MACRO: Structural Unemployment

This insight was published on August 9, 2010. RISK MANAGER SUBSCRIBERS have access to SELECT MACRO content in real-time.





Conclusion: Even though Hedgeye is hiring, unemployment in the United States is becoming an increasingly structural issue as evidenced by the percent of unemployed that have been out of work for 6-months or more.
We are going to keep this note short and tight even by Hedgeye standards.  I asked my teammates Darius Dale and Matt Hedrick to look at longer term unemployment as a percentage of total employment going back as long as the data would allow us.  The output of their work is the chart below.
The chart highlights the percentage of total unemployed that have been unemployed for more than 6-months.  As can be seen in the chart below, more than 45% of unemployed have been unemployed for more than 6-months.  This is the highest level we’ve seen for long term unemployed going back to 1948.
The conclusion is simply that the unemployment in this nation is becoming structural.  While the credit boom created employment in the housing and construction sector, that entire industry has gone away and been replaced by . . . well, not much at this point.
As the non-partisan Congressional Budget Office stated in a recent paper:
“As a result, gains in employment after this recession will probably rely more than usual on the creation of new jobs, possibly in new firms that are located in different places and require workers with different skills than those needed in the jobs that have disappeared. For workers who have lost jobs to which they cannot return, acquiring new skills can take time. (In contrast, it is easier for workers who have been laid off temporarily to return to their jobs because the employers already know the workers and the workers already have the right skills and are familiar with the work.) For workers who need to move to different regions to find new jobs, the sharp declines in home prices during this recession, combined with the high loan-to-value ratios on many mortgages before the downturn, will hinder relocation. With a significant share of homeowners now owing more on their mortgages than their homes are worth, many people may not be able to sell their house for enough money to enable them to buy one in a new area.”
Further, this trend of longer unemployment comes with major issues because the longer unemployment lasts, the more likely it becomes that complacency sets in and the unemployed person becomes less willing to pursue employment in a traditional sense.
Maybe it’s just me, but I’m not sure quantitative easing is going to get us out of this one.



MACRO: Structural Unemployment - chart1



Daryl G. Jones
Managing Director

MACRO: In A Story State, Indeed

This insight was published on July 21, 2010. RISK MANAGER SUBSCRIBERS have access to SELECT MACRO content in real-time.





Conclusion: Bearish data points regarding state and local government budgets spell incremental trouble for U.S. GDP growth in 2H10 and 2011.

The first sentence of the executive summary of the latest National Association of State Budget Officers (NASBO) Fiscal Survey of State Budgets reads: “Fiscal 2010 presented the most difficult challenge for States’ financial management since the Great Depression and fiscal 2011 is expected to present states with similar challenges.”


The reason many (if not all) States around the country have such long faces is because they are having to do just the opposite with their budgets: shorten them. As mandated by federal law, every State except Vermont is required to balance its budget and as a result of declining sales, personal income, and corporate income tax collection (80% of States’ general fund revenue) States and municipalities have had to undertake very drastic measures to combat this – including laying off over 200,000 state and local government employees since June 2009.



MACRO: In A Story State, Indeed - chart1



The pain is likely to intensify, with States facing a $140 billion budget gap in fiscal 2011, according to the Center of Budget and Policy Priorities. Federal stimulus is expected to fall by $55 billion and recently, the Senate failed to pass a measure to provide States $16 billion for extra Medicaid funding. Furthermore, States have already spent 89% of their American Recovery and Reinvestment Act of 2009 funds, which accounted 30% of state spending in 2010.
Despite the erosion of Federal government spending tailwinds, Governor’s recommended budgets imply a 3.7% Y/Y increase in spending, which, by law, has to stem from their estimates of an 3.9% Y/Y increase in tax collections in 2011. Easy comps are what they are (tax collections declined  -2.3% Y/Y in fiscal 2010), but the fiscal 2011 budget implies a 2Y-trend increase of 0.8%.
An increase of any magnitude seems lofty based on current trends regarding state level personal income taxes (see: 9.5% unemployment and jobless claims hovering well above the 400,000/week needed to see improvement in employment). Perhaps that’s why fiscal 2010 revenue collection from sales, personal income taxes, and corporate income taxes are below original projections in 46 States. Expect that trend to continue in fiscal 2011 if we have any semblance of slowing growth and/or federal government austerity in 2H10.
Luckily for local governments, which have been feeling the negative effects of State budget balancing, they mark revenue collection to model, particularly regarding property taxes. As I pointed out in a note back in April, home appraisals for municipal property tax collection (roughly 35% of local government revenue) lag market prices by 2-3 years. As a result, property tax revenue has been positive throughout the housing downturn.
Well, that tailwind is becoming a headwind and a rather large one at that. Recent data shows that 1Q10 marks the first time property tax receipts declined on a Y/Y basis since 2Q03. Backtrack three years from 1Q10, and we see the first of an accelerating series of declines in housing prices. Again, this will become a major 3-5 year headwind for local government tax receipts – especially when factoring in our bearish outlook for housing prices in the next 12-18 months (see: Hedgeye’s Q3 Macro Theme of Housing Headwinds). Expect this to be a double tax on the consumer as falling home values are paired with rising property tax rates as municipalities across the country hike property taxes to try to hold flat income from this important source of revenue.



