Employment data released this morning by the Bureau of Labor Statistics is positive for the quick service restaurant industry. While near-term data out of the group may be underwhelming, from a comparable sales headline perspective, as we lap difficult weather compares, the pace of hiring in the QSR sector should not be ignored.


Per our note ahead of EPS next week, we like YUM, EAT (although Brinker already reported so not featured in note), and JACK (longer-term) and have a negative view on BWLD and CMG.  



Leisure & Hospitality Still Rolling Over


Hiring within the leisure and hospitality sphere is sequentially decelerating, which likely a negative sign for restaurant industry sales, on aggregate.  Full service employment growth tends to follow leisure and hospitality hiring more closely than quick service.  The chart below illustrates trailing-twelve month growth in full service, quick service, and leisure and hospitality. 


RESTAURANT EMPLOYMENT BIFURCATION CONTINUES - leisure   hospitality vs restaurant employment



The chart below shows monthly employment growth and we can see that the divergence between employment growth in quick service and employment growth in full service is becoming more pronounced.  While price points across the industry, among all subgroups, have been converging as the discounting war rages on in casual dining, an upgraded experience is helping QSR take share from casual dining, which is populated with often over-supplied and tired concepts.





Employment by Age Data Mixed Start to Year


Employment growth by age cohort implies that quick service restaurants have been benefitting from strong employment growth among core consumers while casual dining’s difficulties have been  exacerbated by some deceleration among some of the sector’s most vital consumer groups (by age). 


However, the chart below highlights a mixed start to 2013 for employment growth among the younger age cohorts.  Job growth in the 20-24 years of age cohort remained sequentially decelerated to +1%, year-over-year, versus 2.9% in December.  The 25-34 years of age cohort saw employment grow by 2.5% in January, versus 1.2% the month prior. 


The 35-44 and 45-54 years of age cohorts both saw negative year-over-year employment growth.  We interpret this as negative for casual dining, a highly discretionary sector that derives much of its revenue from families and middle-aged consumers.  As the chart below highlights, the 45-54 years of age cohort saw its third consecutive month of negative job growth.  The 55-64 years of age cohort, also significant for casual dining, saw employment growth decelerate to 3.5% in January versus 5.6% in December.






Howard Penney

Managing Director


Rory Green

Senior Analyst




Labor Market: Growing Pains

With the unemployment rate ticking up to 7.9% today, many are questioning if the recovery in the labor market has begun to fizzle out. The principal driver of the increase in Unemployment this month was the delta between the change in the employed and the change in the unemployed. Total employed increased 17,000 sequentially while the total unemployed increased 126k sequentially. 


Labor Market: Growing Pains - EMPLOYMENT1


The hallmark of both the downturn & the recovery was the contrast between the extreme job loss among younger cohorts and the relative employment stability among older workers (employment for 55-64 yr. olds never went negative through the great recession). Interestingly enough, the 20-45 age group has begun to improve recently and the 25-34 year old group is continuing to accelerate. 


Labor Market: Growing Pains - EMPLOYMENT2


Part-time employment (household survey) decreased for a third straight month and posted its first negative growth month since December 11th. Temp employment growth (establishment survey) followed the same trajectory, decelerating 1.6% sequentially. 


Labor Market: Growing Pains - EMPLOYMEN32


Lastly, it’s important to note that after a four year run of negative growth, state & local employment is now approaching the zero line and likely to go positive in 2013.

JCP: Pulling A Risk Management 180 on JCP

Takeaway: We turned fundamentally pos on JCP last month as a rental for 2013. Now the risk mgmt factors are lining up for the 1st time in 15 trades.

We’re adding JCP to our real-time alerts marking the first out of 15 trades where we are not bearish. As a reiteration as to how our process works, our analytical team (McGough, in this instance) will do the long term fundamental analysis, and will put a stake in the ground on a small number of big ideas -- one of which is JCP.  Then at the PM level (Keith), we’ll simply manage risk around the position, which has been 87% on-target thus far on JCP. Risk management levels are in the chart below, though an important point is that if TREND breakout happens here, there's no resistance to TAIL risk line of 24.76


We turned fundamentally positive on JCP last month when near-term sentiment became too bearish at a time when the delta in top line is likely to get better. We think that the improving sales trajectory in 2013 and incremental improvement in store layout and business will drive the stock higher this year – even if JCP needs to buy the better top line. That might not be the best ROIC decision, but we think that this stock will trade on revenue, not ROIC.


To be clear, this is a rental, and not a long term buy. The challenges that this company faces in completing the transition are sizable. But people are getting bent out of shape on issues like shop-in-shop installation delays, and scale back in RFID rollout, which has very little impact on the key factor that would cause another big leg down – and that’s liquidity.


We won’t argue that liquidity is a non-event. It certainly is. But the numbers and scenario analysis tell us that we won’t need to answer that question for 2-3 years at least. Look at Sears. It’s still dogging along 8-years after the K-Mart merger. Granted, it has assets like Craftsman, Land’s End, Die Hard and Kenmore – while JCP is limited to about $10 per share in real estate value. But this is real estate that it can continue to monetize piece by piece to fund its transformation if need be.


