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Short interest data released yesterday shows that for the two weeks ending 3/30, there were some large swings in sentiment in restaurant stocks.  The standouts were BJRI, CBRL, PEET, RRGB, SBUX, DIN, CBOU, THI, TXRH, BWLD, CAKE and RT. 

Sentiment Scorecard Callouts

SBUX:  Despite having been on a tear for 2011, Starbucks has been the best performing QSR stock of 2012 to-date!  Starbucks saw an uptick in sentiment (and short interest) during the last two weeks of March as the Annual Shareholders meeting, Verismo news, and other growth layers emerged to buoy the stock.  We see Starbucks as the standout coffee play, despite the outstanding returns the stock has seen over the last three years, as it continues to innovate and grow internationally.  All that being said the multiple is priced for perfection; any disappointments or mishaps could bring a strong leg down in the stock.

BWLD: As the sell-side gets more bearish the buy-side gets bullish.  Is management whispering something the ear of the buy side and not the sell-side?  Personally I don’t think they are saying anything to anybody, because they don’t want to admit they have a problem.  This quarter is going to be fun.  This stock continues to defy the gravitational pull of significant commodity inflation.  With SSS expectations of 10.7% for Q1, the street is expecting a strong quarter.  What if same-store sales are 9.5%, comps for the first three weeks of 2Q are 5-6%, and wing prices are up 100% in 2Q?  Hope and pray!  Short interest at 11% of the float is not that high and this company is not that well run. 

CAKE: Coming into EPS on 4/25 CAKE is the only casual dining name that has seen a consistent increase in short interest, the short interest ratio now being at 18%.  With bearish sentiment building through the quarter, what are the chances that the numbers are “bad” and the outlook is even worse?  Cheesecake Factory is a high quality name in the casual ding space that could post a disappointing comp number and also see deterioration in its fundamentals as we proceed through 2Q.  California, an important market for Cheesecake Factory given that 20% of the company’s system is in the Golden State, is being impacted heavily by rising gasoline prices given the Californian consumer’s dependence on private cars for transport.   ICSC data (chart below) is also indicating that the first quarter could come in below current expectations of 2.7%.  That said, given the bearish sentiment around the name, it could be a good pick on the long side if earnings disappoint on the 25thof April.  Some seem to be anticipating that disappointment right here and now.


EAT: Brinker is at the bottom of the pile in terms of sentiment.  We like this stock over the TAIL duration but have to respect the fact that casual dining stocks tend to move together.  The slowing trends in casual dining suggest that Chili’s needs to take significant market share in the quarter to gain the 1% in traffic that we think they will need to stay on track to meet FY12 comp guidance of 2%.  The last couple of weeks saw incremental shorting as the sales data slowed.

PFCB: The covering in PF Chang’s continued during the last two weeks of March.  Over that same period, however, the stock declined as investors booked gains even as shorts capitulated.  The success of the Triple Dragon promotion, launched April 2at the Bistro, is the next key data point for the company.

TXRH: Texas Roadhouse is another name that, into the end of 1Q, the sell-side grew more cautious on while the buy-side got more bullish.  Over the past month, the stock has significantly outperformed the casual dining space.  If the company notices any dip in demand for its products resulting from the “pink slime” controversy lessening appetite for beef more broadly, the negative impact of casual dining sales slowing could be amplified in the case of Texas Roadhouse.

RT: Over the past month, Ruby Tuesday has been the worst performing casual dining name on the heels of a disappointing quarter.  Despite the asset value of the company and the free cash flow, management’s actions are conveying a message that the core Ruby Tuesday business is slowly going away.  The company converting Ruby Tuesday stores to other concepts and closing stores out right does not instill much confidence in the investment case.  At best, bulls can buy the stock back and pray that increasing advertising can temporarily boost comps and allow for some profit-taking in the stock.  In terms of a longer term play, we would look elsewhere.

WEN:  The shorts have been climbing all over Wendy’s since the analyst meeting and the marketing debacles in 1Q12.  There is no reason, in our view, to be long this one.  As an aside, if Burger King is fixed that will put incremental pressure on Wendy’s and vice versa.  But we don’t think either chain will be “fixed” any time soon.

GMCR:  The sell-side is still drinking the kool-aid.  We think the stock could get cut in half.

DPZ:  The shorts have been pressing this one all quarter and the sell-side has been getting incrementally more bearish.  We’re also in that camp.  The top line should slow considerably both in the U.S. and in Europe. 

JACK: We think the sells-side is too bearish on Jack in the Box.  Shorts covered for much of the first quarter.  The company may have given the street too much data on Qdoba at the analyst meeting and some concern about margins that we think are overly cautious, may have arisen from that.  We are buyers on weakness and currently long in the Hedgeye Virtual Portfolio.

MCD: McDonald’s already raised some red flags on this quarter by changing its tone on austerity in Europe.  We are not expecting a dazzling beat in 1Q but think that the look into April will be the focus of investors.  We are currently short in the Hedgeye portfolio.  In a soft macro environment, MCD is a “go-to” stock for investors. 

YUM:  Like Starbucks, Yum Brands is on fire.  Is it because Taco Bell is having a great quarter?  We don’t think the sell-side can get any more bullish on YUM.  We are not confident that the turnaround is truly underway at Taco Bell.   The stock has barely reacted to China-related fears recently but softness in that market remains a big risk for the stock. 




Howard Penney

Managing Director

Rory Green