Here is a look at MSSR guidance going into earnings today.


Comparable-store sales

  • MSSR needs to post a -6.2% comparable restaurant sales number or better in order to maintain or improve two-year average top line trends
  • Per Factset, the Street is expecting a comparable restaurant sales number of -3.5%, which would imply a 135 bps sequential improvement in two-year top line trends.  In fact, with the exception of one estimate of -5%, all of the estimates comprising the Factset estimate are -3%.  A -3% comparable-store sales number would imply a sequential improvement of 160 bps in two-year average top line trends


  • Completing 15-20 audio-visual upgrades during 2Q
  • Opening a third Houston, Texas location this summer (three total openings this summer)
  • Revenue for the year between $355 and $365 million
  • Fully diluted 2010 earnings per share are expected to be between $0.40 and $0.45
  • Depreciation and amortization for 2010 is expected to be approximately $16 million
  • G&A is expected to be between $20 and $21 million for 2010
  • Annualized effective tax rate between 10% and 15%
  • Capex for 2010 between $15 and $16 million
  • Beef prices for the company will be 5% to 10% higher this year versus last year


Notable remarks from the most recent earnings call

  • “We believe that driving more traffic through deliberately managing our check average down, driving higher guest satisfaction, and broadening our guest base, will result in higher sales levels on a long-term basis”
  • “Our early weak sales trends on Monday, Tuesday, and Wednesdays are also starting to rebound, which suggests that the business guest base is beginning to strengthen as well”
  • Promotions are responsible for the recent drop in pricing and check
  • Rolling out new menu platform – this had added more value, flexibility, and consumer satisfaction
  • April sales trends were better than March


Howard Penney

Managing Director


Here is a look at MRT guidance going into earnings today.


Comparable-store sales

  • MRT needs to post a 5.5% increase in comparable restaurant sales in order to maintain two-year trends
  • Per Factset, the Street is expecting a comparable restaurant sales number of +5%, which would imply a 30 bps sequential deceleration in two-year top line trends
  • The five estimates that constitute the Factset estimate are: +3%, +5%, +5%, +6%, and +6%.  Excluding the 3% estimate, it seems that the Street is anticipating a leveling of two-year average trends
  • Next fiscal year EPS estimates have been largely static over the past three months, having been raised 48% in the past six months


  • Seeing a gradual increase in business travel – Monday-Thursday business
  • Lodging industry improvement is having a positive impact on MRT’s business
  • The Company is contracted for approximately 20% of 2010 beef needs.  It is the preference of the Company to forward contract meat purchases.
  • While prices have been ticking up, MRT has “pricing flexibility to offset these costs”
  • Anticipating ~3% beef inflation for FY10
  • 2Q revenues are expected to range between 70 and $72 million
  • 2Q comparable restaurant sales increase between 4 and 6%
  • 2Q diluted net income per share from continuing operations is expected to be between $0.02 and $0.04
  • FY10 revenues are expected to range between 293 and $298 million
  • FY10 comparable restaurant sales increase between 3 and 5%
  • FY10 diluted net income per share from continuing operations is expected to be between $0.29 and $0.34
  • Effective tax rate not in excess of 26%


Howard Penney

Managing Director



The Future of the U.S. Balance Sheet

Tomorrow at 11 a.m. eastern we will be hosting our August Theme call, titled: “Should U.S. Government Debt Be Rated Junk Status?”  The intention of the title is not to suggest literally that U.S. government debt should be rated junk status, but rather to raise a serious red flag as to the emerging deficit and debt problem in the United States and the investment implications therein.  If you would like to join the call, please email .


In the chart below, which is sourced from the Congressional Budget Office, the fiscal future of the United States is portrayed based on longer term budget projections.  The CBO provides two scenarios for budget projections.  In either scenario, the balance sheet of the United States sees a continued build-up of debt for the ensuing two decades.  In the more negative scenario, debt as a percentage of GDP accelerates dramatically over the coming decades, eventually approaching near 200%.


As we will discuss in greater detail tomorrow, the primary implication of a build-up in debt on the federal balance sheet is a dramatically different future as it relates to underlying growth.  If the last 200 years of data has shown us anything, it is simply that those nations with high debt balances either default or grow well below mean rates as long as debt ratios remain high.


