“Well, there’s not a day that goes by when I don’t get up and say thank you to somebody.”
Roderick gets it. The youngest of five kids, he wasn’t born into poverty or affluence. The 68 year old rocker from Highgate (North London) was born on my wife’s due date (pending baby #3 for us in January). And God knows, I have nothing but thanks for my family’s health and happiness as we move closer to game time.
I also wanted to take some time to thank you, our clients, for making all that we’ve set out to achieve here @Hedgeye possible. We’re going on 6 years since the founding of our firm. You’ve helped us create 50 jobs in America. For that I’m forever grateful.
With achievement comes great responsibility. Now that we have our new @HedgeyeTV studio and office space built out in Stamford, CT we’re looking forward to being the change we all want to see in both our community and profession.
Back to the Global Macro Grind…
Change starts with being transparent and accountable. All great American (and Canadian) Patriots have held their government to account. While hope is not a reputational management strategy, I sincerely hope you see some of my anti-government rants in that light.
Yesterday’s declining US Consumer Confidence reading is case and point. While the US government and its un-elected @FederalReserve refuses to acknowledge this, there’s an implicit link between:
A) The Purchasing Power of The American People
B) US Consumer Confidence
In real-time economic strategy speak, we call these coincident indicators. As you can see in Christian Drake’s Chart of the Day (US Dollar vs. US Consumer Confidence going back to January, 2013), the following conclusion is also explicit:
1. The US Dollar locked in her YTD highs in the May-July period
2. US Consumer Confidence peaked in mid-July of 2013
Not only did confidence peak; now, alongside the US Dollar (down 3 weeks in a row), it’s starting to plummet. While the chart we are showing is the University of Michigan’s reading, every single US Consumer & Business Confidence survey we track looks the same:
1. US Conference Board Consumer Confidence reading for NOV = 70.4 vs 81.0 in JUL
2. University of Michigan Consumer Confidence reading for NOV = 72.0 vs 85.1 in JUL
3. NFIB Small Business Optimism reading for OCT = 91.6 vs 94.1 in JUL
In other words, as the US government signs off on this no-taper-zero%-rates-on-savings-US-Dollar-devaluation lie, the American people aren’t buying it.
Why? Because everyone who is literate in real-world economics realizes that the current @FederalReserve Policy To Inflate is only good for high income earners in America who are long of the @PIMCO Total Return fund and/or stocks, art, bubbles, etc…
Within another US Consumer Confidence data series, look at the Bloomberg Consumer Comfort readings by Income bracket:
1. INCOME $40,000-50,000 confidence reading for NOV = -45.6 vs -23.1 JUL
2. INCOME > $100,000 confidence reading for NOV = +16.9 vs 17.0 JUL
Notwithstanding the obvious (that low-income earners all have NEGATIVE confidence readings to begin with), this is a national embarrassment; especially for a US President who campaigns explicitly with class warfare words. Obama, what about the “folks?”
I didn’t grow up in a community where we assigned people to different “classes.” I’m the son of a firefighter and teacher who put two feet on the floor every morning just like everyone else. And when someone less fortunate than me needed help, it was my leadership responsibility to do so.
So I’d like to thank you again this morning for the opportunity to lead from the front. There has never been a country that has devalued its way to long-term economic prosperity. Perpetually devaluing the purchasing power of the poor (US Dollar) is wrong. And it’s our patriotic responsibility to end this never-ending-money-printing-policy before it’s too late.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.69-2.81%
Best of luck out there today and Happy Thanksgiving to you and your loved ones,
Keith R. McCullough
Chief Executive Officer
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Takeaway: We are adding BLMN to the Hedgeye Best Ideas list as a short. Full report below.
- Unsustainable business model riddled with different, non-synergistic brands.
- Restaurant Level Margins are very low, due to an inflated Other Expenses line and, as a result, Operating Margins are low.
- Current same-store sales guidance assumes at least +2% traffic on an annual basis in 2014.
