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R3: AMZN, Prada, LVMH, and Chinese IPO’s

R3: REQUIRED RETAIL READING

October 6, 2010

 

Amazon continues on its path to build a scalable and profitable apparel business with the addition of BuyVIP.  Private sale e-commerce players apparently remain in demand, despite the belief that access to high quality fashion goods remains limited by tight supply. 

 

 

RESEARCH ANECDOTES

 

- The student-led movement known as Teens Turning Green staged a protest at Abercombie and Fitch in San Francisco. The group, which aims to educate and advocate socially responsible choices for other kids, schools and communities targeted ANF in effort to stop the “toxic” spraying of the company’s fragrance within its stores. No word on the effectiveness of the effort, which also calls for CEO Jeffries to cease the fragrance spraying within 30 days.

 

- On-jersey sponsorships are likely to be heading to the U.S soon, with the NBA expected to be the first major American sports league to sell valuable advertising real estate on team uniforms. As it stands now, the top 20 teams in the English Premier Soccer League are generating $155 million annually from their sponsored jerseys. The NBA development league and WNBA currently allow for jersey sponsors, which is why some believe the NBA may be quick to embrace the incremental revenue opportunity. Clearly Adi/Reebok would be in favor of yet another reason for fans to purchase licensed apparel.

 

- Google is providing a new interface for viewing TV programs, movies and web sites on the same living room screen. E-retailers Amazon and Netflix are among the early partners that will provide access to movies and TV shows through Google TV.

 

- With inventories up +13% in the 3Q on +12% sales growth and the first increase after 4-years of consecutive declines, management at Wolverine World Wide admitted they are now in a position of chasing demand. A 55% increase in backlog reflecting a shift towards earlier ordering, particularly compared to last year when orders came in significantly later, as well as a an increase in advertising spend ahead of the holiday season suggests we’ll be seeing a lot of WWW’s brands this holiday.

 

 

OUR TAKE ON OVERNIGHT NEWS 

 

Amazon Acquires BuyVIP, Enters High-End Retail For First Time - Amazon, the parent of Zappos, recently acquired BuyVIP, a members-only retail club serving Europe, according to the Wall Street Journal. The company reportedly paid $96.5 mm for the business. BuyVIP has more than 7.5 mm members in Spain, Italy, Germany, Austria, Poland, the Netherlands, and Portugal, sells high-end clothing at discounts of up to 70%, according to its website. In 2009, BuyVIP had sales of approximately $96 mm, according to published reports. This year, the company is projecting revenue of more than $179 mm. The acquisition represents Amazon's first step into the high-end retail space. <sportsonesource.com>

Hedgeye Retail’s Take:  Another step towards building a more meaningful (and profitable) presence in the apparel space.  The purchase also leaves Gilt as one of the few private sale operators that has yet to change ownership hands.

 

Prada Said to Study Hong Kong IPO in First Half of Next Year - Prada SpA, the Italian owner of the eponymous fashion label, is studying an initial public offering in Hong Kong for the first half of 2011, according to three people familiar with the situation. <bloomberg.com>

Hedgeye Retail’s Take:  Nothing new here except that an IPO would finally put an end to the multi-year speculation surrounding an offering.

 

Chinese Kidswear Manufacturer IPO, Get It Why Its Hot - Chinese’s leading domestic kidswear manufacturers Boshiwa International has debuted in Hong Kong and saw its share surge 40.96% on its first day of trading. <fashionnetasia.com>

Hedgeye Retail’s Take:  Growth shouldn’t be a problem for this garment maker, with 360 million children under age 16 in China and growing by 20 million each year. 

 

Club Monaco Dipping Into E-Commerce - Club Monaco is getting its feet wet in the world of e-commerce, with plans to dive in head first later this year. In what will be the first time the brand has ever been available online, the retailer has partnered with Shopbop for its e-commerce launch, and a capsule collection for fall and holiday will make its debut on shopbop.com Oct. 13. With 63 stores in North America and more than 100 points of distribution worldwide, Club Monaco’s decision to collaborate with Shopbop was a strategic one, as the two share the same demographic and psychographic. The 30-piece collection ranges in price from $24 for wool thigh-high socks to $1,100 for a shearling coat. In a concerted effort to beef up its selection of “sharp-priced items that a girl can potentially wear to the office,” offerings also include tailored trousers that start at $119 and a camel-colored, men’s wear-inspired blazer that retails for $239. With a continued focus on the digital sphere, Club Monaco is co-hosting a viral tweet-up with Shopbop to promote the collection at its 57th Street store in Manhattan the evening before the launch. <wwd.com/retail-news>

Hedgeye Retail’s Take:  Given that Club Monaco remains almost an afterthought for RL, we’re not surprised to see e-commerce launched with a partner rather than built entirely from the ground up.  Nonetheless, we add the brand to the list of companies finally transacting online.

