POSITION MONITOR CHANGES
We update our position monitor, reflecting changing risks/rewards and incremental news. We are moving SHAK and DIN to make them a TO FIVE short on the Hedgeye Restaurants Position monitor.
SHAK - SHAK is being mismanaged, and the company will never be profitable under the current management team. Excessive focus on growth and not profitability creates long-term inefficiencies and real estate issues for the company. The stock is up 36% this year and is the 5th best-performing stock in the space. While EPS revisions have recently moved from a loss of ($0.42) to ($0.36), we believe the streets move was premature. We believe that the losses in FY2023 could exceed that of FY2020, which was ($0.56).
DIN - We will be doing a Black Book in DIN this Friday at 12:30, outlining our updated thesis on the company, but in short, DIN will never be a growth company. DIN is like JACK in many respects, where a new CEO tries to convince the street that he can re-make the company into a "growth story" while the core concept (Applebee's) is in a secular decline. In the case of DIN, the CEO growth initiatives and guidance for 2026 are based on false premises that will not materialize. Key executive departures are also clouding the current story.
Softer sales ahead?
According to AAA, U.S. gasoline prices have surged 12% in the past month to average $3.51/gal as of January 28.
The latest jump, while down significantly from last summer's peak of more than $5 per gallon, can be attributed to an increased demand for oil and refinery issues. AAA said that January's mild weather may have led to more drivers getting behind the wheel, pushing up pump prices. The cost of oil has been rising by optimism that global oil demand will prove more robust than expected in 2023 due to the reopening of China's economy. Diesel is rising again toward 2022's highs, with crack spreads hitting more than $60/bbl this past week, from $50/bbl in November and $25/bbl a year ago; diesel could rise further as Europe bans Russian oil products starting February 5. Prices are now down 2.4% YoY.
FAST-ACT 2.0
California's controversial new model for setting fast-food wages and working conditions has been introduced in VA. The proposal in Virginia's House of Delegates goes further in some respects than California's Fast Act, which is on hold until a referendum vote in November 2024.
The Virginia bill sets training mandates, requiring all fast-food workers to take a one-hour course every six months on employee rights and protections. That instruction would be led by what the bill terms "a certified worker organization” or might be seen as union. Fast-food employers would be required to provide proof that every employee has taken the course and to pay the enrollees for the time they spend in the training sessions. The employers would also be obligated to give the certified worker organization the names of each course enrollee and their contact information. The only exceptions would be workers who expressly ask their employers not to provide those details. But the political climate in Virginia is much different than California's, hands-down one of the most liberal and pro-labor states. California Gov. Gavin Newsom signed the Fast Act into law on Labor Day 2022, making him more pro-union for a potential presidential bid. Glenn Youngkin is one of the most conservative state leaders and has less labor support. Industry insiders have raised concerns that a proliferation of Fast Act-like bills could spread industry lobbying resources too thin, as defeating the Fast Act in 2024 is expected to cost tens of millions of dollars. Like the Fast Act, the Virginia bill would create a state council with the power to determine wages and working conditions for employees of Virginia fast-food restaurants that are part of a chain of at least 100 units. The panel would include four fast-food workers, four quick-service employers, and several state officials, including the governor or a cabinet member. The measure also copies the CA Fast Act provision, allowing any municipality with at least 2,000 residents to set up its own counsel. McDonald's USA President Joe Erlinger cited the Virginia proposal as another warning of “what our future could look like” if the Fast Act isn’t scuttled. “This threat is real; if you see special-interest legislation like this coming your way, workers, consumers, and small business owners need to unite and demand better.”
