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The short interest data is showing a lot of capitulation on the short side in the restaurant space.  Even Starbucks saw a reduction in short interest according to data released Thursday.  In this post, we go through our sentiment score card and then, below that, some callouts on short interest in QSR and Casual Dining names.

For the most recent data, which was released yesterday and reflects the short interest level as of the settlement date of 1/31, short interest declined sharply in most names in the restaurant space, as the second table below illustrates.  Only RUTH, CBOU, BWLD, and CBRL saw meaningful upticks in short interest during the two week period ended 1/31.  

Below is our sentiment score card.  The usual suspects are at the top: MCD, YUM, SBUX.  EAT and PFCB languish near the bottom with other “untouchables”.  As we wrote earlier in the week, we don’t see much downside to PFCB.  We feel that there is a couple of outlier FY12 estimates (~$1.80) being baked into consensus that are skewing the consensus EPS number higher than true expectations.  We believe that the more accurate consensus EPS number for FY12 is $1.50.  Earnings are, in our view, in a bottoming period for PFCB.  For investors looking for two-to-three year turnaround stories, we believe PFCB is one to consider.  We like what management is doing and, clearly, the investment community has written it off.  There may be a couple of difficult quarters ahead but we view the longer term risk/reward as favorable on the long side.

SENTIMENT SCORECARD

SHORT INTEREST – HOW LOW CAN IT GO? - sentiment scorecard

 

SHORT INTEREST

 

SHORT INTEREST – HOW LOW CAN IT GO? - short interest

 

QSR CALLOUTS

  • PNRA saw short interest in the stock decline dramatically as it had been for some time.  The stock had posted impressive gains throughout the fourth quarter only to miss on the top line (5.9% bakery comps versus 6.3% consensus)
  • SBUX and MCD sentiment can’t get much better.  SBUX is rated highly by the street (21 Buy ratings, 8 Hold, and 1 Sell) with only 0.9% short interest.  Despite shorts covering coming into earnings on 1/26, the stock declined on the print before regaining ground and reaching a new high yesterday.  MCD has traded lower since its January sales results came out on 2/8.  Despite beating estimates, expectations are extremely high for MCD.  The street remains extremely bullish despite the stock price appreciating by 35% since the beginning of 2011; there are 21 Buy ratings, 9 Holds, and 0 Sells on the stock and a mere 0.7% of the float is sold short.  Even what would be considered as a small factor, like FX turning from a tailwind to a headwind, is enough to move the stock with the long side this crowded.  We expect McDonald’s to continue to take share domestically but as investors ponder the company’s ability to outstrip the impressive top-line growth of 2011, the trajectory of the stock’s price chart will likely moderate.  However, as the remodel program progresses in the U.S., we expect a benefit to same-store sales both through incremental traffic in the box and more efficient execution at the drive-through (6 seconds of time shaved off the process equals one point in same-store sales). 

 

CASUAL DINING CALLOUTS

  • CBRL short interest is building as gas prices climb higher. 
  • Short interest was building in BWLD ahead of its 4Q earnings release as investors were concerned about rising costs and the company’s growth prospects versus the street’s expectations.  Unfortunately for those pressing the short side (we had a bearish fundamental view on the quarter), the top-line blew away expectations and 1Q12 to-date comps – although the impact of weather was not disclosed (PNRA said January comps were helped by 350 bps by weather) – were given as +12.9%.  The stock responded very strongly to this and, with comps like that, it is difficult to argue that it should not.  One concern that we maintain needs to be monitored by investors in this name is the fact that margins declined year-over-year despite flat wing prices (will be unfavorable in 1Q) and a surging top-line. 
  • CAKE is reporting on 2/21 and has seen short interest come down sharply over the last two weeks.  During 4Q11 and 1Q12 to-date, the stock has traded extremely well.  We will be publishing on our view ahead of CAKE’s release on 2/21 late next week.

Howard Penney

Managing Director

Rory Green

Analyst