MACRO: In A Story State, Indeed -  chart2



In summary, waning federal funding, slowing tax receipts, and declining home prices will put additional strain on State and local government budgets, which have an incremental negative effect on the U.S. economy at large. Job cuts at the state and municipality level are affecting all areas of the economy – from public transportation to private companies that work with state governments. Research from the Center on Budget and Policy Priorities suggests that a total of 900,000 private sector jobs could be lost as a result of State and local government cost shedding. All told, further job losses will make it even more difficult for State and local governments to meet revenue estimates, which will force them to cut even further.
As a result of this self-perpetuating cycle, U.S. GDP growth in 2H10 and 2011 may end up even lower than our current 1.7% forecast.
Stay tuned.
Darius Dale


This insight was published on July 21, 2010. RISK MANAGER SUBSCRIBERS have access to SELECT MACRO content in real-time.





We’ve outlined the Rasmussen Presidential Approval Index going back 18-months below and the interepretation is quite clear.  Since the start of the year, President Obama’s approval has been mired between -10 and -20 on this index (a comparison of Strongly Approve versus Strongly Disapprove), which indicates that between 10 and 20% more Strongly Dissapprove of the job President Obama is doing.  At this point, it seems very unlikely that this range bound negative approval rating will change much heading into the midterms this Fall.  This will not help the Democrats in defending their majority in both houses.


  • Battle for the House – Currently the Democrats hold 255 seats, the Republicans hold 178 seats, and there are two vacancies.  If the midterms were held today, according to a Real Clear Politics poll aggregate, the Democrats would win 202, the Republicans would win 202, and 31 would be toss ups.  In effect, there is a jump ball for the house, which is huge shift from 2008.


  • Battle for the Senate – Currently the Democrats hold 59 seats and the Republicans hold 41 seats.  According to a Real Clear Politics poll aggregate, if the election were held today the Democrats would have 48 seats and the Republicans would have 42 seats, with 10 seats being a toss up.  Since only 1/3 of the Senate is up for re-election very two years, this is actually a meaningful shift and once again suggests the potenital for change in power.


While the potential shift in Congress has been widely bandied about, what is more interesting is the threat to President Obama in 2012.  According to a poll out from Quinnipiac University today, if the 2012 Presidential election were held today 36% of those polled would vote for Obama, 39% would vote for a generic Republican candidate, and the remainder are either undecided or it would depend on the candidate.
In aggregate, the point, which is probably somewhat obvious, is that the Democrats are currently in a world of potential electoral hurt.
In another poll by Fox News (and we do get that Fox News may have some biases), the key issues that Republicans are seen to have an advantage with are outlined below.  According to the poll:
“By double-digit margins, Republicans are seen as the party that would do a better job on terrorism (+16 points), the size of government (+16 points), the federal deficit (+15 points) and immigration (+13 points).”
The implication of this poll, and others that mirror it, are that the Democrats, and President Obama specifically, may try to overcompensate to make up ground in the areas in which they are being perceived poorly.  From our perspective, one key area is likely to be American Austerity. As the drum to cut the budget and narrow the deficit beats louder, the more likely it is that the Democrats shift their stance in attempt to regain approval in these areas.  Politics and the need to get re-elected will ultimately trump the strict adherence to Krugman orthodoxy.
While not technically a politician, Chairman Bernanke sounded the American Asuterity horn today when he introduced the idea of beginning to reduce the balance sheet of the Federal Reserve, which is certainly a slight change of tone, especially versus expectations of further quantitative easing.  In our view, this is likely a precursor to a more gradual political shift from the Democrats towards supporting broad based spending cuts and deficit reductions.
The short term implications of this change in policy would ultimately be a potential for slower economic growth in the short term and it is increasingly looking like the Democrats will need to dramatically shift sentiment in the coming months to retain political control.  A hail mary  pass of American Austerity policy could well be the catalyst.  Certainly though, President Obama needs to do something to break out of his range and help his party’s fortunes in the upcoming midterms.






