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PLKI: Delivering the Goods

Takeaway: PLKI is up double-digits intraday and rightfully so.

Popeyes Louisiana Kitchen, Inc. (PLKI) continues to be on our Investment Ideas list as a long.

 

PLKI released earnings after the close yesterday, posting exceptional first quarter results despite a sluggish QSR environment.  Rather than blame the weather, PLKI grew global, domestic and international same-store sales by 4.5%, 4.3% and 5.8%, respectively, while beating top and bottom line estimates.  Similar to what we heard from Chipotle, management noted a strong bounce back in sales following periods of unfavorable weather.

 

Popeyes continues to outperform the domestic chicken-QSR and overall-QSR segments.  Management noted intense competition in the quarter, as direct competitors sought to take advantage of favorable chicken costs by shifting their menu and promotional focus to chicken products.  We believe this increased promotional activity actually benefitted Popeyes by bringing attention to its superior product.  The company managed to increase its share in the domestic chicken-QSR segment to 22.3% from 20.2% a year ago. 

 

Commodity prices are expected to be favorable throughout 2014, primarily led by lower chicken costs. Surging shrimp prices were a bit of a concern heading into the release, but management was quick to point out that shrimp only accounts for approximately 5% of total annual spend.  All told, management doesn’t feel inclined to take any price increases this year as value continues to be very important to their guests.

 

The majority of leverage in its operating model moving forward will be driven by top line sales and, to a lesser degree, enhanced back of house operations.  To that extent, management has notable top line drivers in place including the continuation of its reimage program (65% of domestic stores are currently remodeled; 80% will be by year end), the virtual success cycle of advertising (growing sales drive an increase in media spend), and a full calendar of resonant promotional activity.  Remodels have typically resulted in a 3-4% sales lift although the remaining remodels will be some of the most expensive and dramatic ones to date, suggesting greater upside to any sales lift.  In addition, the new model of restaurants (which is leading the expansion efforts) is generating $1.6 million in average unit volumes, significantly greater than the old model which generates $1.3 million.

 

Longer-term, we believe a significant domestic and international growth opportunity lies ahead for Popeyes and are confident they will expand at a rate that doesn’t sacrifice returns.  Aside from continued expansion, we’re attracted to Popeyes’ diversified revenue stream and stable cash flows which enables management to continue pursuing value enhancing initiatives. In our view, Popeyes is well-positioned to outperform for the remainder of 2014 and we continue to view annual long-term guidance of 1-3% same-store sales growth, 4-6% unit growth and 13-15% adjusted EPS growth as achievable.

 

What we liked:

  • It is clear to us that Popeyes is one of the best managed companies in the restaurant space.
  • Global same-store sales increased 4.5% y/y.
  • Total domestic same-store sales increased 4.3% y/y.
  • International same-store sales increased 5.8% y/y.
  • Management didn’t blame weather and noted a strong rebound in sales following unfavorable periods.
  • Popeyes’ domestic same-store sales continue to outpace both the chicken-QSR segment and overall QSR segment.
  • Popeyes increased its market share in the domestic chicken-QSR segment to 22.3%, up from 20.2% a year ago.
  • Restaurant food, beverages and packaging costs for company operated stores decreased 40 bps to 32.7% of sales.
  • Restaurant employee, occupancy and other costs for company operated stores decreased 34 bps to 46.9% of sales.
  • Restaurant operating profit for company operated stores increased 74 bps to 20.4% of sales.
  • Adjusted EPS of $0.46 grew 15% y/y.
  • Free cash flow grew 21% y/y to $14.2 million.
  • The company repurchased approximately $10 million worth of stock.
  • The company increased full-year same-store sales guidance to 3-4%, up from 2-3%.
  • The company increased full-year adjusted EPS guidance to $1.58-1.63, slightly up from $1.57-1.62.

 

What we didn’t like:

  • Operating margin decreased 15 bps y/y to 26.7%.

 

PLKI: Delivering the Goods - 1

PLKI: Delivering the Goods - 2

PLKI: Delivering the Goods - 3

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst



Jobless Claims: Strong Labor Means Falling Rates

Takeaway: Expect a strong May labor market print next Friday. This should set the stage for more tapering and more downforce on long-term rates.

