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Casual Dining – Silver Lining?

The initial run up in retail gas prices in 2005 led to the precipitous decline in casual dining same-store sales and traffic growth trends. As gas prices increased at an accelerated rate in early to mid 2008, casual dining demand dropped at an accelerated pace as well. Casual dining operators posted their worst traffic declines in the July through October 2008 timeframe since at least 2000 with the October number falling 8.2%. And, based on recent comments from casual dining companies, we are expecting more of the same in November.

That being said, gas prices have been declining and are now down nearly 60% from the peak levels experienced in July, down 40% YOY and have moved below 2005 levels. Although gas prices account for only one factor among many (unemployment, declining house prices, etc.) that have impacted restaurant demand, at some point, these lower gas prices will help to stabilize and reverse traffic trends just as they played a major role in pulling down demand on their upward climb. In fact, SixthManResearch.com estimates that every $0.01 change in the retail price of gas impacts annual consumer spending by $1.5 billion. Based on the current U.S. average retail price of regular gas of $1.70 per gallon and the 2007 average price of $2.81 per gallon, this equates to a $1.11 change or an additional $166.5 billion of annualized consumer spending injected into the economy (or about 1% of consumer spending in 2009), not an insignificant amount.

The charts below highlight the inverse relationship between retail gas prices and casual dining same-store sales growth and traffic trends. If gas prices continue to fall, restaurant operators should begin to see some relief from a demand perspective.


The U.S. Department of Transportation reported that vehicle miles traveled on all U.S. roads and streets fell 4.4% in September on a YOY basis. This same metric has declined 3.5% year-to-date. On a regional basis, the South Atlantic states fared the worst in September with a 5.7% decline in miles traveled followed by the South Gulf states, which dropped 5.2%. The Northeast states held up the best, but still posted a 3.4% decline YOY.

Vehicle miles traveled have declined each month in 2008 so this not a new trend, but with gas prices down nearly 60% from the peak levels seen in July and down 40% YOY, I would not be surprised if this trend started to reverse. Although gas prices had already started their descent in September, prices were still over $3.50 per gallon and on average, were still 30% higher than the prior year, which might help explain why the number of miles traveled continued to fall. Lower gas prices and an increase in miles driven should benefit traffic trends at all restaurants, but CBRL should feel the benefit more proportionately as 86% of its restaurant base is located on the interstate highway system. That being said, its business is highly related to highway travel. Making matters worse is the fact that CBRL’s restaurant base is highly concentrated in both the South Atlantic states (33% of CBRL’s stores) and the South Gulf states (31% of CBRL’s stores), which experienced the biggest declines in vehicle miles traveled in September.

CBRL’s traffic trends have been weak and like other casual dining operators, deteriorated further in August, September and October, down 5.4%, 6.7% and 7.2%, respectively. For reference, even with the significant magnitude of those declines, CBRL actually outperformed the casual dining group as a whole which saw its traffic fall 6.1%, 6.8% and 8.2% in those respective months.

The chart below highlights the strong relationship between vehicle miles traveled and CBRL’s same-store sales and traffic growth. If gas prices continue to fall, thereby leading to an increase in the number of miles driven, CBRL should begin to see some relief from a demand perspective.

SP500 Levels Into The Close...

Of the last 14 position changes we’ve made in the last 3 days of trading, all of them have been buy or cover. This is good. This isn’t easy and I, for one, know what it feels like to be on the wrong side of a “Trade” like this.

Importantly, the SP500’s resistance was overcome today - now that resistance becomes support (down at the 884 line). This is why I covered my SPYs and went long them. The facts don’t lie in momentum modeling. As the facts change, I do.

See the chart below. There is plenty of runway left until we run into the big negative “Trend” line of intermediate resistance. We won’t go there in a straight line, but that line is +14% higher up at 1052. There is immediate term “Trade” resistance at 925, but that line is a moving target that moves higher every time I refresh my models.

I have moved my US Equity invested position up again today.

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The price of the average slot machine has rocketed up 45% over the last 6 years. The advent of cashless gaming, new casinos and expansions, and strong consumer demand for gambling helped fuel an environment for the suppliers to aggressively raise prices. Higher prices, of course, translated into gross margins taking off. Gross product margin for IGT climbed over 9% over the same time period. Good times indeed.

The times they-are-a-changin’. The big guy, IGT, has lost a lot of market share and is starting to flex his muscles. Right now IGT’s power is confined to committing its balance sheet to more aggressively help its customers finance their slot purchases. This effort should buy some market share.

Where IGT could really leverage its low cost manufacturing would be in the pricing arena. It’s debatable whether this would be a good move for IGT, but there is no question the rest of the industry would suffer. IGT is in the midst of a cost reduction program which could offset some of the gross margin pressure from lower pricing.

An aggressive pricing strategy combined with better game development could allow IGT to regain some of its lost market share, which has been considerable. However, as we pointed out in our 11/24/08 post, “SHARING THE MARKET”, IGT’s market share has actually stabilized the last few quarters. I expect IGT to continue to redirect R&D towards game development.

IGT may have an opportunity here to steal share through pricing which, successful or not, would likely be detrimental to the industry.

Pricing and gross margins have been on a rocket ship

Eye On The UK: Bad Math!

When I tried to download the Bank of England’s financial liquidity Index last week, the information spit out by my data provider looked incorrect.

The Index, which is calculated on a daily historical basis but only released twice a year for the BOE Financial Stability Report, is a measure of liquidity in the UK financial system drawn from a host of different capital market and credit data. When the numbers that my data program spit out didn’t add up I went straight to the source and downloaded it from the BOE website --only to discover that the files there were also incorrect. The statistical office at the bank was kind enough to have the Index recalculated and posted with the final level coming in slightly lower than when it went up initially on October 28th.

With the refreshed data charted against the benchmark rate, the conclusion is clear: lowering rates did not returned liquidity to the market prior to November. Last week’s abysmal HBOS house Price data -which came in down over 16% year-over-year, illustrates that the 150 basis points cut since then have not moved the needle either.

We are negative of the UK’s prospects, and will continue to remain so until the facts change. Currently, price momentum in the EWU is underperforming our long position in Germany (EWG), because the facts play to the negative side of the UK’s balance sheet position.

Andrew Barber

Chart Of The Day: Devalue, Re-Flate!

Alongside the last note we just posted on the VIX breaking it’s short term momentum line, we have a very powerful macro signal developing in the US Dollar. On a breakdown and close below $86.34, our Investment Theme of “Re-Flation” will be very hard to ignore.

With the US$ Index trading down -1.2% at $85.82 so far here today, you are seeing a real time example of what I mean. Commodities are raging higher alongside stock markets and foreign currencies, globally. “In the end, we’re all dead”, but in the immediate term, FREE money has it’s short term correlations. Just because we have seen this movie end poorly before doesn’t mean we cant watch it live again.

This is what you get when you have a politicized US Federal Reserve working with a Goldman leverage banker. “Heli-Ben”, drop moneys from the heavens, and “Re-flate”!

Positive intermediate “Trend” line support for the US$ is all the way down at $81.85. That’s a long way from here…

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