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Takeaway: Emerging markets love dollar debauchery.
Takeaway: Join us for a conference call with Guy Constant, CFO, of Brinker International.
Friday, October 25th at 11:00am EDT
We will be hosting a call with the CFO of Brinker International, Guy Constant, to discuss 2Q14 results, the outlook for the balance of the year, and the emerging role of technology in the casual dining industry.
TOPICS TO BE DISCUSSED:
- Bringing technology to the casual dining industry.
- Closer look at 2Q14 results and a detailed outlook for the balance of the year.
- Incremental topics TBD post the 2Q14 earnings call.
Guy Constant is Executive Vice President, Chief Financial Officer and President of Global Business Development for Brinker International. In this role, he is responsible for overseeing Planning and Analysis, Mergers and Acquisitions, Investor Relations, Treasury, Tax and Accounting, Domestic Franchise Business Development, and Corporate, Chili’s and International Finance in addition to overall Development. Guy added his global responsibilities in January 2013 and is responsible for overseeing global operations.
Please email or call to learn more about the event. Attendance is limited. Please note if you are not a current client of our Restaurants research there will be a fee associated with this call.
September’s jobs report was disappointing, as employers added 148,000 jobs in the month, well below the 180,000 that economists expected. Following suit, the narrower data sets released were, on balance, negative for the restaurant industry. Employment growth across all cohorts decelerated on a sequential basis, suggesting that sales at QSR, fast casual, and casual dining companies could remain weak in the early stages of 4Q.
Below, we discuss employment by age and restaurant industry employment. These serve as proxies for demand and operator confidence, respectively, in our models.
Employment by Age (demand)
Employment growth by age skewed negatively across the board in September as the 20-24 YOA cohort saw growth decelerate to +128 bps from +338 bps in August, the 25-34 YOA cohort saw growth decelerate to +152 bps from +185 bps in August, the 35-44 YOA cohort saw growth decelerate to +37 bps from +59 bps in August, the 45-54 YOA cohort saw growth slowing accelerate to -124 bps from -113 bps in August, and the 55-64 YOA cohort saw growth decelerate to 172 bps from 257 bps in August.
Employment by age is an important metric for the restaurant industry. Given the discretionary nature of casual dining expenditure, and the highly-competitive nature of the industry, we infer that sustained employment growth in core demographics is necessary for continued comp growth in the absence of new unit growth or income per capita growth. The sequential acceleration in growth slowing in the 45-54 YOA cohort and the deceleration in the 55-64 YOA cohort reflect negatively upon casual dining companies, indicating that we could continue to see weakness persist within the sector.
Within the QSR segment, we continue to find that the majority of management teams we track consistently highlight the importance of employment growth to the success of their business. The sequential deceleration in the 20-24, 25-34, and 35-44 YOA cohorts, suggest that demand for quick-service and fast casual restaurants could wane.
Restaurant Industry Employment (Confidence)
The Leisure & Hospitality employment data, which leads the narrower food service by one month, suggests that employment growth in the food service industry decelerated sequentially in September. Furthermore, the Leisure & Hospitality data also registered a month-over-month decline of -13k (second chart below), a stark contrast from August’s +21k month-over-month gain.
The more narrow restaurant-focused data sets paint a less clear picture. Limited-service employment growth decelerated sequentially in August, while full-service employment growth accelerated sequentially in August.
Leisure & Hospitality: YoY employment growth at +2.60% in September, down -32 bps versus August
Limited-Service: YoY employment growth at +4.86% in August, down -6 bps versus July
Full-Service: YoY employment growth at +2.85% in August, up +4 bps versus July
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Takeaway: Net monthly NFP gains continue to decline while growth remains steady. Payroll data should strengthen from here as seasonality reverses.
While this morning’s nonfarm payroll data was a continuation of a steady multi-month growth trend, the market remains focused on the magnitude of the absolute number and the read through to prospective Fed policy adjustment. Given the unremarkable, +148K MoM change and the sequential softening in the rolling 3M/6M averages, a Taper delay is increasingly likely.
The absolute NFP numbers have been trending lower since 1Q13 while, on a rate of change basis, the YoY growth in total payrolls has been stable-to-higher over that same period – a dynamic largely stemming from the existent seasonal distortion in the data.
September reflected this same dynamic as total nonfarm payrolls were 45K lower than in August (revised) and the 3M rolling average fell -8K sequentially while YoY growth in payrolls ticked marginally higher.
Elsewhere in the report, the unemployment rate declined to 7.2% on a static participation rate, part-time employment declined -594K MoM, State & local government employment showed positive growth for a 3rd consecutive month, and the U-6 Unemployment Rate and level of LongTerm Unemployed both continued to decline.
On balance, September was another month of middling employment growth with small, ongoing under-the-hood improvements. All-in, the preponderance of data is unlikely to get the Fed to move in the near term.