Daryl G. Jones
Managing Director

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The Singapore Sling: Why We Are Long...

This insight was published on July 14, 2010. RISK MANAGER SUBSCRIBERS have access to SELECT MACRO content in real-time.




The Singapore Sling: Why We Are Long of Singapore



Position: Long Singapore via the etf (EWS); Bullish on SGD-USD.
Conclusion: As part of our call that growth will slow globally in 2H10, we want to be long currency and equity markets that are poised to accelerate domestic consumption. Singapore is one of those economies and, as a result, is one of Hedgeye’s top Macro investment ideas.
Based on recent strength in manufacturing and exports Singapore posted a 2Q10 GDP growth number of 19.3% Y/Y. The record gain was fueled by strong industrial production growth, which accelerated in May to +58% Y/Y. Manufacturing in Singapore has grown by an average of 45% in the first five months of 2010, led by strong output in the pharmaceutical and electronic sectors – two of Singapore’s largest export bases.
Despite the EU’s sovereign debt issues, the large growth in exports during the 2nd quarter, the net of which compromised 25% of GDP in 2009, is an incrementally bullish read-through in conjunction with the 2Q GDP release. Singapore’s non-oil, domestic exports accelerated on the margin in June to +29% Y/Y vs. +24% Y/Y in May. Upon further scrutiny, however, we find that European austerity and economic stagnation in the U.S. paints a more sober picture of the intermediate term trade outlook for the $182 billion economy. Today, the Trade Ministry of Singapore stated:
“In the European Union, domestic demand remains depressed as concerns over the sovereign-debt crisis persist… The implementation of fiscal austerity measures in some of the economies may further weaken their domestic demand. The weakening of the euro against key trading partners will also dampen import demand in the European Union. Signs of a slowdown in the labor market in the U.S. have affected consumer confidence, and sluggish final demand from the world’s largest economy as well as Europe has led to a moderation in manufacturing in Asia.”
The consensus belief that European Austerity may negatively negative impact Singapore’s exports has upside risk.  Nominal exports to the EU are less than 8% of the total with the economically healthy Germany compromising 20% of that share. That said, just last week, the EU Delegation to Singapore plainly stated that trade between the two entities would remain vigorous in 2H10, despite austerity measures.
Breaking down the most recent trade numbers in more granularity, we find that growth of non-oil, domestic exports (NODX) to the EU accelerated in June (+75% Y/Y vs. +5.7% Y/Y in May) due to a favorable inventory cycle for pharmaceuticals, electrical machinery, and computer parts. This is likely to moderate going forward, as Singapore PMI slowed in June (though still showing expansion in all major categories: total, new export orders, new orders, and order backlog). The takeaway from this is that, while cause for concern, European austerity fears  should not be overstated in an analysis of Singapore’s trade outlook.



The Singapore Sling: Why We Are Long... - chart1



Trade Outlook: Moderate
In fact, the majority of Singapore’s exports go to Asian economies, with the largest recipients being: Hong Hong (11.6%), Malaysia (11.5%), China (9.7%), Indonesia (9.7%), and Japan (4.6%) (CIA Factbook, 2009). The U.S. is a destination for roughly 11% of Singapore’s nominal exports, so continued weakness (Y/Y growth flat sequentially from May to June) from that market – which we expect – may continue to weigh on Singapore’s export growth throughout the remainder of this year. Conversely, bullish demand from China – supported by government stimulus and recent wage growth – may help offset any potential declines in exports caused by the U.S., which we’re already seeing evidence of. While growth of NODX to both China and Hong Kong slowed marginally in June, the Singapore Trade Ministry has credited one or both of these markets as the largest contributors to overall export growth in every month this year except February. Even then, Taiwan and Indonesia picked up the slack in February as two of the largest contributors to growth. Asian markets will likely be the key drivers to Singapore’s export growth going forward and the recently launched China-ASEAN Free Trade Area agreement holds the potential to greatly accelerate intra-regional trade.
All said, Singapore’s export growth is still likely to moderate from here and, like many world economies, will slow in 2H10. Despite this, we contend that the economy is in a bullish setup supported by internal demand, as supported by the Ministry of Trade’s third upwardly-revised 2010 GDP estimate today (+13-15% Y/Y vs. previous forecast of +7-9%).


