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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – October 22, 2013


As we look at today's setup for the S&P 500, the range is 52 points or 1.87% downside to 1712 and 1.11% upside to 1764.                                     

                                                                                          

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.29 from 2.29
  • VIX closed at 13.16 1 day percent change of 0.92%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am: ICSC weekly sales
  • 8:30am: Nonfarm Payrolls, Sept., est. 180k (prior 169k)
  • 8:30am: Unemployment Rate, Sept., est. 7.3% (prior 7.3%)
  • 8:55am: Johnson/Redbook weekly sales
  • 10am: Richmond Fed Manuf. Index, Oct., est. 0 (prior 0)
  • 10:30am: EIA weekly natgas storage 10:30am (orig. Oct. 17)
  • 11am: Fed to buy $1.25b-$1.75b notes in 2036-2043 sector
  • 11:30am: U.S. to sell 4W bills
  • 4:30pm: API weekly oil inventories

GOVERNMENT:

    • Senate out of session, House in session
    • Labor, Commerce Depts. begin to issue economic indicators delayed by 16-day federal govt shutdown
    • Supreme Court hears oral arguments in suit challenging certificates of conformity that allow diesel engines produced by Navistar to exceed EPA emissions standards
    • SEC Chairman Mary Jo White delivers opening remarks at National Society of Compliance Professionals membership meeting, 8:30am

WHAT TO WATCH:

  • BofA said to face 3 more U.S. probes of mortgage-bond sales
  • U.S. employers probably expanded payrolls at faster pace in Sept.
  • Apple to debut new iPads
  • Beechcraft said to attract possible bidders Embraer, Mahindra
  • Texas Instruments forecasts profit that trails analyst ests.
  • Netflix sign-ups beat ests. as U.S. total Hits 31.1m
  • Nokia shows larger devices to help Microsoft’s wireless push
  • Apple preparing 65-inch TV for release in 2014, analyst says
  • RadioShack said to boost liquidity with $835m credit line
  • Goldman Sachs said to seek up to $402m in LEG share sale
  • U.S. shoppers in Deloitte survey to boost holiday spending 9.1%
  • Jana Partners boosts QEP stake and seeks Midstream unit breakup
  • Faith in U.S. ’badly shaken,’ Blackrock CEO Fink writes in FT

AM EARNS:

    • AK Steel (AKS) 8:30am, $(0.25)
    • Carlisle (CSL) 6am, $1.20
    • Centene (CNC) 6am, $0.84
    • CIT Group (CIT) 6am, $0.95
    • Coach (COH) 7am, $0.76 - Preview
    • Delta Air Lines (DAL) 7:30am, $1.35 - Preview
    • DuPont (DD) 6am, $0.41 - Preview
    • EMC (EMC) 6:47am, $0.45 - Preview
    • Entegris (ENTG) 7am, $0.13
    • FirstMerit (FMER) 7:30am, $0.34
    • Forest Laboratories (FRX) 7am, $0.14 - Preview
    • Freeport-McMoRan Copper & Gold (FCX) 8am, $0.63 - Preview
    • Gentex (GNTX) 8am, $0.32
    • Harley-Davidson (HOG) 7am, $0.72
    • IDEXX Laboratories (IDXX) 7am, $0.83
    • Ironwood Pharmaceuticals (IRWD) 7:05am, $(0.57)
    • Kimberly-Clark (KMB) 7:15am, $1.40 - Preview
    • Lexmark International (LXK) 7am, $0.91
    • Liberty Property Trust (LRY) 8am, $0.61
    • Lockheed Martin (LMT) 7:25am, $2.27 - Preview
    • McGraw Hill Financial (MHFI) 7:10am, $0.77
    • Nu Skin Enterprises (NUS) 6:35am, $1.42
    • Pentair (PNR) 7am, $0.86
    • Polaris Industries (PII) 6am, $1.61
    • Regions Financial (RF) 7am, $0.21
    • Reynolds American (RAI) 6:58am, $0.86 - Preview
    • Ryder System (R) 7:55am, $1.45
    • Sigma-Aldrich (SIAL) 7am, $0.99
    • State Street (STT) 7:13am, $1.18
    • Synovus Financial (SNV) 7am, $0.04
    • Travelers (TRV) 6:57am,$2.09
    • United Technologies (UTX) 6:58am, $1.54 - Preview
    • Waters (WAT) 7am, $1.23
    • Whirlpool (WHR) 6am, $2.63 – Preview

PM EARNS:

