Looking at the headlines, TXRH had a strong second quarter.  Earnings were in line with expectations but comps came in better-than-expected and were positive for the second consecutive quarter after nine negative quarters.  And, traffic was positive, +2% in the quarter.  Restaurant-level margin increased YOY and came in better than I anticipated given the expected decrease in benefit from food costs deflation.  However, cost of sales as a percentage of sales was still down about 70 bps YOY (versus -185 bps in 1Q10).  This positive margin growth, combined with positive same-store sales, put TXRH in the “Nirvana” quadrant of our sigma chart for a second consecutive quarter.  Management raised its full-year comp and EPS guidance.  The increased comp guidance of +1% is definitely achievable and the street’s FY10 EPS estimate of $0.82 implies 22% EPS growth, above management’s upwardly revised range of +16% to +20%.


So, that all sounds good.  When you look at the underlying trends, however, the +1.4% same-store sales growth for company-owned restaurants in the second quarter, which was better than the street’s +0.9% estimate, implies a 70 bp deceleration in two-year average trends.  The third quarter-to-date comp trend of +3%, which is lapping a -5.5% to -6% comp from the same period last year, points to a continued slowdown in two-year average trends of 10 to 40 bps from the 2Q10 level.  There were a lot of questions on the earnings call about whether management is being conservative with its full-year +1% comp guidance given that same-store sales were up more than that in 2Q10 and in the third quarter-to-date.  This deceleration in two-year average trends may be the reason for management’s conservatism; though management said its weekly trends have been pretty consistent over the last couple of months.


Restaurant-level margin compares get increasingly more difficult in the back half of the year on a YOY basis, but management guided to increased food cost deflation in the third and fourth quarters.  We will have to see how same-store sales trend from here but the tougher restaurant-level margin compares will make it more difficult for the company to remain in “Nirvana” for the balance of the year.  Same-store sales growth will likely remain positive during the third quarter, but comparisons get more difficult in 4Q10 and the company is expecting a slightly negative impact on comp performance from a Christmas timing shift during the quarter (falling on a Saturday in 2010 relative to a Friday in 2009).


Despite TXRH’s conservative comp guidance, management’s sounded optimistic and encouraged by the positive trend in new unit volumes.  To that end, management stated that it will be increasing its unit growth in FY11, above the14 to 15 units expected in FY10, and that it expects unit growth to move even higher in FY12.  Improving new unit growth is a good proxy for the health of the concept, but management also spent some time on the call yesterday talking about how trends have improved, “due in part to moderating [the company’s] development schedule over the last 12 months.”  I am interested to learn to what extent management increases its unit growth (company said it would provide more details on its 3Q10 earnings call) as it will be important that the ramped up growth does not offset the positive trends that have resulted from the slowdown in unit growth. 


TXRH – IN NIRVANA FOR NOW - txrh sigma


Howard Penney

Managing Director


As we look at today’s set up for the S&P 500, the range is 16 points or 0.8% (1,117) downside and 0.6% (1,133) upside.













Enslaving America

"There are two ways to conquer and enslave a nation. One is by the sword. The other is by debt."
-John Adams, US President


Yesterday was another great day for our short position in the US Dollar. It was a terrible day for our short position in the SP500. As perverse as this may sound, both the US stock and bond markets all of a sudden love the idea of America losing its status as the world’s reserve currency as we enslave our citizenry with debt.


The sad news is that despite both America and Japan resorting to “quantitative easing” in the recent past, some professional politicians in this country have learned nothing from these mistakes. So if you have any American friends who get all amped up and cheer the stock market on when they hear “rumors of QE2”, please take a step back, take a deep breath, and tell them to be careful of what they hope for.


Hope, of course, is not an investment process. Hope is not going to make America’s debt and deficit problems go away. Neither will the Paul Krugman type fear-mongering that got both the US and Japan in this mess to begin with. Before the internet, dinosaurs, and YouTube, Krugman’s fear-based model provided the false premise that no one would hold him accountable to his recommendations. No matter where the Krugmanites go, here it is:


“So never mind those long lists of reasons for Japan’s slump. The answer to the country’s immediate problems is simple: PRINT LOTS OF MONEY.”

-Paul Krugman (1997)


To be balanced, it appears that by 2006 when he penned an Op-Ed titled “Debt and Denial”, Krugman showed some evolution in his thought process:


“But serious analysts know that America’s borrowing binge is unsustainable. Sooner or later the trade deficit will have to come down, the housing boom will have to end, and both American consumers and the US government will have to start living within their means.”

-Paul Krugman (2006)


Sadly, now that it’s 2010 it’s clear that Krugman has forgotten the fiscal discipline he mustered while he was Bush-bashing the double edged sword of deficits and debt. He’s right back to his 1997 form in recommending that his Princeton pal Heli-Ben Bernanke “prints lots of money.”


Much like Nassim Taleb did in taking the puck right to the net on another Fiat Republic alum from Princeton in the Huffington Post last night (“The Regulator Franchise – Or the Alan Blinder Problem”), at 11AM EST today, my defense partner, Daryl Jones (aka Big Alberta) will be joined by our macro team here in New Haven, CT taking the Krugmanites and monetarists alike to task.


As much fun as we like to have calling people out (including ourselves), this time it’s game time. We’re dropping the mitts with those debt and deficit sponsors who are putting this country’s national wealth and security at risk.


The primary implication from our conference call will have to do with our #1 concern versus consensus right now – US economic growth. A build-up in debt on the federal balance sheet proactively predicts a dramatically different future as it relates to the underlying growth in America.  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 of economic growth as long as debt ratios remain high.


We’ll have 45 slides of hard data and forecasts today. We also have a 101 slide presentation titled “Housing Headwinds” that our Financials team, led by Josh Steiner, has compiled to back up the embedded conclusions we are making about US GDP growth; namely that US Housing prices could drop -15-20% from this summer’s bear market cycle-peak in the Case-Shiller Index. Here are the details for the call:


"Should U.S. Government Debt Be Rated Junk Status?"


Key topics to be discussed:

  • The implications for the U.S. economy of the massive build up of debt
  • Various federal budget scenarios and their key drivers
  • GDP growth implications based on accelerating debt balances
  • Implications to the deficit under different interest rate regimes
  • Comparison of the U.S. to the PIIGS on key ratios
  • Appropriate investment vehicles for this long-term TAIL theme

If you would like to reserve a spot on the call, please email .


Back to today’s risk management setup. We got a lot of questions yesterday as to when/where I was a short seller of the SP500 (SPY). Once the SP500 broke out above my immediate term TRADE line of resistance (1118) yesterday, that resistance level became very short term support – so I watched and waited. I’d like to short the SP500 from 1133 all the way up to my Bear Market Macro line of 1144. For now, that’s the plan.


For any modern day Risk Manager of real-time market prices, the plan needs to be that the plan is going to change. We’ve been bearish on the US stock market since April and bearish on the US Dollar since June. I may have missed half of the bear market bounce that the SP500 has had since its July 2nd low, but I don’t intend on missing this next selling opportunity as we enter the most critical stage of professional politicians Enslaving America with debt.


We didn’t sell everything yesterday in the Hedgeye Asset Allocation Model, but we took our cash position back up to our highest level of 2010 at 79% (up from 58% Cash on July 2nd when the SP500 bottomed at 1022).


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Enslaving America - el3


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

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.