We, of course, aren’t suggesting that the U.S. is bound to default anytime soon, but there are implications of an accelerating U.S. debt balance that we need to keep front and center.  One longer term consideration is simply that investors, both domestically and abroad, begin to lose confidence in U.S. government debt particularly at the current all-time low interest rates.  An increase in interest rates has meaningful implications for the U.S. budget.  According to a paper from the CBO today titled, “Federal Debt and the Risk of a Fiscal Crisis”, a 4-percentage across the board increase in interest rates would raise interest rate payments by more than $100 billion on an annualized basis.


A conclusion of our analysis tomorrow will be that the future will look much different than the most recent past in terms of the economic outlook of the United States over the coming years.  And the reality is, as debt grows and confidence wanes, the likelihood of a fiscal crisis of some magnitude grows.  In that scenario, as the CBO also wrote today, there are three primary prescriptions for the United States:


“restructuring its debt (that is, seeking to modify the contractual terms of existing obligations); pursuing inflationary monetary policy (that is, increasing the supply of money); and adopting an austerity program of spending cuts and tax increases.”


Is a fiscal crisis in the United States imminent? Perhaps not, but the future of the U.S. government balance sheet is bleak based any reasonable federal government budgetary assumptions.  We hope you can join us for the discussion tomorrow at 11 a.m. eastern.


Daryl G. Jones

Managing Director


The Future of the U.S. Balance Sheet - 1

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Bullish? ISM Manufacturing Index

This morning’s ISM Manufacturing report got some of the bulls heated up - or some of the bears to cover their shorts - or some of both… at a bare minimum, its making for quite an interesting day as US stocks rally to lower-cycle-highs.


When today’s low-volume rally is over with however, this economic report will continue to show the same thing it showed from the minute it was released – another sequential (month-over-month) slowdown in the US manufacturing versus its Q1 cycle-high.


For the month of July, the ISM Manufacturing Index slowed to 55.5 versus the 56.2 reported in June. Sometimes it’s hard to contextualize these numbers when the US stock market futures are going straight up, but here it is for you in a nice tidy chart, with the intermediate-term bearish TREND pointing with a red arrow to the downside.


This survey can fall a lot further from here – so can the US Dollar and US Equities. Our intermediate term TREND line of resistance for the SP500 remains 1144.



Keith R. McCullough
Chief Executive Officer


Bullish? ISM Manufacturing Index - 1

R3: Lew vs. Ralph


August 02, 2010


I think that the ‘RL vs. COH’ argument is more interesting now than ever. With both companies reporting earnings this week, there are some important financial and sentiment considerations.





Lew vs. Ralph

My inbox has had more inquiries than usual lately about the merit of owning RL vs. COH, with more people leaning towards COH. I don’t get it. There are a few considerations…


1)      To start, an important note from a sentiment perspective. General interest in RL has cooled off dramatically over 6-months. One of the reasons, I think, is that with the consolidation of licenses (China, etc…) and the shift in mix towards Int’l shop-in-shop, retail, and, the model has become so dang complex. Seriously…people are losing interest.

2)      Second, the reality on RL is that as it takes control of its distribution globally, and shifts from a wholesale/licensed model to a global direct-to-consumer model over multiple categories and price points, gross margin has a natural tailwind. Take for example. It is only $200mm in revenue today, but with a 75% gross margin. RL has not yet even turned on its platform in Europe or Asia, which could add another $200-$300mm in revenue and $150mm-$225mm in EBIT over 3 years. Yes, that’s $1.00-$1.50 per share alone.

3)      As it relates to Coach, I won’t debate that it’s a good brand. We all know that it is, and that the company executed flawlessly over the 10-years subsequent to its spin out of Sara Lee.  But keep in mind that this was, in large part, driven by increased unit purchases by the core consumer while Coach consistently traded her up in price point. People look at recent Gross Margin performance and think that GM% is bottoming out. But the reality is that before the ‘trade up effect’ took place, Coach’s Gross Margin rate was in the mid-50s. Now it is 72% and continues to roll-over.  Moreover, Coach is trading down in key areas to fuel its top line, and although they appear to be doing so in a way that is not hurting the brand, the reality is that when price point goes down, unit sale requirements go up to keep the top line even. In this global economy, that’s a challenge.

4)      Are margins going back to the mid-50s for COH? No. I don’t think so. But are they headed to the mid-60s? My sense is Yes.   Regardless, as long as the chart below exists, the ‘Coach is cheap’ argument doesn’t hold much water.