- Expectations for 19% EPS growth in 2014 are aggressive.
- AUV growth for Outback, Carraba’s, and Bonefish is decelerating.
- Adding the lunch time daypart at Outback and Carraba’s has not proven to be successful.
- Outback’s Gap-to-Knapp has been narrowing since 4Q12.
- Outback may be losing share to its closest competitors.
- Bonefish Grill, Bloomin’s growth vehicle, suffered from declining same-store sales and traffic in the most recent quarter.
- Incremental, material G&A cuts from this point are unlikely.
- Trading at an unwarranted, premium valuation.
- Sell-side sentiment is very high.
- We see fair value between $18-$22.
SHORT BLOOMIN' BRANDS
Admittedly, we may be biased against a business model that has proven multiple times that it simply does not work in the casual dining industry – but why wouldn’t we? Bloomin’ Brands is another company that doesn’t make sense to us. Contrary to what management teams like to tell you, the majority of multi-concept structures in the casual dining industry tend to create operational inefficiencies that only worsen over time. As the CFO of EAT, Guy Constant, mentioned several weeks ago on a conference call with our clients, the casual dining industry has evolved and, in our opinion, some companies have been unreceptive to these secular changes. You can listen to a replay of the call here.
In the particular case of Bloomin’, the operating structure of the company lacks cohesiveness and its many brands fail to align in vision and strategy. Over the past year, the company has been the beneficiary of the generous valuations being handed out to casual dining companies. As we wrote a couple of weeks ago, the casual dining industry looks suspiciously like a bubble. What’s concerning is that this bubble has developed despite weak casual dining trends, the recent momentum of fast casual restaurants, and the introduction of premium items at quick service chains.
With Bloomin’ currently trading at A P/E of 20.5x and 9.3x EV/EBITDA, we believe the stock more than discounts the potential growth of the company. Given the current demand environment, casual dining companies focused on adding significant capacity are finding it increasingly difficult to generate the incremental returns needed to justify their investments. The street is looking for BLMN to grow EPS by 19% in 2014, despite only managing to grow EPS 12% in 2013. We view this as highly unlikely, and expect this number to be revised down over the coming months.
There are several similarities between BLMN, DRI and the old EAT. In fact, we’d argue that Bloomin’ faces some of the same issues running the company that Brinker experienced five years ago and Darden faces today. To be fair, we constantly ask ourselves what makes BLMN different? Aside from the relative perception of BLMN as a growth company as opposed to a mature company, not much:
The Bloomin’ model has a few aspects to it that simply don’t add up. These became clear during the 3Q13 earnings call:
- In 3Q13, the Outback Steakhouse concept missed sales expectations which management immediately attributed to an underperforming LTO. This was a recurring theme throughout the 3Q13 conference call, which marks the first time, since we can remember, that management constantly referred to LTOs. What bothers us is that there is much more to the operational story than promotions. For example, Outback is continuing to roll out weekday lunch which was offered by approximately 26% of stores at the end of Q3. If lunch is driving incremental traffic, then what does that mean for the core dinner business? The two-year average of Outback’s company same-store sales has been in steady decline since peaking in 3Q12.
- According to management, Bonefish Grill is the company’s compelling growth vehicle. We find this rather odd considering same-store sales were down -2.7% during the quarter and are only up 0.4% on a two-year basis. It is not very encouraging when your growth brand is posting declines in traffic and comps. In what quickly became a common theme during the call, management attributed the weakness at Bonefish to a lack of food innovation and an underperforming LTO. Despite “very strong” brand health, management acknowledged that Bonefish is in need of a menu overhaul.
- Cost saving is an integral part of the Bloomin’ bull case, yet the company needed excessive G&A cuts to beat EPS estimates.
All told, there are some holes emerging in the BLMN story. Management appears to be aiming to be “bigger and better” at the same time and capital allocation decisions are unlikely to add shareholder value. That being said, we realize that management has a couple of levers it can pull in the intermediate-term (i.e. debt reduction, international consolidation) that can be accretive to equity holders. Longer-term, however, we believe the business model will struggle, much like every other multi-branded casual dining company we have covered.
