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The Casual Dining Dilemma

We remain cautious on select names in the casual dining sector as we believe sluggish sales trends, decelerating consumer spending and accelerating inflation will continue to pressure margins and, ultimately, stock prices.  This raises the question: does the casual dining industry have pricing power?

 

We continue to like CAKE, PBPB, BLMN and PNRA on the short side and DRI on the long side in the casual dining space.  We will be publishing brief updates on all of our favorite ideas – both long and short – in the coming days.

Same-Store Sales

Black Box Intelligence reported that same-store sales grew +0.7% in March 2014, a 140 bps sequential improvement from the -0.7% reported in February 2014.  On a two-year basis, sales were positive (+0.6%) for the first time since November 2013.  For 1Q14, same-store sales were down -0.3%, a 20 bps sequential deceleration from the -0.1% reported in 4Q13.  On a two-year basis, same-store sales declined -0.8% in 1Q14.

 

The Casual Dining Dilemma - sales

Same-Store Traffic

Same-store traffic declined -1.2% in March 2014.  This represents a significant 200 bps sequential improvement from February, but continues to confirm that casual dining traffic is in secular decline.  On a two-year basis, same-store traffic declined -1.6% in March.  For 1Q14, same-store traffic was down -2.2%, a 10 bps sequential improvement from the -2.3% reported in 4Q13.  On a two-year basis, same-store traffic declined -3.0% in 1Q14.

 

The Casual Dining Dilemma - traffic 

Food Inflation And Limited Pricing Power

Given the secular decline in traffic, the casual dining industry has limited pricing power to protect against food inflation.  With the CRB Foodstuffs Index up +18.6% YTD, we believe the casual dining will experience significant food inflation over the next twelve months, particularly when current contracts expire.  How will the industry manage the pressure?

 

According to Black Box, the per person average check was up +1.8% in March and up +2.0% in 1Q14.   This is slightly less than the CPI for food away from home, which is running up +2.25% in 2Q14 and significantly higher than the CPI for food at home, which is running up +0.55% in 2Q14.

 

As we head into the later stages of 2Q14 and into the fall, we expect to see more companies talk about price increases.  We believe raising prices is risky for the industry given the secular decline in traffic and knowing the consumer can find better value at the supermarket.

 

The Casual Dining Dilemma - rest value spread

 

 

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst

 


Ralph Lauren Gets Candid | $RL

Takeaway: It's very rare that you see this much candor from Ralph.

Ralph Lauren Gets Candid | $RL - 2

Q&A: Ralph Lauren Now

Below is an excerpt of an article that ran in Women's Wear Daily: 

  • WWD: There’s so much going on at Ralph Lauren right now, not the least of which is the Polo Women’s launch. Why now?

    R.L.: "All of a sudden Blue Label looked like Ralph Lauren’s less-expensive line. It needed an identity. So I thought that this is a good time to do Polo, and that the growth potential was fantastic. I built some men’s stores but I didn’t build men’s and women’s. I didn’t put them together. And that’s why I did it. I felt like I was ignoring a whole business that was sophisticated."
     
  • WWD: As the head of a public company, you have to think about succession.

    R.L.: "People ask me that all the time. I have a lot of good talent working in my company and we have a team of people; it doesn’t depend on one person, so my business won’t go down the drain if I’m not here tomorrow. I like to think that I’m vital to the company and that I’m exciting and important. I also know that I have built into this company people who are talented, who can do a good job and really understand everything I’m talking about…"
     
  • WWD: You recently brought in Valérie Hermann to oversee luxury. What is your luxury strategy?

    R.L.: "My luxury strategy is to almost divide the company on some level. We brought in Valérie as president of luxury so she’s going to look at what stores to show to. When you have a lot of different products sometimes it gets mixed and they use the high price to sell the low price and it doesn’t stand on its own. When you go into a private luxury store in Europe the voice is very clear: This is Gucci; this is Prada… They’re not department stores. So there is a difference.

    Department stores are very important, their growth is very important. But at the same time, the specialty stores, the quality level, the voice comes out…"
     
  • WWD: How do you spin off luxury internally? Valérie came in with Jacki [Nemerov, president and chief operating officer, Ralph Lauren Corp.] already here.

