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BOBE: Leaving Much to be Desired

BOBE remains on the Hedgeye Best Ideas list as a long.

 

We continue to believe there is significant upside in BOBE, but it is likely that this upside will not be realized until we see several changes at the senior level.  Despite an uninspiring quarter, we find solace in the fact that we are one step closer to this becoming a reality.  The 1QF15 earnings call was simply painful to listen to.  Management's vision for the future of this company is outdated and will not materially improve the company or generate the level of returns shareholders deserve.

 

The comments from CEO Steven Davis speak to how disconnected he is from reality -- "Bob Evans Restaurants and Bob Evans Farms Food are making meaningful progress as both businesses leverage the significant capital investment each has made over the last several years."  To put this in perspective, BOBE's EPS has declined from $2.39 to $1.68 over the past year and 1QF15 EPS just declined 83%.

 

Mr. Davis goes on to say that both of BOBE's operating segments remain challenged by macroeconomic factors such as the continuation of a competitive promotional environment and weak consumer confidence.  Two days ago, the Conference Board said that consumer confidence in the U.S. climbed to its highest level in nearly seven years in August.  To be fair, however, we do suspect that BOBE's core customer (lower-middle to middle income guests in the Midwest) remains financially challenged.

 

Bob Evans restaurants same-store sales declined 2% in 1Q15, underperforming the Knapp-Track Family Category which declined 1.6% during this time.  Mr. Davis went into great detail to explain that a closer look into their core markets suggests they are outperforming their most comparable competitors.  Nitpicking statistics is a tired practice that we don't typically value.  The truth is, you're either transforming the business to grow customer counts or you're not!

 

Management provided the following points to suggest the future is brighter for Bob Evans Restaurants:

  1. The key to achieving the expected results relies upon the successful rollout of the Broasted Chicken platform
  2. Day-part expansion
  3. Expanded holiday operating hours
  4. Normalized weather

 

While these are all big question marks, one thing is clear: management hasn't identified a differentiated strategy to drastically improve its positioning in a fast-changing restaurant landscape.  Day-part expansion will be particularly challenging.  The lunch business is weaker with lower guest satisfaction scores and the dinner business is also weak -- operations are more challenged, the staff is subpar, carry-out orders are at their highest and it’s the most competitive day-part.

 

Management has consistently proven that they have a difficult time managing a complex business; they can't even come up with an effective marketing strategy!  Improving the marketing of take-out is not the silver bullet here.  They still expect to achieve 2015 sales goals which they slashed significantly last quarter, but 2HF15 guidance looks aggressive to us.

 

As silly as it seems, management believes that the Broasted Chicken platform will be its saving grace.  Although the Broasted Chicken platform represented 11% of sales mix in the Cincinnati market it's important to remember that a significant portion of this is likely driven by initial trial.  Repeat business will be critical and we're not certain they'll get it.

 

It's difficult to get excited about this company until the new board members complete their "initiation" to every aspect of the business.  After a short honeymoon period, we'd expect to see more changes to the operating structure of the company.  There's much to be done.

 

BOBE: Leaving Much to be Desired  - 1

 

Feel free to email or call with questions.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


ICI Fund Flow Survey - 2-to-1 Demand for Fixed Income over Equities

Takeaway: Despite a slight rebound in equity fund flow trends last week, fixed income demand still outpaced stocks by a 2-1 ratio

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent 5 day period ending August 20th, equity fund flow trends rebounded marginally with domestic stock funds breaking a 16 week running outflow. However intermediate term trends are still intact with aggregate fixed income netting $4.9 billion in net new flow in the most recent five day period, nearly a 2-1 ratio versus the $2.6 billion allocated to equities. Defensive positioning by the investment community continues with taxable bonds having inflow in 26 of the past 28 weeks. Domestic stock funds conversely have had outflow in 16 of 17 weeks and continue to be mired in the seasonally weakest part of the year. We recommend that investors avoid Janus Capital (JNS) and T Rowe Price (TROW) during this time and into 2015 based on this challenging industry data.

