03/12/14 DRI: Are We Being Mushroomed?
03/14/14 Beneficial Environment For QSRs
Events This Week
Monday, March 17
- Sidoti & Company Emerging Growth Institutional Investor Forum: BOBE
Tuesday, March 18
- Sidoti & Company Emerging Growth Institutional Investor Forum: DENN
Wednesday, March 19
- SBUX Annual General Meeting
- Janney Capital Markets Consumer Executive Summit: WEN
Thursday, March 20
- Janney Capital Markets Consumer Executive Summit: BOBE
- Stephens West Coast Conference: RRGB
Friday, March 21
- DRI earnings call 8:45 AM EST
Chart Of The Day
Commodity prices have been surging in Q1 and the CRB Foodstuff Index is up approximately +400 bps YoY. If this index remains at or above these levels throughout the year, we'd expect notable pressure to build on the cost of sales line for many operators as they lap easy YoY comparisons. We've heard expectations of flat-to-slight commodity inflation in 2014, but this chart tells a different story.
Recent News Flow
Monday, March 10
- MCD reported February global comp store sales down -0.3%, primarily driven by a -1.4% comp in the U.S. and offset slightly by a +0.6% comp in Europe.
- WEN introduced two new salads to its menu: the Asian Cashew Chicken Salad and the BBQ Ranch Chicken Salad.
- GMCR changed its name to Keurig Green Mountain, Inc. after shareholders signed off on the name change at its annual meeting the prior week.
- DRI filed a Form 10 in connection with its plan to spin-off Red Lobster.
Tuesday, March 11
- JMBA revealed its new Kale Orange Power Fresh Juice Blend, reinforcing the company’s commitment to health.
- COSI reported disappointing Q4 numbers, including -$0.23 EPS on a -5.7% company comp.
- MCD hinted at some sort of future financial engineering event during its presentation at the Bank of America Consumer & Retail Conference as it continues to look at ways to optimize their capital structure.
- FRSH Papa Murphy’s, the take and bake pizza franchisor, filed a $70mm IPO.
- COSI Antonio Tomasello disclosed a 5.1% stake in the company and advised the board to remove the poison pill and further explore selling company stores to franchisees.
- YUM declared a $0.37 dividend, in-line with expectations.
Wednesday, March 12
- KKD reported mixed results, missing on the bottom line by a penny, but upped guidance and announced a higher share repurchase authorization which likely supported the stock.
Thursday, March 13
- THI was upgraded to buy at KeyBanc with a $75 PT.
- DRI Olive Garden launched a new LTO, the three-course Italian dinner starting at $9.99 in what appears to be a last ditch effort to drive incremental traffic.
- MCD News hit the tape that employees are suing McDonald’s for alleged wage theft. The 27 plaintiffs claim to represent thousands of employees and are looking for back pay and damages.
- ZOES Zoe’s Kitchen, a Mediterranean fast casual chain, filed for an $80.5mm IPO. More than half the money will be used to pay off debt, with the remaining being used to fuel future growth. The company grew comps at a healthy clip (+6.9%) in 2013 and currently has AUVs approaching $1.5mm.
- WEN Senior VP of North America operation, John Peters, has left the company to partner with current Wendy’s franchisee Rick Holland. The two have signed an agreement to acquire 40 company-owned restaurants in the PHX area and Peters will run other restaurants that Holland already owns in the AZ, CO, MI, SD and OH markets. Robert Wright has been named COO.
Friday, March 14
- GMCR, SBUX amended their agreement to give Starbucks better business terms and a more extensive offering of SBUX K-Cup packs and types.
- GMCR will replace WPX in the S&P 500, effective AMC on Friday, March 21.
- THI appointed Managing Director of Google Canada, Christopher O’Neil, to serve as Director effective immediately.
- QUIZNOS filed for bankruptcy in a move to reduce its debt load by approximately $400mm and increase the company’s flexibility to execute on its planned operational enhancements. The chain has struggled amid due to emergence of strong competition (Potbelly, Jersey Mike’s, Jimmy John’s, Firehouse Subs, etc.), an excessive debt load and years of store closures.
U.S. Macro Consumption
Last week was a forgettable week for consumer stocks in general, with the XLY down -2.3% vs the SPX -2.0%. With that being said, restaurant stocks largely outperformed this broader index. The Hedgeye U.S. Consumption Model is mixed this week, with 6 of the 12 metrics we track flashing green. We believe the current environment is more conducive to select fast casual and quick-service restaurants than casual dining restaurants.
XLY Quantitative Setup
From a quantitative setup, the sector remains bullish on an intermediate-term TREND duration.
Below we look at the performance of restaurant companies relative to the XLY and recent trends in earnings revisions estimates.
Casual Dining Restaurants
Top 5 Week-Over-Week Divergent Performances:
Positive Divergence: KONA +14.9%, DFRG +9.4%, CBRL +3.0%, CAKE +2.7%, BJRI +2.7%
Negative Divergence: RT -6.3%, DIN -1.4%, BWLD -0.1%
Notable 1-Month Earnings Revisions:
Positive Revision: RRGB +0.7%, BWLD +0.2%
Negative Revision: BOBE -25.4%, BJRI -25.4%, BBRG -7.8%, DIN -5.7%, KONA -5.4%
Top 5 Week-Over-Week Divergent Performances:
Positive Divergence: KKD +10.8%, GMCR +9.1%, SONC +7.1%, MCD +4.5%, TAST +4.4%
Negative Divergence: JMBA -0.8%, CMG -0.7%, YUM -0.4%, WEN -0.2%
Notable 1-Month Earnings Revisions
Positive Revision: JACK +3.9%, DPZ +1.2%, YUM +0.2%, BKW +0.1%
Negative Revision: TAST -8.1%, BAGL -5.9%, PNRA -4.6%, PLKI -4.6%, THI -2.5%