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DFRG: THOUGHTS INTO THE PRINT

DFRG: THOUGHTS INTO THE PRINT - DFRG13

 

DFRG reports on Tuesday, July 22nd BMO.

 

Takeaway: DFRG remains on the Hedgeye Best Ideas list as a short.  We expect weak casual dining trends and cost of sales inflation (beef, shrimp, milk, cheese) to pressure margins in the Q.  While Del Frisco's may have pricing power at the Double Eagle concept, we doubt they have any at the other two concepts.  That said, same-store sales estimates at Grille (+2.9%) and Sullivan's (-0.1%) continue to look aggressive.

 

Investment Thesis

The company currently screens as one of the most expensive stocks on both a Price-to-Sales and EV-to-EBITDA basis in the casual dining industry.  We believe there are a number of red flags that the Street is unwilling to acknowledge right now, including decelerating same-store sales and traffic trends, declining margins, declining returns, increasing cost pressures, expensive operating leases, peak valuation, positive sentiment and high expectations.  We're confident the stock is dislocated from its intrinsic value as our sum-of-the-parts analysis suggests notable downside.  You can review our full thesis here.

 

Earnings Expectations

For 2Q14, the Street expects revenues of $69.10 million (+14% YoY), adjusted EPS of $21.00 (+4% YoY), and system-wide same-store sales of +2.3% (led by +3.6% growth at Del Frisco's Double Eagle).  We see downside to earnings driven by disappointing comps at Grille and Sullivan's as well as margin pressure due to significant food inflation.

 

Same-Store Sales Trends

Two-year same-store sales trends are plain ugly, but the Street is baking in a recovery in 2Q14.  We're slightly less optimistic.  Grille is still defining its target market and Sullivan's hasn't yet proven its capable of a turnaround.  We believe any potential upside will be driven by the Double Eagle concept, in which case management would need to be able to take ample pricing in the Q.  Certainly a risky proposition given the discounting trends we're seeing across the industry.

 

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Margins

The Street expects slight restaurant level and operating margin deterioration in the quarter, mostly due to food cost pressures.  The real disconnect, however, comes in back half of the year with the Street assuming restaurant level margin expansion in 3Q14 and operating margin expansion in 4Q14.  We continue to expect restaurant level and operating margin deleverage as Grille (lower margin concept) becomes a larger percentage of the portfolio.  Recall that DFRG plans to build 5 new Grille's this year and only 1 new Del Frisco's.

 

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Valuation

DFRG is currently trading at 24.96x P/E and 11.58x EV/EBITDA on a NTM basis.  This is well ahead of its casual dining peers which, on average, trade at 17.1x P/E and 9.4x EV/EBITDA on a NTM basis.

 

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Sentiment

77.8% of analysts rate DFRG a buy, 11.1% a hold and 11.1% a sell.  Furthermore, short interest comprises 6.59% of the float.

 

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Risks

Immediate-term risks to the bear case include strong same-store sales trends across the board and management's ability to take ample pricing to protect margins.  Longer-term risks to the bear case include continued strength in the high-end dining category, system-wide same-store sales acceleration, a quicker than expected turnaround at Sullivan's and Grille's ability to prove itself as a legitimate growth concept in 2014. 

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


HEDGEYE CONSUMER SURVEY: DOES CMG HAVE PRICING FLEXIBILITY?

CMG remains one of our core longs in the restaurant space.

 

With CMG getting set to release EPS after the close, one of the topics that will be top of mind is pricing and the consumer's reaction to the recent menu price increase.  We recently surveyed 500 consumers to gauge their response to Chipotle's recent menu price increase.

 

Summary: We believe CMG has the flexibility to raise prices, but as with any consumer company it is limited.  The results of our survey suggest that most consumers are resistant to the price increase, but the details under the hood suggest that CMG's core consumer is much more open to it.

 

THE HEDGEYE SURVEY

Question: Chipotle Mexican Grill is raising prices. Why will you pay more for its food?

 

Respondents were given four answers to choose from:

  1. I will not pay more
  2. Natural, high quality ingredients
  3. The speedy, customized service style
  4. Both

 

Not surprisingly, 51.4% of consumers said they would not pay more for Chipotle's food.

 

HEDGEYE CONSUMER SURVEY: DOES CMG HAVE PRICING FLEXIBILITY? - 1

 

What is interesting, however, is that 65.7% of consumers age 65+ made up the largest portion of those resistant to higher prices.  Importantly, Chipotle's key cohorts (Millenials and Gen Y) are much more forgiving about the price increase.  Additionally, the younger cohorts valued high quality ingredients more than the older cohorts.

 

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Lastly, it appears suburban consumers are far more resistant to price increases than urban consumers.

 

HEDGEYE CONSUMER SURVEY: DOES CMG HAVE PRICING FLEXIBILITY? - 3

 

If you would like more details about our Chipotle pricing survey, please give us a call.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


Cartoon of the Day: Double Bubbles

Cartoon of the Day: Double Bubbles - Bubble chart cartoon 07.21.2014

 Social media and biotech stocks are firmly in bubble territory.

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MACAU: PLACEHOLDER FOR WEEK 3 OF JULY

The 3rd week of July provides us with the placeholder table revenue figure of HK$5,425 million or HK$775 million per day.  Thus, we would caution investors not to rely on this number.  The fourth and fifth (stub) weeks should provide some volatility to catch up on the placeholder 3rd week.  

 

Our full month projection is for July YoY GGR growth down low single digits.

 

In terms of market share, Galaxy continues to crush it at the expense of MPEL and MGM.  We remain negative on the Macau stocks general but like the long setup here for Galaxy

 

MACAU: PLACEHOLDER FOR WEEK 3 OF JULY - macau

 

MACAU: PLACEHOLDER FOR WEEK 3 OF JULY - macau2



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