RRGB – Price Versus Traffic: An Important Relationship

RRGB appears to be joining the ranks of those companies that are taking the right steps to address the aspects of the business that it can control. Following the company’s 2Q earnings call, I was encouraged by management’s decision to slow new unit growth for FY09 and to hear that they do not anticipate taking any more pricing for the remainder of the year.
  • 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.

Myriad (MYGN): Mr. Tobin's Q

My Partner, Tom Tobin, fortuitously called this one ahead of the quarter; MYGN closed down -5% today. Tobin tends to be lucky, often. I have attached an aerial picture of the 3 year ramp that MYGN has had to 20,000 feet. The shorts look like they covered the top (short interest peaked there at close to 30% of the shares out).

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
(chart courtesy of

The Dead Heat: MGM vs. LVS

The Question here is which of these two charts looks worse? And I can't give you an answer... after dropping 9% and 11% today, respectively, they both look scary.

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
chart courtesy of
chart courtesy of

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Lehman (LEH): When Will Fuld Show Us What's Really In His Hand?

Did he lie? Did he fib? Did he know? Do we care?

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
Chart courtesy of

Chart Of the Day: Macro vs. Earnings Season, Beware...

As another 2008 Earnings Season limps to a close, you'll find this chart as relevant as any other out there. Notice that we are exiting the 3rd earnings season (blue on the chart) of the year, and pay close attention to the path that the US market has taken post the previous two.

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 (TGT) vs. WalMart (WMT): Who Thinks Cash Is King?

On their conference call this morning, Target (TGT) attempted to appease Bill Ackman by talking up their "buy back" program which will fabricate a Q4 earnings lift. This short term call is going to have negative long term ramifications.

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”
  • TGT
  • WMT
TGT Capex as % of Sales
WMT Capex as % of Sales