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Below is a quick account of our stance on restaurant stocks reporting earnings over the next three weeks.

2/4 – YUM is the worst performing QSR stock YTD, underperforming the S&P 500 by over 700 bps.  The concerns about business trends in China are pervasive and not helping business trends in China. We believe that the company has made amends with the Chinese government and are past the issues that have plagued the share price.  The US business is strong and we would be long going into the quarter.  Expectations have been bombed out and the company is likely to be aggressive in using its balance sheet and cash flow to buy back stock in 2013.

2/5 – CMG has underperformed the market by 200 bps YTD.  The stock has rallied recently on the hope that the company’s pricing strategy will save the day.  We think it is unlikely that the company has pricing power.  Recent menu introductions and testing suggest to us that the company is struggling to stay top-of-mind with consumers.  We are bearish, and would be short, ahead of the quarter.

2/5 – PNRA is a name we want to like but it is difficult to get comfortable at this price.  Panera is the second worst performing QSR stock, year-to-date, underperforming the S&P 500 by almost 500 basis points.  We published on this stock yesterday and our macro team’s quantitative analysis indicates that the share price is in a negative formation. 

2/6  - GMCR is a stock that we do not have a high degree of conviction on but retain a bearish bias due to our concerns about the sustainability of the business model.  The new CEO’s articulation of his vision for the company’s future will be important for our view on the stock going forward.

2/7 – BLMN is a stock being supported by high expectations.  Outperforming the market by over 1,200 bps year-to-date, BLMN has little upside heading into earnings, in our view.  We would not pay a premium for 6% revenue growth and 8% earnings growth in FY13.  The lack of leverage in the business model, compounded by the casual dining price wars and red meat inflation, is a red flag for us.  If we had to take a position, we would be short heading into the quarter.  PE firms will be unloading their shares soon!

2/12 – BWLD is our favorite short in the group.  Its shares have underperformed by more than 450 bps year-to-date but we believe that 2013 will be a difficult year for Buffalo Wild Wings. 

2/15 –DPZ is facing a very challenging 4Q SRS compare, but is one of the few restaurant companies that does not face a difficult comp in 1Q13.  The headlines from the 4Q12 press release could pressure the stock price but we would be buyers on weakness.

2/15 –BKW has outperformed the S&P 500 by 320bps YTD.  To some degree, BKW has benefited from MCD’s trends decelerating but there is little in BKW’s strategy, that we know of, that gives us confidence in the sustainability of current top-line trends.  Same-restaurant sales in 4Q12 will likely look strong but we don’t expect subsequent quarters to impress from a headline perspective.  We would be looking to short this name following 4Q12 earnings.

2/15 – BJRI reported 4Q12 same-restaurant sales of 3% during the ICR conference.  Much of the impact has already been taken out of the upcoming release.  Chili’s has launched pizza nationally and is looking to heavily promote this item for the balance of the fiscal year.  We continue to believe that a resurgent Chili’s is negatively impacting BJ’s business.  We are awaiting an entry point to short BJRI. 

2/18 – JACK is still an attractive to investors looking for a longer-term story.  The stock has underperformed the market by over 400 bps year-to-date but we believe the upside remains greatly underappreciated.   We are buyers on weakness.

2/20 – CAKE will likely report 4Q12 results in line with expectations.  We see risk to guidance for 1H13 versus expectations as the Street is modeling significant margin expansion in the face of dairy prices running far ahead of year-ago prices. 

2/21 – TXRH has underperformed the S&P 500 by 150 bps YTD.  We would steer clear of this stock on the long side, given difficult compares during 2013 and the likelihood of higher red meat impacting margins. 

Howard Penney

Managing Director

Rory Green

Senior Analyst