 

Neiman Marcus Unveils Christmas Book, Offers Lower Priced Items - Neiman Marcus on Tuesday unveiled the 84th edition of a holiday season ritual, the retailer’s Christmas Book, offering requisite fantasy gifts such as a $1.5mm swimming pool floor by glass sculptor Dale Chihuly, as well as a $15 candlewick trimmer. For the second consecutive year, almost half the items are priced at less than $250, said Gerald Barnes, president of Neiman Marcus Direct. In an acknowledgment of tough economic times, there are 63 gifts for $100 or less, including Tweezerman red crystal tweezers, Ugg men’s slippers and a pair of Waterford crystal Champagne flutes. <wwd.com/retail-news>

Hedgeye Retail’s Take: The shift towards lower price points are a reality, but one has to question the value proposition of some of these options…red crystal tweezers? C’mon man! Price AND value are key to the consumer in today’s market – retailers offering one without the other are likely to see customers look elsewhere.        

 

U.K. Clothing Retailers Hold Prices With Cotton at 15-Year High - Charles Tyrwhitt, the U.K. clothing maker known for dressing bankers and executives, will absorb the highest cotton prices in 15 years to keep the cost of its least- expensive shirts at 29.95 pounds ($47).  <bloomberg.com>

Hedgeye Retail’s Take: Similar to what we expect out of most retailers, Tyrwhitt is not absorbing it all. Instead, the company will increase prices in higher end suits and shoes where spend is arguably more discretionary – or at least less noticeable. Most domestic retailers have yet to show their cards regarding pricing as we head into the holiday season and as costs are starting to weigh on the P&L, however, we expect to hear a similar tone in the coming months.

 

Louis Vuitton Blames Price Increase on Leather - Due to increases in raw material prices, Louis Vuitton has raised prices for monogram handbags and other leather goods considered classics by up to 9% in the euro zone. <fashionnetasia.com>

Hedgeye Retail’s Take: While cotton isn’t the only commodity up significantly on the year, it should be considerably easier to pass along raw material increases to the consumer given the price points of luxury handbags and their targeted demographic.

 

Predictions See a Weak Holiday Season Due to Highly Promotional Activity - A sleepy September rounded out an uninspiring back-to-school season, as shoppers held off on purchases until the last minute — and laid the groundwork for a highly promotional holiday. Analysts and other experts preparing for Thursday’s reports on September same-store sales from major retailers believe the heavy-handed promotional cadence established this year during b-t-s will carry into holiday. This would appear to make it virtually certain that the robust gains of the first half, achieved against anemic prior-year results, won’t carry into the second six months of 2010 in regards to sales, margins — or profits. The NRF projected a 2.3% gain in total sales, while the ICSC forecast a 3% - 3.5% increase in comps and a 2.5% rise in general merchandise, apparel, furniture and other categories sales.  <wwd.com/business-news>

Hedgeye Retail’s Take: Concerns over year end consumer demand persist as does the expectation for enhanced promotional activity. Coupled with cost inflation hitting the P&L, margins are sure to be the most variable line in models in Q4.

 


EARLY LOOK: Guido's War

This note was originally published October 06, 2010 at 08:01AM ET.

 

"Not everything that is faced can be changed. But nothing can be changed until it is faced."

- James Baldwin

 

EARLY LOOK: Guido's War - James Baldwin

 

America, we have a serious problem. It’s time to face it, or we will crash again.

 

What’s the problem? A picture (see below) may be more powerful in communicating this simple point to your local professional politician than my interconnected global macro prose. These conflicted and compromised leaders of the Fiat Republic either have no idea what debauching our currency means or they are being willfully blind to it. Either way, they are putting their short term job security over your long-term wealth.

