Fiscal 2010 was a really strong year for Cracker Barrel.  The company achieved positive restaurant same-store sales growth with two-year average trends improving each quarter.  Retail comparable sales improved to -0.5% from -5.9% in the prior year.  Operating margin grew about 80 bps YOY, helping to drive 25% EPS growth.  The year ended strongly with CBRL positing positive restaurant and retail comparable sales growth during the fourth quarter and a nearly 50 bp improvement in operating margin.  And, restaurant traffic turned positive during the fourth quarter for the first time since fiscal 1Q07.


To that end, Cracker Barrel started fiscal 2011 from a position of strength.  I think FY11 will be another good year, but it will not be a repeat of FY10.  Instead, I would expect the company’s rate of growth to slow in FY11, largely as a result of commodity costs, which are expected to work against the company during the year.  Management guided to a 1.5% to 2.5% increase in its FY11 commodity costs and currently has 61% of its costs locked for the year.  Commodity cost favorability should continue into the first quarter and then reverse during fiscal 2Q11 with management saying that the YOY commodity cost increase should peak during the second quarter and remain higher YOY for the balance of the year.  Specifically, the company highlighted its expectation for higher dairy and pork costs during the year.


Helping to offset these higher commodity costs are the expected lower labor costs through most of 1H11 until the company laps its lower healthcare benefit costs from a program it implemented in January 2010.  Management also expects to benefit from initiatives that should lead to improving productivity and labor competencies, lower incentive payments at both the store level and in the G&A line, improvements on the utilities expense line and from lapping some one-time expense items that hit the maintenance line in FY10 that are not expected to repeat in FY11.  Increased leverage from improving comparable sales should also benefit margins in FY11, but just how unfavorably commodity costs swing during the year is the biggest unknown for now.


Most of management’s fiscal 2011 guidance seems achievable; though the +2% to +4% retail comparable sales growth implies a sharp improvement in two-year average trends and could prove to be a stretch.  Outside of that, the company’s outlook appears within reach.  I would expect the company’s restaurant same-store sales momentum to continue.  I am currently modeling 10% EPS growth and a 30 bp improvement in FY11 operating margin, all within management’s guided ranges.  Again, this implies a slowdown from the 25% EPS growth and 80 bps of margin improvement in FY10.  Fiscal 1Q11 should continue to be strong as the company benefits from another quarter of favorable commodity costs, but operating margin should decline during the second quarter.


CBRL – FY10 WILL BE HARD TO MATCH - cbrl sigma png


Howard Penney

Managing Director


Once again the headlines from Washington paint a picture of a consumer that is spending like we are in a recovery.  A closer look at the components suggests a slightly different picture.

The bottom line form the Advance Retail Sales data today is that inflation is driving a higher level of sales but not an increased level of consumption.  As reported by the commerce department today (seasonally-adjusted and before inflation adjustments), retail sales were 0.42% in August; July was revised downward to +0.28%.  


In total, roughly 87%of the reported 0.42% gain was attributable to rising seasonally-adjusted food and energy prices, as seen in the improvement in sales at grocery stores and gasoline stations.  Net of inflation, August real sales were likely flat versus the downwardly revised July estimate of 0.28%.  Net of inflation and without the seasonal adjustment (the Washington fudge factor), August retail sales were most likely flat-to-down for the month of August.


The commerce department is reporting contractions in Vehicles & Parts, Furniture (home), Electronic stores and the miscellaneous categories.  This is consistent with non-government (and, in our view, more objective) data from Consumer Metrics which suggest a much more sever contraction in consumer spending.     


On a year-over-year basis, August 2010 retail sales were reported up by 3.5% from August 2009, versus a revised annual July gain of 5.4% (previously 5.5%).  The slowing year-over-year trends reflect the lack of government support in the economy (i.e. last year’s cash-for-clunkers stimulus benefits).   Going forward, it will be interesting to see if the monthly seasonal factors that are accounted for in the retail sales are adjusted to mask the underlying consumer trends.


The Clothing and General Merchandise categories benefited from the back-to-school shopping season and consumers taking advantage of the sales tax holidays in more than a dozen states.


When the smoke is cleared, it is clear that there is no real sequential improvement in retail sales and, in fact, things are slowing on a month-over-month and a year-over-year basis.


