Takeaway: We disagree with David Tepper.
Takeaway: We are removing Bob Evans from our high-conviction stock idea list.
Sandell only won four board seats after gunning for eight. We’re not quite sure what shareholders were thinking when they voted, but the fact of the matter is they’d be better off with Sandell in control of the board.
CEO Steven Davis and Lead Director Michael remain in place, which is a big concern for us. Remember, they led Bob Evans into this mess in the first place.
Same-store sales trends continue to be uninspiring despite management’s attempt to stem the decline.
Sandell was the company’s savior, not the Broasted Chicken, and shareholders must now hope that four board members have enough pull to drive material change.
We’re not sold on this happening.
Although the headline U.S. jobs number disappointed (nonfarm employment advanced 142,000 vs expectations of 225,000) in August, the unemployment rate ticked down to 6.1%. All told, the read-through to the restaurant industry is rather encouraging, as employment growth increased year-over-year across our five primary age cohorts.
While we saw strength across the board, the most notable callout is the strength we saw in the 25-34 and 45-54 cohorts, which both posted their strongest month of employment growth in over three years. August marked the second straight quarter of employment growth in the 45-54 cohort which, prior to that, had seen 20 straight months of employment deterioration. This bodes particularly well for casual dining restaurants, which could begin to see a boost from this reversal.
In aggregate, widespread employment growth is bullish for both quick-service and casual dining restaurants. With that being said, however, we continue to favor select quick-service and fast-casual operators including JACK, CMG, WEN, KKD and PLKI.
August employment growth data:
- 20-24 YOA +2.40% YoY; +6 bps sequentially
- 25-34 YOA +2.61% YoY; +36 bps sequentially
- 35-44 YOA +0.54% YoY; +12 bps sequentially
- 45-54 YOA +0.63% YoY; +48 bps sequentially
- 55-64 YOA +2.61% YoY; -13 bps sequentially
Employment growth at full-service restaurants, limited-service restaurants and leisure & hospitality continues to grow, despite seeing steady deceleration since high of mid-2013 likely due to significant cost pressures these companies are facing on both the food and wage front.
In the chart below, we look at the correlation between TTM Leisure & Hospitality Employment Growth and TTM Knapp Comps. As we've pointed out before, Knapp same-store sales have historically tracked well with employment growth in the leisure & hospitality industry, however, this positive correlation broke down in mid-2012. Despite improving same-store sales numbers, this trend continues to support our case that the casual dining industry is in secular decline. In this type of environment, we believe that only the most nimble, innovative and operationally focused players will thrive.
Hedgeye CEO Keith McCullough sits down with JonesTrading Chief Market Strategist Mike O'Rourke, one of the last remaining bears on Wall Street, in the latest installment of Real Conversations. O'Rourke contextualizes the current bubble, warns of a coming "bear-mageddon" scenario, and addresses the waning effectiveness of QE.
1:04 One of the only bears left
2:10 Contextualizing the bubble
3:01 Undergoing a structural shift
4:08 Counter cyclical signals
4:35 The Fed will remain easy
5:58 The Bear-Mageddon scenario
6:58 Lower highs = negative growth signal
7: 53 Signs of an equity market top
8:47 Narrowing leadership in the stock market is a concern
10:24 When this bubble pops no one will be able to get out
11:20 Market turns can be dangerous
12:31 The most epic bubble of all time
14:59 Return on capital vs. return of capital
15:34 How do you cut from zero?
16:49 QE will stop working
Takeaway: We are adding EDV to Investing Ideas.
Our macro team is adding EDV to Investing Ideas. As CEO Keith McCullough wrote today:
Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP # this wk and the NFP number), it's time to really think through the un-Teppering of this bond market. This is an extended duration ETF (20-30yr). I am doubling down on our biggest macro call of 2014 - that US growth would slow and bond yields fall in kind.
Takeaway: SIGMA summary. ZQK equity nearly worthless - ripe to be restructured. PVH/KSS misrepresented by mainstream media – we don’t like either.
ZQK - 3Q14 Earnings
Takeaway: This one definitely deserves some commentary. There's definite brand value here, but there's just no bottom visible on the top line in what was once ZQK's core market. The company continues to have execution issues across several businesses. It will find a bottom -- and our sense is that it will be a matter of quarters instead of years. But until then, cash burn will increasingly be an issue. But one thing we can't shake is that we're seeing companies like Dollar General bid 12-13x EBITDA for marginal assets like FDO, which seems flat-out egregious from where we sit. And yet there's a company like ZQK with under $1bn in EV, but $1.3bn in NOLs. At this price, the equity is pretty much worthless, and the reality is that this company shouldn't be public. A purchase and balance sheet restructuring is just a matter of time.