Also keep in mind that while JCP uses all 3rd party brands (aside from a dwindling portfolio of value-less private label) and cannot sell anything like SHLD could, the reality is that there are hundreds of brands that are at risk of going away on their own – even without JCP dynamics.  Even plenty of good brands face meaningful risk. They’ll flex wherever and whenever they can to get additional distribution to stay alive. They need JC Penney -- at least for a short time until they find alternative solutions.


The punchline is that we think that liquidity will be an ongoing concern, but it won’t be proved a valid concern anytime soon. What will matter are store-level trends and execution of JCP’s transformation. Whether the company SHOULD transform or not is irrelevant. The fact is that it is moving forward with the strategy, and after a brutally painful 2012, Johnson has more levers to pull in 2013 to instill hope in the investment community. That might be all we need with 30% of the float short. 


JCP: Pulling A Risk Management 180 on JCP - jcp11

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Employment: Some Positives Under A Benign Hood.

Takeaway: Inclusive of prior month revisions & the improvement in the B-D adjusted NSA payroll numbers, we’d view today's print as modestly positive.

Below we provide a two-pronged breakdown of today’s Labor Market Numbers:  Analysis of the Current Population Survey (Household Survey) which drives the Unemployment Rate & the Establishment Survey (CES) which drives the NFP Number:



Household Survey: 


Total Employed & Employment By Age:  Total Employment as measured by the household survey was essentially flat in January, up 17K sequentially with y/y growth decelerating 60bps sequentially to +1.2%.    


The hallmark of both the downturn & the recovery was the contrast between the extreme job loss among younger cohorts and the relative employment stability among older workers (employment for 55-64 yr. olds never went negative through the great recession). 


Notably, Employment growth across the 20-45 age group has begun to improve in recent quarters and is showing continued stability to start the year with 25-34 year old employment continuing to accelerate.  Demand levered to this age demographic continues to hold some upside should the current trend continue. 


For example, correlations between birth trends and employment growth for 20-35 year old women are strong across durations.  Our healthcare team has been positive on MD (neonatology) as a way to find exposure to improving employment and a recovery in births – this trend has already begun to manifest as evidenced by accelerating SS volume growth for MD in 4Q12 


Employment: Some Positives Under A Benign Hood. - CPS   Employment By Age


Employment: Some Positives Under A Benign Hood. - US Births vs. Employment vs. MD volume normal

(source: Hedgeye Healthcare)



Civilian Noninstitutional Population:  Each January the Census Bureau's estimates of the civilian noninstitutional population ages 16 and over are revised back to the base period for intercensal estimation, currently April 2010.  The annual benchmark adjustment is applied without any smoothing or rearward revision and shows up as single bolus in the January release.  


The January 2013 adjustment (+138K) was largely benign from a historical perspective.  The takeaway, inclusive of the benchmark adjustment, is that growth in the Civilian Noninstitutional Population decelerated 60 bps sequentially to 1.0% y/y in January.  Note that slower CNP growth is a tailwind to Unemployment Rate Improvement (all else equal), and vice versa.


Employment: Some Positives Under A Benign Hood. - CNP MoM


Employment: Some Positives Under A Benign Hood. - CNP



Unemployment Rate:  The Unemployment rate increased from 7.8% to 7.9% m/m.  The unemployment rate is a function of the growth in the Civilian Noninstitutional Population (CNP), growth in the employed, and the labor force participation rate/growth in unemployed. 


The principal driver of the increase in Unemployment this month was the delta between the change in the employed and the change in the unemployed. 


Total Employed increased 17K sequentially while the Total Unemployed increased 126K sequentially – this -109K delta drove both the labor force participation rate and the unemployment higher despite the favorable impact from slowing growth in the CNP.   


Employment: Some Positives Under A Benign Hood. - Unemployment Rate vs LFPR Monthly


Part-time & Temp Employment:  Part-time employment (household survey) decreased for a 3rd straight month and posted its first negative growth month since 12/11.    Temp employment growth (establishment survey) followed the same trajectory, decelerating 160bps sequentially.   


To the extent growth in full-time employment can displace growth in part/temp employment and business can gain some further fiscal policy clarity into mid-year (post Fiscal cliff, debt ceiling, budget debates) sustainable real consumption growth stands to benefit. 


Employment: Some Positives Under A Benign Hood. - Part time Employment


Employment: Some Positives Under A Benign Hood. - Temp Help



Establishment Survey: 


Total NFP Gains & Growth:  Total Nonfarm Payrolls increased 157K in January vs. consensus at 165K.  More notable than the marginal 9K miss in the current month were the positive revisions to the 2012 monthly estimates.    The cumulative 12M revision was +336K with 150K occurring in 4Q12 as November was revised from +161,000 to +247,000, and the change for December was revised from +155,000 to +196,000.  


Inclusive of the strength of the revision and the improvement in the Birth-death adjusted NSA payroll numbers (below), we’d view the January print as benign to modestly positive.    