Howard Penney

Managing Director




The Grind: What's In My Notebook

Feedback on the last grind was good. Here it is again – global macro/risk management PRICE and DATA points in my notebook from the last 48 hours:




1.       Chinese economic data for august = re-acceleration in growth (IP and Retail Sales) + expansion of money supply to +19.2% (AUG) vs +17.6% (JUL)


2.       Chinese equities have been up for 3 straight days, confirming bullish TRADE and TREND lines of support in the Shanghai Composite


3.       Indian Equities powered to higher-highs again last night = bullish TRADE and TREND confirming the same in Hong Kong, Indonesia and Singapore


4.       European equities continue to flash more bullish than US Equities as does the Euro vs the US Dollar


5.       Petrodollar stock markets (Russia, Norway, UAE, etc.) are now trading as bullish from a TREND perspective as the price of oil is


6.       Oil is holding its TREND line breakout from last week with TREND line support = $75.77/barrel


7.       Gold continues to flash higher-lows and higher highs; there isn’t a bullish line of price momentum that’s been challenged as suport


8.       US Budget Deficit spending line dropped 100bps sequentially (month over month) to +9.4% y/y growth (AUG) vs +10.4% in July.


9.       Brazil buying US Dollars to the tune of +$18.6B (net) YTD vs $7.3B in all of last year


10.   China introducing a CDS market by year end with allegedly tight control parameters


11.   Turkey’s PM Erdogan wins an important vote (58% to 42%) giving him increasing power over secular courts and army


12.   Basel3 timing pushes out the blowup case for banks out on the duration curve (9 years is to comply is a long time)


13.   Boehner falls in line with Obama’s middle class tax cut idea; give and takes = more, not less, tax cutting


14.   Frank Quattrone is back (selling Go-Daddy) and reminding us that bankers are back from holidays doing M&A


15.   SP500 continues to flash immediate term TRADE bullish (support = 1107) with upside to its intermediate term TREND range (1129-1144)





1.       Chinese inflation (CPI) pushed higher sequentially (month over month) to +3.5% (AUG) vs +3.3% (JUL) and September looks higher to me too


2.       Japanese Equities (Nikkei225) continue to flash very negative divergences vs both rest of Asia and the Fiat Republic nations


3.       UK CPI (AUG) sticky at +3.1% y/y vs the same in July


4.       German ZEW (confidence) drops to a 19 month low (-4 vs +14 last month)


5.       Greek equities and bond yields continue to flash the nasty; a breakdown for the Athex Index below 1575 will be very bearish for worlds worst mkt YTD


6.       US Treasury yields are dancing on coals on the short end of the curve with immediate term TRADE line of support for 2s at 0.52%


7.       Back to a compression day today in Treasury Yield Spread (bearish leading indicator) with yield spread contracting 8bps day over day


8.       US Dollar continues to act like the dog of the Fiat Republic – down over 1% yesterday and down 13 of the last 16 weeks


In summary, this chaos theorist still sees more bullish than bearish PRICE and DATA in the immediate term. That’s why the Hedgeye has more longs than shorts (14 longs, 7 shorts) as of this morning’s open. That can, and will, change as PRICE and DATA does.




Keith R. McCullough

Chief Executive Officer


The Grind: What's In My Notebook - The Grind

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Chinese Growth: Sequential Slowdown Moderating?

Conclusion: The most recent batch of Chinese economic data supports the recent strength in Chinese equities and concerns that the government may have to induce further tightening to cool inflation. Further analysis shows that China may ultimately prove to be content with the current reading from a policy standpoint, opting to allow yuan appreciation to quell inflation going forward.


Position: Long Chinese equities (CAF); Long Chinese yuan (CYB)


As we anticipated, the Shanghai Composite has rallied 13.8% off its July 5th low on the strength of now-confirmed re-accelerating economic data. The supportive bullish data points include: 

  • Industrial Production growth re-accelerated sequentially  to +13.9% y/y in August versus +13.4% in July;
  • Retail Sales growth re-accelerated sequentially to +18.4% y/y in August versus +17.9% in July;
  • Money Supply growth re-accelerated sequentially to +19.2% y/y in August versus +17.6% in July;
  • and Loan Growth re-accelerated sequentially to 545.2 billion ($80B) yuan in August versus 532.8 billion yuan in July.

Chinese Growth: Sequential Slowdown Moderating? - China IP Retail Sales


Chinese Growth: Sequential Slowdown Moderating? - China Money Supply 


While these data points are supportive of a moderation of the broader slowdown within the Chinese economy, they do raise concern about the potential for incremental monetary tightening when taken in context of the latest inflation data.


CPI accelerated to +3.5% y/y in August – the highest increase in 22 months and well above the government’s full year target of 3%.  Driven by higher food costs, the 3.5% August gain is 125bps greater than China’s benchmark one-year deposit rate. The negative real interest rate setup is eroding the value of savings deposits as well as forcing some monies into real estate in order to earn a rate of return (investment in real estate development accelerated sequentially to +34.1% y/y in August versus +33% in July).


Chinese Growth: Sequential Slowdown Moderating? - China CPI


Chinese property prices, while down sequentially in August on year-over-year basis for the fourth consecutive month (+9.3%), have failed to make headway in the desired direction on a month-over-month basis for the past two months (flat in July and August). This has some investors worried that China could take further steps to cool the property market, including stopping loans to real estate developers, compulsory lowering of home prices, and a ban on third home purchases, according to a report from 21st Century Business Herald dated 9/8.