    • ACE (ACE) 4:01pm, $2.25
    • Altera (ALTR) 4:15pm, $0.34
    • Amgen (AMGN) 4pm, $1.78 - Preview
    • Apollo Group (APOL) 4pm, $0.25
    • Broadcom (BRCM) 4:05pm, $0.68
    • Canadian National Railway (CNR CN) 4:01pm, $1.62 - Preview
    • Celestica (CLS CN) 4pm, $0.21
    • CR Bard (BCR) 4:05pm, $1.40
    • Cree (CREE) 4pm, $0.39
    • Cubist Pharmaceuticals (CBST) 4pm, $0.33 - Preview
    • FMC Technologies (FTI) 4pm, $0.59
    • Fulton Financial (FULT) 4:30pm, $0.20
    • Juniper Networks (JNPR) 4:05pm, $0.31 - Preview
    • Nabors Industries (NBR) 4:02pm, $0.19
    • Panera Bread (PNRA) 4pm, $1.35
    • RF Micro Devices (RFMD) 4pm, $0.10
    • Robert Half International (RHI) 4pm, $0.48
    • Total System Services (TSS) 4pm, $0.46
    • Trustmark (TRMK) 4:01pm, $0.47
    • Unisys (UIS) 4:30pm, $0.94
    • Waste Connections (WCN) 4:05pm, $0.50

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • WTI Oil Trades Below $100 a Second Day as U.S. Stockpiles Gain
  • Overflowing Canada Grain Bins Compound Global Glut: Commodities
  • Nickel Reaches 8-Week High as Export-Ban Prospect Spurs Buying
  • Soybeans Fall on Prospects for Weather to Speed Up U.S. Harvest
  • Raw Sugar Declines as Traders Assess Santos Fire; Cocoa Retreats
  • Gold Swings as Investors Await U.S. Jobs Data to Gauge Stimulus
  • Rebar Declines on Concern China Home Price Gains May Spur Curbs
  • Palm Oil Imports by China Set to Slow as Soy Shipments Surge
  • Iron Ore Backwardation Signals 22% Price Drop: Chart of the Day
  • Copper Has Less Support From Speculators Than Three Months Ago
  • Gazprom China Deal Revives as LNG Prices Soar: Energy Markets
  • U.K. Nuclear Future Relies on Reactor Plagued by Delays: Energy
  • StanChart Hires Liam Pepper From JPMorgan for Agriculture Sales
  • WTI Crude Seen Extending Drop Below $100 as U.S. Supplies Surge

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 


All-time Highs: SP500 Levels, Refreshed

Takeaway: If the reaction to the employment report is bullish, 1764 is next; if its bearish, 1712 is next. So #GetActive.

This note was originally published October 21, 2013 at 10:46 in Macro

POSITION: 7 LONGS, 5 SHORTS @Hedgeye

All-time Highs: SP500 Levels, Refreshed - bull8

All-time is a long time. And fighting a setup like this (higher-lows and higher-all-time-highs) is as tough as tough gets. Forget about Fed fighting – don’t fight Mr. Market.

 

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

  1. Immediate-term TRADE overbought = 1764
  2. Immediate-term TRADE support = 1712
  3. Intermediate-term TREND support = 1671

In other words, the US stock market remains in what we call a Bullish Formation (bullish on all 3 of our core durations – TRADE, TREND, and TAIL). If the reaction to the employment report is bullish, 1764 is next; if its bearish, 1712 is next.

 

So #GetActive.

KM

 

Keith R. McCullough
Chief Executive Officer

All-time Highs: SP500 Levels, Refreshed - km1


ASIAN POLICY PROPULSION?: JAPAN AND INDIA SOUND OFF

Takeaway: Economic reforms will become the primary focus of investors over the next 6-8W in Japan and over the next 6-8M in India.

SUMMARY BULLETS:

 