Employment: Some Positives Under A Benign Hood. - NFP


Birth/Death Adjustment & NSA Payrolls: In order to get a true sense of the underlying strength of the monthly jobs reports, we have to net out the BLS estimates of business openings and closures – more commonly known as the Birth-Death Adjustment.


Since the MoM BDA is non-seasonally adjusted, it’s important we use the MoM NSA payrolls data. A YoY calculation of that figure is ultimately the best proxy for the rate of “actual” job growth.


On this metric, growth in non-farm payrolls accelerated MoM in JAN to 138K from -33K prior. That’s above recent monthly trends and agrees with the ongoing, albeit modest,  improvement in the claims data


Employment: Some Positives Under A Benign Hood. - Employment BD


State & Local Government employment:  After a four year run of negative growth, state & local employment is now approaching the zero line and likely to go positive in 2013. State & local government gross investment & consumption expenditures went positive (positive contribution to GDP) for the first time in 11 quarters in 3Q12 and, collectively, states expect  continued tax revenue growth in 2013 with total General  fund revenues expected to surpass the 2008 peak in nominal terms.  


Employment: Some Positives Under A Benign Hood. - State   Local Govt Jan Qtrly 



Christian B. Drake

Senior Analyst 


Darius Dale

Senior Analyst





In preparation for RCL's F4Q 2012 earnings on Monday, we’ve put together the recent pertinent forward looking company commentary.



  • "The last few months of booking activity have been fairly stable. Our deployment has been adjusted slightly to accommodate for the stronger markets and the early order book for 2013 is encouraging. There are still challenges in Europe, especially Southern Europe, but solid demand from other regions appears to be more than offsetting this."
  • [2nd Oasis] "We expect that any order would come at a lower cost per berth than either of the first two vessels and also that any order would include further advances in the energy efficient design."
  • "With a mid-year delivery in 2016, our five-year capacity growth rate would still remain in the low-single digits at roughly 3%."
  • "Currently, the fourth quarter sailings, our load factors are slightly below last year, but at slightly higher APDs. Caribbean itineraries, which account for 42% of our inventory in the fourth quarter, are showing the greatest strength. On the other hand, European itineraries, which account for 27% of our capacity, are forecasted to be down slightly."
  • "Overall, 2013 capacity will increase 1.3% with the largest increases coming in the Asia-Pacific region. Our European exposure is being reduced by approximately 10%, and Europe will now account for 27% of our product offering. Caribbean will remain our largest itinerary group and will account for 44% of our deployment."
  • "We are seeing a much more normalized booking curve from the North American market. Europe and particular Southern Europe has had a contracted booking curve. Northern Europe has actually had a pretty normal booking curve as we look out."
  • [Onboard yield] "We saw some strength in gaming, in retail and in short excursions."
  • [Overall fuel consumption] "We're in a fairly stable environment."
  • "While the ECA came into effect on August 1 of 2012, it isn't really until 2015 that the very – much more significant burden of sulfur requirements kicks into effect. So while we are facing a somewhat extra burden of fuel costs because of the first stage of the ECA right now and that will continue through the end of 2014, it's really not significant in the scheme of things for us and, I think, for the industry in general. The question is really what more will happen as we approach 2015? Will the ECA regime stay exactly in a fact as it is, or will there be potentially some adjustments through political or legislative process."
  • [2013 cost pressures] "I think we've talked about on the capital side that we are investing in IT and trying to upgrade a lot of our systems, both shore side and shipboard. Not all those expenses are capitalized, so we may feel some pressure there. I think we're looking at some modest increases in insurance, but I think they'll be manageable. We do have a number of revites, as Adam alluded to, over the next year, and there are costs that hit the P&L that come from there. And we're still evaluating things like food inflation and freight and whatnot. So there are some pockets of pressure, but again, I think we have pretty disciplined environment here that, hopefully, we can help keep this to a minimum.".



The Big Winner

Client Talking Points

Energy Crisis

The issue with energy right now is that oil isn’t soaring to $150 a barrel and driving profits at E&Ps and other companies the way it did in 2009 and 2010. That’s good for the consumer who doesn’t want to pay $5 a gallon when they fill up their car and good for global growth, but it’s bad for the energy guys. Still, interestingly enough, Energy is top performing sector in the S&P 500, up +7.6% year-to-date versus the S&P 500 which is up +5.04% for the same time period. The second best sector behind energy is financials at +5.77% year-to-date; clearly, energy has the legs. Our Energy Analyst Kevin Kaiser wrote this morning’s Early Look, the sum of which leads to this statement:


“Over our long-term TAIL duration, we believe that select companies highly-levered to US natural gas prices will generate the best risk-adjusted investment returns in the space.”


So there you have it. Have an excellent Friday and make sure you’re trading the risk range properly out there. 

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.


With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.


HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road


“Murder on the dancefloor $CL-F” -@NicTrades


“No one has ever had an idea in a dress suit.” -Sir Frederick G. Banting


The U.S. created a less-than expected 157,000 jobs in January and the unemployment rate ticked up to 7.9%.

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