    R.L.: "They work together. Jacki is a strong executive; she runs a big amount. They’ll work together and talk together; they’re not behind closed doors. [Valérie’s] mission is to build that specialty store sensibility, [make sure] that we’re not in the wrong stores and that we sell in the stores that we believe can carry the clothes. A lot of people say, 'Oh that’s Ralph Lauren; it’s not luxury.' They think you belong in one department. It’s clarity for the brand, it’s like cutting the company in half."
     
  • WWD: How do you deal with it when someone major in the company—Roger Farah, for example—says “I’m retiring” or “I’m leaving?

    R.L.: "Roger is one of the very good talents. I’d say that Roger really helped me have a successful company, someone I have great respect for. If he decides to go, then hopefully he’s built enough people behind him. Jacki was a licensee first and then I asked her to come here because I thought she was great. She’s now COO. She and Christopher Peterson who is [chief financial officer] work very well together; they’re both very smart. Roger’s not out of the company. He’s vice chairman. He’s here, but not as full-time as he was. But you need talent."

Takeaway From HEDGEYE's ALEC Richards:

It's very rare that you see this much candor from Ralph. He addressed a number of topics in this one-on-one, but we found the comments on growth drivers (Polo & International), succession plans, and the C-Suite particularly notable.

 

Editor's Note: This is a complimentary research excerpt from Hedgeye Retail Analyst Alec Richards. Follow Retail Sector Head Brian McGough on Twitter @HedgeyeRetail

Subscribe to Hedgeye.


European Banking Monitor: Greek Credit Risk Tightens

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

---

 

European Financial CDS - Swaps across Europe's banking system were little changed (median change = 0 bps), but the Greek banks continue to tighten notably, dropping an average of 40 bps in the past week and 185 bps in the past month. This morning's news that GS & MS will be leading a secondary offering for National Bank of Greece doesn't hurt either.

 

European Banking Monitor: Greek Credit Risk Tightens   - European Financials CDS  1

 

Sovereign CDS – Sovereign swaps mostly widened over last week. Irish sovereign swaps tightened by -2.7% (-2 bps to 71 ) and Spanish sovereign swaps widened by 7.1% (6 bps to 93).

 

European Banking Monitor: Greek Credit Risk Tightens   - Sovereign CDS  2

 

European Banking Monitor: Greek Credit Risk Tightens   - sovereign cds chart  3

 

European Banking Monitor: Greek Credit Risk Tightens   - sovereign cds chart  4

 

Euribor-OIS Spread – The Euribor-OIS spread was unchanged week-over-week at 13 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

European Banking Monitor: Greek Credit Risk Tightens   - euribor ois spread  5

 

Matthew Hedrick

Associate 

 

Ben Ryan

Analyst


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Just Charts: XLP Marginally Outperforms S&P500

The table below lists our current investment ideas as well as a list of potential ideas we are in the process of evaluating (watch list).  We intend to update this table regularly and will provide detail around any material changes.

 

Just Charts: XLP Marginally Outperforms S&P500 - 1

 

Consumer Staples outperformed the broader market last week, falling -0.5% versus the S&P500 at -2.6%. XLP is down -0.5% year-to-date vs the SPX at -1.8%.

 

For a sixth straight week, XLP is bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up. This is a material shift as the sector traded bearish TRADE and TREND for the majority of the year-to-date.

 

 

Just Charts: XLP Marginally Outperforms S&P500 - 2

 

The Hedgeye U.S. Consumption Model shows a worsening outlook over recent weeks, with only 4 of the 12 metrics flashing green. 

 

 

Just Charts: XLP Marginally Outperforms S&P500 - 3

 

Despite the bullish quantitative set-up for the sector, we continue to believe that the group is facing numerous headwinds, including:

 

  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating, and Q2 2014 theme of #ConsumerSlowing
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
  • The sector is loaded with a premium valuation (P/E of 18.8x)
  • Less sector Yield Chasing as Fed continues its tapering program
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index has not seen any real improvement over the past 6 months, and declined to -31.9 versus -30.0 in the prior week

 

Just Charts: XLP Marginally Outperforms S&P500 - 4

Just Charts: XLP Marginally Outperforms S&P500 - 5

Just Charts: XLP Marginally Outperforms S&P500 - 6

 

 

Top 5 Week-over-Week Divergent Performances:

Positive Divergence:  LVMUY 5.7%; ADM 3.2%; K 3.0%; DEO 1.8%; EL 1.8%

Negative Divergence:  HLF -9.9%; STZ -7.5%; HAIN -7.4%; DF -7.3%; JAH -6.1%

 

 

Last Week’s Research Notes

 

Earnings Calls This Week (in EST):

 

Tuesday (4/15):  NESN (2:30am); KO (9:30am)

 

Thursday (4/17): PEP (8am); PM (9am)

 

 

Quantitative Setup

 

In the charts below we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we can offer one.  As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).