  • All told, it’s now or never for Japanese policymakers to meaningfully affect structural growth expectations.
  • A failure to deliver policies that are both concrete and consequential is likely to result in broad-based foreign selling of Japanese equities and a grand, “I told you so” from the Japanese public to its politicians. On the flip side, Japan has an opportunity to knock the cover off of the ball by delivering just that.
  • From today’s prices, we think it pays to bet on the latter outcome. With respect to the intermediate-term TREND duration, Japanese equities are likely to remain range-bound as fiscal and monetary policy disappointments continue to weigh on the USD vs. the JPY. With respect to the long-term TAIL duration, however, we think our base case for USD/JPY ~125 in 12-18 months remains firmly intact and, in conjunction with likely economic policy propulsion, that catalyst should propel the Japanese equity market much higher from here over a similar timeframe.
  • All told, the potential for positive upside surprises with respect to Indian fiscal policy over the intermediate-term TREND and long-term TAIL is highly supportive of being long Indian equities from here – especially if the market can close above its previous all-time highs, which were recorded way back in 4Q10.
  • Bet on the long side of India over the intermediate term? Certainly – especially with the USD in no-man’s land here (bearish TREND; bullish TAIL). A breakdown on the DXY below its long-term TAIL line of support of 79.21 in conjunction with a breakdown in US Treasury Bond Yields below TREND-line support of 2.58% on the 10Y would be a resounding thumbs up for speculating on the long side of EM assets across the asset allocation spectrum (CLICK HERE for our latest tactical and strategic asset allocation thoughts on emerging market assets). Remember, the Fed may be setting up to remain dovish for significantly longer than consensus among the international investment community currently anticipates. There is a probable chance that tapering is a DEC 2014 – i.e. not 2013 – phenomenon (CLICK HERE for a deeper discussion of that possibility).
  • Lastly, without a clear co-directional trend in the USD and US interest rates (i.e. a continuation of the existing status quo), we think investors should play the long and short side of EM assets on idiosyncratic country fundamentals until further notice. That includes India and its simmering political landscape.

 

JAPAN: WILL THE THIRD ARROW FINALLY BE RELEASED FROM ITS QUIVER?

Tomorrow the Diet will begin an extraordinary session debate and ultimately pass laws pertaining to the highly-anticipated “Third Arrow” of Abenomics.

 

Prime Minster Shinzo Abe has gone as far to state on record that this is “a session for getting things done”. With an overwhelming majority in the Lower House (325 of 480 seats, factoring the NKP’s 31 seats) and a working majority in the Upper House (135 of 242 seats, factoring in the NKP’s 20 seats), the avenue for reform is wide open and only limited to the boldness and imagination of the powers that be atop the LDP.

 

During this parliamentary session, Japanese policymakers will be charged with finding ways to deregulate various industries, as well as implementing concrete steps designed to boost the “Four C’s” for Japanese corporations: [employee] compensation, capital expenditures, [international] competitiveness and [industry] consolidation.

 

In our OCT 2 note titled, “GET TIGHT AND TRADE THE RANGES IN JAPAN”, we detail exactly why the we think the first three of those “Four C’s” are the most meaningful areas for Japanese politicians to focus on with respect to ramping structural growth expectations among Japanese corporations and households, as well as in the eyes of domestic and foreign investors.

 

On the investment front, minuscule equity allocations among Japanese pension funds and households tell us that structural growth expectations inside Japan remain extremely subdued after 10-plus years of deflation:

 

  • Even after its recent reallocation, GPIF – the nation’s largest pension fund with ¥121 trillion AUM – is targeting only 12% of its assets to be held in Japanese equities (vs. 60% for JGBs); and
  • Japanese households hold only 8.1% of their financial assets in equities vs. 16% for the Eurozone and 32.1% for the US.

 

With the Nikkei still underwater relative to its MAY 22 YTD high, we feel comfortable in stating that foreign expectations for Japanese growth are also relatively muted – at least when compared to the hype surrounding the Abenomics agenda in 1H13:

 

ASIAN POLICY PROPULSION?: JAPAN AND INDIA SOUND OFF - Nikkei 225

 

Needless to say, the stage is now set for the LDP to deliver a pretty meaningful upside surprise with respect to economic reform(s) in Japan.

 

They had better deliver this time; increasingly tougher comps and reduced stimulus from decelerating appreciation momentum on the USD/JPY cross serve as headwinds to Japan’s TREND duration growth outlook. This morning’s reported slowdown in export growth in SEP (+11.5% YoY from +14.6%) highlights the latter point:

 

ASIAN POLICY PROPULSION?: JAPAN AND INDIA SOUND OFF - JAPAN

 

ASIAN POLICY PROPULSION?: JAPAN AND INDIA SOUND OFF - USDJPY

 

All told, it’s now or never for Japanese policymakers to meaningfully affect structural growth expectations.

 

A failure to deliver policies that are both concrete and consequential is likely to result in broad-based foreign selling of Japanese equities and a grand, “I told you so” from the Japanese public to its politicians. On the flip side, Japan has an opportunity to knock the cover off of the ball by delivering just that.

