The Economic Data calendar for the week of the 17th of September through the 21 is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
Takeaway: There is a lot of risk in assuming a rebound in casual dining comps any time soon $DRI, $ BLMN, $DIN, $EAT,
The Bureau of Labor Statistics released CPI data for the month of August this morning. The spread between CPI for Food at Home versus Food Away from Home continues to grow. Inflation in the restaurant check is far-outstripping inflation in the grocery aisle.
We have long been calling out this trend; the advantage that restaurants enjoyed over grocers in 2011, in terms of lower price increases year-over-year, continues to fade. Grocers were forced to raise prices in line with inflation to protect margins during 2011; we believe that restaurants benefitted from that. Last year, restaurants’ strong top-line trends helped the industry mitigate the impact of inflation on margins but, it seems, this year pricing power is much-diminished. Even McDonald’s is running price at roughly 3% in the United States.
Using a “Restaurant Value Spread”, which is the basis point spread between CPI for Food at Home and CPI for Food Away From Home, we believe we have a good indicator of the traffic cycle for many casual dining brands. This is not a complicated theory; when inflation at the grocery store is far in excess of inflation at the restaurant, people are more likely to skip the grocery store and eat at a restaurant. We will be publishing on this in more detail over the weekend/early next week but our initial take is that the collapsing Restaurants Value Spread is bearish for casual dining traffic and comps (Knapp). The relationship is quite strong.
Looking at the first chart in this note, above, it seems that the value spread has more room to decline. Darden’s Red Lobster, in particular, could be facing a difficult environment if the current Restaurant Value Spread cycle has similar amplitude to the last. In addition, consensus estimates (quarterly so not shown here) from Consensus Metrix suggest that the Street is anticipating a quick rebound for Red Lobster comps. We do not think that is going to happen; the Restaurant Value Spread is likely to decelerate for another 6-9 months.
Please reach out if you want to discuss this in greater detail or in the context of other names within the restaurant space.
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QE: THE UNTHINKABLE
CLIENT TALKING POINTS
QE: THE UNTHINKABLE
It’s truly amazing what we witnessed yesterday. It’s clear the Federal Reserve can’t help the economy at this point. A cute short-term rally is what we’ll get from Ben Bernanke’s extension of 0% rates and MBS buybacks. After the rally? Higher fuel prices, higher food prices. No new jobs. Stagnant economy growth. Sounds great, doesn’t it? QE can save anything, anytime, right?
Remember back when gas was $1 a gallon and you’d as your parents or friends for a couple bucks to fill up your tank so you could go out for the weekend? Those days are truly a relic of the past. We’re at an average of $4 a gallon gas right now and as if that weren’t bad enough, we’re going higher. As the S&P 500 climbs and as Ben Bernanke destroys the US dollar and juices commodity prices, we’ll no doubt see $5 gas, followed by $6 gas and so on. Aren’t central planner great?
U.S. Equities: Up
Int'l Equities: Flat
Fixed Income: Down
Int'l Currencies: Flat
TOP LONG IDEAS
Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.
Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.
LAS VEGAS SANDS (LVS)
LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.
THREE FOR THE ROAD
TWEET OF THE DAY
“Insiders knew Bernanke was going to go all in; they'll live large this weekend while you take it in the pump” -@KeithMcCullough
QUOTE OF THE DAY
“There is no fate that cannot be surmounted by scorn.” –Albert Camus
STAT OF THE DAY
US Retail Sales increase by 0.9% for August.
Takeaway: $CAT: Call at 11AM to discuss our view of $CAT. Don't be the investor who holds CAT through peak margins...
CAT CALL AT 11AM: REVIEW OF BEARISH THESIS
Please join us for a quick review of our bearish thesis on CAT at 11AM this morning.
MATERIALS: Follow the link CAT's Deep Cycle
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If you think that aftermarket parts will save CAT, so did these guys.
(Picture from CAT's 1953 Annual Report)
Since then, CAT has cycled down a half dozen times.
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