Chinese Growth: Sequential Slowdown Moderating? - China Property


Further, the acceleration in CPI, loan growth and the marked acceleration in money supply could suggest one of two things going forward. The first is that China may want to clamp down incrementally on its monetary policy should inflation continue to hover meaningfully above target. CPI, however, has averaged only 2.78% y/y in the year-to-date, so there is some headroom remaining for China to be flexible in its monetary policy going forward. On the flip side, Chinese loan growth at 5.72 trillion yuan YTD has only 1.78 trillon yuan of headroom left, which means loan growth must average 445 billion yuan per month through year-end if China is not to exceed its full year target of 7.5 trillion yuan. To put this in context, loan growth in China hasn’t been less than 500 billion yuan on a monthly basis since December of last year.


A second way to look at the acceleration in loan growth is that China could, in fact, be relaxing its previously-established lending ceiling to accommodate demand from the business sector in order to support domestic demand in light of slowdowns in Europe and the U.S. Moreover, the recent uptick and above-target annualized rate of loan growth may also be reflective of China’s recent mandate that banks transfer off-balance sheet loans back on to their books. Knowing full well that a lack of securitization will likely cause Chinese bank’s balance sheets to expand, China may be content to allow the 7.5 trillion yuan target in loan growth to be breached by year end.


Lastly, and shifting gears a bit, we want to highlight the August trade data out of China and how it relates to global commodity markets. Year-over-year Import growth accelerated sequentially in August (+35.2%) for the first time since March, which has been supportive of the oil and copper price of late, including crude oil’s recent TREND line breakout.


All told, China’s August economic data has been supportive of equity prices both domestically and globally. Furthermore, the accelerating inflation data has been supportive of the People’s Bank of China allowing the recent strength in the yuan, which today reached the highest level per dollar since the central bank unified official and market exchange rates at the end of 1993 (6.7435). Considering, China is likely to resist the urge to aggressively combat inflation by raising interest rates, and we expect the recent rally to continue as China seeks to decouple its growth prospects from its foreign counterparties by supporting domestic consumption. We also expect the yuan to continue to appreciate under its own merits, despite increased pressure from U.S. Congress to impose further trade sanctions.


Darius Dale



Chinese Growth: Sequential Slowdown Moderating? - China Trade


MPEL share remains strong, Wynn not so much.



Through 9/12, September table gaming revenues were HK$5.91 billion.  After factoring in the number of weekend days versus weekdays and anticipated slot revenue, this projects out to HK$15.0-15.4 billion, or 41-43% growth.  The second week in September clearly accelerated and we are hearing it was concentrated in VIP volume and VIP hold percentage.  Mass growth appears “sluggish” in comparison but obviously still very strong on a YoY basis.


In terms of market share, recent monthly trends are continuing.  Wynn’s table game revenue share dropped all the way down to 11.3%, well off its recent high of 17.2% in June, and below August’s 13.9%.  We are hearing Wynn held poorly on the VIP tables, below 2.3% versus a normal 2.9%.  MPEL continued its recent strength, at 16.0%, in-line with its recent high in August of 16.3%.  LVS share was substandard at 17.7% while SJM had a great start to the month at 34.4%.  Look for LVS and MGM to gain VIP share in the coming months, probably at the expense of the Peninsula - Wynn and SJM.


We would caution people that the data represents only 2 weeks and as we saw from week 1 to week 2, can fluctuate wildly.


MACAU ACCELERATES - sep 12 maca market share

R3: China, Wages, TIF, SKX, & Teen Apparel


September 14, 2010


Another day, another handful of stories focusing on wage pressure in Asia.  At this point, it’s widely known inflation in apparel is on the horizon.  What is less known, is how companies will ultimately deal with rising prices and its impact on demand.  History suggests “adding more detail” into the garment is not the secret sauce.





- Word has it that the iPad will be making its way onto Target’s shelves in early October. Recall that the discounter recently became the only physical retailer to sell Amazon’s Kindle. To further add fuel to the fire, Kindle just revealed its latest TV campaign which highlight’s the Kindle’s ability to be read in direct sunlight while the iPad reader is left fighting the glare.


- According to a Harris Interactive poll, two thirds of American’s think the current job market is bad, while 22% say it’s neither god or bad, while only 12% say it’s good. On a slightly positive note, the monthly poll has improved since January, which at that time indicated 70% of Americans thought the job market was bad.


- According to Piperlime’s VP/GM, the website garners 20% of its revenues and 24% of its customers from New York. As a result, the recently opened SOHO pop-up shop appears to be well placed. The store, which is the first physical location for the brand, is now open for 25 days, coinciding with NYC’s Fashion Week.





