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BOBE: Asset-Light Is Right

Ron Ruggless of Nation’s Restaurant News published a relevant and timely article yesterday afternoon, highlighting the wave of private equity activity that hit the restaurant industry last year.  David L. Epstein, principal with the Chapman Group, was particularly complimentary of the refranchising efforts of Applebee’s (DIN) and Wendy’s (WEN) in 2013.  Similar to us, Epstein is surprised by the lack of transactions in 2014:

 

I thought the huge success Wendy’s and Applebee’s have had in selling their corporate units to franchisees that a lot of other restaurants would see that and embark upon the same thing, but we haven’t seen that.”

 

As you know, we’ve been strong advocates of a potential refranchising effort at Bob Evans Farms (BOBE), suggesting that the transition to an asset-light model would benefit the company greatly.  We typically point to the successful restructuring Jack in the Box (JACK) has undergone over the past few years, but Applebee’s is another reminder of the significant value that can be created under such a scenario. 

 

We continue to believe BOBE would benefit from a reliable, diversified revenue stream and lower-risk business.  Suggestions that refranchising is merely a financial engineering event are heavily misleading.  In fact, franchisees have been known to run better restaurants than the franchisors running the brand, which would hypothetically lead to improved sales, traffic and brand perception.  BOBE would benefit greatly from finding a few franchisee partners to address the operational issues plaguing the company and recent history suggests there is significant appetite for these types of deals. 

 

We surmise the appetite on Wall Street would be as strong – investors tend to favor asset-light operators, often awarding these companies with premium multiples.  In our view, it’s a win-win.

 

BOBE: Asset-Light Is Right - chart1

 

BOBE: Asset-Light Is Right - chart2

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


Sell Growth: SP500 Levels, Refreshed

Takeaway: The weather turned, but the consumption data that matters most didn’t.

Editor's Note: This research note was originally sent to subscribers on May 13, 2014 at 10:04 a.m. EST by Hedgeye CEO Keith McCullough. Follow Keith on Twitter @KeithMcCullough.

  

POSITION: 8 LONGS, 7 SHORTS

 

But whatever you do, don’t call falling bond yields (do not sell bonds here!) on today’s #ConsumerSlowing (Retail Sales +0.1%) print a US growth slowing confirmation. The weather turned, but the consumption data that matters most didn’t.

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE overbought = 1901
  2. Immediate-term TRADE support = 1866
  3. Intermediate-term TREND support = 1845

 

In other words, you have -1.8% and -2.9% immediate (TRADE) and intermediate-term (TREND) risk to the downside if you get plugged chasing the all-time SPY high here. So don’t do that.

 

Both the Russell2000 and UST 10yr yields remain bearish, because growth is slowing.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Sell Growth: SP500 Levels, Refreshed  - SPX

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Hedgeye Retail: Wal-Mart Plays Right Into #GrowthSlowing | $WMT

Takeaway: Not a great start for new CEO Doug McMillon.

Hedgeye Retail: Wal-Mart Plays Right Into #GrowthSlowing | $WMT - 2

 

The chart below shows what everybody already knows: Walmart comps disappointed. The company cited weather for 20 basis points of the decline. And if there's any retailer who's data we trust, it's Wal-Mart's.

 

But the two-year trend, which we place much heavier weight on as it relates to drilling down the real underlying trend, is nothing to write home about. This plays right into Hedgeye's #GrowthSlowing theme as it relates to the US Consumer.

 

Hedgeye Retail: Wal-Mart Plays Right Into #GrowthSlowing | $WMT - wmt comps

 

The more telling visual is the earnings per share (EPS) miss. In 11 years, Wal-Mart has only missed 12 times, and nine of those were by a penny. Today it missed by a nickel. That's only happened once before – in 2007.

 

The blue bars in this chart show the absolute EPS variance to consensus for each quarter. The dots refer to the right axis showing the percent beat or miss in each period. Not a good way to start things off in the first quarter for new CEO Doug McMillon.

 

Hedgeye Retail: Wal-Mart Plays Right Into #GrowthSlowing | $WMT - wmt2 

 

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Editor's Note: This research note was originally sent to subscribers on May 15, 2014 at 8:36 a.m. EST by Hedgeye Retail sector head Brian McGough. Follow Brian on Twitter @HedgeyeRetail.

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ICI Fund Flow Survey - Best Week All Year For Bonds Versus Very Light Week For Equities

Takeaway: Last week the combination of taxable and tax-free bond fund flow had the best week all year versus very light equity fund flows

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent 5 day period, the combination of taxable and tax-free bond funds had the best week all year with $5.5 billion in inflow, well above the running year-to-date average of $1.9 billion. Conversely, equity funds had a very light inflow of just $754 million, well below the year-to-date average of $3.3 billion

 

It was an anemic week for equity mutual fund and ETF trends. Total equity mutual fund flows experienced slight relief w/w, improving sequentially from a net outflow last week, but still producing a tally well below the 2014 year-to-date weekly average. The $754 million that flowed into all equity mutual funds during the most recent 5 day period ending May 7th was split between a $2.0 billion outflow from domestic equity funds and $2.7 billion inflow into international equity funds. This outperformance from foreign equity products has been consistent over the past two years; international stock fund inflow has averaged $2.6 billion per week thus far this year, on par with 2013's $2.6 billion inflow, while domestic fund trends have averaged an inflow of just $770 million thus far in '14 and $451 million inflow in '13. The 2014 running weekly average inflow for all equity mutual funds is now $3.3 billion, only a slight improvement from the $3.1 billion weekly average inflow from 2013. 

