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PNRA HYPE MAKES IT SHORTABLE

Panera Bread’s stock has been upgraded two times in as many days and the stock has soared in response.  We believe there is an opportunity to short PNRA at current levels for a trade (three weeks or less).

 

Fundamental Setup Less Positive (summary bullets)

  • Traffic trends suggest that the consumer may be tiring of consistent price increases at Panera Bread
  • Comp sales growth has become increasingly dependent on mix
  • Total revenue growth continues to slow from the peak in 3Q11.  4Q13’s figure will be skewed because of an extra week
  • Same-restaurant sales, margin guidance at risk
  • Earnings estimates revisions unlikely to go higher absent sales acceleration
  • Valuation is likely stretched at current levels

 

Traffic Trends

 

As the chart below illustrates, Panera’s traffic trends have been decelerating over the last three quarters.  Embedded in some of the optimism in recent upgrades has been an idea that easier comparisons may play a part in better traffic trends in 2013. Traffic trends may improve sequentially but we see the 4Q traffic number, against an easy comparison, as an indication that Panera could have a traffic problem.

 

PNRA HYPE MAKES IT SHORTABLE - pnra traffic growth

 

 

Revenue Growth

 

Along with traffic trends, total revenue growth has been decelerating for the three quarters,  If this trend continues, we believe that the multiple implied in the stock’s price could compress (more below).

 

PNRA HYPE MAKES IT SHORTABLE - pnra revenue growth

 

 

Comparable Sales Trends

 

The company has guided to company-owned same-store sales growth of 4.5% to 5.5% for fiscal 2013 and 4.0% to 5.0% for 1Q13. Consensus expectations are for the company to post 4.3% same-store sales and sequential improvement thru the balance of 2013. We believe there is sufficient risk to traffic expectations to bet against the sequential improvement that the Street is forecasting.

 

PNRA HYPE MAKES IT SHORTABLE - pnra sss components

 

 

Earnings

 

Earnings revision growth has slowed and, absent meaningful acceleration in sales trends, there may be no additional upside to estimates.  The company is guiding to 2013 EPS growth of 17-19%, inclusive of the 53rd week impact.

 

PNRA HYPE MAKES IT SHORTABLE - PNRA EEG

 

 

Valuation

 

We don’t anticipate any catalyst materializing to drive PNRA’s multiple higher over the next year.  Particularly if our concerns about traffic growth are well-founded, it could be difficult to argue for a higher multiple.  The last time the stock was trading a turn higher than current levels, on an EV/EBITDA basis, the company was posting high-single-digit same-restaurant sales growth and low-single-digit traffic trends.  If traffic trends don’t accelerate, we believe that the multiple has significant downside.

 

 

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst


Buyem: SP500 Levels, Refreshed

Takeaway: I bought this SPY on my line. I also bought the US Dollar (UUP) again today. The SPY vs USD correlation = ) +0.84 right now.

POSITIONS: 19 LONGS, 8 SHORTS @Hedgeye

 

We are well aware that this week’s news on the jobs front (both NSA Rolling Claims and the Monthly Jobs Report) weren’t good; at least not as good as the employment news has been. That’s now another market opportunity – what if next week’s jobless claims improve?

 

What if the mortgage rate for a 30yr falls back to where it was 3 months ago? What if the US Dollar continues to strengthen? What if Oil prices continue to fall? Plenty of questions to answer for tomorrow as people are forced to react to what’s now old news today.

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE resistance = 1575
  2. Immediate-term TRADE support = 1540
  3. Intermediate-term TREND support = 1502

 

In other words, A) we held TRADE support (1540) this morning and B) I’m giving you a higher (all-time) high of resistance (1575). I am only giving you these because my quant model gave them to me. I do what she says.

 

I bought this SPY on my line. I also bought the US Dollar (UUP) again today. The SPY vs USD correlation = ) +0.84 right now. So if the US Dollar makes another higher-low here and VIX makes another lower-high, you know what to do.

