Takeaway: We remain bearish on BWLD, DRI, TXRH, and cautious on the casual dining sector.

Industry data continues to suggest that casual dining restaurant companies are at risk of missing consensus expectations in the fourth quarter.



Knapp Track


According to Malcolm Knapp, estimated Casual Dining comparable restaurant sales growth for October 2012 was -0.9%.  The sequential change, in terms of the two-year average trend from September to October, was -80 bps. 


Guest counts declined -2.8% versus October 2011.  The sequential change, in terms of the two-year average trend, was -55 bps.  While these results are disappointing, they are not as bad as had been feared intra-quarter.  We remain negative on the casual dining category.



Restaurant Value Spread


The Restaurant Value Spread, or the spread between CPI for Food Away from Home versus CPI for Food at Home, updated for October CPI data released this morning, is implying that inflation at restaurants continues to outstrip inflation in the grocery aisle.  We believe this is a negative for casual dining pricing trends.








We continue to believe that consensus is far too bullish on casual dining top-line trends.  Anemic real wage growth is just one of many macroeconomic headwinds that we believe merit caution going forward.  Consensus is assuming a strong recovery in industry same-restaurant sales in 4Q12 and 2013.  Accelerating negative declines in traffic growth suggest that trends could deteriorate further from here.




Howard Penney

Managing Director


Rory Green




HOLX: Lots To Like

In the past, we’ve been bullish on Hologic (HOLX) and we think the time has come to go long the stock again. We added HOLX to our Real Time Alerts yesterday based on the stock’s potential for long-term growth and the company’s new business model following the GPRO acquisition that relies less on lumpy capital equipment sales and offers more exposure to physician utilization uptick and birth recovery themes. 


HOLX: Lots To Like - HOLX   levels 11 16 12

NKE: Another Reason To Own

Takeaway: Nike should never have bought Cole Haan and Umbro, but with a net positive swing of $1bn in FCF, it is making the best of its mistakes.

We’re surprised to see that Apax Partners emerged as the victor for buying Cole Haan at a price of $570mm from Nike, as they outmaneuvered TPG – which counts former Cole Haan CEo Matt Rubel as its CEO. No one is more qualified to offer insight into that business than Rubel given that he is the one who staged its turnaround before he left Cole Haan for Payless in 2005.


This is a complex sale, as the biggest issue in our opinion is the extent to which Cole Haan can still use Nike technology such as Air and Lunar in the product after Nike lets the brand go. There has to be some transitional agreement, but nothing will be in perpetuity. Without Nike, Cole Haan has a challenge on its hands. Rubel knows this, and therefore was likely against bidding up against what ended up being a rather rich price for Cole Haan.


The bottom line is that combined with Umbro, Nike is getting $795mm on a combined basis for two brands that are losing money. That is precisely $1 for every dollar in revenue generated by the brands last year. In the end, Nike is getting $795mm in cash, plus eliminatig a $43mm operating loss. If we take the proceeds, add back the operating loss, and then $160mm in working capital avoidance, we’re looking at a net positive swing in cash flow right around $1bn. That’s about 10mm shares Nike can repurchase, or 2.3% earnings accretion at current levels.


Nike would have been better off to never have bought these businesses in the first place. But it definitely made the most of unwinding the mistakes. 

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WMT: Buying Again

Yesterday, we added Walmart (WMT) back into our Real Time Alerts after the selloff. The decline can be blamed on the perception that earnings were weak combined with the slew of Foreign Corrupt Practices Act violations the company is facing globally. We think concerns will blow over and the stock is close to its TAIL line of support at $66.12 a share. There’s plenty of room for upside for WMT and we’re buyers. The FCPA violations will amount to tens of millions or maybe even a hundred million bucks. For a company like Walmart, this means nothing.


WMT: Buying Again  - image003


WMT: Buying Again  - image004

Moving Past The Noise

Client Talking Points

The Slowdown Continues

Corporate earnings continue to slow in addition to global growth. Moving into Q4, when companies report, expect a lot of misses. Any company that didn’t guide lower into the next quarter has to really prove they can beat the Street by a longshot. The market certainly has lost confidence in the ability of corporations to put up solid numbers, so testing 1300 on the S&P 500 soon isn’t some kind of crazy pipe dream. We can go a lot lower here so anyone screaming that stocks are “cheap” should realize that cheap can get a whole lot cheaper.

