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SEQUENTIAL REVPAR UPDATE

Based on Upper Upscale RevPAR coming in at 10%, August represented a sequential slowdown in seasonally adjusted absolute RevPAR from July.

 


As we discussed in our 08/10/10 note “DOLLAR REVPAR MORE RELEVANT THAN %,” to keep pace with July, August need to generate RevPAR of roughly $100.  Actual August YoY RevPAR growth came in at +10% which, on the surface, appears stronger than July’s 7.8% increase.  However, on an absolute basis, adjusted for seasonality, August growth need to be at least 14% to match July’s performance.  In our opinion, RevPAR is actually on a declining pace sequentially which gives credence to our Pent Up Demand thesis espoused in our 08/17/10 note “PENT UP DEMAND THEORY.”

 

The good news is that September needs only to grow RevPAR 8% to match August’s performance versus 12% to match July.  The bad news is that if this new level of absolute RevPAR continues, 2011 RevPAR could fall below the Street’s estimate.


REGIONAL TRENDS LIKELY WORSENED AUGUST

With IL, IN, and IA already reported, August is looking worse than July on an absolute basis, after adjusting for seasonality.

 


As we did for lodging – yes, 10% RevPAR growth in August actually represented a slowdown – we’ve taken a look at sequential regional gaming trends on an absolute basis.  Of course, we adjust for seasonality since August is typically a better than average month but slower than July while September is one of the slowest months of the year.  Ignoring YoY changes is prudent in our opinion given the extreme volatility over the last two years. 

 

Seasonally adjusting the July actual revenues yield August regional gaming revenues of $1.047 billion, up 2% over last year.  However, Illinois, Indiana, and Iowa have already reported August, and they were all disappointing relative to July.  Plugging in those actual numbers, we arrive at a new estimate of $1.029 billion, flat with last year.  But that assumes that Louisiana, Mississippi, and Missouri are also not disappointing.  Since the regional markets tend to be impacted by the same macro factors, those three states could come in lower.  Thus, we believe August gaming revenues may come in at -1% to -3%. 

 

Based on July, the seasonality model would’ve projected September to be up almost 2% but if we are right on August, that would lower our September estimate to -2% and our October estimate to -4%.  Looking further ahead, November could be the first positive YoY month, but just barely, while December has more cushion and should be a positive growth month.  Nevertheless, these don’t sound like recovery numbers just yet.

 

REGIONAL TRENDS LIKELY WORSENED AUGUST - regional final


Covering our S&P 500 Short

This note was orinigally published at 3:02pm ET for Risk Manager Subscribers.  To receive Macro Select Content, and our Virtual Portfolio positions in real-time, please sign-up for a 14-day free trial or as a RISK MANAGER subscriber.

 

 

 

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Position Changes Today: Covered SPY, Bought EWG

I attempted to explain this today in my EL titled “Feeling Strange”, but I think it’s worth repeating. Duration Mismatch crushes performance and the best way to avoid it is having a Duration Agnostic risk management process.
 
As a reminder, we have 3 core durations that we manage risk around: TRADE, TREND, and TAIL.
 
Currently, the SP500 is bullish from an immediate term TRADE perspective (support = 1085)
and bearish from an intermediate term TREND perspective (resistance = 1144). That means that we can be mentally malleable enough to admit that the immediate term upside in the SP500 is more probable than the immediate term downside. Be sure not to confuse this with pretending you are going to be the next Buffett – keep a bullish TRADE a trade.
 
Both the DATA (ABC confidence, MBA mortgage apps and jobless claims) and the SP500’s PRICE support this immediate term bullish view. You might say, heh last week you shorted the SPY and how can you change your mind that quickly? Well, for starters, I didn’t have this week’s DATA or PRICES in my back pocket when I made that move earlier last week. The key to risk management isn’t being wed to a view that was based on prior DATA and PRICES.

If next week’s DATA turns back to bearish and the SP500 breaks 1085 again, I’ll short SPY again. As is customary, all my moves are on the tape – I have done nothing but cover and buy positions in the Hedgeye Portfolio since 11:02AM on September 3rd.
 
If the SP500 closes above our immediate term resistance line of 1107, I see heightened probability of this pain trade taking us all the way back up to another lower-high of 1123. And from a bearish intermediate term TREND perspective, nothing will have changed other than immediate term DATA and PRICES.

 

 

Covering our S&P 500 Short - chart1

 

 
Stay transparent my friends,
KM


Keith R. McCullough
Chief Executive Officer


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Bear Market Macro: SP500 Levels, Refreshed...

Position Changes Today: Covered SPY, Bought EWG

 

I attempted to explain this today in my EL titled “Feeling Strange”, but I think it’s worth repeating. Duration Mismatch crushes performance and the best way to avoid it is having a Duration Agnostic risk management process.

 

As a reminder, we have 3 core durations that we manage risk around: TRADE, TREND, and TAIL.

 

Currently, the SP500 is bullish from an immediate term TRADE perspective (support = 1085) and bearish from an intermediate term TREND perspective (resistance = 1144). That means that we can be mentally malleable enough to admit that the immediate term upside in the SP500 is more probable than the immediate term downside. Be sure not to confuse this with pretending you are going to be the next Buffett – keep a bullish TRADE a trade.

 

Both the DATA (ABC confidence, MBA mortgage apps and jobless claims) and the SP500’s PRICE support this immediate term bullish view. You might say, heh last week you shorted the SPY and how can you change your mind that quickly? Well, for starters, I didn’t have this week’s DATA or PRICES in my back pocket when I made that move earlier last week. The key to risk management isn’t being wed to a view that was based on prior DATA and PRICES.

