• It's Coming...

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

Below, we go through our thoughts on this upcoming earnings season in order of release dates.

Chipotle Mexican Grill (CMG) 4/18: We would stay away from this stock on the long side as expectations for the second half of the year have become aggressive. Price performance has been strong during the year to-date and the company has benefitted from decelerating inflation. Pending further indication that returns are bottoming, we are remaining on the sidelines. The street is expecting SRS of 1% in 1Q13. One key question is whether management will raise prices in 2H13 to protect margin. We think this is a likely move.

McDonald’s (MCD) 4/19: We’re bearish on McDonald’s and are hosting a call on April 25th to go through our bearish thesis in greater detail.  One concern that we have expressed for approximately a year is the self-inflicted wounds that are having a negative impact on operational efficiency and, as a result, speed of service. This has been a factor behind the decline in the core business that the Street, anticipating an acceleration in trends during the second half of 2013, doesn’t seem to be embedding in its expectations.  In Europe, many of the issues that hurt the company in 2012 are still present in 2013. The most important European market, Germany, continues to experience economic malaise and the FX outlook is also a headwind for the stock given the thigh exposure to Europe from an operating income perspective (~40%).  We believe the company has ample means to manage the EPS number for 1Q13, but expect a negative revision of earnings expectations as the year progresses. The stock has broken higher from $85 with no supporting increase in earnings estimates. The 1Q13 consensus estimate of $1.26 or 3% EPS growth looks aggressive, but the company has many levers to manage the number.

Brinker (EAT) 4/23: We’re bullish on Brinker’s stock as one of the best ways to play our macro team’s bullish Strong Dollar, Strong America theme (Down Commodities, Up Consumption).  EAT represents the best way to play casual dining on the long side, in our view, particularly if macroeconomic growth continues to stabilize. The Street is estimating that Chili’s SRS will be -0.9%, implying a Gap-to-Knapp of 40 bps. We expect the company to beat the current expectation of $0.69, or 15% versus the year prior, in EPS for 3QFY13. 

Yum! Brands (YUM) 4/23: We’re bullish on this stock for the long-term TAIL duration but, due to current headlines in China, it is not an easy time to be long the stock. Looking past the near-term, we believe that YUM represents the best growth stock in the restaurant space. Ongoing negative news flow from China is likely to weigh on sentiment into earnings.

Panera Bread (PNRA) 4/23: We’re bearish on PNRA, having recently held a call with clients (reply to this email for replay, materials) outlining our bearish bias on the stock. We believe that traffic and price/mix expectations for the remainder of the year are unlikely to be achievable in tandem; consensus is likely to be disappointed by comparable sales growth in 2013.

Bloomin’ Brands (BLMN) 4/24: This Company is one of the most overvalued names in casual dining. Earnings have been boosted by the impact of the recent refinancing but top line trends continue to be slower than some have been expecting. The stock has momentum, currently, and is supported by a bullish sell-side. Continuing operational improvements are needed for the company to maintain its premium valuation and we would remain on the sidelines into earnings.

The Cheesecake Factory (CAKE) 4/24: In February, we pitched CAKE long during Hedgeye’s 2/11 Best Ideas call and the stock has performed strongly since, up 11%. Strong top-line momentum has supported the stock. 4Q12 same-restaurant sales grew 1.3% at The Cheesecake Factory and declined -3.2% at Grand Lux Cafe.  Consensus is looking for +0.7% and -0.9%, respectively, in 1Q13.  consensus expectations for 14% EPS in 1Q13 and the FY13 seem very achievable.  One of the more underappreciated parts of the CAKE story is the emergence of the international business.

Dunkin’ Donuts (DNKN) 4/25: We are positive on DNKN heading into the earnings announcement. We expect Dunkin' to be a solid performer over the near-, intermediate-, and long-term durations (TREND, TRADE, TAIL).  A significant portion of the company’s new unit growth is being driven by existing franchisees and we expect the franchisee base to strengthen as weaker operators fall away from the system.  This improving employment picture and deflation in coffee costs should provide a boost to the franchisee base and management’s earnings.

Starbucks (SBUX) 4/25: We remain bullish on Starbucks as headwinds related to employment and input costs support the top and bottom lines, respectively, in CY13. We expect management to strike a confident, bullish tone on the 2QFY13 earnings call as the improving job market in 1Q likely gave management increased reason for optimism. We see Starbucks as having the highest degree of leverage, of all companies in the restaurant space, to an improving job market.

BJ’s Restaurants (BJRI) 4/26:  We believe BJRI will continue to underperform as erratic same-restaurant sales growth weighs on expectations. On 4/2, we wrote a note advising clients to stay away from this still-loved stock despite the eye-catching underperformance versus the S&P 500.  A strong Chili’s is bad for BJ’s, particularly as some of that strength is likely coming from the new flatbread items on offer at the Brinker-owned chain. We expect the multiple to remain in the 8-10x EV/EBITDA range unless traffic recovers in the next couple of quarters.

Texas Roadhouse (TXRH) 4/29: We are bearish on TXRH as the stock is ahead of the company’s fundamentals. Relative to the two-year run rate of 5% in 4Q12, consensus seems to be conservative at a 2.3% estimate for 1Q13 same-store sales.  TXRH unit level returns are some of the lowest in the industry and as a result don’t generate significant ROIIC.  We don’t see the leverage in the business model that will allow the company to grow EPS 12% in 1Q13.

Buffalo Wild Wings (BWLD) 4/29: We have backed away from our bearish stance on BWLD given the decline in chicken wing price and improving consumer environment in the U.S.  Our most pressing concern is that the company is trying to managing food costs to a specific margin. We have seen in the past that this can cause operational issues for BWLD. Specifically the company’s aggressive pricing strategy in late 2012 will likely have a negative impact on traffic trends, which may cause the cash flow multiple embedded in the stock to contract.

Wendy’s (WEN) 5/8: Wendy’s is in no man’s land. We like the long-term TAIL thesis that CEO Emil Brolick and his management team will begin to generate consistently positive traffic trends at Wendy’s but the stock seems to be ahead of the fundamentals at this point. Significant cash flow demands will continue to impact free cash flow as the onerous task of fixing the asset base is undertaken.

Howard Penney

Managing Director

Rory Green

Senior Analyst