5)      With RL, will it’s margins ever converge with those of COH? No. The reality is that even with its geographic, channel, and product expansion, it still is primarily an apparel company, which cannot sustain 60%+ margins. But what I can say is that a) margins are headed higher over the near term, b) revenue should reaccelerate in 2011 (Mar), and ultimately, consensus estimates for RL are way too low for the quarter and the year. (I’m at $1.12 for the quarter and $5.70 for the year vs. the consensus at $0.89 and $4.68, respectively). Is it possible that RL hides some EPS this quarter in its model as a buffer for its Asia business as the year progresses? Yes. But even if it does that, we’re looking at a 1Q11 EPS number above a buck (12% above consensus).


R3: Lew vs. Ralph - RL image






The New Norm of Consumer Behavior? - Several recent research reports on consumer sentiment and shopping behavior show that Americans are not ready to open their wallets any wider this year than last. Nearly half of the people polled by BIGresearch disagreed or strongly disagreed that a financial recovery is under way. Two-thirds of the 6,648 consumer polled said they had cut back on their credit card usage and 72.9% said they didn’t plan to return to how they used credit cards before the recession. AlixPartners found even gloomier sentiments: 70% of Americans said their economic situations were the same or worse than a year ago, and 83% expect to spend the same or less on non-essential purchases in the next 12 months. Almost two-thirds (63%) do not expect an economic recovery until 2012—or later. That percentage is strikingly higher than the firm’s previous surveys. To cope, consumers are resetting their spending behaviors and focusing on value. For example, they shop at more stores but realize they can leave without buying something. They have also widened their brand considerations.  <>


R3: Lew vs. Ralph - 2 


China Manufacturing Faces Slowdown, Not Meltdown - China’s July manufacturing data were the weakest in more than a year as the government clamped down on property speculation and investment in polluting and energy- intensive factories. A purchasing managers’ index released today by HSBC Holdings Plc and Markit Economics slid to 49.4 from 50.4 in June. A separate, government-backed PMI fell to 51.2 from 52.1, the Federation of Logistics and Purchasing reported yesterday. Fifty is the dividing line between expansion and contraction. Officials may delay raising interest rates from crisis levels as austerity measures and unemployment in advanced economies dim the outlook for exports.  <>

Hedgeye Retail’s Take: From a retail perspective, we’re looking at the relative spread between import costs from China and other Non-Japan Asia countries. These other countries know where their bread is buttered. They can’t set the tone in Asia. But those who arb the spread in costs vis/vis China will gain the most share. Translation = if you hear about China slowing (which our Macro team called 9 months ago) don’t discount other nations that will pick up the slack and pump product into our stores. 


Sports Participation Rankings of 2009

  • 1 Basketball, '09 PARTICIPATION 24 million, CHANGE FROM ’08: -8.6%
  • 2 Baseball, '09 PARTICIPATION 13.8 million, % CHANGE FROM ’08: -7.9%
  • 3 Outdoor Soccer, '09 PARTICIPATION 13.7 million, % CHANGE FROM ’08: -3.7%
  • 4 Touch Football, '09 PARTICIPATION 9 million, % CHANGE FROM ’08: -14.6%
  • 5 Slow-Pitch Softball, '09 PARTICIPATION 8.5 million, % CHANGE FROM ’08: -13.3%
  • 6 Court Volleyball, '09 PARTICIPATION 7.3 million, % CHANGE FROM ’08: -11.1%
  • 7 Tackle Football, '09 PARTICIPATION 6.8 million, % CHANGE FROM ’08: -11.7%
  • 8 Flag Football, '09 PARTICIPATION 6.6 million, % CHANGE FROM ’08: -10.4%
  • 9 Indoor Soccer, '09 PARTICIPATION 4.9 million, % CHANGE FROM ’08: 3.7%
  • 10 Grass Volleyball, '09 PARTICIPATION 4.9 million, % CHANGE FROM ’08: -4.6%
  • Hedgeye Retail’s Take: These numbers are a year-old, but quite sad in that 9 of the top 10 sports in the US showed a meaningful decline in participation rates last year. I guess these statistics don’t count time played on a Wii.

