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BWLD: SHORT TERM LOOKS GOOD BUT LONG TERM ISSUES MAKE IT A TRADE

Conclusion: The Street is mixed on BWLD, but the consensus EPS expectations seem low.  I am currently modeling FY10 EPS of $2.14 versus the street at $2.08 with more of the upside falling in 4Q10.

 

I estimate EPS for 3Q10E and 4Q10E of $0.45 (versus the Street at $0.43) and $0.60 (versus the street at $0.56) respectively.  The primary risk to my 4Q estimate is the ability of the industry to maintain the current trend of posting improved comparable-store sales results on a two-year average basis.

 

Reasons for upside:

 

Company comparable-store sales were up 2.2% in July versus +1.2% in the year-ago period, which implies a 30 bp improvement in two-year average trends since the end of 2Q10 (and trends came in much better-than-expected during 2Q10 after turning positive in June from -3.7% in April).

 

While this data point for July is encouraging, it obviously does not make a quarter.  Industry trends, on average, have improved on a one and two-year basis since early in the summer.  Comparisons become easier for BWLD for the remainder of the quarter as 3Q09 comparable-store sales came in at +0.8% (after being up 1.2% in the first four weeks of the quarter). 

 

I am modeling +3.0% company SSS for 3Q10, which implies a nearly 60 bp acceleration in 2-year average trends from the prior quarter.

 

The consensus says: The chart below shows the current sentiment surrounding the stock.  Positive ratings (“BUY” and “OUTPERFORM”) are at 55.6%, down from the peak of 63.2% in March, and up from the low of 44.4% in May.

 

BWLD: SHORT TERM LOOKS GOOD BUT LONG TERM ISSUES MAKE IT A TRADE - bwld ratings

 

COGS: Chicken wing prices were down nearly 11% in 2Q10.  Based on two-month number given for 3Q10 of $1.41/lb, wing costs will be down closer to 16% in 3Q10 versus the $1.67/lb cost in 3Q09.  The year-over-year benefit should be even greater in 4Q10 as the company is lapping its highest price paid in 4Q09 of $1.78/lb.  This, combined with same-store sales trends that should improve on a 2-year average basis, should drive the bulk of the year-over-year restaurant-level margin growth in 2H10.

 

Labor: Management guided to slight year-over-year leverage in 3Q10.

 

Offsets: Restaurant operating expenses are moving higher in 2H10 due to additional pay-per-view TV programming costs and an expected 11% increase in media spending in 3Q and 4Q.

 

Preopening expenses will be higher year-over-year as the company is expected to open 13 units in 3Q10 versus 5 in 3Q09 and 14 units in 4Q10 versus 12 in 4Q09.

 

3Q10 EPS Growth:

Although management guided to 20% EPS growth for the full year, they said on the last earnings call that it may not achieve that target in each quarter of the year and they mentioned the expected higher level of preopening expense in 3Q10. 

 

This, along with the fact that the company is lapping its highest quarter of YOY growth from FY09, leads me to think that the company will post its lowest year-over-year growth in 3Q10.  My 3Q10 EPS estimate assumes nearly 20% EPS growth after 23% and 31% growth in 1Q and 2Q, respectively.

 

I think the 49% reported EPS growth in 3Q09 relative to the 24% full-year growth was partly a function of comparisons.  The company’s 3Q08 EPS grew only 6% versus 24% for FY08 overall.

 

SSS actually slowed sharply in 3Q09 on a one-year and two-year basis and chicken wing prices were up 43% during the quarter.

 

Preopening expenses, however, were much lower YOY in 3Q09 and drove a bulk of the EPS growth as the company only opened 5 units in 3Q09 relative to 18 in 3Q08.  If you make 3Q09 preopening expense equal to the 3Q08 level, EPS would have only been up closer to 20%.

 

BWLD: SHORT TERM LOOKS GOOD BUT LONG TERM ISSUES MAKE IT A TRADE - bwld sigma

 

Summary:

Based on our restaurant sigma chart, it looks as though the company has a good chance of remaining in the “Nirvana” quadrant (positive same-store sales growth and positive restaurant-level margin growth) for the next several quarters if comp trends hold steady (that is obviously a big if).  BWLD needs positive comp growth to offset the growth-related costs inherent in its P&L and comps trends definitely improved more than I was expecting during the second quarter.  It will be important to see if BWLD can maintain this top-line momentum.

