THE HBM: MCD, RT, BJRI, TAST, COSI, BEEF PRICES

Notable news items and price action from the restaurant space as well as our fundamental view on select names.

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MACRO

Beef Prices

The drought in Texas that we highlighted in our WEEKLY COMMODITY MONITOR on Wednesday is contributing to an increase in beef prices.  As previously highlighted, despite the short-term increase in supply, ultimately the smaller herd size supports prices.  As of July 1, the nation’s inventory of all types of cattle and calves fell to 99.69 million head, down 1.4% from the same date in 2010, according to a Dow Jones Newswires survey of analysts.  That would be the smallest herd for that date since the U.S. Department of Agriculture began compiling a July 1 figure in 1973.  This will likely keep beef prices elevated well into 2012.

Jim Robb, the director of the Livestock Marketing Information Center, was quoted by Bloomberg as saying “we are slaughtering animals that are potential productive-breeding animals…They are going into feedlots and beef-production systems. We’re not holding heifers for future breeding herd growth.”  The poor pasture conditions are making it less feasible for farmers to maintain larger herd sizes.

Subsectors

The rally in the consumer space recently has been led by categories that were previously lagging.  Within our universe, and related spaces, food processing has picked up performance-wise and full service restaurants have underperformed. 

THE HBM: MCD, RT, BJRI, TAST, COSI, BEEF PRICES - subsector fbr

QUICK SERVICE

  • MCD reported 2Q earnings this morning.  EPS came in at $1.35 versus $1.28.  Comps for the quarter were: Global +5.6%, US +4.5%, Europe +5.9%, APMEA +5.2%.  In June, comps were: Global +7.7% versus StreetAccount consensus +3.8%, US +6.9% versus consensus +3.3%, Europe +9.1% versus consensus +4.1% and APMEA +4.8% versus +3.3%.  The stock is trading up to all-time highs this morning.  July, according to management, is expected to bring global comparable sales of 4-5%.
  • TAST reported that its Burger King division’s same-restaurant sales for 2Q declined -5.2%.
  • SBUX, MCD, and now Chick-fil-A Inc. will be following the restaurant industry grain Monday when it debuts new steel-cut oatmeal on its breakfast menu.
  • COSI is cooked - reports Q2 system-wide comps (0.2)% vs. Q1 increase of +1.7% Company-owned +0.5% - Franchise-operated (1.3%)

CASUAL DINING

  • RT reported a horrible 4QFY11; comps came in at -0.1% versus +0.1% consensus.  EPSS came in at $0.25 ex-items versus consensus at $0.31.
  • RT was cut to Underperform from Neutral at BofA.
  • BJRI reported strong 2Q results with EPS coming in at $0.28 versus $0.27.  Comps came in at +6.9% versus consensus +5.3%.  Trading at such a high multiple, the stock is priced for perfection.

THE HBM: MCD, RT, BJRI, TAST, COSI, BEEF PRICES - stocks 722

Howard Penney

Managing Director

Rory Green

Analyst