Knapp Track and Black Box Intelligence
Yesterday, Knapp and Black Box both reported disappointing sales trends for June after posting three straight months of positive sales.
Knapp reported that June 2013 same-restaurant sales declined 2%, while comparable traffic trends declined 3.1%. April and May same-restaurant sales trends both showed a 0.5% increase. Overall for the second quarter, same-restaurant sales and traffic were down 0.3% and 1.5%, respectively.
Black Box reported slightly better June numbers than Knapp. June 2013 same-restaurant sales came in flat, while comparable traffic trends declined 2.5%. April and May same-restaurant sales increased 0.4% and 0.8%, respectively. The cumulative second quarter results showed a 0.4% increase in same-restaurant sales and a 2.0% decrease in traffic.
Despite the discrepancies in the numbers, both measures of sales trends suggest that this summer will present a challenging top line environment for the casual dining industry. With the Bloomberg U.S. Full Service Restaurant Index up 37% YTD and valuations at cyclical highs, we see little room for upside in the group from current levels.
In our view, stocks most vulnerable to this type of environment are the marginal regional concepts that are trying to compete with the national chains. Although our favorite short in the casual dining space is RRGB, we believe that very few stocks will be spared in the midst of a casual dining correction.
Other Casual Dining Names
CAKE – Remains on the Hedgeye Best Ideas list as we feel the business model is one of the best in the casual dining industry. We don’t believe that DRI’s aggressive push toward discounting will impact CAKE nearly as much as more direct competitors in the space.
EAT – Has been a Hedgeye LONG tail call for three years. Unfortunately, the Chili’s chain is in the direct line of fire for the DRI discounting initiatives. We do not believe that EAT management will succumb to the temptation to increase discounting, but rather will continue to focus on what has been driving the business forward for the past few years.
DRI – The spread between the Knapp and Black Box data suggests that DRI had a very bad June. However, we cannot confirm that to be the case. We are buyers of DRI on dips below $50. Ultimately, we believe that DRI is in need of a major restructuring.
BLMN – From a valuation perspective BLMN is the best short in the group - but valuation is not a catalyst. In response to DRI, BLMN has stepped up its discounting, which will likely hurt the margin recovery story. BLMN’s top line has been more resilient than others in the group which is a net positive. While we view BLMN as a likely short, it is more due to a group call rather than any specific issue we have with the business model.
TXRH, BWLD, RT and BJRI – All of these names are on our list of potential shorts at these levels.