Visa Steps Up Online Shopping Service With Rightcliq - Starting today, Visa Inc. gets serious in its battle with online giants like Google and PayPal for the loyalty of web shoppers. The world’s leading credit and debit card brand is launching a major marketing push for Rightcliq, the online shopping service it announced in March and has been testing ever since. Rightcliq provides an electronic wallet where consumers can store their payment card numbers—including those from Visa competitors like MasterCard and American Express. Visa is adding several other components as it tries to distinguish itself from competing online payment systems. They include:

  • Discount offers from participating merchants, some of them retailers that already work with the Visa Incentive Network, a targeted marketing system Visa introduced in 2005. About a third of the top 100 Internet retailers will be making offers at the outset, Visa says.
  • The ability to track in one place the delivery status of pending purchases, initially with the U.S. Postal Service, as well as to store online purchase history.
  • A browser plug in that will fill in personal and payment information on checkout pages.
  • A social component that allows consumers to drag images of products they’re considering from retailers’ web sites into a section of their Rightcliq accounts Visa calls My Wishspace and then to seek advice from their friends on those products via Facebook or e-mail.  <>
  • Hedgeye Retail’s Take: Makes perfect sense.

Sears To Begin Home Delivery Services - Sears Holdings Corp., which earlier this month began offering to parts of the Chicago area home delivery of groceries, prescriptions and other items from its e-commerce site, plans to announce Tuesday that it will expand that home delivery option to merchandise sold in its marketplace. The option will initially be available to consumers in the Chicago, Boston, Washington, D.C. and New York City areas. The service will also allow consumers to buy online at but pick up the order directly from either the marketplace merchant's Store or Sears stores.  <>

Hedgeye Retail’s Take:  Great… the retailer that is more levered to the Housing Cycle than any other (yes, including Home Depot) is strengthening this bond further.


Hanes Can’t Get Enough of Michael Jordan - The basketball pro is yet again the star of new ads in an ongoing campaign for men's underwear, dubbed "Hanes Flight 23." The TV spots, breaking this week, mark phase two of a Hanes campaign—via The Martin Agency—that kicked off in May. The ads highlight new underwear with Comfort Flex waistbands, which are more stretchable waistbands now included in all Hanes men's briefs, boxers and boxer briefs. <>

Hedgeye Retail’s Take: MJ’s relevance to the urban consumer with Nike’s Jordan brand is unquestionable. But I gotta wonder how long MJ’s pitchman status is a positive ROI for underwear.


Callaway Restructures Manufacturing/Distribution Processes - Callaway Golf Company announced a restructuring of its global operations to occur over the next 18 months. The initiative encompasses the reorganization of manufacturing and distribution centers located in Carlsbad, CA and Toronto, Canada; the creation of third-party logistics sites in Dallas, Texas, and Toronto; and the establishment of a new production facility in Monterrey, Mexico. <>

Hedgeye Retail’s Take: ELY is taking down cost of manufacturing, as well as asset intensity of warehousing and delivery. If the quality of the clubs holds up throughout this, then this could be a massive event for ELY.


Footwear Firm Aetrex Worldwide Making Serious Waves - For Aetrex Worldwide, the next year will be one of many firsts. With sales already on the upswing, the roughly 60-year-old family business is planning a string of new initiatives, including its first concept store, a TV campaign and a line of toning shoes. CEO Larry Schwartz said 2010 has been encouraging. The Teaneck, N.J.-based company, known for its comfort footwear and accessories, experienced only single-digit growth in 2009 over 2008, but in June, business was up 20% from last year. And Schwartz said he expects similar growth through the year’s end. The company, whose warehouse can stock up to 300,000 pairs of shoes during peak periods, routinely fills orders for one or two pairs of shoes, as well as orthotics.  <>

Hedgeye Retail’s Take: Great example of how toning is helping little brands redirect newfound capital into R&D.



July Macau market share was subpar which could give legs to the bear call that Encore hasn’t been additive enough.



Encore had a high ROI out of the box in Q2 but that won’t change the bear view that Encore isn’t incremental.  We think this negative thesis will actually gain momentum as the July market share numbers are digested.  As we reported today, we think Wynn’s July Table GGR Macau market share fell to 14.6%, down from May and June (both post Encore opening) of 15.6% and 17.2%, respectively.  Obviously, hold percentage is volatile – May and especially June were high – and July was probably low at the Wynn Macau properties.


At least for the short term – a lifetime for Macau stocks – this negative Encore narrative may dominate the discussion.  After a nice recovery, the stock could be under pressure.  We reserve the right to get positive again down the road at lower levels.

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