Domestic Consumption Outlook: Bullish
At a mere 2.2% in 1Q10, Singapore’s latest unemployment rate is at its lowest level in 18 months, thanks to private and public efforts to bolster the services sector the Southeast Asian economy. The opening of two casino resorts by Genting Singapore Plc and Las Vegas Sands contributed to a net addition of 36,500 jobs in the quarter and record tourism for the sixth consecutive month (+30% Y/Y in May and driven by intra-Asian visitation). Singapore has a resident population of roughly only 5 million, so 36,500 job adds and high tourism rates will have an measured impact on the economy. Further, Singapore also has an open policy of importing highly-skilled labor to meet its growing demands (1.5 million immigrants from China, India, and Malaysia).
The demand for highly-skilled labor is particularly prevalent in the financial services, construction and energy sectors. For the third consecutive year, the World Bank has ranked Singapore as the easiest place in the world to do business and the fundamentals behind that calculation make Singapore a likely destination for relocated financial services as a result of global industry regulation. Singapore is already Asia’s leading OTC commodity derivatives hub with more than 50% of the region’s volume. According to Singapore’s Ministry of Trade and Industry, increased intra-regional trade will likely result in the need for upwards of $8 trillion of infrastructure and insurance investment over the next decade, so the government has been busy making concessions to accommodate this growth. In the construction sector, the government has set aside 25% ($250 mil.) of the National Productivity Fund for manpower development and technology adoption. In the energy sector, Singapore is developing a facility to store liquefied natural gas to reduce dependence on imports from neighboring countries where the pricing outlook is uncertain. All in all, Singapore is making moves in line with our TAIL thesis that Asian markets will continue to take share from the U.S. and the EU in the global economy.



The Singapore Sling: Why We Are Long... - chart2



Risks: Moderate in the Absolute; Negligible Relative to the Downside Risks of Other Advanced Economies (U.S., Spain, France, Greece, Mexico)
So what are the downside risks to the bullish case on Singapore’s economy? With the equity market up only 1.9% YTD and far from the top of the performance leaderboard, this leading indicator suggests there are risks associated with this thesis. Those risks include: an expedited move in the Singapore Dollar vs. the U.S. Dollar, which would further dampen export prospects to that market; and a potential for a hiccup in pharmaceutical manufacturing, which itself is a very volatile industry subject to large production swings by big companies such as Sanofi-Aventis SA.
With 19% Y/Y GDP growth and CPI currently running at the highest level since Dec. ’08 (+3.24% Y/Y), the Singapore Dollar is in a hawkish setup ahead of the next Monetary Authority of Singapore policy review in October (the Monetary Authority uses the Singapore Dollar instead of interest rates to manage inflation). The currency rose as much as 1.2% on the day of the last MAS meeting back in April when the board allowed a revaluation of the Singapore Dollar and shifted to a stance of gradual appreciation. If the currency continues to strengthen against the U.S. Dollar from here, export competitiveness to the U.S. market may come under pressure. SGD-USD has gained 1.5% against the last two weeks alone and our Short the US Dollar thesis makes this trend likely to continue. If the euro appreciates further from here, however, relative strength in that currency may offset a portion of this pressure. Fifty-eight percent of the U.S. Dollar Index is Euros, further U.S. Dollar debasement from here will provide reasonable support for the EUR-USD, which is teetering on a TREND line breakout above $1.28. SGD-EUR supports this view, down (-0.3%) in the last two weeks.



The Singapore Sling: Why We Are Long... - chart3



The Singapore Sling: Why We Are Long... - chart4



A second risk to Singapore’s go-forward outlook is the prospect of an eventual overheating in the housing sector. An alarming report by CIMB suggests that overall housing affordability in Singapore is now inching closer to the banks’ mortgage-to-income threshold ratio, after a 10% YTD increase in private home prices which has elevated those levels above the 1996 peak. While appropriate cause for alarm, further analysis suggests that housing prices are far from a China-like bubble. First, housing CPI (the largest component of the consumer price index) has lagged overall inflation for the past 12 months. From the November 2008 peak-of-peaks, housing CPI has experienced a (-4.2%) decline. Furthermore, a marginal deceleration of Y/Y growth in the latest housing CPI reading suggest that concerns are likely overdone for now. In the event that they aren’t, however, expedited appreciation in Singapore’s housing market will likely put more pressure on the MAS to raise the value of the currency – which would further augment our bullish consumption thesis. Moreover, immigration policies designed to expand Singapore’s population by over 50% in 10 years suggest there won’t be any “ghost towns” on the island anytime soon.