 

ICI Fund Flow Survey - 2-to-1 Demand for Fixed Income over Equities - chart 2 seasonality

 

 

Total equity mutual funds had inflow in the most recent 5 day period ending August 20th with $2.6 billion coming into all stock funds as reported by the Investment Company Institute. The composition of the inflow continued to be weighted towards International stock funds with $1.9 billion coming into foreign funds making it a perfect 33 for 33, i.e. inflows in every week of 2014 for the category. While domestic stock funds last week had a marginal $738 million subscription and snapped 16 consecutive weeks of redemption, over $40 billion has been redeemed from U.S. stock funds over the past 4 months. We don't categorize a drawdown sequence as having been broken until there are 4 consecutive weeks of inflow and thus we are still looking for weak domestic fund trends for the rest of the year, especially entering the seasonally weak fourth quarter. The running year-to-date weekly average for equity fund flow is now a $1.5 billion inflow, which is now well below the $3.0 billion weekly average inflow from 2013. 

 

Fixed income mutual funds had another positive week of production with $4.9 billion coming into the asset class. The inflow into taxable products of $4.1 billion made it 26 of 28 weeks with positive flow. Municipal or tax-free bond funds put up a $814 million inflow, making it 31 of 32 weeks with positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $1.9 billion weekly inflow, an 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). 

 

ETF results were broadly positive during the week with inflows into both equity funds and fixed income products. Equity ETFs put up a $8.8 billion subscription while fixed income ETFs put up a $2.7 billion inflow. The 2014 weekly averages are now a $1.5 billion weekly inflow for equity ETFs and a $995 million 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 positive $3.7 billion spread for the week ($11.5 billion of total equity inflow versus the $7.7 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 $4.0 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). The 52 week moving average chart displays the declining demand for all equity products (funds and ETFs) for the safety and security of fixed income. 

 

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 - 2-to-1 Demand for Fixed Income over Equities - chart 1

ICI Fund Flow Survey - 2-to-1 Demand for Fixed Income over Equities - chart 2

 

 

 

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

 

ICI Fund Flow Survey - 2-to-1 Demand for Fixed Income over Equities - chart 3

 

ICI Fund Flow Survey - 2-to-1 Demand for Fixed Income over Equities - chart 4

 

ICI Fund Flow Survey - 2-to-1 Demand for Fixed Income over Equities - chart 5

 

ICI Fund Flow Survey - 2-to-1 Demand for Fixed Income over Equities - chart 6

 

ICI Fund Flow Survey - 2-to-1 Demand for Fixed Income over Equities - chart 7

 

 

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

 

ICI Fund Flow Survey - 2-to-1 Demand for Fixed Income over Equities - chart 8

 

ICI Fund Flow Survey - 2-to-1 Demand for Fixed Income over Equities - chart 9

 

 

Net Results:

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $3.7 billion spread for the week ($11.5 billion of total equity inflow versus the $7.7 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 $4.0 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). The 52 week moving average chart displays the declining demand for all equity products (funds and ETFs) for the safety and security of fixed income.

 

ICI Fund Flow Survey - 2-to-1 Demand for Fixed Income over Equities - chart 10 

 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA



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THE 0.1% CLUB: INITIAL CLAIMS AND 2Q GDP

Takeaway: The high frequency labor market data remains strong. A positive revision to the trade balance drove the upside in the 2Q14P GDP estimate

INITIAL CLAIMS 

THE DATA:  The high-frequency labor market data remains strong with Initial claims registering their 14th consecutive week of -10% YoY improvement on a rolling NSA basis.  Headline claims declined -1K to +298K vs last week’s revised number with rolling claims falling -1.25K WoW to 299.75K.   

 

THE CYCLE:  As we’ve highlighted, when initial claims (rolling, SA) have reached their current level, historically, the broader market index (S&P 500) has gone on to advance for another 12-18 months.   

 

Further, our profiling of the last 7 economic cycles shows initial claims have served as a top leading indicator - reaching trough levels ~7 months ahead of the peak in the economic cycle.  See our previous note for a more detailed discussion >> PATIENCE OR PENURY: THE JOBLESS, WAGE-LESS, INVESTMENT-LESS RECOVERY?  

 

No cycle is the same, but historical cycle precedents and the ongoing improvement in the claims data suggests the peak in the current economic cycle is not immediately imminent. 