 

Longer-term thesis:

I continue to think the company is growing too fast.  I consider return on incremental invested capital to be the best metric to look at when considering the sustainability of a company’s unit growth plans.  After declining in 2009, returns look to be recovering in 2010 to about 30%, which is impressive.  Based on my current estimates (I think it will be harder for the company to achieve 20% EPS growth in FY11), I would expect returns, however, to fall off again in 2011 to a low double-digit range.  Although this still implies positive returns for 2011, I have found that the absolute direction of the trend in returns is the more important indicator of future trends and, ultimately, stock performance.

 

Howard Penney

Managing Director


FRIDAY MACRO MIXER - INCOME, ISM & SENTIMENT

Conclusion: We continue to see weakness in the consumption trends when government spending is stripped away.  Slower growth is likely going forward.

 

Commerce Department figures released today show that consumer spending rose in August while ISM and consumer confidence data have flashed to the downside in recent releases.  See our conclusions below and a chart of ISM component shifts in the most recent months.

 

INCOME - Consumer spending in the U.S. rose 0.4% in August; the gain exceeded the 0.3% increase projected the Bloomberg consensus.   Incomes were up 0.5%, the biggest advance this year (propelled by the incorrigible hand of Washington).  Transfer payments jumped 1.6%, indicating that the government’s crutch is still a core factor in this “recovery”. 

 

Hedgeye conclusion: there will be a rocky road transitioning from the government supporting consumer spending to the “real” economy.

 

 

ISM - The ISM print was better that feared, still growing in September, but at the slowest pace in 10 months.  The I SM factory index dropped to 54.4 from 56.3 in August.  Bloomberg consensus forecast a decline to 54.5.

 

Hedgeye conclusion: A sequentially lower ISM print in October is likely.

 

 

CONFIDENCE - The University of Michigan final index of consumer sentiment fell to 68.2 from 68.9 in August, but up significantly from the preliminary reading of 66.6 issued last month. 

 

Hedgeye conclusion: Maybe there was a fat finger in Michigan!  The bottom line is that confidence is not improving, but people are spending more thanks to gifts from Washington. 

 

Howard Penney

Managing Director

 

FRIDAY MACRO MIXER - INCOME, ISM & SENTIMENT - ISM COMPONENTS



CHART OF THE DAY: Deflation?

 

POSITION  

Long Treasury Inflation Protection (TIP)

Short US Dollar (UUP)

 

 

CHART OF THE DAY: Deflation? - chart1

 

 

Assuming that the man saw this morning’s inflationary spike in the PRICES PAID component of the ISM survey (70.5 SEP vs. 61.5 AUG), we’re quite sure about what Ben Bernanke is doing right now – hoping you don’t see what markets do.
 
As we like to say at Hedgeye, hope is not an investment process.

Look at the two red arrows in this chart:
 
1.      SEPTEMBER 2007

2.      SEPTEMBER 2010

Heli-Ben didn’t recognize the inflection point in 2007, so we don’t expect him to publically consider the risk management questions now… but what if this debauchery of the US Dollar continues to put upward price pressure on everything priced in dollars?
 
Don’t forget that the question mark in this chart is the risk – and the risk remains NOT that inflation is born out of currency debasement, but that the mother-load of all inflations (the dotted red line) is actually in play.
 
We’re quite certain that consensus expects “deflation”, because that’s what the Fed needs to see. What you need isn’t always what you get. Ask 1970’s Fed Head, Arthur Burns, about that.


KM


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Deflation? Chart Of The Day

POSITION: Long Treasury Inflation Protection (TIP), Short US Dollar (UUP)

 

Assuming that the man saw this morning’s inflationary spike in the PRICES PAID component of the ISM survey (70.5 SEP vs. 61.5 AUG), we’re quite sure about what Ben Bernanke is doing right now – hoping you don’t see what markets do.

 

As we like to say at Hedgeye, hope is not an investment process.

 

Look at the two red arrows in this chart: 

  1. SEPTEMBER 2007
  2. SEPTEMBER 2010 

Heli-Ben didn’t recognize the inflection point in 2007, so we don’t expect him to publically consider the risk management questions now… but what if this debauchery of the US Dollar continues to put upward price pressure on everything priced in dollars?

 

Don’t forget that the question mark in this chart is the risk – and the risk remains NOT that inflation is born out of currency debasement, but that the mother-load of all inflations (the dotted red line) is actually in play.

