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    MARKET EDGES

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The biggest take away from this quarter’s earnings season was the decline in the earnings outlook for Full Service sector versus the Quick Service sector.

 

Full Service trends

  • 57.8% of the companies in the FSR space saw DOWNWARD revisions over the last month
  • 36.8% of the companies saw UPWARD revisions over the last month

 

QSR Earnings Trend

  • 52.9% of the companies in the QSR space saw UPWARD revisions
  • 11.7% of the companies saw DOWNWARD revisions
  • Two companies have not yet reported

Full Service Sales Trends

  • 7 concepts had negative SSS in 4Q10 - Industry average SSS was 2.2%
  • 7 concepts had negative SSS in 1Q11 - Industry average SSS was 2.4%
  • 9 concepts have negative SSS in 2Q11 - industry average estimates SSS is 3.0%
  • The Hedgeye estimate for 3Q11 SSS is 1.5%.
  • The Hedgeye estimate for 4Q11 SSS is 0.7%.
  • As many as 15 concepts could see negative SSS by 4Q11.

The concepts that are negative in 2Q11 are; Cracker Barrel, IHOP, Chuck E Cheese, McCormick & Schmicks, PF Chang, Pei Wei and California Pizza Kitchen.

 

Quick Service Sales Trends

  • 2 concepts had negative SSS in 4Q10 - Industry average SSS was 5.0%
  • 3 concepts has negative SSS in 1Q11 - Industry average SSS was 2.9%
  • 3 concepts have negative SSS in 2Q11 - industry average estimates SSS is 3.0%
  • The Hedgeye estimate for 3Q SSS is 2.0%
  • The Hedgeye estimate for 4Q SSS is 0.7%

The concepts with negative SSS trends in 2Q11 were Pizza Hut (-2%), KFC (-5%), and Taco Bell (-5%).

 

Sector Performance Trends

The response to the significant revisions in consensus EPS for the casual dining industry has led to a significant correction in the subsector.  As you can see from our subsector performance table (which we publish every day in the HBM) the group has begun to significantly underperform.  In contrast, the QSR sector has significantly outperformed.

In our view, contrarian investors could profit from looking at the food processing space for potential longs.  The Processing stocks have underperformed for quite some time, despite a correction in commodity prices.  However, TSN, recently commented that it expects protein prices to rise across the board in the coming months and SYY is also expecting high inflation for a few quarters. 

Looking at the broader consumer space over the past three weeks, the QSR segment showed significant outperformance along with Discount Stores.  The two sectors that underperformed the most over the past three weeks were Gaming, Lodging & Leisure and Homebuilders.

RESTAURANT INDUSTRY - SALES AND EARNINGS TRENDS - subsector consumer

Howard Penney

Managing Director

Rory Green

Analyst