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The Week Ahead

The Economic Data calendar for the week of the 15th of August through the 19th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

The Week Ahead - b. cal

The Week Ahead - 8. cal2


THE HBM: CONFIDENCE, GMCR, WEN, BKC, PNRA, THI, DRI, EAT, BWLD, RRGB

THE HEDGEYE BREAKFAST MENU

 

Notable news items and price action pertaining to the restaurant space. 

 

MACRO

 

Confidence

 

University of Michigan Consumer Confidence was a BOMB this morning, coming in at 54.9 versus 62 expectations and 63.7 prior.

 

THE HBM: CONFIDENCE, GMCR, WEN, BKC, PNRA, THI, DRI, EAT, BWLD, RRGB - UMICH CONF


 

According to the Bloomberg consumer confidence index, sentiment dropped 1.5 points, to -49.1 for the week ended August 7; dropping back near its mid-May low and only 5 points from its all-time low. 

 

THE HBM: CONFIDENCE, GMCR, WEN, BKC, PNRA, THI, DRI, EAT, BWLD, RRGB - bloomberg conf

 

 

Retail Sales

 

Retail sales rose 0.5% in July, the largest gain in four months; excluding autos core sales grew 0.3%, down from the upwardly revised 0.5 June figure.  In July, growth was led by miscellaneous retailers, gasoline stations and electronics and appliance retailers.   On the down side were Sporting goods and hobby stores, department stores, and building supply stores.

 

Subsectors

 

Thank in large part to GMCR, the QSR category has performed strongly relative to its peers.  What we would call out here is the improving performance in Food Processing, a space that has been heavily beaten down throughout the recent phase of high levels of inflation in agricultural commodities.

 

THE HBM: CONFIDENCE, GMCR, WEN, BKC, PNRA, THI, DRI, EAT, BWLD, RRGB - subsectors fbr

 

 

QUICK SERVICE

  • WEN discussed the new coffee program at breakfast and a new prototype to drive sales during its earnings call yesterday.  Other than that, it wa just an OK quarter!  SSS for Wendy’s company-operated stores were flat sequentially on a 2-yr basis at -0.3%.
  • BKC SSS grew by +6.8% in Latin America and +2.2% in Europe, Middle East, Africa and Africa and Asia Pacific (EMEA/APAC) and declined by 5.3% in the U.S. and Canada.  BK has been testing smoothies, salads, parfaits and oatmeal at 100 locations.
  • PNRA was upgraded to “Buy” from “Neutral” at Miller Tabak.
  • THI was upgraded to “Buy” from “Hold” at TD Newcrest.

FULL SERVICE

  • DRI has entered into an agreement with CMR, a Mexican casual-dining restaurant operator, to develop and operate Red Lobster, Olive Garden and The Capital Grille brands in Mexico.
  • EAT was downgraded to “Neutral” from “Buy” at SunTrust Robinson Humphrey.
  • BWLD was upgraded to “Buy” from “Neutral” at Sterne, Agee.
  • RRGB has named Stuart Brown CFO of the company, according to reports out this morning.

THE HBM: CONFIDENCE, GMCR, WEN, BKC, PNRA, THI, DRI, EAT, BWLD, RRGB - stocks 812

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 


JCP: Woof, Woof

 

JCP reported adjusted earnings of $0.13 coming in well below its own guidance as expected, but it ‘managed’ to come in above both our $0.07 and the Street’s $0.10 estimate on lower quality earnings (i.e. further SG&A cuts). In addition, the company is guiding Q3 lower, but instead taking full-year guidance down as we expected they simply pulled it altogether. So much for transparency. JCP continues to be at the top of our short list. Here are a few other callouts:

  • Sales came in down -1% and e-commerce up only +2.8% well below prior full-year double-digit growth expectations as expected. The company’s inability to drive top-line growth persists.
  • Gross margins came in down -110bps compared to company guidance calling for flat to up slightly and even below our down -50bps expectations. Margin pressure is clearly underway. In addition, JWN just highlighted that they have yet to see a squeeze from inflationary pressure, which is right in-line with our call that JCP is the most exposed in this regard.
  • Managing SG&A expenses is how the company ultimately got to its number. Expenses coming in down -2.5% compared to company expectations to increase “slightly,” saved the quarter from being a complete disaster. For reference, if the company maintained its investment schedule and increased SG&A by +1.5% as we expected, earnings would have come in NEGATIVE with EPS of ($0.01). Had JCP kept SG&A flat, EPS would have come in at $0.04. As we highlighted in our recent Black Book, the company has already cut expenses down to the bone. There simply isn’t much left for JCP to keep pulling from in an attempt to juice earnings on a go forward basis.
  • The sales/inventory spread was about the only positive I could find in the quarter with the spread improving on the margin while still planted firmly in the 'danger zone.'
  • As for guidance, the company guided Q3 to $0.15-$0.20, well below the street at $0.27E & they pulled full-year guidance altogether. The table below captures what the implied earnings would have to be in Q4 given 1H results and the high-end of Q3 guidance in order to achieve prior guidance of $2.15-$2.25 as well as where the full-year could shake our based on out and the Street’s expectations. In short, it’s not happening.

