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DPZ – Broadening its Menu and Relevant Dayparts

Domino’s recently announced the national roll-out of its new oven baked sandwiches, priced at $4.99. I have written about the success Subway has had with its $5 price point from a traffic standpoint so these new sandwiches could really help to drive traffic for DPZ (relative to the overall QSR pizza category, which has experienced negative traffic trends for the last 6 quarters, according to NPD data).

Although the sandwiches will not generate the same margins as a one-topping pizza, they should provide incremental business during the lunch daypart and add to the overall ticket. President of Domino's USA Patrick Doyle stated, "This launch springboards Domino's into the lunch business by providing a product that is high quality, priced right and aimed at convenience-minded people without a lot of time. Of course, sandwiches are also available any time our stores are open.”

Eye On Leadership...

Two of my Partners here at the firm, Brian McGough and Howard Penney, we're outstanding Morgan Stanley analysts, and they often talk of their experiences working there. One of their favorite people at Morgan Stanley was hall of fame Strategist, Byron Wien.

In a sign of the times, as supply growth in the hedge fund industry finally begins to slow, and growing pains emerge, Byron Wien has moved to a hedge fund - Pequot Capital. He is their Chief Investment Strategist.

For those of you who missed Byron's interview in Barron's this weekend, it should be on your required reading list. I am not going to dissect why I disagree with two thirds of his current market views; it’s too late in the trading day, and I need to manage the close. I have long been a big fan of Wien's work, and he deserves all the respect our industry has given him.

That said, since Wein points out that the research business has reached a critical crossroad, I’d like to highlight one of the points he made that is indirectly aligned with my views of global macro risk management.

Barrons: "How do you compare this market with others you've seen in your career?"

Wien: "This market is different because globalization has changed the nature of investing. When I started as a securities analyst (1965), I was focused on U.S. equities alone, and I didn't know much about what was going on around the world, and I could do my job very well; today, you can't."

This business is Schumpeterian, on many levels. Creative destruction always allows someone to enter the game and do something that everyone else says "you can't" do.

I for one have lived my life for that very cause. It’s what gets my feet on the floor every morning. It's "Macro Time". Let's drop the puck and get this game started.
KM

(Wien pictured recently in BusinessWeek)

TRAVEL AND TOURISM: IT’S CERTAINLY GLOBAL THIS TIME

Growth in worldwide travel and tourism is slowing and, in some cases, falling in many areas. After perusing my daily First Rain update on this industry, I was taken aback by the number of negative data points coming from across the globe. I’ve included a few in this post.

Keith McCullough has hit on the global macro theme of “It’s global this time” aggressively over the past few months. I’m certain we are seeing a pretty dramatic slowdown in tourism and travel with big negative implications for the hotel industry. As the excerpts below show, Singapore, China, Canada, India, and the UK, to name a few, are struggling to attract tourists. In my 8/18/08 post, “US HOTEL REVPAR ‘LINKED’ TO THE DOLLAR”, I outlined the impact of a now stronger dollar and slowing global growth on international visitation to the US. Most of these hotel companies maintain significant international exposure as well. The US RevPAR growth story died earlier this year and the global RevPAR story is on life support. The only growth story left in lodging involves the continued demand for branded hotel product from overseas owners. With this in mind MAR is the only stock I’d in which I’d even consider a long position. Unfortunately, I’m still a ways away from making that call.


Article excerpts discussing negative travel and tourist trends

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Ugly, Ugly Macro Chart... Running Japanese Investment Over By A Bus

When my teammate, Andrew Barber, brought up this data point in our morning meeting today, I said "pardon?"!

Toyota reported sales in Japan for the month of July today. For the 23rd consecutive month, the number of trucks & buses sold by Japan’s largest auto company in their home market declined on a percentage basis vs. the same month in the prior calendar year.

Ben Bernanke and Co. please look at this chart. This is what happens when economies are ran into the ground by Keynesian easy money bailout policy makers. No one wants to invest domestically/commercially, even though the money is free!

KM

BKC – Not Too Unlike its Competitors

BKC announced yesterday that it is adding menu items to its BK Value Menu. New items will include the Cheesy Bacon BK Wrapper and the Spicy Chicken BK Wrapper, which will be available for a suggested retail price of $1.39. Both items will also be offered as a Value Meal, which will include two wraps and will be priced at $3.99 for the Cheesy Bacon and $4.59 for the Spicy Chicken. BKC’s President of Global Strategy, Marketing and Innovation Russ Klein stated, “Unlike our competitors, Burger King Corp. is helping cash-strapped customers by adding to our BK(TM) Value Menu, not cutting back.” I found this statement kind of amusing because it seems like all of BKC’s QSR competitors have been adding more value items to their menus. And, they (BKC included) are doing so regardless of the impact on margins. Just last week, BKC reported that its 4Q08 U.S. and Canada restaurant margins (net of the reimaging program) declined 230 bps despite a 5.5% same-store sales lift.
  • NPD data point to a significant increase in the number of visits driven by deals within the QSR segment, particularly the hamburger segment (which includes BKC, MCD, WEN, etc), and based on recent menu introductions, we will continue to see the QSR segment chase less profitable traffic growth.
  • Other recently announced QSR promotions and added menu items at lower price points:

    Nation’s Restaurant News reported yesterday that 400 Wendy’s units in Florida will give away coupons for more than a million free Double Stack hamburgers on Labor Day. For reference, the Double Stack typically sells for $0.99 on the company’s value menu and is made with two hamburger patties, cheese, onions and pickles. At $0.99, this menu item is already cutting into margins, and now the company is giving them away for free!
  • Earlier this week, Jack in the Box introduced its Pita Snacks, a new product platform of snack-sized, wrap-style sandwiches, which will be offered at $1.99.

Industry Nuggets from BWS Conf Call

Several interesting call outs for the industry from Brown Shoe’s 2Q results and conference call.

• Though traffic was down 5.2%, and total comps down 2.9%, athletic comps were +1.3%.
• Nike, New Balance, Reebok and Puma all stand-outs.
• No mention of Skechers.
• Skate doing especially well.
• Fashion and juniors down.
• Will be shifting more inventory to Athletic
• California, Nevada, Arizona and Florida all the most troubling markets. Ironically, Dick’s and/or Sports Authority are adding stores in all of them.

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