Texas Roadhouse is not a vehicle we would recommend to play the long side of the steak category. 


TXRH is currently trading at a premium multiple on a cash flow basis.  8.2x EV/EBITDA NTM is the third highest multiple in casual dining, trailing only BJRI and DIN.  I hold a negative view of the stock from here. 


The primary negative factors for the stock are as follows:

  • 65% of the company’s commodity costs are locked for the year (80% of beef needs) but significant exposure remains in diary costs in particular.  While dairy costs came down significantly over the past week, the commodity markets remain volatile and there is significant risk that the company’s guidance of 3% food inflation for the year 2011 will prove conservative.
  • TXRH has been performing well from a top-line perspective.  However, traffic compares get increasingly difficult over the next three quarters and, while optimists may point to top-line outperformance as evidence of some room to add price to the menu, a combination of a step up in price and tough traffic compares could spell trouble for the TXRH top-line.
  • As mentioned earlier, the stock is trading at a lofty multiple which, I believe, is too high given the alternative plays on the space (RUTH at 5x cash flow) and the stock’s less-than-certain outlook.  While there is a strong divergence between the valuation of RUTH and TXRH, the respective sell-side ratings around the stocks (as the second chart below indicates) are much the same.
  • I am also unsure of the effectiveness of the Leader of the Door strategy being implemented at TXRH restaurants to improve wait times.  While management maintained their enthusiasm around this initiative at the most recent Analyst Day in New York, how exactly this will play out remains to be seen.
  • The TXRH core customer is sensitive to gas prices and it seems that Texas Roadhouse could feel some top-line pain from the current level of prices at the pump.  Commentary from DRI CEO Clarence Otis on the most recent Darden earnings call regarding the impact of gasoline prices on casual dining revenues highlighted how acute of a concern gas prices are.



TXRH – PRICEY WITH A TOUGH OUTLOOK - ruth comp ratings


Howard Penney

Managing Director


It’s not surprising that RUTH was one of best performing restaurant stocks next to MSSR yesterday.  As luck would have it, I have been spending some time on the RUTH story and the risk-reward from here is favorable.


Trading at ~ 5.0x EV/EBITDA, there is nothing but skepticism in the stock.  Given the company’s exposure to higher prices for red meat this is understandable, but negative expectations appear to be priced in.


Yesterday, Tilman’s bid for MSSR was a telling sign.  For the right operator everything has its price, no matter what the fundamentals look like.  As a public company, MSSR has been a disastrous stock.  As a private company, the new owners can potentially implement the changes necessary to drive incremental profitability and not worry about quarterly earnings.  While no all companies are susceptible to these same issues to a greater or lesser degree, I believe RUTH is more resilient in the current climate given the franchise store base the company maintains.


Beyond the obvious industry related issues, one negative (but could also be a positive) is that the stock is closely held.  Management has skin in the game owning 22.7% (including the 19.7% owned by Bruckmann, Rosser, Sherrill & Co).  Another 17% is owned by the three largest shareholders.  While this can create some liquidity issues it is also creating inefficiencies in valuation.





As of RUTH’s 2/18/11 conference call, January's same store sales were up mid-single digits at Ruth Chris according to management.  I estimate that Ruth Chris comps increased by between 4 and 5% in January and trended roughly level throughout the quarter.  In 4Q10, Ruth Chris’ two largest markets, California and Florida, were up 9.3% and 7.8% respectively.  Nearly every company-operated restaurant is producing positive comps (nearly all traffic) as the company has not raised prices recently.  Management said that Mitchell’s remained negative, in the mid-single digit range – which I estimate to be -2% to -3% - in January.  The weakness at Mitchell’s was driven by the soft Florida market, where sales were down 10.6%, while all other markets improved for the brand.


Within the Rut's Chris’ franchise system, domestic comparable franchise-owned same-store sales increased 8%, while international same-store sales increased 15.5%.





Up until 2011, RUTH’s senior management has had to play defense, burdened by a leveraged balance sheet into the teeth of a major recession that brought a violent snap-back in consumption levels.  For the past 18 months there has not been any unit growth, management has cut G&A and taken much-needed steps to deleverage the balance sheet.  In February 2010, Bruckmann, Rosser, and Sherrill made a $25 million investment in preferred stock and concurrently followed that with a $25 million rights offering, issuing 10.2 million shares.  In aggregate, those two transactions allowed the Company to pay down $44 million on its credit facility.