Claims Strong = Rates Down

Yesterday the 10-Year Treasury yield dropped 8 basis points to close at 2.44%, down from 2.52% on Tuesday. In early May, we argued that the Fed's ongoing taper, facilitated by strong labor market data, was indirectly causing downward pressure on long-term rates. This was based on the idea that following the expiration of both QE1 and QE2 we saw 100+ basis points declines in long-term rates.

 

Jobless Claims: Strong Labor Means Falling Rates - how to get a better job

 

With that in mind, today's initial jobless claims data is very strong, and the ongoing taper of QE3 should continue and, by extension, the ongoing decline in long-term rates should persist over the short/intermediate term. The year-over-year change in NSA initial claims came in at -15% and the four-week rolling average is now lower by 10.4% year-over-year versus the prior week being lower by 5.3%.  It's fair to say that this is some of the strongest labor market data we've seen in a while, and it bodes well for next Friday's May labor market report. It's also interesting in the context of the negatively revised 1Q GDP print.

The Data

Prior to revision, initial jobless claims fell 26k to 300k from 326k week-over-week, as the prior week's number was revised up by 1k to 327k.

 

The headline (unrevised) number shows claims were lower by 27k week-over-week. Meanwhile, the four-week rolling average of seasonally-adjusted claims fell -11k week-over-week to 311.5k.

 

The four-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -10.4% lower year-over-year, which is a sequential improvement versus the previous week's year-over-year change of -5.3%

 

Jobless Claims: Strong Labor Means Falling Rates - 2

 

Jobless Claims: Strong Labor Means Falling Rates - 5

 

*   *   *   *   *   *   *

 

Editor's Note: This is an excerpt of a research note that was originally provided to subscribers on May 29, 2014 at 9:35 a.m. EST by Hedgeye’s Financials team. Follow Jonathan Casteleyn and Josh Steiner on Twitter @HedgeyeJC and @HedgeyeFIG.

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PENDING HOME SALES REMAIN SLUGGISH

Takeaway: April pending home sales rose 40 bps m/m, but are down 9% year-over-year - consistent with the trend over the last four months.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

 

 

PENDING HOME SALES REMAIN SLUGGISH - Compendium 052914

*Note - to maintain cross-metric comparability, the purchase applications index shown in the table below represents the monthly average as opposed to the most recent weekly data point.

 

 

Today's Focus: April Pending Home Sales Index

The National Association of Realtors (NAR) today released its Pending Home Sales Index for the month of April. Pending Home Sales rose by 0.4% month-over-month to an index level of 97.8 (vs 97.4 in March). For reference, an index value of 100 corresponds to the average level of contract activity in the year 2001. While the report was positive month-over-month, contract activity remains down year-over-year by 9%. This is a stark contrast vs where we were one year ago, when contract activity was running +10% year-over-year. Weakness on a year-over-year basis was pervasive geographically. The best performing region is the South, where contract activity is down 6.4% y/y while the West is the worst at -15.0%.

 

Pending Home Sales activity tends to lead price by ~18 months, as we show in the second chart below. This is why we are bearish on the outlook for HPI in 2H14 and 1H15. We expect the y/y weakness we're seeing in demand since the middle of 2013 will manifest in weaker rates of home price appreciation as we progress into 2014 and 2015. Inflections in the rate of HPI have historically been powerful macro tailwind/headwind drivers. 

 

 PENDING HOME SALES REMAIN SLUGGISH - PHS Index   YoY  TTM

 

PENDING HOME SALES REMAIN SLUGGISH - PHS vs Case Shiller 18Mo Lag

 

PENDING HOME SALES REMAIN SLUGGISH - PHS LT

 

PENDING HOME SALES REMAIN SLUGGISH - PHS by Region

 

PENDING HOME SALES REMAIN SLUGGISH - PHS vs Purchase Apps Line Chart unlagged 

 

PENDING HOME SALES REMAIN SLUGGISH - Pending vs Existing 1Mo Lag Line Chart

 

PENDING HOME SALES REMAIN SLUGGISH - Pending vs Existing 1Mo Lag Scatterplot

 

About Pending Home Sales:

The Pending Home Sales Index is a monthly data release from the National Association of Realtors (NAR) and is considered a leading indicator for housing activity in the US. It is a leading indicator for Existing Home Sales, not New Home Sales. A pending home sale reflects the signing of a contract, but not the closing of the transaction, which occurs 1-2 months later. The NAR uses data from the MLS and large brokers to calculate the Pending Home Sales index. An index value of 100 corresponds to the average level of activity during 2001.