 

Pull up a chart of your Burning Buck. The US Dollar got hammered again yesterday and, sadistically, CNBC cheered. The US Dollar is down for 16 out of the last 19 weeks, losing -12% of its value, hitting fresh 8-month lows. Considering the systemic leverage issues in parts of Western Europe and Japan, this US Dollar crisis tells you everything you need to know about America’s problems relative to the rest of the Fiat Fools.

 

EARLY LOOK: Guido's War - ELwed

 

What does the rest of the world think about this?

  1. FIAT INTERVENTION - Governments are intervening in their respective currency markets at an unprecedented pace. Yesterday alone saw the following countries “intervene”: Japan, South Korea, Brazil, Argentina, India, Thailand, Malaysia, Indonesia, Philippines, and Taiwan.
  2. FIAT POLICY - Ahead of the IMF’s annual meeting with the World Bank in Washington, IMF Chief, Dominique Strauss-Kahn, told the FT, “there is clearly the idea that currencies can be used as a policy weapon” and that this would have “a negative and very damaging longer-run impact.”
  3. GUIDO’s WAR - Last week, Brazil’s Finance Minister, Guido Mantega, labeled this an “international currency war.”

Timmy Geithner, having never traded a currency market or protected the value of his citizenry’s currency in his life, was quick to tell Groupthinkers in DC that he “doesn’t know what” Guido’s War “means”…

 

 

EARLY LOOK: Guido's War - Geither Summers

 

 

Great Timmy… just great. Now that Larry is gone and your ideological overlord Robert Rubin won’t come within a square mile of a YouTube camera on the topic of sovereign debts issued in fiat currencies, America is hostage to your analytical incompetence on global macro matters.

 

America, if the head of the US Treasury doesn’t know … and the US Federal Reserve doesn’t know… but the rest of the free world knows… who in God’s good name is going to show President Obama a chart of the Burning Buck? I can assure you it won’t be Warren Buffett or Bill Gross. They’re both getting paid by short term performance on dollar down days too.

 

What do the other Fed Heads over at the Academy of Academic Dogma think?

  1. New York Fed Head Bill Dudley says “QE me” with as much free moneys from the heavens as Heli-Ben can create!
  2. Chicago Fed Head Charles Evans mercy crushed the US Dollar yesterday when he said QE “may not be enough”?!?

I couldn’t make this up if I tried folks, but markets don’t lie – politicians do. If you didn’t know New York City and Chicago Fed Heads get paid by Burning the Buck, now you know.

 

Admittedly, Dudley’s NYC cronies are getting paid with less immediate-term TRADE intensity than the boys in the pits of Chicago as of late. Check out the refreshed immediate-term inverse correlations between the US Dollar and the following:

 

Chicago Commodities

  1. Gold = -0.97
  2. Silver = -0.97
  3. Copper = -0.97

 

New York Stocks

  1. SP500 = -0.83

*note: Timmy, these are extremely high correlations.

 

 

Again, since the Secretary of the US Treasury will be the first to remind the world that he’s “not an economist”, we don’t expect him to get the math, or have a risk management radar that might signal Guido’s War to him if it was staring him in the face.

 

What I can assure you of my fellow Americans (and Canadians), is this – no country has ever debauched its currency, imposed inflation on its people, and played possum to what real-time markets and prices are doing. And ever, is a long time.

 

 

EARLY LOOK: Guido's War - Bernanke Hedgeye Image

 

As short term stock market bulls beg Bernanke for QE, and the conflicted and compromised Fed Heads from Chicago to New York pander to this “reflation” battle cry that might resonate with 5% of this country’s population, this week’s ABC/Washington Post Consumer Confidence reading tells you that the other 95% of Red, White, and Blue Americans aren’t buying into this sucker’s rally. Been there, done that.

 

After the best September in 71 years for US stocks, weekly Consumer Confidence dropped like the pit that’s in my stomach right now to MINUS -47 from minus -45 last week.

 

NEWSFLASH: The rest of the world and 95% of Americans understand what Guido’s War is – Washington perpetuates it. As for the 5% of you who choose to stand in silence when you should be protesting as your currency burns at the stake, as Abraham Lincoln said, you are cowards.

 

My immediate term support and resistance levels for the SP500 are now 1144 and 1164, respectively. From here on up in the SP500 (north of 1164), and from here on down for the Burning Buck, the probabilities of a US stock market crash will continue to heighten.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer


Guido's War

"Not everything that is faced can be changed. But nothing can be changed until it is faced."

- James Baldwin

 

America, we have a serious problem. It’s time to face it, or we will crash again.

