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Short interest data released on Friday, in conjunction with sell-side sentiment, show that for the two weeks ended 2/29 most restaurant stocks saw gains or no change in their sentiment scores versus the prior period’s reading.  Only CMG, RRGB, PZZA, KKD, and BAGL saw their sentiment scores decline.  We expect much more movement in the sentiment scores when the next release comes out on the 26thof March.

Sentiment Scorecard Callouts

MCD: Continues to lead the pack but, following disappointing February sales and the emerging reality that austerity is impacting the company’s sales in Europe, there is room for sentiment to come down.  That said, we would expect that the sell-side will be reluctant to lead the charge given the 21 Buys, 9 Holds, and 0 sell ratings currently held on MCD by the street and historically bullish consensus on this name.

DNKN: This stock is trading well today and, the latest data point aside, short interest has been coming down over the last couple of months.  The stock was recently initiated “Buy” at Citigroup also, which boosted sentiment.  Coffee prices coming down are a benefit to DNKN franchisees but, in terms of the company’s EPS, this factor is less relevant for DNKN than it is for PEET and SBUX, for example.

CMG: Chipotle’s sentiment score came down for the second reading in succession despite the stock price continuing to grind higher.  While the valuation implied by the stock price is egregious, we are waiting to see the company’s return on investment metrics flash negative in the Hedgeye Sustainability Model before looking at this stock on the short side.  With the returns that the company has generated from new stores over the past couple of years, CMG is unlikely to fall off a cliff. 

CBRL: Cracker Barrel’s sentiment score ticked up as shorts covered their positions during the two weeks ended 2/29.  The stock had spiked on earnings guidance for 2012 being raised on 2/21 but gave back much of its gains over the next couple of weeks.  Gas prices are the obvious threat to Cracker Barrel but, with many casual dining executives recently stressing that they were not noticing any impacting from gas prices.  The consumer's pain threshold can be breached quickly with prices moving higher as quickly as they are, however, and we think that political polls released over the weekend highlighting gas prices as a particular problem for Obama’s approval rating could be an indication that we are approaching that threshold. 

PFCB: P.F. Chang’s remains an untouchable for investors in the restaurant space.  As longer-term bulls on the name, we like this as we believe that the turnaround is in motion.  The road ahead is certainly not without difficulty but we believe the company has a distinct advantage over other casual dining chains that are also faced with serious issues; namely, a management team that has acknowledged the reality of the situation and has the acumen to remedy it.  One risk for all of casual dining, P.F. Chang's included, is that the seasonal adjustment distortion in jobless claims turning into a headwind from May through July leads to employment headline numbers disappointing versus investor expectations.  Initial jobless claims data heavily impact the casual dining space.



RESTAURANT SENTIMENT SCORECARD - short interest historical



Howard Penney

Managing Director

Rory Green