 

Frequency:

The NAR Pending Home Sales index is released between the 25th and the 31st of each month and covers data from the prior month.

 

Joshua Steiner, CFA

 

Christian B. Drake


INITIAL CLAIMS: STRONG LABOR = FALLING RATES

Takeaway: Expect a strong May labor market print next Friday. This should set the stage for more tapering and more downforce on long-term rates.

Claims Strong = Rates Down

Yesterday the 10-Year Treasury yield dropped 8 bps to close at 2.44%, down from 2.52% on Tuesday. In early May we put out a note entitled "Tapering = Rates Falling", in which we argued that the Fed's ongoing taper, facilitated by strong labor market data, was indirectly causing downward pressure on long-term rates. This was based on the idea that following the expiration of both QE1 and QE2 we saw 100+ bps declines in long-term rates. See our note for more detail.

 

With that in mind, today's initial jobless claims data is very strong, and the ongoing taper of QE3 should continue and, by extension, the ongoing decline in long-term rates should persist over the short/intermediate term. The y/y change in NSA initial claims came in at -15% and the 4-week rolling average is now lower by 10.4% y/y vs the prior week being lower by 5.3%.  It's fair to say that this is some of the strongest labor market data we've seen in a while, and it bodes well for next Friday's May labor market report. It's also interesting in the context of the negatively revised 1Q GDP print.

 

To reiterate our conclusion from our early May note, falling rates means more tough sledding for Financials positively correlated to long-term rates such as banks (R = +0.62), Life Insurers (R = +0.75) and Online Brokers (R = 0.67). Conversely, negatively correlated Financials include the agency mortgage REITs like NLY, MFA (R = -0.90) and select bond fund managers (i.e. AB, where R = -0.45). Squaring these values will tell you the magnitude of the headwind you're fighting being long. Yield plays also do well amid falling rates so our recent Best Idea addition, OZM, should fare well alongside our traditional fixed income asset manager idea LM. 

 

The table below is from our May 6 note and shows the correlations of various Financial stocks to the 10-Year Treasury yield over the past year.

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - rates correlation table 2

 

The Data

Prior to revision, initial jobless claims fell 26k to 300k from 326k WoW, as the prior week's number was revised up by 1k to 327k.

 

The headline (unrevised) number shows claims were lower by 27k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -11k WoW to 311.5k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -10.4% lower YoY, which is a sequential improvement versus the previous week's YoY change of -5.3%

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 1

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 2

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 3

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 4

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 5

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 6

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 7

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 8

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 9

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 10

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 11

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 12

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 19

 

Yield Spreads

The 2-10 spread fell -10 basis points WoW to 208 bps. 2Q14TD, the 2-10 spread is averaging 224 bps, which is lower by -15 bps relative to 1Q14.

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 15

 

INITIAL CLAIMS: STRONG LABOR = FALLING RATES - 16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Waterfall of Risk

Client Talking Points

10YR UST

The yield crashes to 2.42% after snapping our 2.61% TAIL risk signal line a month ago – consensus (long rates) has had plenty of time to prepare for the waterfall of risk, but instead continues to send out emails saying why this “shouldn’t be happening” and why “it’s different this time.” US #ConsumerSlowing, reiterated.

YEN

Not interested in selling off versus USD after testing Hedgeye TREND support. This is an important signal as both the MOTHERS Index and Nikkei are signaling immediate-term TRADE overbought as well (highly correlated to the YEN/USD).

OIL

Food/energy now taking turns plundering the people as cost of living (US Rents) hits all-time highs. Brent sold off small yesterday but held all lines (TRADE, TREND, TAIL) of support. Buy #Inflation + Energy stocks (XLE, XOP) and stay short growth (Russell2000).

Asset Allocation

CASH 21% US EQUITIES 0%
INTL EQUITIES 10% COMMODITIES 22%
FIXED INCOME 24% INTL CURRENCIES 23%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

OC

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.

LM

Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason. 

Three for the Road

TWEET OF THE DAY

RUSSIA: leads gainers this morning +1.1% as Putin's Petro Dollars rip humanity a new one #InflationAccelerating @KeithMcCullough

QUOTE OF THE DAY

"Stop worrying about the potholes in the road and enjoy the journey." - Babs Hoffman

STAT OF THE DAY

Apple is officially buying Beats for $3 billion. The company will pay $2.6 billion up front, plus another $400 million over time. (CNN)


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