 

Enjoy your weekend,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Buyem: SP500 Levels, Refreshed - SPX


Winds Of Change

In February, Hedgeye Financials Sector Head Josh Steiner warned that the positive data coming out of the labor market regarding employment would not last forever. Week-after-week of positive data that beat expectations was unsustainable and the seasonal-adjustments that were acting as a tailwind for the data would become a headwind by late March/early April. Sure enough, this week's ADP employment report, initial jobless claims and non-farm payroll numbers were nothing short of disappointing. 

 

Winds Of Change - image005

 

On February 28, Steiner wrote:

 

"The end of February marks of the peak of the seasonality distortion tailwind. Next week will mark the final tailwind datapoint. Then, beginning in March, we'll start to see the effect reverse and the market's perception around the momentum in the labor market will begin to weaken and ultimately will turn bearish as the reverse effect peaks in August."

 

Winds Of Change - image006

 

You can see in the charts we've included in this note that the labor market is now bearing the brunt of the seasonal-adjustment headwinds. Don't expect any meaningful recovery in the labor market, save for the occasional weekly surprise, until Labor Day weekend.

 

Winds Of Change - image017

 

Winds Of Change - image010


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JOBS: A Disappointing Week

This morning's non-farm payroll numbers for the month of March were the lowest in 10 months and disappointing to say the least. Only 88,000 new jobs were added for the month on a seasonally-adjusted basis, the smallest increase since June of last year as new hires fell and more people continued to drop out of the labor force. This comes on the heels of this week's ADP employment report and initial jobless claims report, both of which showed a slowdown in the labor market and came in below consensus expectations.

 

JOBS: A Disappointing Week - image010

 

Meanwhile, the unemployment fell from 7.7% to 7.6%, the lowest level since December 2007. While it may appear as a positive overall, the reality is that more people have dropped out of the labor force. The participation rate, which measures the number of working-age people who have or want a job, fell to 63.3%, the lowest level since 1979.

 

JOBS: A Disappointing Week - image012

 

JOBS: A Disappointing Week - image004

 

JOBS: A Disappointing Week - image002


Morning Reads From Our Sector Heads

Todd Jordan (GLL):

 

China culls poultry as bird flu death toll reaches six (via BBC)

 

Brian McGough (Retail):

 

Versace Sees Full-Year Growth — and Perhaps an IPO (via WWD)

 

Josh Steiner (Financials):

 

U.S. Regulator, Bank of America Reach Mortgage-Loss Settlement (via WSJ)

 

Money Spigot Opens Wider (via WSJ)

 

Kevin Kaiser (Energy):

 

Europe to Shut 10 Refineries as Profits Tumble (via Bloomberg)

 

Jay Van Sciver (Industrials):

 

Boeing Girds for 787 Battery Fix as Teams Near Biggest Fleet (via Washington Post)

 

Rob Campagnino (Consumer Staples):

 

China Bird Flu Deaths Rise to Six, Poultry Markets Shut (via Bloomberg)

 

Howard Penney (Restaurants):

 

Fast Food Workers Call For $15 An Hour Wage, Union Protections (via NY1)

 


Rattling Sabers

Client Talking Points

Down With The KOSPI

Korea's KOSPI index dropped the most in five months as the Bank of Japan stimulus resonates throughout the country. 41% of the KOSPI is tech/industrial that competes head to head w/ Japanese Manufacturers and as the Yen continues to be debauched, the KOSPI continues to slip lower, down another -1.6% overnight.

Bear Oil

When crude oil drops in price, that's bullish for the economy. Americans hate high gas prices and an increase in consumption is a bullish catalyst for growth. Brent Crude oil is down -4.3% year-to-date and it's starting to look a lot like gold did three months ago as the US dollar continues to roar higher. Oil can still come down further from these current prices. Get the dollar right, you'll get oil right.

Asset Allocation

CASH 18% US EQUITIES 30%
INTL EQUITIES 25% COMMODITIES 0%
FIXED INCOME 3% INTL CURRENCIES 24%

Top Long Ideas

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HOLX

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Three for the Road

TWEET OF THE DAY

"@moorehn Well if recent history teaches us anything, basically no one in America gets how money works." -@KatherineMiller

QUOTE OF THE DAY

"The cure for boredom is curiosity. There is no cure for curiosity." -Dorothy Parker

STAT OF THE DAY

U.S. creates just 88,000 jobs in March; unemployment rate down to 7.6%.


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