We expect seasonality to drive strengthening headline improvement in the employment data over the next 6 months with peak positive impact (again) occurring in March. Incidentally, prevailing expectations are shifting towards March as the likeliest timeline for Tapering – at which point Yellen should be fully confirmed at the helm of the Fed, Fiscal Policy uncertainty should (hopefully) be rearview, and the domestic marco data will, optically, be at peak strength.
Below is a summary review of the September Employment data along with a visual re-highlight (see: Initial Claims: "Tis the Season) of how seasonality has manifest in the macro data, expectations, and market prices over the last 4 years.
NFP: Net Non-Farm payrolls gained sequentially coming in at +148K – holding flat on a YoY growth basis at +1.66% while the 2Y average decelerated 3bps to 1.64%.
NFP Revision: The net two month revision was +9K with July revised lower from +104K to +89K and August revised higher from +169K to +193K.
Household Survey: The net employment gain as measured by the Household Survey was positive at +133K vs. -115K in August
Employment by Age: Employment growth held positive but decelerated across all age cohorts except for 45-54 year olds, where payrolls remain mired in negative growth.
Unemployment Rate: The Unemployment Rate dropped to 7.2% from 7.3% as the total labor force increased +73K alongside a -61K decrease in Total Unemployed and +133K increase in Total Employed.
Labor Force Participation: A positive +209K change in the working age population alongside a +73K net change in the labor force pushed the Labor Force Participation Rate down to 63.19% from 63.22%.
Part-time/Temp Employment: Part-time employment declined by -594K (2M chg = -828K) while Temp employment gained +20K, registering its 12th consecutive month of net gains.
Industry Employment: Leisure/Hospitality and Finance were the lone losers with employment declining -13K and -2K, respectively in September.. Manufacturing gained jobs for a second straight month while Trade/Transportation and Construction posted their largest gains in 10 and 21 months, respectively.
State & Local Government Employment: Net positive change of +28K in September and a third consecutive month of positive YoY growth.
Ave Weekly Hours for Private Employees: Hours held flat at 34.5 MoM and YoY.
Seasonality Reminder: The September Trough
Positive Seasonal impacts build from September through March then reverse to a headwind that builds over the April to September timeframe. The seasonality impacts have been pervasive across the reported domestic macro data, sentiment, and market prices. From here, seasonality should manifest via strengthening improvement in the employment data through 1Q14.
Christian B. Drake
RAI reported Q3 top and bottom line results in-line with consensus, and slightly revised downward its FY EPS guidance to $3.17 to $3.27 (versus last quarter’s estimate of $3.15-$3.30). The stock is trading down over one percent on what we view as a stronger quarter sequentially, with total cigarette volume declines moderating at -4.3% (versus -6% last quarter), solid smokeless results, and increased excitement around the launch of its e-cigarette VUSE (more below). Our quantitative set-up suggests the stock is a buy below $50.
Total retail share slipped 50bps to 26%, offset by higher pricing year-over-year and strong performance from smokeless offerings: it saw a +0.7% share increase to +17.8% from Camel and Pall Mall, the company’s growth brands that account for almost 70% of total share volume. Camel SNUS, which enjoys dominate market share (~80%), grew +0.4 points and increased pricing from its moist-snuff brand Grizzly gained +1.6% share points in the quarter.
We do expect cigarette volume pressure through year-end. The company said volumes should decline closer to -4% (vs previous guidance of -4 to -5%) for the year, but did not predict any less consumption based on the impact from the government shutdown. We’re bullish on the migration to smokeless tobacco and e-cigs to offset declining cigarette volume over the medium term.
On e-cigs: If you don’t think e-cigs matter to big tobacco – think again! On the earnings call, the progress on VUSE, the company’s first e-cig that was launched in July in the test market of Colorado, was the first brand that management reviewed. CEO Delen said that VUSE is getting a great reception with leading market position in the state (we’d expect so given the strong couponing). He noted strong repeat purchasing and that its replacement cartridge was the largest selling SKU, and believes that VUSE can attain cigarette-like margins over the medium term. Further information on its plans around a national roll-out were indicated to come at next month’s Investor Day meeting.
Delen indicated that he has no further information on when the FDA may come out with a ruling on e-cigs (expected October timeline) and/or if the government shutdown will delay the announcement. He did note that RAI engaged with the FDA on VUSE, and the meeting was heavily attended by the FDA.
Given that Colorado is a test market, it’s hard to extrapolate the costs for a nationwide roll-out – certainly it’s a competitive category and RAI is playing slightly behind the 8-ball. We look forward to monitoring VUSE’s performance.
Results: On the quarter, EPS was in line with consensus at $0.86, up 8.9% year-over-year. Revenue also met analysts’ estimates at $2.14B, up 0.9% year-over-year. On the year, RAI revised its EPS guidance to $3.17 to $3.27 versus last quarter’s estimate of $3.15-$3.30.
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