With the balance sheet issues now in the past, the focus can turn to more efficient operations and unit growth.  One of the potential catalysts for the stock over the next six months is the reacceleration of unit growth.  Once growth stops, it generally takes a chain like Ruth Chris approximately 18 months to recommence the expansion of their restaurant base.  Currently management is working on filling the Ruth's Chris unit pipeline for 2012 and beyond.  The company is less focused on standalone units, but instead cited growth with an emphasis on the gaming and hotel industries as key for the 2012 and 2013 growth pipeline.  Currently, the company does not have not have any formal development agreements in place.  In 2011, RUTH can expect up to three potential franchise openings in 2H11.





The biggest risk to the RUTH story is the uncertainty surrounding margins on a go forward basis.  As of the end of January, RUTH has not locked in pricing for their 2011 beef needs.  During fiscal 2010, RUTH purchased more than 60% of the beef it used from one vendor, New City Packing Company, Inc.  I suspect that New City Packing does not want to take the other side of the RUTH trade and lock in a price.   This could be an instance of the Bernanke-sponsored price volatility that our Macro team highlights with such frequency.


In 4Q10, beef prices were up 12%, which caused a 140pbs decline in food cost margins.  While the company is very cautious about raising prices, they are planning to take a price increase of approximately 0.50 bps in March.  Management intends to “evaluate further pricing opportunities as we go through the year.”


The company does not give annual guidance but does outline the following guidelines; Food and beverage costs of 30.5% to 31.5% of restaurant sales, marketing spend 3% to 3.5% of total revenues, G&A expenses of $23 million to $25 million and an effective tax rate of 25% to 30%.








RUTH – VALUE WITH CATALYSTS - ruth comp ratings


RUTH – VALUE WITH CATALYSTS - ruth short interest



Howard Penney

Managing Director

TGT: Virtual Portfolio Update


Keith shorted TGT in the Hedgeye virtual portfolio on low-volume strength and a strong move higher for the majority of the sector.


With near-to-intermediate top-line trend results critical to this show-me story and March sales results on the horizon, we maintain our bearish outlook on Target. Not only has the company fallen short of Street expectations three months in a row, but is also has one of the more pronounced Easter shifts, with same store sales planned down mid-to-high single-digits in March followed by a mid-teens increase in April. Moreover, guidance for incremental comps of +200-400bps driven by growth in P-Fresh remodels and 5% reward penetration continues to appear aggressive.


TGT: Virtual Portfolio Update - TGT MoGrid 4 11


TGT: Virtual Portfolio Update - TGT VP 4 4 11



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 80.43%
  • SHORT SIGNALS 78.34%


Keith bought Brinker in the Hedgeye Virtual Portfolio yesterday at $24.92. 


Brinker remains one of my favorite intermediate-term ideas in the restaurant space.  I began getting vocal about the name in April 2010, stating that the name had some volatile quarters ahead, but that FY11 would bring improved performance.  That scenario is largely playing out as top-line trends stabilize and margin gains are achieved by management.  I would expect continued improvement in margins in 2H11 and, as I wrote on 3/24, earnings has the potential to reach $1.90-$2.00 per share in fiscal 2012. 


Given current sales trends, I also believe that the current consensus estimates for 3Q11 and 4Q11 are low by $0.02 per quarter.


Besides the improving fundamentals, the steep drop in the company’s share count is also going to support EPS growth over the next few quarters.




Howard Penney

Managing Director

R3: WMT, OSTK, Modell’s, New Balance




April 5, 2011






  • In yet another sign that sporting goods retail stores are getting smaller, Modell’s announced the opening of its second sub-9,000 sq. ft. store in New Jersey following the company’s first in NYC last fall. While smaller than Sports Authority’s 12,000-15,000 sq. ft. S.A. Elite concept stores, the trend towards more convenient compact stores appears to be gaining traction.
  • Following speculation that he may be one of the front-runners to design Kate Middleton’s wedding dress, Erdem Moralioglu is also rumored to be the next collaboration for H&M. The designer’s namesake line, carried in roughly 50 high-end department stores and specialty shops in the U.K. and U.S. including Barney’s could be the next in a recent line of successful collaborations for the fast-fashion retailer. With the U.K. one of the few regions to post positive growth in H&M’s 1Q, we wouldn’t be surprised to see the company target the London-based designer.
  • After launching 6-months ago, Shoprunner – currently owned by GSI and soon to be sold by eBay has grown from a goal of 40 participating retailers by the end of 2010 to now having more than 70 among which is the recent addition of Dominos Pizza. Unlike the traditional free 2-day shipping, the restaurant/food retailer will offer members free shipping on all food orders.
  • In another sign that gun and ammunition sales continue to slow, Freedom Group Inc. the owner of Remington, Bushmaster and other firearm brands withdrew plans for its IPO. In addition to seeing its firearms segment sales down -24% in 2010 since filing in October 2009, the company’s former CEO left the firm in September further complicating plans to go public.