Political Dysfunction

President Obama meets with Congressional leaders today to kick off negotiations on the Fiscal Cliff. Obama won’t give wealthy Americans a break on taxes where as Republicans in the House want everyone to enjoy the benefits of a tax cut. Neither side is likely to budge, so you can imagine how well this will work out.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

After a long downward slide, TCB has finally turned the corner. The margin has stabilized after the balance sheet restructuring. Loans are growing thanks to the equipment finance business. Non-interest income is more likely to go up than down going forward, a reversal from the past 18 months. Credit quality has a tailwind from a distressed housing recovery in TCB’s core markets: Minneapolis, Detroit and Chicago. On top of this, the CEO, Bill Cooper, is one of the oldest regional bank CEOs, which raises the probability that the bank will be sold. Expectations are bombed out at this point, so we think it’s time to move from bearish to bullish on TCB.


There is improving visibility on 20%+ EPS growth with P/E of only 11x with better content leading to market share gains. New orders from Canada and IL should be a catalyst. Additionally, many people in the investment community are out in Las Vegas at the annual slot show (G2E) and should hear upbeat presentations by management.


While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

Three for the Road


“Romancing The Fiscal Cliff” -@JohnBiggs


“If I had only known, I would have been a locksmith.” -Albert Einstein


Hostress Brands, maker of the infamous Twinkie, will close its doors and lay off 18,500 employees. The end of an era.

FL: Early Read

Takeaway: Solid Q confirming concerns over slowing sales were overstated. With $3 in EPS now squarely in view next yr we expect FL to work through YE.

Solid quarter out of FL coming in at $0.63 (adj) vs. $0.54E and our $0.59 expectation. Comps came in at +10.2% slightly higher than our +9.5% estimate and well above consensus (+7%). As always, we’ll get further detail on the call (at 9amEST), but we suspect domestic comps came in up low-to-mid double-digits offset by slower international growth of flat to slightly down. As noted in our 10/20 note ‘FL/FINL: Stealth Strength in Athletic Specialty,’ concerns over slowing sales were overstated due to a widening spread between the athletic channel and industry.

In addition, we’ll get the customary month-to-date comp update which we expect to be one of the least encouraging in recent quarters due to the impact of Sandy – this is not new news to investors. We suspect sales are likely running negative with weekly industry trends reporting sales down -6% November-to-date (see table below). While this sample consistently understates performance in athletic, we wouldn’t be surprised to learn that sales are down to start the quarter.


Gross margins came in essentially in-line with more modest SG&A spend accounting for the EPS upside. SG&A spend was flat yy leveraging 202bps. Taking into account $7mm in vacation pay accrual adjustments last year, SG&A was up +2%. With an estimated $2mm benefit from Fx and further growth in marketing investments, the spread between core SG&A and revenue growth continues to drive meaningful margin expansion.

Inventories marked the twelfth consecutive quarter of a positive sales/inventory spread though down 4pts to +6% which likely reflects some initial inventory build related to the storm at quarter end. This continues to put FL in a very good position to manage merchandise margin pressure near-term and gross margins through year end against easing compares.


FL is clearly continuing its momentum following a significantly more challenging 1H printing EPS 17% above expectations. Basketball continues to be a favorable tailwind given last year’s disruptions though we suspect that the company’s women’s initiatives are starting to play a more significant role in driving top-line in recent months as well. We expect plenty of air-time on the call to be allocated to the recently announced SIX:02 women’s only concept that will be tested this holiday season. This makes a ton of sense as the company looks to increase its women, kids, and apparel mix as well as growing the international store footprint (more productive that domestic base), and expanding digital platform to drive business over the next several years.


With a favorable setup through year-end, we expect more opportunity for further upside in performance. With $3 in EPS now squarely in view next year, we expect this one to rebound and work higher over the intermediate-term.



FL: Early Read - FL S


FL: Early Read - FW sales


FL: Early Read - FL FW sales chart