We see several other issues that are difficult to overlook:
- Full-year same-store sales guidance assumes at least 2% positive traffic.
- Management publicly announced that a disappointing LTO was the reason for weak comps in Q3, yet they are confident that “Q4 should be the strongest domestic comp of the year.”
- Driving business through LTOs is not a sustainable practice and is a flawed long-term strategy.
The casual dining industry continues to struggle:
- Industry volatility will persist and the segment will continue to be flat, on average, until we see a notable improvement in discretionary income and spending.
- The casual dining industry has become aggressively promotional and value-focused.
- Aside from internal competition and aggressive pricing practices, the industry continues to face external pressure from both fast casual and quick-service companies.
INTERNATIONAL IS A BRIGHT SPOT
Bloomin’ is one of the better positioned restaurant companies internationally, where casual dining is growing. Last quarter, BLMN completed the acquisition of 80% of its Brazilian JV. While Brazil is one of the strongest consumer markets in the world, it is still an emerging market and we caution that it should be viewed as such. According the management, the Brazilian restaurant AUVs are double the domestic locations and they believe the business abroad can double to 100 restaurants over the next five years. This acquisition will be accretive to EBITDA, but it is not enough, in itself, to support the bull case.
OVER TIME, COMPANIES WITH A DIVERSE PORTFOLIO OF BRANDS UNDERPERFORM
There has never been a successful casual dining company that attempted to manage a large, diverse portfolio of brands. In our opinion, BLMN is no exception.
Quite frankly, some of management’s recent commentary is startling: “Having a portfolio that spans steak, Italian, seafood and high end, puts us in a strong position to weather any variability in category demand.” If demand for the entire industry is declining, why would a portfolio of different brands be good? When all is said and done, we believe the success, or lack thereof, of the Outback concept will drive Bloomin’s stock. Unfortunately, we believe management has too many balls in the air to successfully manage that business. Bloomin’ will, inevitably, suffer from the “impact of brain space.”
CAN A 17 YEAR OLD CONCEPT SUCCESSFULLY INTRODUCE LUNCH?
Management continues to roll out weekday lunch at Outback and Carraba’s which, for now, is “comping” positive. However, with only 50% of the Outback chain in a position to serve lunch, the overall opportunity is smaller than many expect.
Curiously, Bloomin’s recent commentary around lunch trends is inconsistent with what others in the industry are saying. According to management: “…as you look out over the last 12 months ending March 31, the lunch segment in general for the industry has held up better than the dinner segment.” We suspect management may be exaggerating the state of the lunch daypart in an attempt to build excitement around their rollout. According to what we’ve heard from the majority of casual dining companies, both the lunch and dinner dayparts are performing relatively the same, with weekday lunch slightly weaker than weekend lunch. As a reminder, casual dining same-store sales trends have been rather anemic for the majority of the year.
As of the end of 3Q13, approximately 26% of Outback locations and 28% of Carraba’s locations were offering weekday lunch. This is up from 25% for Outback and 21% for Carraba’s in 2Q13. During 3Q13, the company lapped the rollout of the weekend lunch at Outback. The weak performance during the quarter suggests that the company had a difficult time lapping the rollout of weekend lunch. As we progress thur 2014, we believe the street will begin to question if lunch is truly incremental to the overall business if Outback does not see a significant improvement in same-store sales in 4Q13.
IS UNIT GROWTH A POSITIVE OR A NEGATIVE?
A large part of the Bloomin’ bull case is embedded in the unit growth potential of the company. We’re not sold on this being a positive. We haven’t seen any mature branded casual dining company grow its restaurant base without running into major problems in due course.
In 3Q13, BLMN opened 14 new system-wide locations and is targeting the lower end of the 45-55 unit guidance for 2013. Development has been slower than anticipated due to the high demand and intense competition for “A” sites. This slowdown could be a blessing in disguise, but we don’t expect it to last. The company is guiding for new unit openings in 2014 to be well in excess of what we saw in 2013.