Wal-Mart Explores Selling Large Appliances - Wal-Mart Stores Inc. may begin adding large appliances such as stoves and dishwashers to stores in Texas this year as part of a pilot program that could lead to a nationwide launch. The retailer is looking at a program selling appliances from General Electric Co. and could roll out to more than 100 stores initially, according to analysts and consultants familiar with the retailer's plans. Last month, Wal-Mart's U.S. chief Bill Simon, speaking at an industry conference, said the company is "looking at everything including appliances right now." Mr. Simon didn't provide specifics about the scope other than saying: "If it's something that we believe there is customer demand for and an opportunity to make some money, we're going to get into it in a big way." A Wal-Mart spokesperson declined to provide details. A GE spokesman didn't respond to a request for comment. Budd Bugatch, retail analyst at Raymond James, said shoppers in Texas might expect to see 75 or more products in the appliance display areas that Wal-Mart is expected to set up, including major appliances such as stoves, washing machines and refrigerators.<WallstreetJournal>

Hedgeye Retail’s Take: Typically reserved for home improvement and electronics big-box retailers, appliances are one of the few categories that Wal-Mart hasn’t participated in – until now. Interestingly, a recent J.D. Power and Associates report revealed that when making big-ticket appliance purchases, a customer’s overall shopping experience was more important than the price itself when it came to price satisfaction. With WMT ranking not only below its direct peers Macy’s and Sears according to the American Customer Satisfaction Index, department and discount stores also rank lower than specialty retailers like Home Depot and Lowe’s that are key players in the appliance category. As such, expect WMT to be highly price competitive.


New Balance, Red Sox Strike Sponsorship Deal - New Balance has signed on to become the official footwear and apparel sponsor of the Boston Red Sox. The company has unveiled an illuminated sign featuring its logo on an HD videoboard in Fenway Park's right field. "From the outset, we knew this would be a special relationship. New Balance has consistently brought ideas to the table that demonstrate a shared commitment to adding value to important areas of our business, including our home, Fenway Park, and philanthropic efforts like the Run to Home Base," said Sam Kennedy, Executive Vice President/COO for the Boston Red Sox, in a written statement. "Today marks the beginning of a collaboration that brings two iconic Boston-based organizations together, and we couldn't be more excited." The New Balance sign will display a looped and flashing "we won" message to highlight Red Sox victories. <SportsOneSource>

Hedgeye Retail’s Take: Only days after signing Red Sox star Kevin Youkilis to an endorsement deal, the two historic Boston-based franchises finally unite. The notable increase in marketing spend not only supports the brand’s effort to gain share in the highly fragmented cleated business, but also stem Under Armour’s continued momentum in the space.


Overstock to Reward Customers in States Where it Cut off Affiliates - Hoping to turn its opposition to online sales taxes into increased customer loyalty, announced today a plan to shift money from affiliate programs shuttered because of newly enacted sales tax laws to consumers taking part in the e-retailer’s Club O rewards program. The promotion applies to online shoppers in the states of Illinois, New York, North Carolina and Rhode Island. Each state has enacted laws that require Internet retailers to collect state taxes if they work with in-state affiliates, which are web site operators that provide links to products sold by web merchants and then receive commissions on those sales. State officials say affiliates constitute an online retailer’s physical presence in a state, satisfying a legal requirement that lets the state require online retailers to collect the taxes. Overstock calls such laws unconstitutional and, along with, has cut ties with affiliates in states that have enacted the tax laws. “We have decided to sever our relationships with thousands of marketing affiliates in those states, take the money we would normally pay those affiliates, and use it to reward our best customers in those states,” says Patrick Byrne, CEO of Overstock, which is No. 28 in the Internet Retailer Top 500 Guide. <InternetRetailer>

Hedgeye Retail’s Take: Stepping up in opposition of what has been dubbed the “Amazon Tax” in Arkansas (see below), Overstock is adopting what appears to be a win/win strategy. With the likelihood that legislation requiring online retailers to collect taxes will pass, the company is utilizing rewards to strengthen ties with its customer base, something that will be remembered if/when online retailers are forced to collect.


