The following is a monthly look at restaurant trends, valuations, and key macroeconomic factors. For a complete look at my overview of the restaurant space for February, please click here for a pdf, or copy and paste the link into your browser: http://docs.hedgeye.com/Hedgeye Restaurant Perspectives February 2011.pdf
FEBRUARY THEMES
- The Consumer Discretionary sector performed well in February, outperformed only by Energy, closing up 6% on the month. Tellingly, from the 18th through the 23rd, XLY declined sharply as oil prices jumped. Further gains in the price of oil may put pressure on the XLY.
- This month has seen a spate of earnings releases for the last quarter of CY10. In the last edition of Restaurant Perspectives, I suggested that this year would likely be a turbulent year for restaurant stocks from a commodity cost perspective. The outlook provided during earnings calls in February certainly suggests that commodity costs are the primary concern going forward. There is a divergence between companies that have simplified their focus and operations and those that are less focused and, therefore, more exposed.
- EAT, SBUX, COSI, and WEN (not in any particular order) are a few of the management teams that I think are focusing their energy in the right areas and best positioning their companies to navigate 2011.
- I continue to believe that MCD faces serious challenges in 2011, as detailed in my Black Book released mid-January. MCD has underperformed versus the S&P 500 since then. It is interesting to note that while the Consumer Discretionary Sector has performed strongly in February, MCD has underperformed the XLY by almost 330 basis points despite being a larger component of the ETF than any other stock.
- I still like where SBUX is going with its business model and that is good for PEET and bad for GMCR. GMCR’s deal with Dunkin’ Donuts and the internal memo further convince me of this thesis. See the numerous notes we published on this subject in February.
QSR VALUATION THOUGHTS
- CMG continues to maintain its premium valuation, as it has been for some time. While its “food with integrity” mantra resonates with consumers, concerns are emerging about the company’s commodity exposure. Longer term it’s new focus on an Asian-style chain will likely be a negative, not positive, for the stock.
- I expect GMCR’s multiple to contract as SBUX paves its own way through different channels of the coffee category.
- WEN is cheap and set to improve returns with a more focused approach now that Arby’s is on the block.
CASUAL DINING VALUATION THOUGHTS
- EAT remains one of the cheaper names in this category from a valuation perspective and the potential upside remains significant. I expect a continued improvement in the relative fundamentals of the company on the top line as well as marked progress towards the net 400 bps of margin expansion management is targeting.
- Like it or not, weather is an issue for the group.
CONSUMER OUTLOOK:
The negative:
- Inflation – wheat, oil, cotton. Prices at the pump are climbing. James Hamilton, professor of economics at UC San Diego, says that a 10-cents-per-gallon increase in gas prices takes away approximately $14 billion from consumers’ discretionary spending.
- Unemployment – the jobs picture has been improving of late with rolling initial claims declining to a three handle. The absolute level of joblessness, especially when the labor force participation rate is normalized, remains elevated.
The positive:
- University of Michigan Consumer Sentiment Index data came in positive for February and this offered some support to consumer stocks over the last few days of February.
- The Government continues to support consumer spending trends, but the impact will wane and even reverse as severe cuts are likely implemented as we move through 2011.
Howard Penney
Managing Director