Another issue is the declining trends at BLMN’s primary growth vehicle, Bonefish Grill. Considering the sluggish top line trends, the brand needs to quickly turn things around in order to justify the 2014 unit opening story.
According to management, they are seeing strong progress on the productivity front. This includes year-to-date savings of $42 million of the “at least $50 million” of savings in 2013. According to management in 2013, the majority of savings have come from the cost of sales line, which suggests there is no material benefit to margins given the inflation the company is seeing. On a rolling 12-month basis, cost of sales has gone from 32.47% in 4Q12 to 32.56% in 3Q12 and is expected to edge higher in 4Q13.
Moving to the labor side, the company is suggesting that its new scheduling tool is gaining traction and should lead to further savings in 4Q13. On a rolling 12-month basis, labor costs are expected to only decline by 15 bps in 2013, which includes an estimated 42 bps drop in 4Q13.
For all the hype surrounding productivity savings and the results this will yield, EBIT margins are only expected to improve 39 bps in 2013. The trend certainly appears to be heading in the right direction, but the company will need to see 2%+ same-store sales in order to meet current street estimates.
REGARDING G&A, HOW MUCH IS LEFT IN THE TANK?
At 5.79%, G&A was down 100 bps y/y in 3Q13 and represents the lowest percent of sales in a quarter for which we have the data. This decrease is due to the aggressive management of the line, which was driven down by lower corporate compensation and lower professional fees. We suspect that management pulled forward some cuts from 4Q13 in order to appease the street in 3Q13.
OUTBACK SAME-STORE SALES
The health of the Outback brand is vital to the success of BLMN. Despite maintaining a positive Gap-to-Knapp in 3Q13, its outperformance has been in steady decline since 4Q12 and appears to be waning. Outback’s Gap-to-Knapp peaked in 4Q12 at +600 bps and has since fallen to +220 bps in 3Q13.
Outback’s Gap-to-BlackBox tells the same story, although with perhaps a more discouraging twist. Because BlackBox excludes Darden’s brands, most of which are struggling mightily, some investors view it as a more accurate gauge of the casual dining industry. The second chart below shows that Outback’s Gap-to-BlackBox peaked at +550 bps in 4Q12 and has since fallen to merely in-line with the industry in 3Q13.
These numbers suggest that Outback is losing market share. This could either be to other unrelated casual dining companies or to its direct competitors. The chart below suggests that Outback has been losing share to LongHorn Steakhouse.
BLMN is up +69.0% over the past year and has outperformed the S&P 500 by 40.8% over this time. The stock is trading at a P/E of 20.5x and 9.3x EV/NTM EBIDTA and above its direct peer group. In our opinion, the current fundamentals of the company do not warrant a premium multiple.
Highlighted in the chart below, 80% of analysts rate BLMN a buy while the other 20% rate BLMN a hold. This puts sell-side sentiment regarding the stock approaching levels not seen since September 2013. Further, short interest is only 7% of the float.
This note was originally published at 8am on November 13, 2013 for Hedgeye subscribers.
“The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital . . . the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth in the economy.” -President John F. Kennedy
As stock and bond market operators, we all know full well that the world is laden with risks. For any investment, there are macro risks, industry risks, and company risks, to name a few. As portfolio managers, there are then the universal risks of timing and sizing, which can be critical to performance and ultimately job risk.
On the macro level, I recently happened upon President Kennedy’s quote above and it made me ponder a risk we actually think about very frequently at Hedgeye – government risk. In this case, Kennedy’s quote refers to the specific issue of taxation and its impact on the economy.
There are some analysts out there who believe a dollar sent to the government is no different than a dollar left in the hands of the consumer or investor. Without getting into politics, hopefully the recent debacle over the website for the affordable care act reinforces this idea that government is inefficient at allocating capital, particularly to new businesses.
Back to the global macro grind...