 

We’re quite certain that consensus expects “deflation”, because that’s what the Fed needs to see. What you need isn’t always what you get. Ask 1970’s Fed Head, Arthur Burns, about that.

KM 

 

Deflation? Chart Of The Day - ISM Prices Paid


European Manufacturing PMI Declines for “Biggies” in Europe

Hedgeye Portfolio: Long Germany (EWG), Long British Pound (FXB), bullish on EUR-USD; Short Italy (EWI)

 

The final September figures for European Manufacturing PMI came out today – in aggregate there is a noticeable downturn in the September figures for the major economies (excluding France), in line with our forecast for weaker European economic data in the back half of 2010. We’ll note that the PMI figures in the tables below do not all come from the same sources, although most do, including the big three Eurozone economies of Germany, France, and Italy, which are issued from Markit/Reuters.  That said, our focus is on the changes in the data on the margin, in particular the month-over-month moves. One highlight here is Scandinavia, which continues to outperform, mirrored by its equity market that is up +14.1% YTD and a growth forecast of 3.6% Y/Y this year (Bloomberg), the highest versus its major European peers. 

 

To be clear, our position on Europe remains that we see a clear divergence among countries, similar to our Sovereign Debt Dichotomy theme in 2Q10. Currently we are bullish on Germany and continue to warn of further deterioration in the capital markets of countries like Portugal, Ireland, Italy, Greece, and Spain. One TRADE that has worked for us is long EUR, short USD, despite the ongoing sovereign debt contagion threats across the Eurozone. With the Euro rising to $1.37 today, it’s bumping up against our overbought TRADE (3 weeks or less) line of resistance at $1.38, which we’ll be watching acutely. The TRADE line of support remains at $1.34.

 

Matthew Hedrick

Analyst

 

European Manufacturing PMI Declines for “Biggies” in Europe - manu


R3: WMT, DKS, JAH, and E-com

R3: REQUIRED RETAIL READING

October 1, 2010

 

More movement in the C-level ranks at Dick’s with the departure of its CMO, while Wal-Mart resets the bar for affordable prescription drugs partnering with Humana in a rare case of cost deflation for the domestic consumer. 

 

 

RESEARCH ANECDOTES  

  • Forever 21 continues its quest for retail domination, this time taking one of the most expensive pieces of real estate in Manhattan. The fast-fashion retailer is expected to take a short, sixth month lease on Fifth Avenue formerly occupied by Takashimaya. Clearly Forever 21 believes it can operate in any type of location after signing a sub-lease in a Sears last week and a $1,000 per foot location this week.
  • Keep an eye on supermarkets coming to a mall near you. Mall operators are beginning to experiment with filling vacant space with traditional supermarkets, in an effort to rejuvenate traffic and visitor frequency. Westfield’s Seattle Southcenter mall has seen a 26% increase in traffic over the first few weeks since Seafood City opened in a vacant Mervyn’s location. Aldi also recently inked a deal to open a store in Illinois.
  • According to a Harris Interactive poll, mature consumers (age 65+) are most pessimistic about an improvement in the economy over the next 6 months. While 22% of the overall population expects the economy to improve in the next sixth months, only 8% of those age 65+ expect their financial condition to improve. The echo boomers (18-33) are the most optimistic, with 28% expecting an improvement over the next 6 months.

OUR TAKE ON OVERNIGHT NEWS

 

Wal-Mart Sets Bar for Affordable Prescription Drugs - Wal-Mart Stores Inc., the world’s largest retailer, said it will team with health insurer Humana Inc. to offer the cheapest prescription drug plan in the U.S., as the companies seek to take sales of medications from rivals. The companies will begin marketing the plan today to Americans in Medicare, the U.S. government health program for the elderly and disabled, William Fleming, a Humana vice- president, said in a conference call yesterday. The policies, which take effect Jan. 1, will cost $14.80 a month, less than half the average premium this year, and will boost sales for both companies, Fleming said.  <Bloomberg>

Hedgeye Retail’s Take: This appears to be a win-win for both consumers and WMT given the substantial reduction in the price of the premium.  Given that the elderly are the most challenged demographic from an economic standpoint, we’d expect this program to be well received. We’d also expect others to follow in order to close the price gap.