The Singapore Sling: Why We Are Long... - chart5



Conclusion: Long EWS; Long SGD-USD
In summary, we like economies in the back half of 2H10 and 2011 that are setup to accelerate domestic consumption to offset a decline in global trade and industrial production (China, Brazil, Singapore). Keep in mind, however, that every market and currency has its price and with growth poised to slow globally, relative economic performance will matter even more in 2H10. We are no longer in a “rising boat lifts all tides” investment environment, so we’re waiting for price confirmation in markets like China and Brazil on the long equity side. From a quantitative standpoint, Singapore’s price is right. We expect Singapore’s FTSE Straits Times Index to outperform many global equity markets throughout the remainder of the year. From a currency perspective, Singapore’s hawkish economic setup and low deficit-to-GDP ratio (2.6% in 2010) makes the Singapore Dollar a strong FX play - particularly relative to the $USD.



The Singapore Sling: Why We Are Long... - chart6



Darius Dale


As expected, BYI missed the Street slightly and provided lower than consensus FY2011 guidance. However, we don't think the Q or guidance was too far off from the whispers.




  • Increased game operations revenue was helped by Cash Spin
  • Repurchased $62MM of their stock since April 1st
  • EPS was negatively impacted by 2 cents of FX and 2 cents related to discrete
  • For systems, $2.1MM less revenues reported in the quarter under the new accounting standards
  • Estimate NA ship share of 18% in the quarter
  • With the introduction of the new Pro Series cabinet, they expect that their margins will be initially impacted, but over time their margins will exceed legacy margins
  • Margins on gaming operations were negatively impacted by jackpot expense
  • For FY2011: Effective tax rate between 35-36.5% 
  • Expect to net $60-65MM on Rainbow, post taxes
  • Have $88MM remaining under their shareholder buyback plan
  • Leverage is well under 1x
  • Product sales, NA sales: 2,605, of which 2,264 were replacement sales. ASP increase was due primarily to product mix. Pro-Series Alpha II Cabinet feedback continues to be very positive, but timing of the release has impacted their share
  • Focused on improving their low denomination game performance
  • Executed agreements with 2 concessionaires in Italy for the placement of 3,600 games.  Expect to place games/collect revenues in early 2011. Expect to get more contracts.
  • Will launch in Australia in early 2011
  • Gaming operations: Launch of Cash Spin has been "phenomenal," having placed 750 units and have commitments for 750 units. Next month it will be available as an application on iPhone.  Margins on gaming operations were in the mid point of their range - but they had higher than usual jackpot expense. 
  • Refreshed their WAP product and it's growing well.  Net installed WAP base grew by 20 units.
  • Engaged in expanding their already strong position in Mexico as that market transitions into Class III
  • Do not expect a pick up in replacements for the rest of calendar 2010, but believe that replacement demand will modestly pick up in 2011
  • Systems business: International revenues comprised 40% of total systems revenues. Maintenance revenues were $15.1MM. Approximately 70% of 2010 systems revenues came from existing customers.
  • More than 610 casino sites that are either using or getting installations of BYI slot/table tracking systems
  • Signed their systems first contract with a New Zealand customer. They expect to sign additional contracts in the region over the next few months.
  • Galaxy Starworld went live with iVIEW DM across 90% of their floor
  • FQ12011 will be weak for them in systems due to timing of installations, however, systems revenues should hit a record of $220-235MM in FY2011
  • Expect revenues in each of their 3 business will increase YoY, but with a back end loaded year (IL/Italy/Australia etc).  About 40% of revenues in 1H2011, with 2Q being better than 1Q.