 

THE UNFORTUNATE FEW:  Meanwhile, the unfortunate fraction that is the recently fired as a percent of both the total and employed populations continues to make lower lows.  At present just 0.12% of the civilian population is recently unemployed – an all-time low.   

 

In isolation, the claims data remains supportive of a positive NFP number.  Of course, there’s two inputs into the net Hires equation (hirings less firings) and with employment still middling at the ~200K/mo level in the face of ongoing improvement in the claims data, we continue to largely fire on one labor market cylinder. 

 

source: Hedgeye Financials

THE 0.1% CLUB:  INITIAL CLAIMS AND 2Q GDP - 2 normal  1

 

THE 0.1% CLUB:  INITIAL CLAIMS AND 2Q GDP - Claims the 0.1  Club

 

THE 0.1% CLUB:  INITIAL CLAIMS AND 2Q GDP - Claims Cycle trough

 

THE 0.1% CLUB:  INITIAL CLAIMS AND 2Q GDP - Labor cycle table

 

 

2Q14 GDP (1st Revision):  Net Exports Drive the Non-Event 1st Revision

 

The positive revision to the trade balance drove the bulk of the upside revision to 2Q GDP.   No big surprises or much in terms of investible takeaways from this morning’s release  - below we summarily highlight the preliminary data.  The impact of the 1st revision can be seen on the far right column in the table.

 

Headline:  Positive +0.2% revision, taking real GDP to 4.2% QoQ SAAR from 4.0%.   The inflation estimate ticked higher by 0.1%, so the revision was a function of higher ‘growth’ estimates – principally, a positive revision to NX.

 

C + I + G + NX:  The positive revision to net exports supported most of the upside in the headline increase.  The GDP contribution from NX was revised higher by 0.18 with “G” down small, “I” up modestly, and “C” unchanged. 

  • Consumption:  Aggregate “C” was unrevised with a downward revision to Nondurables balancing modest positive revisions to Durables and Services. 
  • Investment:  Downward revision to inventories offset by a sizeable positive revision to Nonresidential Investment
  • Trade Balance:  the confluence of a 0.6% revision to Export growth and a -0.7% revision to Import growth drove the positive revision to NX 

Real Final Sales (GDP less Inventory Change):  grew +2.8% QoQ….revised +0.5%

 

Real Final Sales to Domestic Purchasers (GDP less exports less inventory change):  This is arguably the best read on overall domestic, private sector demand: grew +3.1% QoQ …revised +1.0% 

 

THE 0.1% CLUB:  INITIAL CLAIMS AND 2Q GDP - GDP Table

 

 

Christian B. Drake

@HedgeyeUSA

 


Initial Claims: Labor Market Chugging Along

The last couple weeks have seen little change in trend from the initial jobless claims data. Overall, the number of people losing their jobs continues to decline at a rate of roughly 10% year-over-year. this has been the trend now for the last ~14 weeks. This week's print showed a 10.3% y/y improvement, which was slightly better than last week's 9.6% improvement and down a bit from the 11% improvement two weeks ago. 

 

As we've highlighted recently, when initial claims (rolling, SA) have reached the level they're currently at the broader market index (S&P 500) has gone on to advance for another 12-18 months - at least, this has been the case in the last few cycles. As Mark Twain famously said, history never repeats, but it does rhyme.

 

The Data

Prior to revision, initial jobless claims fell 0k to 298k from 298k WoW, as the prior week's number was revised up by 1k to 299k.

 

The headline (unrevised) number shows claims were lower by 1k WoW. 

Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -1.25k WoW to 299.75k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -10.3% lower YoY, which is a sequential improvement versus the previous week's YoY change of -9.6%

 

Initial Claims: Labor Market Chugging Along - chart1


LEISURE LETTER (08/28/2014)

Tickers:  LVS, 880:HK, CHDN, RCL

EVENTS

  • Aug 28:  Hollywood Dayton Raceway opens
  • Sept 1/2:  Revel closes
  • Aug 28- Sept 2: July Nevada gaming revenues released

COMPANY NEWS 

LVS – Metals Trader’s Brother Sued by Sands Over Gambling Debt(Bloomberg) 

Chen Jilong, a so-called premium casino player at Marina Bay Sands Pte, owes S$1.88 million ($1.5 million) and has refused to make payment, according to a lawsuit filed with the Singapore High Court earlier this month. The casino gave him S$3 million credit in November 2011, according to court papers.