 

From today’s prices, we think it pays to bet on the latter outcome. With respect to the intermediate-term TREND duration, Japanese equities are likely to remain range-bound as fiscal and monetary policy disappointments continue to weigh on the USD vs. the JPY. With respect to the long-term TAIL duration, however, we think our base case for USD/JPY ~125 in 12-18 months remains firmly intact and, in conjunction with likely economic policy propulsion, that catalyst should propel the Japanese equity market much higher from here over a similar timeframe.

 

INDIA: WILL THE BJP's RECENT SURGE FORCE THE CONGRESS PARTY TO GO “ALL IN"... JUST TO EVENTUALLY LOSE THE POT ANYWAY?

Ahead of nationwide parliamentary elections that must be called by MAY, polls are leaning heavily towards to the Hindu-nationalist Bharatiya Janata Party (BJP) on confirmation that Gujarat Chief Minister Narendra Modi will be their front man for the premiership seat currently held by incumbent Prime Minister Manmohan Singh of the ruling Congress Party.

 

Specifically, results from the most recent poll (AUG 16 through OCT 15) out of polling agency C-Voter show that the BJP is projected to take 162 of 545 seats in the Lower House (Lok Sabha) vs. only 102 for the Congress Party in the upcoming nationwide parliamentary elections.

 

Factoring in allies, the tally bifurcation is a more striking 186 to 117 seats for the BJP’s National Democratic Alliance and Congress Party’s United Progressive Alliance, respectively. Those alliances currently hold 117 and 206 seats, respectively – effectively underscoring the magnitude of this potential political blow to the Congress Party.

 

One potential saving grace to the Congress Party is its recent decision to split off the Telangana region of Andhra Pradesh (population 85M) into its own state, potentially giving it access to a few additional parliamentary seats (in 2009, Congress won 33 of its 206 seats from Andhra Pradesh), as India’s Upper House (Rajya Sabha) politicians are elected by the various state legislatures. A recent spate of massive protests in coastal Andhra Pradesh suggests the move could ultimately backfire, however.

 

All told, we’ll be monitoring the results of the five state assembly elections between now and the end of the year – the last such spate of elections before next year’s main event – for incremental clues as to which party will take charge of India’s economic and fiscal policy platform with respect to the long-term TAIL. The BJP is expect to “win” the larger three of the five contests (Madhya Pradesh, Chhattisgarh and Rajasthan), while Congress has a decent chance in the smallest two contests (Delhi and Mizoram).

 

With Indian real GDP growth slowing to a decade-low of +5% in the most recent fiscal year and even further to +4.4% YoY in 2Q13 (-1.1x standard deviations below the trailing 3Y mean), our money is leaning heavily on a  BJP/NDA rout in the upcoming nationwide elections. Headline inflation (WPI) has come down to an average of +6.1% YoY for 3Q13 (-1.1x standard deviations below the trailing 3Y mean), but has remained elevated for much of Congress Party’s rule (WPI has averaged +7.6% YoY since mid-2009) and is likely to accelerate from here absent dramatic tightening out of the RBI (more on that HERE). Recall that rampant, and perhaps more importantly, unchecked rates of inflation have sparked a number of political protests in India over the past ~3Y – including well-publicized hunger strikes back in 2011.

 

ASIAN POLICY PROPULSION?: JAPAN AND INDIA SOUND OFF - INDIA

 

In short, our call for a BJP/NDA rout ultimately means investors will begin to increasingly vet Narendra Modi’s leadership skills and policy biases. It is our view that, at this point, anyone not named Manmohan Singh is a near-lock to drum up interest among the international investment community.

 

It’s worth noting that real GDP growth in Gujarat has dramatically outpaced the national average over the past 10Y (+10.2% vs. +7.9%), so it is likely that Modi will garner some clout among activist EM investors who are looking for a reason to help India unlock its admittedly robust economic growth potential. That being said, investors may also choose to focus on the fact that anti-Muslim riots that occurred under Modi’s watch in 2002 saw over 1,000 people killed and many others injured.

 

Indeed, Modi is surely a controversial figure, but his biggest saving grace might just be the fact that he’s not associated with incumbent Prime Minster Singh or his wildly ineffective Congress Party.

 

That’s not to say that the BJP will come to power next year and crush it economically by implementing a spate of pro-growth policies, but it’s certainly an increasingly-probable upside risk to monitor from here. At the bare minimum, we expect the ruling United Progressive Alliance to feel the polling heat and turn up the dial on their economic reform agenda to save face ahead of the aforementioned nationwide elections.