 

 

BUD – held its newfound bullish TREND this wk = $103.52 support

 

Just Charts: XLP Marginally Outperforms S&P500 - 7

 

 

DEO – still doesn’t look like BUD – bearish TREND resistance remains overhead at $127.42

 

Just Charts: XLP Marginally Outperforms S&P500 - 8

 

 

KO – bearish TREND resistance intact up at 39.39

 

Just Charts: XLP Marginally Outperforms S&P500 - 9

 

 

PEP – bullish TREND confirmed w/ $82.29 TREND support

 

Just Charts: XLP Marginally Outperforms S&P500 - 10

 

 

GIS – bullish TREND confirmed now for a month – support = $49.96

 

Just Charts: XLP Marginally Outperforms S&P500 - 11

 

 

MDLZ – hanging on to bullish TREND support of $34.07

 

Just Charts: XLP Marginally Outperforms S&P500 - 12

 

 

KMB – still the best looking long on this list; TREND support = $106.56

 

Just Charts: XLP Marginally Outperforms S&P500 - 13

 

 

PG – finally chases down the Yield Chasing style factor the market craves – what was TREND resistance of $80.51 is now support, but needs to hold to confirm

 

Just Charts: XLP Marginally Outperforms S&P500 - 14

 

 

MO – confirming the bearish to bullish TREND reversal now for a month w/

TREND support = $36.45

 

Just Charts: XLP Marginally Outperforms S&P500 - 15

 

 

PM – making a run (on no volume) at TREND resistance of $84.21 – must chase yield!

 

Just Charts: XLP Marginally Outperforms S&P500 - 16

 

 

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst


Senator Durbin Back at It With FDA E-Cig Recommendations – The Industry Is Already Prepared

Massachusetts Senator Dick Durbin (Dem.) – who most recently was a mouthpiece for Bill Ackman’s claim that HLF is a pyramid scheme – was joined by Senators Waxman, Harkin, Rockefeller and members of Congress in releasing a report this morning titled “Gateway to Addiction? A Survey of Popular Electronic Cigarette Manufacturers and Targeted Marketing To Youth”.

 

Lorillard (LO) remains our preferred name in tobacco and we believe the contents of this report have already been priced into the tobacco stocks . Why?

 

The report says nothing new about the industry’s own stance on the likely “deeming” regulation that the FDA will hand down on e-cigs.

 

In the conference calls we’ve held with the CEOs of e-cig companies, including with NJOY, LOGIC, Ballantyne Brands, and Victory – they’ve all suggested to us that they’re bracing for FDA regulation, including:

 

  • A ban of online commerce
  • Age verification standards at retail
  • Flavor limitations (beyond tobacco and menthol)
  • Health/safety certifications
  • Labeling and marketing requirements

Directly below are the key recommendations from the Durbin & Co. report, which show great overlap between its call for regulation and those that are being braced for/expected and encouraged from the industry. 

 

Senator Durbin Back at It With FDA E-Cig Recommendations – The Industry Is Already Prepared - a. durbin ecig recs

 

Note that the group solicited information via surveys sent to 9 e-cig manufacturers last September, including to MO (Mark-Ten), RAI (Vuse), LO (blu), NJOY, Eonsmoke, LOGIC, VMR, Green Smoke, and Lead by Sales. It reported that all the companies responded to the survey except for Lead by Sales.

 

The report’s loudest call, to keep e-cigs out of the hands of children (no marketing of them, no attractive properties like flavors, no ease to purchase via strict age restriction), again echoes the industry’s leaders’ expectations and desires for the category, and we believe that the FDA, when it chooses to act, is likely to carve out similar standards so as to treat e-cigs similar to traditional cigarettes in terms of sales and marketing.

 

Call with questions,

Matt

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst


MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES

Takeaway: Tech Wreck + So-So FIG Earnings. The silver lining is that the short-term setup looks asymmetrically bullish for XLF.

Key Callouts:

What a difference a week makes. The ongoing collapse of high-flying social media tech names coupled with weaker-than-expected earnings from JPMorgan on Friday led to a 4.0% rout in the XLF last week. That makes Financials the second-worst performing sector YTD behind only consumer discretionary (down 2.65% through Friday's close). Utilities, for reference, are the best performing sector at +9.80% YTD. 

