expectation for '09 is in the clouds.

Charting Europe's Slowdown: Pounding the Pound

Last night, the UK printed their worst employment report since 1992. Additionally, I am starting to believe that the British housing bubble may be bigger than the one here - that's hard to do.

More on that later....


(Chart by Andrew Barber, Director)


Michael Phelps remains, The Man. Phelps became the most decorated athlete in Olympic history last night, winning his 10th and 11th gold medals. He has 3 more events to swim, and he won’t be doing it naked. As Warren Buffett said in his 2001 Chairman’s Letter, “you only find out who is swimming naked when the tide goes out."

“Naked” short selling, as the Street likes to call it, quickly became public shareholder enemy #1 of all things US Financials, allegedly. Yesterday, the SEC dropped its month long ban on short selling provisions however, and the tide rolled out on the levered long community again. The S&P 500 closed out the day at 1289, after drowning for a -1.8% down move from where I issued my “Trade” sell signal at 1312 the day prior. Call me lucky, or call me right – I’m happy to have my swim trunks on. Keep a “Trade” a trade.

Who’s naked now? Who will be revealed as naked next? Only time will tell, but the Japanese government gets no medals from me here this morning. I have been pounding on this country more aggressively than any other as of late because it has fallen so far from the shores of free market capitalism that it is putting the global economy at risk.

Japan is the world’s 2nd largest economy, and sometimes people forget that. Wall Street had some of the levered long lemmings convinced that, during the “its global this time” peaks of 2007, that the “BRIC’s” were going to take them and their chariots of consensus to the Olympic podium in 2008. Brazil and Russia (B + R in BRIC) have sunk -27% and -28% since May 2008 alone. Check that spelling, it’s “BRICK”, and the theme has sunk to the bottom of the pool like one.

Japan’s GDP growth was reported overnight at down -2.4% for Q2 of 2008. This economic deceleration is shockingly negative when considering that Japan grew +3.2% in Q1. We flashed the “Japanese Stagflation” chart in the portal yesterday. When Producer Price inflation is running +7%, and economic growth is negative like it is being reported now, there is no “bottom” to where this country’s equity valuations can go.

Year over year export growth in two of Asia’s largest island economies is now NEGATIVE. Japan and Singapore are EXPORT led economies. This is not trivial. However, for whatever reason, every other day I see a Wall Street buy recommendation on a shipping stock. I even saw the launch of a shipping “SPAC” (special purpose acquisition company) a few weeks back! Names like Dry Ships (DRYS) look cheap. Sure. So did Bear and Lehman before they lost all of their cash flow. Being levered long cyclical businesses who are levered to the world slowing down, materially, is the next scary movie coming to a theater near you.

US commodity driven inflation has certainly deflated in the last month. The CRB Commodities Index is down -19% in a straight line, and we can all see the crude oil quote on CNBC. This has buoyed US stocks for a “Trade”, but is quickly morphing into consensus. What is not consensus is the potential tail risk associated with a meaningful slowdown in global growth. If it was consensus, Japan wouldn’t have had its largest down day since August 1st last night.

In a global “growth” slowdown environment, Warren Buffett is one of the few investors in this world who can truly be a “value” investor. He is one of the few out there who has unlimited duration on his investments. He is also carrying a 47% cash equivalent position right now, by the way.

Any hedge fund product that needs to report weekly and monthly returns is being revealed for what it is. Investment products with tight duration constraints are called “momentum” strategies, not “value”. My definition of value incorporates time as a factor. That time clock is ticking. The world is slowing. Don’t get caught swimming naked as this tide rolls out.


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