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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.
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.
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.
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.
Takeaway: It's very rare that you see this much candor from Ralph.
Below is an excerpt of an article that ran in Women's Wear Daily:
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.
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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.
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).
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.
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.
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.
The Hedgeye U.S. Consumption Model shows a worsening outlook over recent weeks, with only 4 of the 12 metrics flashing green.
Despite the bullish quantitative set-up for the sector, we continue to believe that the group is facing numerous headwinds, including:
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)
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
DEO – still doesn’t look like BUD – bearish TREND resistance remains overhead at $127.42
KO – bearish TREND resistance intact up at 39.39
PEP – bullish TREND confirmed w/ $82.29 TREND support
GIS – bullish TREND confirmed now for a month – support = $49.96
MDLZ – hanging on to bullish TREND support of $34.07
KMB – still the best looking long on this list; TREND support = $106.56
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
MO – confirming the bearish to bullish TREND reversal now for a month w/
TREND support = $36.45
PM – making a run (on no volume) at TREND resistance of $84.21 – must chase yield!
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:
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.
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.
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