  • Cash Spin impact?
    • Budgeted a higher churn, but Cash Spin placement was 2.5-3x better - meaning that most of the units placed were incremental
  • Diluted share count at the end of the quarter - 57,582; for the year, 57,675.
  • Does the guidance contemplate buyback? Yes.
  • Quantify Italy and IL impact:
    • IT: will be a mix of recurring revenue and sale, expect to start shipping units in 1H2011
    • IL: in the hands of the regulators, anticipate some IL late in their fiscal year
  • Think that their ship share will get to above 20% again next year
  • How are the Alpha II Pro Series trials performing
    • There is the slant and V22 upright cabinet: had some technical issues on the slant that were fixed, but the V22's have only been out there for 2 weeks
    • Pricing premium - $2,500 to $4,000 - probably won't get the full premium in the beginning
  • Why the wide range of guidance?
    • Replacement sales
    • Acceptance of Alpha II
    • New markets: Italy/ IL/ Australia
    • Does Alabama come back?
  • Have no more Alabama units - they have written it all down. 
  • Its also possible that Acqueduct opens - but it's unlikely
  • Did ship 1/3 of their order to Sugar house in the June quarter, balance will be in the September quarter
  • MD order are all on lease / 8% revenue share and not in the quarter
  • At these prices, they view their stock as an attractive investment, given their view of 2011 & 2012
  • Fireballs are doing well, but they are cannibalizing their existing base
  • Italy and IL are not the sole cause for the gap of their guidance range.  IL isn't as material to 2011 as Italy right now.
  • Sense is that if there isn't a double dip that customers will start spending more on replacements next year
  • Mexico update?
    • They are in the hands of the partners. They supply their partners with the conversion kits.  Properties in the North have already been converted to Class III; the South still has some Class II which should be converted in a few months.
    • Mix of conversions and new Class III product has been 2/3 conversions
  • Why the dip in international sales?
    • There was a large shipment to Mexico and Singapore last quarter
  • Acqueduct - They are used to delays in New York - so they are hopeful that a facility can open in 6 months, but it's prudent not to count those. They would expect to get 50% - which is under contract.  However, if they open with a temp facility it will be in 2 stages.
  • Impact of the incremental jackpot expense was about 2 cents in the quarter
  • $1.93 EPS in FY2010 excludes Rainbow results and gains
  • They have been doing less financing then their competitors. Their DSO's were actually down.
  • Think that their share in March was more of an aberration than this quarter being a huge improvement in ship share.  It will take them 9-12 months to build a library for Alpha II.
  • Big release of the iVIEW applications is occurring now, and the impact should be seen through the sale of the DM units. Unclear how much they will be able to sell the applications for.  There could be some upside from that. Race game and cash wheel have gotten good feedback.


I’m surprised that this stock was not down today


The consensus was right; EAT did not have a good quarter and chances are they are not going to have a good 1Q11 either.  4Q10 was not a disaster and the balance sheet and free cash flow are helping to support the stock (EAT could buy back as much as 25% of the market capitalization).  The short interest doubled during the quarter which speaks volumes to how the stock is trading today.  As a client told me today, ‘Chuck is scaring the shorts with the “I’m gonna start buying tomorrow speech”’.


I‘m completely on board with the changes the company is making to the Chili’s business model and convinced that at some point in the not too distant future the pay off will be what the company is expecting.


The trick is getting from point A to B.  As I sit here today the process seems slightly more challenging than it did when first proposed.  The current guidance is as expected; EPS from continuing operations is expected to increase between 10% and 20%, including a lap of the 53rd week.   


What scares me from today’s call is this: “we do need better top line results than we originally forecasted to hit that goal but were not prepared to walk away from the target today.”  My translation: “current sales trends are not good and we need to see a significant improvement to make the numbers.”  Chili’s same-store sales decelerated in 4Q10 and have continued to slide in 1QFY11 - not good.


Right now current guidance is for same-store sales to be flat to down 2%, while revenue will be down 2% to 4%.  Excluding the impact of the 53rd week, revenue will be flat to down 2%, and franchise revenue to increase in the mid single digits.  Traffic growth needs to improve over 500 bps in an extremely difficult environment. 


With 64% of their commodity exposure contracted for the fiscal year, lower cost of sales should be supportive in 1HFY11. Unfortunately, top line sales will likely not gain traction until FY 2H11.  Three months ago I thought we were 6 months away from seeing a turn in the fundamentals; unfortunately it now seems that we are still 6 months, or possibly even 9 months, away. 


I’m very much supportive of the direction the company is headed, but relative to current guidance for the top line, we are set up for more disappointments. 






Howard Penney

Managing Director

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