 

All told, the potential for positive upside surprises with respect to Indian fiscal policy over the intermediate-term TREND and long-term TAIL is highly supportive of being long Indian equities from here – especially if the market can close above its previous all-time highs, which were recorded way back in 4Q10.

 

ASIAN POLICY PROPULSION?: JAPAN AND INDIA SOUND OFF - India SENSEX

 

Bet on the long side of India over the intermediate term? Certainly – especially with the USD in no-man’s land here (bearish TREND; bullish TAIL). A breakdown on the DXY below its long-term TAIL line of support of 79.21 in conjunction with a breakdown in US Treasury Bond Yields below TREND-line support of 2.58% on the 10Y would be a resounding thumbs up for speculating on the long side of EM assets across the asset allocation spectrum (CLICK HERE for our latest tactical and strategic asset allocation thoughts on emerging market assets).

 

ASIAN POLICY PROPULSION?: JAPAN AND INDIA SOUND OFF - DXY

 

ASIAN POLICY PROPULSION?: JAPAN AND INDIA SOUND OFF - UST 10Y

 

Remember, the Fed may be setting up to remain dovish for significantly longer than consensus among the international investment community currently anticipates. There is a probable chance that tapering is a DEC 2014 – i.e. not 2013 – phenomenon (CLICK HERE for a deeper discussion of that possibility).

 

Lastly, without a clear co-directional trend in the USD and US interest rates (i.e. a continuation of the existing status quo), we think investors should play the long and short side of EM assets on idiosyncratic country fundamentals until further notice. That includes India and its simmering political landscape.

 

Darius Dale

Senior Analyst


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MCD: MIGHTY WINGS OR MIGHTY DISASTER?

Takeaway: MCD remains on the Hedgeye Best Ideas list as a short.

This note was originally published October 02, 2013 at 12:35 in Restaurants

McDonald's remains on the Hedgeye Best Ideas list as a short.

MCD: MIGHTY WINGS OR MIGHTY DISASTER? - mwing 

To be clear, we believe MCD has a secular top line issue and not a cyclical one.  That said, we don’t believe management is willing to acknowledge this.  So far in 2013, the new product pipeline has failed to stimulate incremental customer traffic and new products, such as Mighty Wings, seem like a desperate attempt to hide from reality.

 

We posted a note a couple of weeks ago titled, “MCD: A Pending Mighty Disaster,” in which we stated that MCD’s decision to sell wings this fall could be disastrous for the company.  Given current trends, we have no reason to back off this negative bias.

 

We have three main issues with the current MCD menu strategy:

  • Mighty Wings will not enhance the McDonald’s brand (Premium Wraps have not helped either)!
  • Both new products (Mighty Wings and Premium Wraps) have slow service times.
  • Adding new products to an already complex menu is the wrong direction for the company to go.

We also have two main issues with the Mighty Wings promotion:

 

Mighty Wings Are Too Expensive 

For the smallest portion, you are paying a dollar per mighty wing.  

 

McDonald’s Mighty Wings are available in three portion sizes. There is a 3-piece for $2.99, a 5-piece for $4.79 and a 10-piece for $8.99.  Across the pricing spectrum, this is equivalent to paying $0.99, $0.96, and $0.90 per wing, respectively.

 

Inconsistent Product From McDonald's

We are hearing that frequent visitors of McDonald’s are not used to the bone-in chicken wings product.  While bone-in chicken wings are standard fast food options for restaurants that specialize in fried chicken – for example, KFC and Popeyes – it does not seem to fit well with the rest of McDonald’s products.

 

Summary

This whole situation is all too reminiscent of the period from 1998-2002, when we witnessed the sad decline of a mismanaged McDonald’s brand.  During that time, the company was focused on unit growth and cost reduction rather than driving high margin, top line sales.

 

As the image of the brand began deteriorating, management failed to invest in the brand and customer experience.  Rather, they turned to monthly promotional tactics in order to drive short-term sales at the expense of brand equity and margins.  This strategy did not end well for either the company or investors and we’d be surprised if this time was any different.

 

MCD: MIGHTY WINGS OR MIGHTY DISASTER? - penney1

 

We continue to believe there is a disconnect between investors’ expectations and the company’s fundamentals.  As long as this remains the case, we are looking for more underperformance versus both peer consumer and S&P 500 benchmarks.

 

 

Howard Penney

Managing Director

HPenney@hedgeye.com

 

 


BEIJING: BACK IN BLACK

Takeaway: We're beginning to nibble in China.