The one government risk that is improving is the risk of rising federal deficits. As we highlight in the Chart of the Day, the federal deficit as a percentage of GDP peaked in fiscal 2009 (Obama’s first year in office) and has declined steadily to -4.1% in this fiscal year ending September 30th. On a notional level, the deficit has declined from -$1.4 trillion in 2009 to -$680 billion in 2013.
Certainly, running an almost $700 billion deficit into the fifth year of a “recovery” is nothing to get overly excited about. But one marginal positive point, which we do need to give our elected officials credit for, is that actual federal government outlays have declined sequentially for the last two years by -1.8% in 2012 and -2.4% in 2013. And, frankly, the obstructionist “Tea Partiers” probably deserve the most credit for this improvement.
From an investing perspective, this decline in deficit is certainly a positive tailwind for the U.S. dollar. It takes off the table certain questions of U.S. credit worthiness and the likelihood of future tax increases, which bode more positively for future GDP growth. As painful as the budget debates have been in the last couple of years, this novel approach of cutting spending and growing the economy has worked.
As quietly as the deficit as improved, the fourth branch of government, the Federal Reserve, appears to be no closer to getting out of the way. Instead of protecting against inflation, as has historically been the case, the Fed now seems overly focused on the omnipresent evil known as: deflation. The top headline on Bloomberg.com this morning says it all:
“Central Banks Risk Asset Bubbles in Battle with Deflation Danger”
The premise that deflation is dangerous resolves largely around the concept that as consumers begin to see that prices are falling they will hold off on purchases in anticipation of lower prices. Secondarily to this is the idea that in an inflationary environment, inflating assets will allow consumers, and the government, to pay off debts quicker.
Call me a simpleton, but personally I’m going to pay off more debts when I have more excess cash flow, not due to lower prices for basic goods (food and energy) or lower taxes. Even if I agreed with the concept of inflation as a way to pay off debts, the broader issue is changing the definition of CPI does not mean deflation exists. In fact, based on the MIT billion prices index, inflation has been solidly at over 2% for most of this year.
The biggest challenge with the ever moving inflation, GDP and employment goal posts of global central banks is that it breeds contempt and confusion, which ultimately leads to increased volatility (we’ve seen this in spades in the interest rate markets this year). The longer term issue of central banks trying to save us from every economic threat known to man is that when we do eventually unwind this extreme policy, it will be excruciatingly painful.
Another challenge of course is that central banks have limited room to stimulate from current levels. As Bridgewater's Ray Dalio recently wrote:
“Because central banks can only buy financial assets, quantitative easing drove up the prices of financial assets and did not have as a broad effect on the economy. The Fed’s ability to stimulate the economy became increasingly reliant on those who experience the increased wealth trickling it down to spending and incomes, which happened in decreasing degrees (for logical reasons, given who owned the assets and their deceasing marginal propensity to consume) . . . the marginal effects of wealth increase on economic activity have been declining significantly.”
In essence, the more central bankers attempt to stimulate from current levels the less and less impact it will have on real economic activity.
Luckily for us, not every central banker in the world wants to pursue an activist strategy and attempt to manage every ebb and flow of the global economy. Fellow Canadian and BoE Governor Mark Carney actually seems rather content to let the improving economy do its thing and not, like his ECB counterparts, double down on easing. As a result, Carney is also raising his 2014 GDP forecast for the United Kingdom to 2.8%. Long the pound remains one of our top macro ideas.
Speaking of activists, it was nice to see Dan Loeb from Third Point show up in one of our Best Ideas, Fed-Ex. The stock is up more than 25% since we added to our Best Ideas list on February 27th of this year and may have more room to run. If you’d like to learn about access to our Industrials Sector and go through our 60 page presentation on Fed-Ex, ping email@example.com.