Arkansas Newest State to Ready an “Amazon Tax” LawThe Arkansas General Assembly has passed and sent to Gov. Mike Beebe a bill that would require Internet retailers to collect sales tax if they accept referrals from affiliate web sites and do more than $10,000 a year in sales in Arkansas. Beebe, a Democrat, supports the legislation and is expected to sign it soon, a spokesman says. Once SB 738, which is referred to in Arkansas as the both Amazon Tax law as well as the Main Street Fairness law, is signed into law, Arkansas will become the fifth state to enact such legislation, joining New York, North Carolina, Rhode Island and, most recently, Illinois, according to Daniel Schibley, a state and local tax analyst at CCH Inc., a unit of Wolters Kluwer that publishes tax and business information<InternetRetailer>

Hedgeye Retail’s Take: The swell continues to grow at the state level. While the AMZN and OSTK continue to put up a good fight, gravity is inevitable.


Under Armour Secures Loan for Office Complex Acquisition - Under Armour, Inc. has entered into a credit agreement covering a total loan commitment of $325 million comprised of a revolving credit facility commitment of $300 million and a term loan commitment of $25 million. The company anticipates using a term loan of up to $25 million to finance a portion of the purchase price for the previously announced acquisition by the company of part of the office complex at the company's corporate headquarters.  The credit agreement replaces the company's existing $200 million revolving credit facility and has a term of four years, according to a filing with the Securities & Exchange Commission. The term loan commitment expires May 29, 2011. Subject to certain conditions, the acquisition is expected to close by that date. The $300 million revolving credit commitment amount under the credit facility may be increased to up to $350 million, subject to certain conditions and approvals as set forth in the Credit Agreement.  <SportsOneSource>

Hedgeye Retail’s Take: With nearly 50% of the property still leased by tenants, the acquisition of the company’s new headquarters is expected to be a cash flow neutral. That said, the new facility is also at more favorable rates at LIBOR (no floor) + (1.25%-1.75%) compared to the prior facility at LIBOR (subject to a floor of 1.25%) + (2.0%-2.5%).


Puig in Talks to Buy Gaultier Stake - As Parisian as the Eiffel Tower, Jean Paul Gaultier might soon become a Spanish-controlled company. According to market sources, Puig — the Barcelona-based parent of Carolina Herrera, Nina Ricci and Paco Rabanne — has entered into exclusive negotiations to acquire the 45 percent stake in Gaultier owned by Hermès International. It is understood Puig will also purchase some shares from Gaultier himself, which would give the Spanish beauty giant majority ownership of a landmark French house — and instantly make it a bigger player in the fashion world. Gaultier, 58, is expected to retain a significant stake in the company he founded in 1982, and remain at the creative helm. As reported, Hermès said Friday it had initiated discussions to sell its shares in Gaultier, without identifying the potential buyers. The maker of Birkin bags and silk scarves declined all comment on Monday, as did a spokeswoman for Gaultier. <WWD>

Hedgeye Retail’s Take: As a follow up to news of the sale out last week, it appears that Hermes is not struggling to find interest for the coveted fashion house.





The Macau Metro Monitor, April 5, 2011




PBoC said the benchmark 1-year lending rate will increase to 6.31% from 6.06% and that the 1-yr deposit rate will rise to 3.25% from 3%, effective tomorrow.  This is the 4th time that China has raised rates since the global financial crisis.



Marina Bay Sands is appealing a decision by the High Court registrar allowing new allegations to be made in a lawsuit over an aborted spa deal.  Investors of Spa@Sands claimed that management under former MBS CEO Tom Arasi reneged on an agreement to let them rent more than 23,000 sq ft of space for a luxury spa on the resort's 55th floor.  Instead, Banyan Tree was awarded a contract last year to manage the luxury spa.  No opening date is scheduled for the Banyan Tree spa, but it is expected to open soon, according to an MBS spokeswoman.


Spa@Sands argued MBS showed it accepted the spa agreement when it banked in the spa firm's two checks, $233,660 plus $44,866 in stamp fees.  But MBS attorneys said MBS had not accepted the offer and had refunded $278,526 paid by the spa.

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