- RRGB has been aggressively raising prices at the expense of traffic. This trend was magnified in 2Q when traffic declined 4.4%, down significantly from 1Q’s 0.4% decline. Thankfully, CEO Dennis Mullen stated on the conference call that “we’re nervous about pricing in this economy.” Average check was up 4.3% in 1Q and 4% in 2Q and the company guided to an average of 4% for the year so there will not be a significant drop off in the back half of the year, but I was happy to hear the company will not be implementing another pricing increase when they roll off about 3% of price in 3Q. Restaurant margins should deteriorate further in 3Q as the company is up against its most difficult same-store sales growth comparison from 2007 and will not have has much price to offset these declines. That being said, I think the company’s decision to be more disciplined with its pricing strategy is the right one as margins will not improve until RRGB gets more people in its restaurants.
- RRGB lowered its FY09 unit growth target to 17-20 company-owned restaurants (down from FY08’s goal of 30-32). The company’s capital expenditures as a percent of sales have been coming down while its net cash flow from operations/net income ratio has moved into positive territory. RRGB’s decision to slow its growth will only help to support these two trends, which I view as a definite positive. The company’s FY08 capital expenditures of about $80 million to $85 million should decline to close to $50 million in FY09. RRGB will not see the real benefit of this reduced capital spending until 2H09, however, as the company’s new unit growth will be heavily weighted to 1H09.
- Lingering concerns:
I continue to be wary about RRGB’s national advertising campaign and whether it is yielding adequate returns. The company lapped its initial launch in 2Q08 with an even amount of advertising weeks in the quarter year-over-year and traffic declines worsened. Although 2Q was a difficult quarter for all restaurant operators, I continue to believe that the company will require incremental advertising investments to provide a lift in traffic (for reference, 3Q08 will have 7 weeks of advertising versus 5 weeks in 3Q07 and 4Q08 will have 3 weeks versus no advertising in 4Q07). Going forward, RRGB’s advertisements will include product promotions rather than solely being a branding initiative as it has been, which is a good sign, because from what I have witnessed, branding advertising campaigns do not typically work for restaurants.
- RRGB’s board recently authorized an additional $50 million share repurchase effective through 2010. As I have said numerous times, I do not think borrowing money to buy back shares (as the company did in 2Q) generates shareholder value. The company’s lowered new unit growth for FY09 will free up additional cash, but I would not like to see RRGB offset this shareholder-friendly capital allocation decision by then borrowing money to buy back more stock than it should.
See Tobin's Portal postings for the fundamental view into and out of today's conference call. I see downside risk here to $52.51.
- MYGN breaking $63.71 today was a material negative event
My partner, Todd Jordan, continues to be cautious on this group for structural reasons that you'll find on balance sheets, or Todd's portal.
- MGM broke my short term "Trade" support line of $30.23 today
- LVS broke my short term "Trade" support line of $46.19 today
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Accountability has not been part of the leadership equation here. Transparency was not part of the Fuld business model either. There is officially no love for the "Level 3 Asset" scheme, and now Fuld wants to sell the Street real estate and Neuberger Berman?
He may very well do that, and at the same time, the Street is selling his stock. Down another -13% today. That's an unlucky number. Luck may not save the day here anyway. Ever play ‘Monopoly’ against someone who is levered up and forced to sell assets?
- LEH support? $11.35 looks like next stop
I know - everyone doesn’t "do Macro". But I also know … that everyone knows… that it matters.
If you are still levered up long, beware of this upcoming Macro Season.
(Chart by Andrew Barber, Director - Research Edge LLC)
Target bought back another $1.7B worth of stock (33.8M shares) at an average price just north of $50/share. I am initiating that price as my new stop loss level on the short side.
Below I have attached capital intensity charts for WMT and TGT. Pershing Square likes playing the levered long investing game. Unfortunately that shortsighted strategy was best served for years that are behind us now. The economic cycle has changed course. As cost of capital increases and access to capital tightens, we want to own prudent management teams that are cutting capex and holding cash in the bag for the rainy days that cometh.
*Full Disclosure: I remain long WMT and short TGT in our “Hedgeye Portfolio”
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