 

Conversely, fixed income mutual fund flows accelerated notably on a w/w basis. For the five day period ending May 7th, $5.5 billion flowed into all fixed income funds, as opposed to last week's much weaker $931 million inflow. The improvement in bond fund flow this week was the result of $4.4 billion that flowed into taxable products and $1.1 billion that flowed into tax-free or municipal products. The inflow into taxable products this week was the 13th consecutive week of positive flow and the inflow into municipal or tax-free products was the 17th consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $1.9 billion weekly inflow, a vast improvement from 2013's weekly average outflow of $1.5 billion, but still a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow). 

 

ETFs had polarized trends this week, with a substantial weekly redemption in equity ETFs and a solid week for bond ETFs. Equity ETFs experienced an $8.7 billion outflow w/w, while Fixed Income ETFs experienced $3.0 billion in inflows. The previous week saw a $4 billion inflow into stock ETFs and a $818 million inflow into bond ETFs. The 2014 weekly averages are now a $385 million weekly inflow for equity ETFs and a $1.0 billion weekly inflow for fixed income ETFs. 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $16.4 billion spread for the week ($8.0 billion of total equity outflow versus the $8.5 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.4 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   

 

ICI Fund Flow Survey - Best Week All Year For Bonds Versus Very Light Week For Equities - chart11

ICI Fund Flow Survey - Best Week All Year For Bonds Versus Very Light Week For Equities - chart12

 

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product:

 

ICI Fund Flow Survey - Best Week All Year For Bonds Versus Very Light Week For Equities - 2

 

ICI Fund Flow Survey - Best Week All Year For Bonds Versus Very Light Week For Equities - 3

 

ICI Fund Flow Survey - Best Week All Year For Bonds Versus Very Light Week For Equities - 4

 

ICI Fund Flow Survey - Best Week All Year For Bonds Versus Very Light Week For Equities - 5

 

ICI Fund Flow Survey - Best Week All Year For Bonds Versus Very Light Week For Equities - 6

 

 

Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:

 

ICI Fund Flow Survey - Best Week All Year For Bonds Versus Very Light Week For Equities - 7

 

ICI Fund Flow Survey - Best Week All Year For Bonds Versus Very Light Week For Equities - 8

 

 

Net Results:

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $16.4 billion spread for the week ($8.0 billion of total equity outflow versus the $8.5 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.4 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 

 

ICI Fund Flow Survey - Best Week All Year For Bonds Versus Very Light Week For Equities - 9.2 

 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 


Scary WMT Visual ***Correction

Takeaway: The comp miss is obvious. But the EPS miss is startling given historical context. Not a great start for new CEO McMillon.

Chart 1 shows what everybody already knows, that WMT comps disappointed. The company cited weather for 20bps of the decline. If there's any retailer who's data we trust, it's Wal-Mart's. But the 2-year trend, which we place much heavier weight on as it relates to drilling down the real underlying trend, is nothing to write home about. This plays right into Hedgeye's #growthslowing theme as it relates to the US Consumer.

 

Scary WMT Visual ***Correction - wmt comps

 

The more telling visual is the EPS miss. In 11 years, WMT has only missed 12 times, and nine of those were by a penny. Today it missed by a nickel. That's only happened once before -- in 2007. The blue bars in this chart show the absolute EPS variance to consensus for each quarter. The dots refer to the right axis showing the percent beat or miss in each period.   Not a good way to start things off in the first quarter for new CEO Doug McMillon.

 

Scary WMT Visual ***Correction - eps variance 


INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG

Takeaway: Sub-300k initial claims takes us back to 1999 / 2006, for better or worse. It'll be interesting to see if and when wage inflation engages.

Party Like It's 1999 ...

The labor market is heading very much in the right direction again. This morning's data marked just the second time since 2007 that the SA print came in below 300k. As the chart below shows, 300k is a Rubicon of sorts in that it has historically coincided with levels of near-peak employment such as 1999 and 2006. It's interesting to look at the contrast between then and now as the unemployment rate and NFP reports remain well off the levels seen in those respective timeframes. The disconnect has largely to do with the long-term unemployed, both those being counted in the data and those who've dropped out of the work force, either due to disability or otherwise. If one excludes those in the long-term unemployed category one finds that the labor market today is functionally similar to that last seen in the '99 and '06 periods, albeit with much more modest wage inflation. We would reiterate the question, however, that if claims are a measure of slack in the labor force and slack is tight it would seem reasonable to assume that wage inflation should be coming in the near future. The one wrinkle here remains housing, which is showing plenty of signs of ongoing deceleration.

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 9

 

The Data

Prior to revision, initial jobless claims fell 22k to 297k from 319k WoW, as the prior week's number was revised up by 2k to 321k.

 

The headline (unrevised) number shows claims were lower by 24k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -2k WoW to 323k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -6.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -5.2%

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 1

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 2

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 3

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 4

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 5

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 6

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 7

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 8

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 10

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 11

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 12

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 13

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 19

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 14

 

Yield Spreads

The 2-10 spread fell -1 basis points WoW to 218 bps. 2Q14TD, the 2-10 spread is averaging 226 bps, which is lower by -13 bps relative to 1Q14.

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 15

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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