 

 Conference call at 9:30am

 

JCP: Woof, Woof - JCP Guid 8 11

 

JCP: Woof, Woof - Dept SIGMA 8 11

 

Casey Flavin

Director

 

 


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RRGB: THE MACRO IS NOT AN EXCUSE

Last night RRGB reported 2Q GAAP diluted earnings per share of $0.44 versus $0.36 consensus.  On a non-GAAP adjusted EPS were $0.48, compared to adjusted EPS of $0.29 last year.  Importantly, Red Robin's company-owned comparable restaurant sales increased 3.1% driven by 4.5% increase in average check, which was partially offset by a 1.4% decrease in guest counts.

 

That was the good news.

 

On the conference call, management said “through August 7th, the first four weeks of 3Q11, same-store sales were up 0.5%; driven by a 5.8% increase in average check and 5.3% decrease in guest counts.  This compares to same-store sales being up 1.4% in the first four weeks of 3Q2010, which were driven by a 2.7% decrease in average check, more than offset by a 4.1% increase in guest counts.”

 

In my view, the biggest problem was that management used the macro environment as an excuse.  The roller coaster in US equities which has been down ~13% over 14 days of trading (over the last three weeks the VIX is up 44.1%, 26.7 and 36.3% (through Thursday), respectfully) as the reason for the decline in traffic.  The stock market is a discounting mechanism and is clearly, over the last two weeks, implying deep concerns about the future prospects of the U.S. economy.  For RRGB, though, the consumer has been impaired for some time and management’s clinging to the macro environment for an excuse is not convincing.

 

Declining traffic trends are always a concern and, while management is attributing this slowdown to the macroeconomic environment, we would contend that there is likely more to it than that.  It is unlikely that such a sequential deceleration in traffic can be entirely accounted for by soft macroeconomic trends.  The consumer environment has been challenging for some time.  The Bloomberg Weekly Confidence Index is only 5 points from its all time low.  On the other hand, gas prices have come down, albeit to still-elevated levels.  While the market plunge has definitely shook confidence, we do not believe it has caused the Red Robin consumer to stop bringing his/her children for a burger. 

 

The RRGB turnaround is progressing and management is forging ahead with acceleration in new unit development.   The decline in traffic trends overshadowed what was otherwise a strong quarter and this is a worry for investors going forward.

 

RRGB: THE MACRO IS NOT AN EXCUSE - rrgb

 

RRGB: THE MACRO IS NOT AN EXCUSE - rrgb quadrant

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


BYI: BAGS OF SAND

I guess we were right to worry about FY12 guidance but this is well below what we expected. Don’t expect our estimate to go there though.

 

 

Meet and lower is what we expected, but not this much lower.  Below is management’s guidance for FY2012:

 

BYI: BAGS OF SAND - sandbags

 

“At least” $2.15 for FY2012?  Thanks for those two words of comfort.  While sympathetic to current BYI shareholders, we really like the setup for would be investors.  This is a complete sandbag – nothing less.  We scrubbed and scrubbed and we can only get down to $2.40.  Our guess is that the real guidance should’ve been “at least $2.40”.  And to throw salt in the wound – or icing on the cake for new investors – JPM slapped a downgrade on the stock this morning cause it’s now a show-me stock.  This stock could trade with a 2 handle this morning implying a 12x forward 12 month P/E on what we see as a bad case estimate.  Ridiculous but opportune. 

 

Look, we are pretty certain the gaming supply business will exhibit very strong long-term growth.  What’s really attractive about BYI though, is they have a near term growth driver beginning in the back half of FY12 the other guys don’t have.  I’m talking systems and it is visible.  So even if replacement demand takes another year or two to materialize – mathematically it has to at some point – BYI begins its growth cycle much sooner.  Please see our 8/3/11 note “BYI 4Q POSTVIEW” where we laid out the back ended loaded FY2012 and the systems visibility.

 

The quarter was actually decent and we didn’t see much in there that was disconcerting – one reason why we don’t buy into the $2.15 number.  Here are some observations from the quarter:

 

FQ4 Takeaways

  • Despite dire outlooks for the coming fiscal year, it appears that replacements were over 13k units this quarter – up about 20% YoY.  For the first half of the 2011 we estimate NA replacement units were 28.4k, up about 12% YoY while new and expansion units were down 31% to just over 5k units.
  • The only real disappointment this quarter was the low game sales margin for BYI and higher than expected SG&A.
  • For gaming operations at least, we know that licensed titles have about a 10% lower margin than in house themes, so the explanation of lower margins on game sales isn’t complete BS. Nonetheless, we have taken down our margin assumption for game sales in FY12
  • It looks like BYI garnered NA market share of about 18% - although we won’t know for sure until ALL reports – but 18% is a lot better than 14% the last few quarters, and that’s before a full game library is available for Alpha 2
  • Other quarterly observations:
    • Game sales :  North American units were a little better, international a little worse, pricing much better
    • Game Ops was spot in line with our estimate
    • Systems was above our estimate


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