Takeaway:  Will we see tighter credit requirements for premium/VIP players?

 

880:HK (Macau Business Daily) SJM casino workers from Grand Lisboa say they will clock in for work on Saturday morning, as usual. But they won’t deal cards to punters at their tables.  Some 1,000 dealers from Grand Lisboa are expected to go on strike at their place of work from Saturday morning, until Sociedade de Jogos de Macau (SJM Holdings Ltd) takes action to resolve their demands

Takeaway:  Labor issues persist

 


 

RCL (TTG)RCL CEO Richard Fain insisted the “price value” for Royal Caribbean’s latest offering was “astronomical”. He added that although he expected the new ship to be “nicely profitable with good margins”, he still believed prices for the lines’ cruises were currently too low.  “The UK is still a young market – not as much as Asia, but still relatively young, and it has a lot of growth potential,” he added.

Takeaway:  We agree with Fain.  Quantum will give RCL a nice boost but the core RC fleet is struggling with pricing in the Caribbean. 

INDUSTRY NEWS

Japan – Toru Mihara, a professor at the Osaka University of Commerce who helped lawmakers draft the casino bill, told reporters the government should tackle the issue of problem gambling through counselling and other means, and not by imposing a ban on local gamblers.  "I would estimate that about 80% of all visitors will be Japanese. The remainder will be foreigners," he said.

 

Separately, Mihara said that given the likelihood that the government will not submit other important legislation which would be given discussion priority, it’s highly likely that the casino bill will be passed by November.  Japan’s parliament is expected to convene for its fall session at the end of September and meet through December. The bill, called a promotion law, wouldn’t immediately lift the ban on casino gambling.  It would direct the government to craft another law to give the final go-ahead.

Takeaway:  Looking good for the fall...

 

Chui (Macau News) – Macau CEO Fernando Chui Sai On said that his second-term government would study the setting-up of a mechanism for non-local workers to “bow out” during an economic downturn to ensure that locals will have jobs.  He also urged citizens to have confidence in his government’s determination to guarantee local workers’ benefits and rights which would never be allowed to be undermined by non-local workers.

Takeaway:  Chui may need to be more flexible with foreign labor if the new Cotai casinos cannot find enough local croupiers or casino supervisors. 

 

Jobless (DSEC)  – Macau’s unemployment rate for May-July stood at 1.7%.  It has remained at 1.7% since Nov 2013.

Takeaway:  Persistently low unemployment increases upward pressure on labor and vulnerability of casinos to labor demands. 

 

Regionals & REIT Conversion (LVRJ) Reporter Howard Stutz is again fanning the flames of potential REIT conversions for both BYD and PNK with a recent story highlighting how various activist investors believe the real estate owned by Pinnacle Entertainment and Boyd Gaming Corp. is key to unlocking hidden value within the Las Vegas-based regional gaming operators. 

Takeaway: Mr. Stutz relies on dated news for his story which is only worth mentioning because based on our March 18, 2014 "EXPERT CALL: THE REIT STRUCTURE: A VIABLE ALTERNATIVE FOR BYD AND OTHERS" we have held the position a tax-free REIT spin-offs by BYD and PNK are virtually impossible to effectuate.  A taxable spin is possible and would be value creating, in our view.

 

Affinity Gaming Names New CEO – Las Vegas-based casino operator Affinity Gaming, a portfolio company of Z Capital Partners, has appointed Michael Silberling as CEO. Silberling will also be added to the board of directors. Previously, he worked at Caesars Entertainment Corp. Also joining the board are James Zenni, Andrei Scrivens and James Cacioppo. Affinity Gaming is a diversified casino gaming company headquartered in Las Vegas, Nevada. The Company’s casino operations consist of 11 casinos in four states, five of which are located in Nevada, three in Colorado, in Missouri and one in Iowa. 

MACRO

Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.


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