 

What’s the problem? A picture (see below) may be more powerful in communicating this simple point to your local professional politician than my interconnected global macro prose. These conflicted and compromised leaders of the Fiat Republic either have no idea what debauching our currency means or they are being willfully blind to it. Either way, they are putting their short term job security over your long-term wealth.

 

Pull up a chart of your Burning Buck. The US Dollar got hammered again yesterday and, sadistically, CNBC cheered. The US Dollar is down for 16 out of the last 19 weeks, losing -12% of its value, hitting fresh 8-month lows. Considering the systemic leverage issues in parts of Western Europe and Japan, this US Dollar crisis tells you everything you need to know about America’s problems relative to the rest of the Fiat Fools.

 

What does the rest of the world think about this?

  1. FIAT INTERVENTION - Governments are intervening in their respective currency markets at an unprecedented pace. Yesterday alone saw the following countries “intervene”: Japan, South Korea, Brazil, Argentina, India, Thailand, Malaysia, Indonesia, Philippines, and Taiwan.
  2. FIAT POLICY - Ahead of the IMF’s annual meeting with the World Bank in Washington, IMF Chief, Dominique Strauss-Kahn, told the FT, “there is clearly the idea that currencies can be used as a policy weapon” and that this would have “a negative and very damaging longer-run impact.”
  3. GUIDO’s WAR - Last week, Brazil’s Finance Minister, Guido Mantega, labeled this an “international currency war.”

Timmy Geithner, having never traded a currency market or protected the value of his citizenry’s currency in his life, was quick to tell Groupthinkers in DC that he “doesn’t know what” Guido’s War “means”…

 

Great Timmy… just great. Now that Larry is gone and your ideological overlord Robert Rubin won’t come within a square mile of a YouTube camera on the topic of sovereign debts issued in fiat currencies, America is hostage to your analytical incompetence on global macro matters.

 

America, if the head of the US Treasury doesn’t know … and the US Federal Reserve doesn’t know… but the rest of the free world knows… who in God’s good name is going to show President Obama a chart of the Burning Buck? I can assure you it won’t be Warren Buffett or Bill Gross. They’re both getting paid by short term performance on dollar down days too.

 

What do the other Fed Heads over at the Academy of Academic Dogma think?

  1. New York Fed Head Bill Dudley says “QE me” with as much free moneys from the heavens as Heli-Ben can create!
  2. Chicago Fed Head Charles Evans mercy crushed the US Dollar yesterday when he said QE “may not be enough”?!?

I couldn’t make this up if I tried folks, but markets don’t lie – politicians do. If you didn’t know New York City and Chicago Fed Heads get paid by Burning the Buck, now you know.

 

Admittedly, Dudley’s NYC cronies are getting paid with less immediate-term TRADE intensity than the boys in the pits of Chicago as of late. Check out the refreshed immediate-term inverse correlations between the US Dollar and the following:

 

Chicago Commodities

  1. Gold = -0.97
  2. Silver = -0.97
  3. Copper = -0.97

New York Stocks

  1. SP500 = -0.83

*note: Timmy, these are extremely high correlations.

 

Again, since the Secretary of the US Treasury will be the first to remind the world that he’s “not an economist”, we don’t expect him to get the math, or have a risk management radar that might signal Guido’s War to him if it was staring him in the face.

 

What I can assure you of my fellow Americans (and Canadians), is this – no country has ever debauched its currency, imposed inflation on its people, and played possum to what real-time markets and prices are doing. And ever, is a long time.

 

As short term stock market bulls beg Bernanke for QE, and the conflicted and compromised Fed Heads from Chicago to New York pander to this “reflation” battle cry that might resonate with 5% of this country’s population, this week’s ABC/Washington Post Consumer Confidence reading tells you that the other 95% of Red, White, and Blue Americans aren’t buying into this sucker’s rally. Been there, done that.

 

After the best September in 71 years for US stocks, weekly Consumer Confidence dropped like the pit that’s in my stomach right now to MINUS -47 from minus -45 last week.

 

NEWSFLASH: The rest of the world and 95% of Americans understand what Guido’s War is – Washington perpetuates it. As for the 5% of you who choose to stand in silence when you should be protesting as your currency burns at the stake, as Abraham Lincoln said, you are cowards.