 

Earnings thus far have been a mixed bag. Though we only have a handful of reports in hand at this point, three of the four "big uglies" have reported. Two of the three, Citi and Wells, have come in better than expected, while JPMorgan was a disappointment. We'll get results from the fourth horseman, BofA, on Wednesday morning. 

 

As far as the risk monitor is concerned, we continue to see a fairly benign backdrop characterized by modest widening in sovereign and bank-specific swaps, but no real change in interbank systemic risk measures. Some of the main callouts are:

 

* XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 4.4% upside to TRADE resistance and 0.7% downside to TRADE support.

 

* TED Spread – The TED spread fell 1.7 basis points last week, ending the week at 18.8 bps this week versus last week’s print of 20.46 bps.

 

* U.S. Financial CDS -  Swaps widened for 21 out of 27 domestic financial institutions. The Global US banks were all wider, by an average of 4 bps w/w, but remain tighter by 4 bps on a m/m basis. The specialty finance companies we track were wider on the week and on the month with the biggest moves coming from the mortgage insurers, MTG & RDN and Sallie Mae. The US insurers were little changed aside from the bond guarantors, MBIA and Assured Guaranty, where swaps widened out 60 and 32 bps, respectively w/w and are now wider by 106 and 62 bps m/m.

 

* European Financial CDS - Swaps across Europe's banking system were little changed (median change = 0 bps), but the Greek banks continue to tighten notably, dropping an average of 40 bps in the past week and 185 bps in the past month. This morning's news that GS & MS will be leading a secondary offering for National Bank of Greece doesn't hurt either.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 4 of 13 improved / 2 out of 13 worsened / 7 of 13 unchanged

 • Intermediate-term(WoW): Positive / 8 of 13 improved / 2 out of 13 worsened / 3 of 13 unchanged

 • Long-term(WoW): Positive / 5 of 13 improved / 1 out of 13 worsened / 7 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 15

 

1. U.S. Financial CDS -  Swaps widened for 21 out of 27 domestic financial institutions. The Global US banks were all wider, by an average of 4 bps w/w, but remain tighter by 4 bps on a m/m basis. The specialty finance companies we track were wider on the week and on the month with the biggest moves coming from the mortgage insurers, MTG & RDN and Sallie Mae. The US insurers were little changed aside from the bond guarantors, MBIA and Assured Guaranty, where swaps widened out 60 and 32 bps, respectively w/w and are now wider by 106 and 62 bps m/m.

 

Tightened the most WoW: AON, CB, AIG

Widened the most WoW: MBI, WFC, AGO

Tightened the most WoW: MET, GNW, UNM

Widened the most MoM: MBI, AGO, TRV

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 1

 

2. European Financial CDS - Swaps across Europe's banking system were little changed (median change = 0 bps), but the Greek banks continue to tighten notably, dropping an average of 40 bps in the past week and 185 bps in the past month. This morning's news that GS & MS will be leading a secondary offering for National Bank of Greece doesn't hurt either.

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 2

 

3. Asian Financial CDS - It was a mixed bag for Asian financials last week as Chinese banks tightened nominally while Japanese and Indian financials were generally wider.

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 17

 

4. Sovereign CDS – Sovereign swaps mostly widened over last week. Irish sovereign swaps tightened by -2.7% (-2 bps to 71 ) and Spanish sovereign swaps widened by 7.1% (6 bps to 93).

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 18

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 3

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 1.7 bps last week, ending the week at 5.65% versus 5.63% the prior week.

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1855.

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 6

 

7. TED Spread Monitor – The TED spread fell 1.7 basis points last week, ending the week at 18.8 bps this week versus last week’s print of 20.46 bps.

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 7

 

8. CRB Commodity Price Index – The CRB index rose 2.7%, ending the week at 309 versus 301 the prior week. As compared with the prior month, commodity prices have increased 2.2% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread was unchanged week-over-week at 13 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 2 basis points last week, ending the week at 2.74% versus last week’s print of 2.76%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened -4 bps, ending the week at 57 bps versus 61 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 11

 

12. Chinese Steel – Steel prices in China rose 2.2% last week, or 74 yuan/ton, to 3,367 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 227 bps, -4 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 4.4% upside to TRADE resistance and 0.7% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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