Continuing our theme of a potential silver lining in Casual Dining!

Casual Dining operators on average are facing a much easier EBIT comparison in the current quarter as 4Q07 marked the first quarter of significant YOY declines, with margins on average down over 200 bps. Although same-store sales growth started to taper off in 2006, the casual dining companies saw a dramatic fall off in growth in 4Q07 when comparable sales growth fell 2.4% and traffic declined 4.2%. Trends have obviously deteriorated further since then but that sequentially more substantial decline in top-line growth in 4Q07 coincided with a sequential and YOY spike in both food and labor costs, which put increased pressure on EBIT margins.

This easier margin comparison in 4Q08 will not be enough to offset the significant same-store sales declines. We already know that October casual dining same-store sales declined 6.1% with traffic down 8.2% and we are expecting November to not get any worse. However, should top-line growth start to stabilize in December and early 2009 as a result of Obama’s expected fiscal stimulus program, the YOY comparisons could finally start to play in these companies’ favor. Casual dining operators are lapping both higher food and labor costs in 4Q08 and 1Q09 so the YOY pressure on margins should start to moderate, particularly with the recent declines in commodity costs. Most of the companies are forecasting that their cost of sales will be up in FY09 but at a much more manageable pace relative to the increases experienced in FY08 with the biggest YOY benefit expected in the back half of the year. Lower gas prices (down nearly 45% YOY) should help margins both from a cost and demand perspective.

Although the timing around when top-line results start to stabilize remains the number one question, I would not be surprised to see this group rally in early 2009. Any incremental lift to same-store sales growth in 2009 will coincide with moderating food costs on a YOY basis and should improve margins from their current depressed levels.

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more