 

My immediate term support and resistance levels for the SP500 are now 1144 and 1164, respectively. From here on up in the SP500 (north of 1164), and from here on down for the Burning Buck, the probabilities of a US stock market crash will continue to heighten.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Guido's War - ELwed


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THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - October 6, 2010

As we look at today’s set up for the S&P 500, the range is 20 points or -1.44% downside to 1144 and 0.28% upside to 1164. Equity futures are trading above fair value in a continuation of yesterday's strong performance. Japan's decision to lower rates yesterday has sparked increased expectations that the Fed will implement further QE measures with other countries likely to follow suit in what could be a coordinated action to stimulate global growth.

Today's macro highlight is September's ADP's Employment report ahead of Friday's nonfarm payroll reading.

  • Costco (COST) reported 4Q EPS 97c vs est. 95c
  • Diamond Foods (DMND) forecast FY11 EPS $2.38-$2.48, vs est. $2.45
  • Equinix (EQIX) sees preliminary 3Q rev. $328m-$330m vs est. $336.6 (also watch SVVS, RAX)
  • M&T Bank (MTB); Allied Irish will start selling 22.4% stake
  • Yum! Brands (YUM) raised FY 2010 adj. EPS forecast to $2.48 from $2.43, vs est. $2.49

PERFORMANCE

  • One day: Dow +1.80%, S&P +2.09%, Nasdaq +2.36%, Russell 2000 +2.97%
  • Month/Quarter-to-date: Dow +1.45%, S&P +1.71%, Nasdaq +1.32%, Russell +1.95%
  • Year-to-date: Dow +4.95%, S&P +4.09%, Nasdaq +5.76%, Russell +10.22%

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 1092 (+3429)
  • VOLUME: NYSE - 1239.17 (+31.31%)  
  • SECTOR PERFORMANCE: Every sector was higher - The bulk of the yesterdays upside driven by the heightened momentum behind the risk trade following the unexpectedly aggressive easing announcement overnight by the BoJ. The BoJ cut target for the overnight rate to a range of 0.0%-0.1% from its previous target of 0.1% and announced a ¥5T facility to purchase JGBs, commercial paper, corporate bonds, exchange-traded funds and real-estate investment trusts. The accompanying bout of dollar weakness helped drive the outperformance on the part of commodities and commodity equities, while pockets of the market with outsized leverage to global recovery expectations also fared well.
  •  MARKET LEADING/LAGGING STOCKS YESTERDAY: Harley Davidson +9.18%, Juniper +5.98% and Pioneer Natural +5.75%/Iron Mtn -8.58, Colgate Palmolive -1.96% and American Express -1.95%
  • VIX: 21.76 -7.52% - YTD PERFORMANCE: (0.37%)
  • SPX PUT/CALL RATIO: 1.16 from 1.48, -21.88%

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 17.51 -0.741 (-4.061%)
  • 3-MONTH T-BILL YIELD: 0.12%, -0.01%
  • YIELD CURVE: unchanged at 2.09

COMMODITY/GROWTH EXPECTATION:

  • CRB: 288.42 +1.56%
  • Oil: 82.82 +1.66%
  • COPPER: 376.20 +0.83%
  • GOLD: 1,340.25 +1.94%%

CURRENCIES:

  • EURO: 1.3830 +1.02%
  • DOLLAR: 77.49 -0.89%%

OVERSEAS MARKETS:

 

Europe

  • European markets: FTSE 100: +0.92%; DAX +1.00%; CAC 40 +1.22%
  • Major indices remain strong with Mining, Construction, Financial Service sectors pacing other sectors.
  • Peripheral European markets up strongly with Greece's ASE Composite (+2.03%), Ireland's ISEQ (+1.25%) and Spain's IBEX (+0.66%)
  • Eurozone Q2 Final GDP +1.9% y/y vs prelim 1.9%
  • Germany Aug Industrial Orders +3.4% m/m vs cons +0.8%
  • Moody's places long-term ratings of Allied Irish Bank, Bank of Ireland plus ICS, EBS and IL&P on review for possible downgrade
  • Greece's 2009 budget deficit increases to 15.1% of GDP from 13.8% previously stated 

Asia

  • Asian markets: Nikkei +1.81%; Hang Seng +1.07%; Shanghai Composite (closed for public holiday)
  • Markets finished higher following yesterday performance on Wall Street. 
  • The Nikkei extended yesterday's gains building on the BOJ's unexpected rate cut and hopes of further quantitative easing from the Fed. Japanese Financials (+3.4%) led gains despite news that Japan's financial regulator is considering a capital surcharge for the country's largest banks.
  • Record high gold prices, driven by a faltering dollar, have driven gold mining shares higher. 
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends

 

THE DAILY OUTLOOK - S P

 

THE DAILY OUTLOOK - VIX

 

THE DAILY OUTLOOK - DOLLAR

 

THE DAILY OUTLOOK - OIL

 

THE DAILY OUTLOOK - GOLD

 

THE DAILY OUTLOOK - COPPER

 



THE M3: MORE MACAU MORTGAGE RESTRICTIONS

 The Macau Metro Monitor, October 6th 2010

 

MONETARY AUTHORITY OF MACAU ISSUES NEW GUIDELINES ON RESIDENTIAL MORTGAGE LOANS macaubusiness.com

 

The Monetary Authority of Macau released new guidelines on residential mortgage loans effective 12/1/2010. The guidelines include a maximum 70% LTV ratio, a maximum 50% debt servicing ratio, and mortgage loans which cannot have a maturity longer than the borrower's retirement age.

 

 


YUM – THE SUN RISES IN THE EAST

Conclusion:  China carried the third quarter relative to expectations, but commodity and labor inflation should take a toll on margins in 4Q10.  Top-line trends in the U.S. and YRI were positive, but continued to decline on a two-year average basis.  It will be difficult for the company to sustain its reported restaurant-level margin growth if trends do not improve in both the U.S. and YRI.


YUM 3Q10 earnings came in relatively in line at $0.73 per share versus the street’s $0.72 per share estimate, and management raised its FY10 EPS guidance to $2.48 from $2.43, matching the street’s full-year estimate.

 

Relative to expectations, China was the bright spot during the quarter with same-store sales growing 6% versus the street’s 4.0% estimate.  This 6.0% comp growth implies a 300 bp acceleration in two-year average trends from the prior quarter.  Restaurant margin grew 90 bps YOY, which was better than I was anticipating, as a result of both the better-than-expected comp growth and the fact that the company guided to both commodity and labor inflation in the back half of the year, which did not fully materialize in 3Q10.  Although the company did experience higher labor costs during the quarter, it benefited from another quarter of YOY commodity deflation.  That being said, management expects commodity and labor inflation to negatively impact margins in the fourth quarter.  To that end, I would expect restaurant-level margin to decline during 4Q10; though given the company’s strong year-to-date restaurant margin gains, YUM should easily achieve its full-year goal of growing restaurant-level margin in China.

 

Same-store sales growth came in below expectations in both the U.S. and YRI.  U.S. comparable sales growth was up 1% during the quarter relative to the +2.2% consensus estimate.  Pizza Hut posted another quarter of 8% comp growth, which at first glance, looked very impressive, but it is important to remember that the concept was lapping a -13% number from last year.  Positive comps are impressive in this environment, nonetheless, but two-year average trends decelerated 250 bps from the prior quarter.  This slowdown points to share losses within the casual dining segment given the improvement in two-year average Knapp trends in July and August (and rumored for September).  Please refer to my “KNAPP TRACK: SEPTEMBER (RUMORED) TRENDS” post for more details.

 

Taco Bell same-store sales came in +3%, which points to better trends on a one-year basis but slowing trends on a two-year average basis relative to 2Q10.  And, KFC just continues to be horrible.  Comps declined 8.0%, implying a 300 bp sequential deceleration in two-year average trends.  Management said that trends at KFC would be soft in the back half of the year as “there is no quick fix.”  YUM has been in the process of a turnaround at KFC for some time now and although the concept sees an occasional quarterly uptick in sales, we are yet to any sustained improvement in trends.  U.S. restaurant margin improved 30 bps YOY despite the sales shortfall, which management attributed primarily to refranchising. 

Comparable sales growth at YRI grew 1% in the quarter, in line with the prior quarter on a one-year basis, but implying a 50 bp slowdown on a two-year average basis. 

 

On the second quarter earnings call, management guided to stronger sales growth for the balance of the year at YRI, largely as a result of easier comps in the back half of the year, so this sequential slowdown in two-year average trends was disappointing.  The street was looking for 2.3% growth during the quarter.  That being said, restaurant level margin improved 160 bps, which the company again attributed to the impact of refranchising.

 

 


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