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RCL: MOMO FROM EUROPE/QUANTUM

Q2 and Q3 look like beats although we’re not sure management will raise guidance when they report company earnings on Thursday

 

 

CALL TO ACTION

RCL will report Q2 earnings this Thursday morning.  We expect a Q2 beat and while Q3 guidance could match consensus estimates, our proprietary pricing survey is suggesting another beat in Q3.  Thus, we remain above the Street for 2014 as a much stronger Europe offsets a still struggling Caribbean market.

 

ESTIMATES

We expect Q2 net yields (constant-currency) and EPS to be 2.8% and $0.54, respectively, above the consensus EPS estimate of $0.52.  Given what we’ve seen out of Europe on pricing and bookings, we expect Q3 yield guidance of +4-5%, which should be enough to placate the bears.  For Q3, we’re forecasting 4.9% net yield growth and $2.19 in EPS versus the Street EPS estimate of $2.11. 

 

EUROPE

We usually prefer to focus on sequential pricing trends as YoY pricing indicators are highly volatile and weak in their predicative power in signaling price pivots.  However, we feel it is worthwhile to highlight the rapid ascent RCL has seen in European YoY pricing as this year has progressed.

 

As seen in the chart from our mid-July pricing survey below, we believe European pricing (as weighted by brand) have averaged 15% YoY growth for Q2 sailings and averaged 10% YoY growth for Q3 sailings.  Q4 pricing is trending close to double digits YoY as well.  Given the strength in bookings, particularly for the RC brand, European yields could be +20% for Q2 and +15% for Q3.  Europe will play a prominent role in Q3 as it accounts for 44% of all RCL sailings, compared with 22% in Q2.  

 

RCL:  MOMO FROM EUROPE/QUANTUM  - rcl1

 

QUANTUM OF THE SEAS

This ‘transformational’ ship is getting quite a lot of positive buzz.  In fact, it’s one of the few bright spots in the overcrowded, fiercely competitive Caribbean market.  Agents continue to rave about Quantum, which has held pricing for its winter itineraries since we started tracking in February.  We believe Quantum will easily take over the NJ/NY market for Winter 2014/Spring 2015 Caribbean sailings, at the expense of Norwegian Gem and Breakaway

 

2015

As we look out to 2015, Quantum’s sister Anthem of the Seas is seeing increased demand for its summer 2015 sailings out of Southhampton.  RCL will need this surge as the company deals with some of the toughest comps and higher capacity in Europe.  China, while an exciting opportunity, will certainly be a wild card in the 2H of 2015.

 

CONCLUSION

We are encouraged by the sticky pricing driven partially by easy comps in Europe for the RCL brands.  Given the persistently weak pricing in the overcrowded Caribbean market, to which RCL is not immune, we do not believe RCL will raise its previously disclosed FY 2014 net yield guidance of 2-3%. However, RCL will receive a big lift in Q4 Caribbean when Quantum of the Seas hits the market in November 2014.  As we’ve seen multiple times, investors are giddy whenever a media-happy new ship is about to be deployed.


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.

 

DFRG: THOUGHTS INTO THE PRINT - 22

DFRG: THOUGHTS INTO THE PRINT - dfrg3

DFRG: THOUGHTS INTO THE PRINT - dfrg4

DFRG: THOUGHTS INTO THE PRINT - dfrg5

DFRG: THOUGHTS INTO THE PRINT - dfrg12

 

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.

 

DFRG: THOUGHTS INTO THE PRINT - dfrg6

DFRG: THOUGHTS INTO THE PRINT - dfrg7

DFRG: THOUGHTS INTO THE PRINT - dfrg8

 

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.

 

DFRG: THOUGHTS INTO THE PRINT - dfrg9

DFRG: THOUGHTS INTO THE PRINT - dfrg10

 

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.

 

DFRG: THOUGHTS INTO THE PRINT - dfrg11

 

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.

 

HEDGEYE CONSUMER SURVEY: DOES CMG HAVE PRICING FLEXIBILITY? - 2

 

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


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

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.

SUBSCRIBE TO CARTOON OF THE DAY.

 


VIDEO: McCullough: 'Bull Market Narrative Is Getting Ridiculous'

Hedgeye Risk Management CEO Keith McCullough and JonesTrading chief market strategist Michael O’Rourke discuss geopolitical risk and whether the bull market in stocks is getting long in the tooth on Fox Business' "Opening Bell." According to McCullough, "the real bull market is in bonds, gold, and anything slow-growth, yield-chasing that reflects a slower economy."


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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20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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