Changes to the position monitor
Shifting the Focus of the Position Monitor Towards Domestically Operated Firms in the Sector
In an evolving narrative, the giants of the global eating-out scene—names like McDonald's (MCD), Restaurant Brands International (QSR), and Yum! Brands (YUM)—have stumbled, failing to meet expectations. This downturn is rooted in the persistent strife in the Middle East coupled with swelling inflationary forces worldwide. These challenges are not fleeting; they bear the weight of continuity, threatening to exacerbate with time. The ripple effects are palpable across critical economies grappling with recessionary pressures, including China, Germany, the United Kingdom, and Japan. Within the confines of the United States, a narrative unfolds of economic strain bearing down on the lower-income demographic.
- A strategic recalibration is in order in anticipation of Domino's Pizza's (DPZ) financial disclosures scheduled for February 26. DPZ will be extracted from our roster of long positions—though it retains its place as a beacon of strength in the KM signal long selections. Similarly, Domino's Pizza Group plc (DOM.LON) and Domino's Pizza Enterprises Ltd. (DMP.ASX) find themselves sidelined from the long list, victims of the pervasive top-line pressures within their respective markets.
- Conversely, Sysco Corporation (SYY) finds a new categorization under the short bias list, a tactical maneuver post-earnings uptick.
- Kura Sushi USA, Inc. (KRUS) moves up the SHORT list. A staggering 70% surge in the past quarter, juxtaposed with a deceleration in growth and an overly optimistic valuation, underscores this decision.
- On the flip side, Darden Restaurants, Inc. (DRI) and First Watch Restaurant Group, Inc. (FWRG) are moving from LONG bias to Best Ideas Longs.
FWRG: HOW THIS BREAKFAST/BRUNCH PLAYER IS STRATEGICALLY CARVING A NICHE NATIONWIDE
The First Watch's narrative in the casual dining sector is a tale of dynamic expansion. With only a modest 524 outlets, their trajectory is set towards an ambitious target of over 2,200 locations across the United States. The brand has been charting a robust growth pattern, with annual increases in units exceeding 10%, propelled by a strategic blend of geographical spread and sustained, albeit modestly offset by traffic, same-store sales growth. The company is carving a niche in the breakfast/lunch/brunch segments, which resonates with the current health-conscious and quality-centric consumer trends. Their strategic moves, such as incorporating alcoholic beverages and bolstering their off-premise service capabilities, have effectively broadened their market reach and total addressable market. Culinary creativity remains a cornerstone of their strategy, offering the flexibility to introduce premium products. Introducing new unit designs has been a game-changer, yielding higher volumes per unit and improving restaurant-level margins, thus underscoring the strength of their unit economics. Their approach to growth is further augmented by a franchise acquisition strategy, enhancing their presence in established markets. Financially, First Watch stands on solid ground, generating sufficient cash flow to fuel its primary growth engine – unit expansion. The path ahead is marked by a significant potential for new unit development, with the added advantage of scale and operational leverage poised to enhance margins over time. As with others, enhanced consumer analytics are set to refine personalization and propel sales. From a valuation standpoint, the company's growth trajectory and prospects render it an attractive investment, meriting a premium multiple in line with other high-growth entities in the restaurant industry. The potential for substantial growth looms as First Watch extends its footprint nationwide.
Three reasons to be bullish on FWRG stock:
- Strong unit growth - 10%+ this past year with 51 new locations. We see the potential for 2,200 US locations in total.
- They are innovating and staying ahead of consumer trends (alcohol, off-premise, technology) to drive traffic.
- They are acquiring franchisees to enable accelerated growth in existing markets.
Three reasons to be bearish on FWRG stock:
- Brand awareness is still relatively low, so discovery is a challenge.
- Labor inflation, staffing, and retaining people have likely been difficult with low unemployment.
- Potential macroeconomic uncertainties like inflation could pressure consumers and sales trends.
The Pasta Payoff: Olive Garden Fuels Darden's Earnings Beat
In the prevailing economic landscape, where the performance of global restaurant conglomerates is waning, Darden Restaurants, Inc. distinguishes itself as a beacon of robustness for investors scouting for dependable domestic dining establishments. The argument tilting in favor of Darden is compelling, underpinned by its impressive margin profile, formidable cash flow capabilities, and Olive Garden's revered position at the helm of the industry.
Nonetheless, it's prudent to acknowledge the shadows cast by rising inflation and the potential for a downturn in consumer spending. These factors introduce a layer of uncertainty, serving as critical variables that warrant close observation in assessing Darden's future trajectory. Despite these looming concerns, the scales tip towards optimism, buoyed by Darden's financial health and strategic positioning.
Three reasons to be bullish on DRI:
- Strong operating performance with industry-leading same-restaurant sales growth and substantial margin expansion. This indicates the company's brands and execution are resonating with consumers.
- Numerous opportunities remain for business optimization. As seen with the Ruth's Chris acquisition, there is room to leverage Darden's scale, supply chain infrastructure, and balance sheet strength. More synergies can be captured over time through ongoing integration.
- Long track record of shareholder returns via dividends and buybacks. Management emphasizes returning excess cash to shareholders while maintaining a solid balance sheet. This signals an ongoing commitment to balanced capital allocation.
Three reasons to be bearish on DRI:
- Further, consumer weakness or a slowdown in the restaurant industry could impact sales. If consumers pull back discretionary spending more broadly, it could dampen Darden's momentum despite its relatively solid performance.
- Labor & Commodity cost inflation may pressure margins in an era of less pricing.
- Valuation is reasonable, but the stock may be priced for some operational perfection. There is limited upside if execution stalls at all.
Savoring Innovation?: Starbucks Unveils Pork-Flavored Latte for Lunar New Year in China
According to CNN, SBUX is introducing the "Abundant Year Savory Latte" by Starbucks in China for the Lunar New Year celebration. This drink, which incorporates Dongpo Braised Pork Flavor Sauce into a traditional latte, represents a fusion of culinary traditions and modern café culture, aiming to appeal to Chinese consumers' palate and cultural practices related to the New Year. The pricing of the latte at 68 yuan (approximately 9.45) reflects Starbucks' premium positioning in the Chinese market, where it has been expanding rapidly. Including a piece of pork on the drink serves as a nod to the cultural significance of eating meat for prosperity in the New Year, blending the traditional with the contemporary in a unique offering. Starbucks faces stiff competition from local chains like Luckin Coffee, which has become the largest coffee chain in the country by offering more affordable options. The reaction to the pork latte on Chinese social media platforms like Weibo, with mixed curiosity and skepticism from users, underscores the challenges and opportunities for global brands like Starbucks to innovate while respecting local tastes and traditions. The high-interest level, as evidenced by the number of views on Weibo, indicates significant consumer engagement, whether positive or negative. Starbucks' introduction of the "Abundant Year Savory Latte" is a fascinating example of how global brands adapt and innovate within different cultural contexts, seeking to blend their identity with local traditions to create new and unique consumer experiences.