Tiffany Back to the Accessories Business - Back into handbags and small leather goods for the first time in the last two decades, Tiffany has recently launched its new leather accessories collection in twelve of its US stores. <>

Hedgeye Retail’s Take:  Finally, the company’s acquisition of Lambertson Truex is beginning to show at the store level.


K-Swiss Enters Accessory Licensing Deal - Active Energy, a division of Accessory Exchange, has inked a deal with K-Swiss to become its exclusive accessory licensee. Active Energy will produce and distribute accessories to include socks, sport bags, and headwear. <>

Hedgeye Retail’s Take:  Yesterday it was a collaboration with sportswear designer Billy Reid and today it’s a licensing deal.  Clearly the team at K Swiss is looking at any and all options to reinvigorate the top line.


Skechers Secures 70th Patent on Shape-ups Footwear - Skechers USA, Inc. has secured its 70th patent worldwide for its Shape-ups footwear line. <>

Hedgeye Retail’s Take:   We remain concerned that SKX has morphed from a marketing company (and a pretty good one) into an R&D company, with an increasing focus on innovation and performance in the athletic category.  It’s great to protect the company’s IP, but it’s also a completely different business model that is costly and with higher risks.


China Will Spur Consumer Spending Earlier - China will move up the timetable on reforms to spur consumer spending, with an eye toward balancing its trade surplus and moving toward long-term economic stability, Premier Wen Jiabao said Monday. In his opening address to the summer meeting of the World Economic Forum, Wen spoke about China’s success in weathering the global financial downturn through stimulus spending and other macroeconomic controls. He said that while the country’s $586 billion spending package was necessary, changes are needed to build a stronger economic foundation. <>

Hedgeye Retail’s Take:  Nothing new here as China continues to move from an export economy to one of consumption. 


Teen Market Price Wars - The teen market has a new price leader, as Forever 21 displaced The Wet Seal Inc. for the lowest average unit retail (AUR) price this month. According to a study Forever 21’s AUR declined to $15.34 this month, down 9.3% from its September 2009 AUR, while Wet Seal’s climbed to $17.36, up 13% from the year-ago level. While overall AUR prices in the teen sector rose 6% from a year ago pricing wars continue to place significant margin pressure on teen retailers. The largest decline in AUR was registered by Aéropostale Inc., which tallied a 17.4% decline to $18.88. Urban Outfitters Inc. increased its year-on-year AUR a full 18.7% to $47.35 while Abercrombie & Fitch Co.’s Hollister brand followed a 30.6% decline in AUR in August with a 5.6% drop this month.  <>

Hedgeye Retail’s Take:  This data confirms what management teams described as an “aggressive” promotional environment for back to school.  Perhaps the change in seasonal weather patterns will help to firm up pricing on Fall apparel, while at the same time clearance levels remain light on a year over year basis.


Cambodia: Garment Workers Plan for Massive Strike - About 80,000 Cambodian workers are planning a massive week-long strike over wages, which will threaten production that contributes a sixth of the country's garment factories.<>

Hedgeye Retail’s Take:  More inflation on the way, as workers across Asia and the Indian sub-continent continue to protest in an effort to secure higher wages.


Legislation Will Impact US Trade With China and South Korea - The fashion industry is closely watching the Congressional agenda this fall as momentum appears to be building for legislation targeting China’s undervalued currency and approving a free trade agreement with South Korea. With just seven weeks until midterm elections on Nov. 2 — and Republicans seeking to take control of the House with all 435 seats, as well as one-third of the Senate up for grabs — Democratic congressional leaders are promoting a domestic manufacturing and small business agenda they hope will sway voters disenchanted because of the troubled economy. <>

Hedgeye Retail’s Take:   Yet another reason why sourcing expertise remains a key competitive advantage.  Enter Li & Fung which could soon be busy looking for additional South Korean factory capacity if and when the cost of doing business with China increases as a result of legislation. 


Brooks Brothers Extends Brand Through New Products and Launches - At its spring presentation on Monday, the retailer revealed that it will launch a separate Web site for the Black Fleece collection designed by Thom Browne. The site,, will go live at the beginning of next month and will feature an online look book and some original content designed to appeal to the collection’s customers. In addition, the company will add body splashes for men and women to the Black Fleece offering in November. Produced by Inter Parfums, the company’s licensee for its Black Fleece fragrance, there will be three separate bottles, called Red, White and Blue, which are signature colors of the collection. <>

Hedgeye Retail’s Take:  Oddly enough Black Fleece, which is substantially more youthful and edgy vs. the its conservative parent hasn’t sold so well.  The hip, but expensive, sub-brand can be found in abundance at local sample sales as well as other off-price retailers



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