China showed solid follow through overnight after Friday’s China #GrowthStabilizing data for Q313 and September. The Shanghai Composite led Asian Equities higher closing up +1.6%. It's back-in-black in China year-to-date. We're starting to allocate capital to it in the Hedgeye Asset Allocation Models.

 

So, the Chinese and the rest of the world continued to exist despite the fear-mongering and dysfunction in DC. Imagine that. Bottom line: If China bases here on the growth curve, an acceleration in 2014 could be next. 

 

Click image to enlarge.

BEIJING: BACK IN BLACK - dale1

BEIJING: BACK IN BLACK - china22


EAT: EARNINGS PREVIEW

We continue to believe EAT is one of the best managed companies in the restaurant space.  Following the earnings report on 10/23, we will be hosting a call with the CFO, Guy Constant, on Friday, October 25th at 12pm.

 

We believe Brinker’s macro commentary from last quarter still applies.  This is a very difficult operating environment for many restaurant companies and we expect to see slightly diminished margins given current sales trends.  Looking back to 4Q:

  • EAT continued to see a fairly lethargic category and the macroeconomic environment was not as strong as they had expected.
  • The restaurant industry was not recovering as quickly as they had expected.
  • In 4Q, the company was negatively affected by the deep discounting of their peers.
  • Management decided not to match this aggressive discounting and remained committed to their Plan to Win strategy.
  • Company-owned same-restaurant sales were down slightly for the quarter.

In 1Q14, EAT’s Chili’s brand is up against its most difficult comparison of the year at +2.8%.  In our opinion, the current Consensus Metrix estimate of -0.4% for Chili’s appears to be aggressive, as this would represent a 40 bps acceleration to +1.2% in the two-year trend.  Given what we know about current industry trends, EAT is unlikely to significantly beat sales estimates.  In 4Q12, Chili’s company-owned same-restaurant sales and traffic were down -0.6% and -2.1%, respectively.  Depending on where same-restaurant end up for 1Q14, management may need to address the current full-year guidance of 1-1.2% same-restaurant sales growth.

 

EAT: EARNINGS PREVIEW - EA

 

 

During the quarter, the company decided it will roll out tabletop tablets to all U.S. company-owned restaurants by the middle of next year.  Franchisees have been given the option to include the devices in their locations.  These devices are all-encompassing, as they can take menu orders, accept credit cards, let customers play games and more.  In our opinion, this should enhance the customer experience at a manageable cost, as the installation costs are minute compared to the returns they will generate.  We view this announcement as a positive, and believe Brinker is well-positioned, particularly compared to other casual dining chains, to take advantage of a changing consumer landscape.  However, we do not expect to see the tabletop rollout have a material impact on sales until the second half of next year.

 

Looking past the near-term sales pressure, the company business model remains in good shape.  In our opinion, food costs is one segment of the P&L that could come in better than expected.  Guidance is for this line to improve in 1Q14. Consensus Metrix estimates indicate the street is looking for a 20 bps improvement in the quarter, which we believe may be too conservative.  The company will also continue to benefit from new operating initiatives, which will result in continued labor and efficiency gains, specifically in the first half of FY14.  We are expecting restaurant level margins to improve 80 bps y/y in 1Q14.

 

EAT: EARNINGS PREVIEW - EAT OPERATING

 

EAT: EARNINGS PREVIEW - EAT RLM

 

EAT: EARNINGS PREVIEW - EAT LABOR

 

EAT: EARNINGS PREVIEW - EAT FOOD

 

EAT: EARNINGS PREVIEW - EAT ITGER OP

 

 

The bottom line is, we aren’t expecting to learn anything shockingly new when EAT reports on 10/23 and we do not know how the stock will react.  Short interest has been coming down over the past month and the sell-side has been becoming more bearish of late.  In our view, the recent incremental bearish bias toward EAT is simply a byproduct of the current industry conditions as opposed to anything company specific.  The excessive discounting from DRI is hurting everyone in the industry, but particularly EAT.  With that being said, Brinker would be one of the biggest beneficiaries from our dismantling Darden thesis, if it played out.

 

EAT: EARNINGS PREVIEW - EAT SAHREs

 

 

Despite the difficult operating environment, EAT remains financially robust.  In 4Q13, the company passed the $1 billion share repurchase mark since its fiscal 1Q10.  Over the same period, management reduced the share base by nearly 33%.  Looking out over the next 12 twelve months, we expect EAT to repurchase another $250 million in stock, effectively reducing the share base by another 7%.

 

 

 

Howard Penney

Managing Director

 


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