Our immediate-term Risk Ranges are now:
UST 10yr Yield 2.66-2.81% (bullish)
SPX 1748-1778 (bullish)
FTSE 6656-6748 (bullish)
Shanghai Comp 2067-2044 (bearish)
VIX 12.22-14.51 (bearish)
USD 80.85-81.39 (bearish)
Pound 1.58-1.60 (bullish)
Euro 1.33-1.35 (neutral)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
TODAY’S S&P 500 SET-UP – November 27, 2013
As we look at today's setup for the S&P 500, the range is 14 points or 0.43% downside to 1795 and 0.35% upside to 1809.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.43 from 2.42
- VIX closed at 12.81 1 day percent change of 0.16%
MACRO DATA POINTS (Bloomberg Estimates):
- 7am: MBA Mortgage Applications, Nov. 22 (prior -2.3%)
- 8:30am: Init. Jobless Claims, Nov. 23, est. 330k (pr 323k)
- 8:30am: Durable Goods, Oct., est. -2% (pr 3.7%, rev 3.8%)
- 8:30am: Chicago Fed Natl Activity, Oct., est. 0.1% (pr 0.14)
- 9:45am: Chicago Purch Mgrs Index, Nov., est. 60 (pr 65.9)
- 9:45am: Bloomberg Consumer Comfort, Nov. 24 (prior -34.6)
- 9:55am: U of Mich Conf., Nov. final, est. 73.1 (prior 72)
- 10am: Freddie Mac mortgage rates
- 10am: Index of Leading Eco Ind., Oct., est. 0.0% (pr 0.7%)
- 10:30am: DOE Energy Inventories
- 12pm: EIA natural-gas storage change
- 1pm: Baker Hughes rig count
- House, Senate not in session
- 10am: Consumer Federation of America, Credit Union Natl Assn event on Holiday Consumer Spending Survey
WHAT TO WATCH:
- Hewlett-Packard sales top ests. on corporate demand
- HP, Whitman lose bid to dismiss investor suit over Autonomy
- Gensler gives Wall Street 2 mos. to meet cross-border policy
- JPMorgan pressured to reveal $13b accord complaint
- Crocs said to discuss investment w/funds including Blackstone
- Japan to issue icing risk warning to JAL on Boeing 787 engine
- Position for volatility on Mon. after Black Fri., Goldman says
- IMF may shift more bailout risk to bondholders, NYT says
- Microsoft’s Skype enters new China JV w/GMF, China Daily says
- Symantec to end struggling data-storage service amid overhaul
- Morgan Stanley hiring in China being probed by DOJ: Reuters
- KKR’s Bis Industries scraps plan for Australian share sale
- ANA, Japan Air fly through new China zone without notice
- German consumer confidence to rise to highest since Aug. 2007
- U.K. economic growth accelerates on investment, homebuilding
- Golar LNG (GLNG) Bef-mkt, $0.41
- Golar LNG Partners (GMLP) Bef-mkt, $0.60
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- WTI-Brent Spread Widens for Sixth Day as U.S. Stockpiles Climb
- Zeppelins Seen Hauling Caterpillars to Mine Siberia: Commodities
- China Gold Imports From Hong Kong Rise to 2nd Highest on Record
- Soybeans Reach Two-Month High as Demand Seen for U.S. Supplies
- Copper Rises as Premiums and Stockpiles Indicate Steady Demand
- Rebar Drops on Slowing Demand Ahead of Industrial Profit Data
- Rubber Falls to 2-Week Low as U.S. Confidence Data Weaken Demand
- Codelco Said to Raise Korea Copper Premium to Nine-Year High
- U.S. Oil Glut Seen in 2015 as Export Ban Tested: Energy Markets
- Energy Market at Mercy of Wars, Fed as Year Dawns: 2014 Outlook
- Gold Heading for 2013 Low as Haven Demand Ebbs: Chart of the Day
- Illegal Coal Mines Leave Hundreds Dead in Ukraine’s East: Energy
- China May Delay U.S. Corn Buying as Cargo Held, Shanghai JC Says
- Crude Traders Skeptical Iran Deal Will Bolster Oil Supplies
The Hedgeye Macro Team
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