PVH - 2Q14 Earnings/KSS Read Through
Takeaway: Business is better on the margin, but to be clear, this was one of those 'EBIT is still down, but just not down as bad as we guided' quarters. We're waiting to see how the Street comes in with EPS estimates. We definitely have a bias to the short side here.
One of the more interesting things was how PVH's comments on KSS were misrepresented by the mainstream media. Like clockwork, CEO Chirico was on Cramer immediately after the print (one of the few companies to religiously use this format as spin-control 16 hours before the conference call with the Investment Community). The following exchange was hysterical...
Chirico: "At Kohls, we have really started to see our business take off the last couple of weeks there."
Cramer: "That’s what I'm feeling, I'm feeling Kohls is making the turn."
Now, let's put this into context. PVH’s Izod brand launched at Kohl’s in mid-Aug. Of course that business is turning! That does not mean KSS as a whole is improving sequentially. KSS traded up on this, but it shouldn't have.
GIII - 2Q15 Earnings
BEBE - 4Q14 Earnings
ZUMZ - 2Q14 Earnings
Don't let the good-looking SIGMA deceive you -- ZUMZ guided down 3Q due to a weaker than expected sales outlook. Not a shocker that this happened in conjunction with the ZQK miss.
KORS - Silas Chou and Lawrence Stroll to Sell Remaining Stake in Michael Kors
- "Silas Chou and Lawrence Stroll are about to exit the Michael Kors business."
- "Michael Kors Holdings Ltd. has filed a shelf registration to sell slightly over 11.6 million shares of common stock in a secondary public offering that would have Chou and Stroll resign from the Kors board upon the closing date of the offering."
Takeaway: Chou and Stroll are the longest standing Board members of KORS (12 yrs). On one hand, we're glad they're gone. Their history in retail corporate governance never sat well with us (remember the early days of Tommy Hilfiger? That was Chou). On the flip side, when two Board members -- who have managed their own PA quite well over time -- both leave at the same time, it is never a good sign.
Fast Retailing- Uniqlo Tennis Bet Pays as Endorsers Featured at U.S. Open
- "Fast Retailing Co. is ready for war. The clothing maker’s battle begins Saturday, when world No. 1 Novak Djokovic takes on 10th-seed Kei Nishikori in the U.S. Open semifinal."
- "Billionaire Chairman Tadashi Yanai wins, regardless of the outcome. Both players, signed on in the last three years, will be wearing his Uniqlo brand clothes at the final Grand Slam of the year in New York."
Takeaway: Djokovic has always been a huge win for Fast Retailing, but the fact that they have two athletes competing in such a high profile event against one another is pretty huge. The irony is that they will win, but will also lose. Our sense is that this gives FAST the bug and it gets more aggressive in the endorsement game. Not good for the traditional sports brands.
COST, LB, GPS, BKE - August Comparable Store Sales
HD - Home Depot asks Canadians to report ‘unusual activity’ on credit cards
- "A spokesperson said Thursday the big box renovation store can’t yet confirm whether a breach has occurred at Canadian or U.S. stores."
- "'Our forensics and security teams have been working around the clock since we first became aware of a potential breach Tuesday morning,' Home Depot spokesperson Paula Drake told Global News."
- "Drake also advised Canadian consumers 'to closely monitor their accounts and contact their card issuers if they notice any unusual activity.'"
TGT - Target to open city store TargetExpress in Berkeley
- "Berkeley residents often complain there’s nowhere in their city to buy underwear. That might change now that Target has announced it will open one of its new breed of city stores, called TargetExpress, in downtown."
- "The Minneapolis-based retailer is poised to turn a long vacant building at the corner of Shattuck Avenue and Allston Way into one of its new-concept TargetExpress stores by March 2015."
JWN - Nordstrom Board of Directors Authorizes $1 Billion Share Repurchase Program
- "Nordstrom, Inc. announced today that its board of directors has authorized a repurchase program of up to $1 billion of the Company’s outstanding common stock, through March 1, 2016. The Company intends to fund the repurchase program from existing cash on hand."
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