 

If next week’s DATA turns back to bearish and the SP500 breaks 1085 again, I’ll short SPY again. As is customary, all my moves are on the tape – I have done nothing but cover and buy positions in the Hedgeye Portfolio since 11:02AM on September 3rd.

 

If the SP500 closes above our immediate term resistance line of 1107, I see heightened probability of this pain trade taking us all the way back up to another lower-high of 1123. And from a bearish intermediate term TREND perspective, nothing will have changed other than immediate term DATA and PRICES.

 

Stay transparent my friends,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bear Market Macro: SP500 Levels, Refreshed... - 1


CHART: Three Currency Monte

The chart was extracted from a note dubbed "THREE CURRENCY MONTE" issued to Risk Manager Subscribers earlier today, September 9, 2010.  Sign up for a free-trial or subscribe for access to the note, Macro Select updates and the real-time portfolio.

 

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The past couple of days have provided some interesting commentary and data points out of Asia and the U.S. as it relates to the yuan, the yen, and the dollar. We remain bullish on the Chinese yuan from a TAIL perspective, bearish on the U.S. dollar from a TAIL perspective and bearish on the Japanese yen from a TREND perspective.

 

 

CHART: Three Currency Monte - Screen shot 2010 09 09 at 1.23.57 PM


COSI - ALL ROADS POINTS NORTH

I recently met with CEO Jim Hyatt at a COSI in NYC.

 

Normally when you schedule to meet a restaurant executive at a store they pick one that has recently been renovated.  For my meeting with Jim, he picked a store on 6th ave in NYC that is actually under renovation (it was going to get a new coat of paint that night).

 

How fitting that our first meeting should be at that location; the store serves as a perfect metaphor for the stock.   The perception of passersby in the street, and of investors on Wall Street, is that the store and stock, respectively, are undergoing renovation.  What the street does not see yet is how good things are going to look when it is finished.  I have never met Jim before but he seems to be the right person for what is needed at COSI - a restaurant operator. 

 

By way of background, Jim was a multi-unit Burger King franchisee and was recruited to join Burger King's corporate operations in 2002.  From 2002 until his promotion to Chief Operations Officer in 2005, his responsibilities at Burger King included Senior Vice President, Operations Services and Programs; Senior Vice President, U.S. Franchise Operations; and Executive Vice President, U.S. Franchise Operations.  Mr. Hyatt was Executive Vice President & Global Chief Operations Officer of Burger King Corporation from August 2005 until joining Cosi in September 2007.

 

Cosi has had a rocky time as a public company.  First, it went public before it was ready and it was owned and operated by executives who only knew how to grow the store base.  With an overly-aggressive store grow came a corporate infrastructure that did not allow the company to make money.  As I see it, the old management team never figured out the operating model but they continued to open stores regardless.  Needless to say, a disaster ensued but that is all history.

 

Since joining in 2007, Jim’s operating mentality has been to right-size the ship - close unprofitable stores and get the cost structure of the company better aligned.  In addition, he needed to get all the units operating under one common platform.  Unfortunately, between the time he joined and the results he is posting today, the consumer environment got significantly worse. 

 

While we are still looking at a difficult consumer environment, the company that has spent the last three years focused on operations and profitability and they should reap significant rewards from their efforts.  We are only now just seeing the fruits of all that work and there is still much to do. 

 

COSI operates in the more upscale “quick casual” segment of the industry which is seeing better trends than other segments in the restaurant industry.  Like others in the “quick casual” space COSI offers a comfortable and contemporary atmosphere.  It’s a restaurant that appeals to young generations who want to relax, eat, and use their mobile devices.  Not to mention that the signature bread creates customer loyalty.

 

For 2Q10, system same-store sales increased 3.1% with franchise sales up 2.6% and company-owned sales up by 3.3% (traffic increased 3.1% in the quarter).  On the 2Q10 earnings call COSI reported that July was up 8% and represented the fifth consecutive month of positive same store sales.  I believe that August and September will make it seven straight months. 

 

The improvement COSI is seeing in the top line is coming from all day-parts: catering, breakfast, lunch, snack and dinner.  The biggest winner on a percentage basis is breakfast with growth well above 8%.  More importantly, next week in Chicago COSI will be testing online ordering and online catering.  If all goes well, the online ordering initiative will be rolled out by the end of November.  Early indications are that this could accelerate same-store sales or, at a minimum, give strong visibility for same-store sales growth well in to 2011 and 2012.  

 

The current growth in same-store sales is also being driven by increases in, and more efficient use of, marketing dollars.  With the help of a new advertising agency, COSI has increased spending on “out-of-store” media to increase awareness of the brand and drive incremental traffic.  COSI also has a newly designed website, menu boards and a new social media team in place to drive the marketing effort. 

 

Given the current sales trends and the appeal of the COSI concept, it will not be long before the franchise community is on board.  The better the numbers the company puts up the increased likely hood the company can refranchise stores to new franchisees and see growth from the existing franchise base.  I would also not be surprised to see the company sign a couple of foreign franchise agreements.  

 

If we assume a 45% flow-through on every additional sale coming through the store base and 8%+ same-store sales (and take into account the company’s ability to control costs), there is a very high probability that the COSI will be profitable in 3Q10.

 

Lastly, Jim offered up his 2020 vision for the company.  With the backdrop of a concept with a strong operating model, unit growth will occur over time.  So where does he see the company in 2020? He believes that COSI will have 500 stores in the U.S. and 150 overseas.

 

COSI - ALL ROADS POINTS NORTH - cosi pod1

 

Howard Penney

Managing Director


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