 

Dicks' CMO Out - Jeff Hennion, EVP and chief marketing officer at Dick's Sporting Goods, has left the company. According to a filing with the Securities & Exchange Commission, his job was terminated, effective Sept. 24. William Colombo, vice chairman of Dick's SG, will assume the responsibilities of chief marketing officer on an interim basis until the search for a new CMO is completed. Hennion had been EVP and chief marketing officer of Dick’s SG since 2008. Previously, Hennion was SVP — chief marketing Officer, a position he held since 2005. <SportsOneSource>

Hedgeye Retail’s Take: Big shoes to fill for the chain which has built a major presence on the national advertising scene. 

 

Rawlings Returns to Helmets Business (JAH) - Rawlings is planning to launch a line of football helmets. According to the St. Louis Post-Dispatch, Rawlings is outfitting a limited number of high school, college and professional athletes with helmets this fall in advance of its planned launch in March 2011. The helmets will broaden the company's offerings to complement its line of football pads, gloves, uniforms and apparel. Rawlings stopped making football helmets two decades ago. The article noted that Rawlings' re-entry comes as Schutt Sports in early September was forced to file Chapter 11 bankruptcy protection in early September after losing a patent battle with Riddell. Schutt is appealing a court's $29 million judgment that it has to pay Riddell in the patent infringement case. <SportsOneSource>

Hedgeye Retail’s Take: With concussions finally being addressed with a high degree of seriousness, this is precisely the time for Rawlings to step in and give Riddell some competition. 

 

Hong Kong Auction Bellwether for High-End Luxury Demand - A jade seal of China’s 18th century Qianlong emperor is one of the star attractions at Sotheby’s 3,200-lot Hong Kong auction that may raise HK$1.6 billion ($210 million) in a test of Chinese demand for art. The seven-day marathon also includes cases of Chateau Lafite Rothschild; a 6.4 carat pink diamond; antiques; jewelry and paintings by masters including Chinese abstract painter Zao Wou-ki, New York-based Sotheby’s said. The sale will show whether rising wealth in China will continue to drive an increase in prices. Sotheby’s said the sale has 800 more lots than its April auction in the city, which took a record HK$2 billion and revived prices in most categories to pre-credit-crisis levels. “The estimate for the fall auction is the highest in our 37-year history of auctions in Asia,” Kevin Ching, Sotheby’s chief executive officer for Asia. <Bloomberg>

Hedgeye Retail’s Take: The days of multi-million Sharks in tanks appear to be in the past as the Asian audience shifts its tastes towards more traditional collectibles. 

 

Bloggers Beware - Marketers and other corporate communications professionals may sometimes feel they have a thankless task: carefully craft messages about their company’s thought leadership, social responsibility efforts and new product or service launches, only to find those messages distorted as they’re disseminated through the media. PR and communications firm Burson-Marsteller analyzed more than 150 messages sent out by companies in the Financial Times Global 100 list of firms and discovered a large gap between the messages that went out and how they were covered on blogs. Message distortion was highest for companies in Latin America and the US, with a global average of 69% of blog postings not reflecting the message companies were trying to send. According to the report, bloggers tended to include “opinions, personal experience, knowledge of competitors and products, and speculation.” Distorted messages are not a new phenomenon; they have been a problem in mainstream media as well. <emarketer>

Hedgeye Retail’s Take: While the perception of an official presence on blog sites is largely seen as a high risk proposition by most companies given the lack of quality checks, the message here is that it’s a risk worth taking given the misinformation perpetuated by miss/less informed public. 

 

R3: WMT, DKS, JAH, and E-com - R3 10 1 10

 

R3: WMT, DKS, JAH, and E-com - R3 2 10 1 10

 

Latest Research on Online Shopping - 58% of U.S. adults go online to research products and services they are considering purchasing, an increase from 49% who did so in 2004, a new report finds. Further, the number of those who do research about products on any given day has jumped from 15% of adults in September 2007 to 21% in September 2010, according to the report released today by the Pew Research Center’s Internet & American Life Project.  Additionally, 24% of U.S. adults say they have posted comments or reviews online about the products or services they buy, indicating that many consumers are willing to share their opinions about products and their buying experiences, the report says. These new statistics track with other Pew Internet Project data that show more consumers are buying online. For instance, the percentage of Americans purchasing products online rose from 36% in 2000 to 52% in 2010. And the percentage making travel reservations or purchasing travel services such as airline tickets, hotel rooms or rental cars rose from 22% in 2000 to 52% in 2010. <InternetRetailer.com>

Hedgeye Retail’s Take: Believe it or not, some retailers are still on the sidelines in this game and increasingly disadvantaged as a result.

 

 

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%
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