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Bullish on Bloomin'

Takeaway:

After removing BLMN from our Best Ideas list as a short back in May, we now find ourselves turning constructive on the name, albeit for atypical reasons.  The company continues to operate what we believe to be an unsustainable business model, comprised of a portfolio of five different casual dining brands.  Furthermore, the fundamentals of the company – decelerating same-store sales, cost of sales inflation (beef, seafood, dairy), margin deterioration and little brand momentum – remain unattractive.  The value, however, is there and we suspect management will be forced, or tempted, to unlock it one way or another.  With casual dining sales improving, brand initiatives underway and an inflection point in cost of sales approaching (could become a tailwind in 2015), we believe now is an opportune time to get long the stock.

 

Key Themes:

  1. Same-Store Sales: Two-year average same-store sales have been deteriorating at all of Bloomin’s brands since the end of 2011.  In fact, two-year average same-store sales have decelerated nearly ~400 bps since 1Q12.  Outback’s dinner business, the core business of BLMN, has shown notable weakness lately as management continues to rollout weekday lunch.  Coincidence?  We think not.  Carrabba’s new menu launch at the end of February proved unsuccessful and Bonefish, in a similarly dire situation, launched a new menu on July 29th.  Internationally, the Brazil business continues to be strong but Korea has been a material headwind, as casual dining sales have fallen over 20% the past two quarters likely due to an oversaturated market.  We have little visibility into trends in this region, but believe management will take an aggressive approach to stem this decline.
  2. Daypart Expansion: Management continues to rollout weekday lunch at Outback and Carrabba’s restaurants and was being served in 56% and 51% of locations, respectively, at the end of 2Q.  While adding a new daypart should boost same-store sales in the immediate-term, we believe it has hampered the core dinner business and, subsequently, margins.  We continue to have our doubts with the lunch daypart, as casual dining chains have been falling out of favor to more convenient fast casual restaurants that offer similar (or higher) quality food at a lower price point.  
  3. Potential Transaction: We recently penned a note calling for management to sell-off its non-core assets and refocus on growing the profitability of the Outback Steakhouse brand.  The crux of our reasoning is that multi-concept casual dining companies are structurally flawed and the current fundamentals of the company would suggest the same.  If management can restructure the company by pairing it down to one (Outback) or two brands, it could then focus on improving low margins at Outback and growing the business internationally, where it has had great success (save for Korea) to-date.  Our sum-of-the-parts analysis values the total of Bloomin’s chains close to $35 and suggests shareholders are getting the Outback business at a discount and the company’s four other brands for free. 

 

Valuation & Sentiment:

The street is bullish on BLMN for reasons we don’t necessarily agree with as 73.3% of analysts rate the stock a buy.  Short interest is also fairly low at 4.67% of the float.  At 7.7x EV/EBITDA (NTM), BLMN trades at a discount to its peers, reflecting structural issues, lower margins and a high debt-to-EBITDA (~3.6x).

 

*Appendix: Same-Store Sales

Please note that consensus estimates are shown.

Bullish on Bloomin' - 11

 

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Bullish on Bloomin' - 66

 

*Appendix: Margin Structure

Please note that consensus estimates are shown.

Bullish on Bloomin' - 77

 

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Bullish on Bloomin' - 99

 

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Bullish on Bloomin' - 1111

 

Bullish on Bloomin' - 1212

 

Email or call with questions.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


The Hong Kong Government Has Already Lost

This note was originally published October 01, 2014 at 08:18 in Morning Newsletter

“The triumphant success of Hong Kong demands - and deserves - to be maintained.” Charles, The Prince of Wales

The big picture

The crowds of tens of thousands in Hong Kong are swelling in number. Today, Chinese National Day, the numbers are likely to increase significantly. While started by students, all facets of the population are represented. One can only be in awe at how so many can demonstrate peacefully, even in the face of harsh and utterly unnecessary police tactics: Not one single shop window has been broken in 5 days of protest.

 

The Hong Kong Government Has Already Lost - zz. EL 2

Macro grind

How did this all get started?

 

In the run-up to the 1997 Handover of Hong Kong, Universal Suffrage was promised under Article 45 of the Basic Law. In 2004, the National People’s Congress said this would not occur before 2012. In 2007, the NPC pushed the date to 2017. In 2014, Universal Suffrage is redefined: Everyone can vote, but only for the 2 or 3 candidates pre-selected by Beijing. The serious matter of a peoples’ freedom to elect their leaders has been made a farce by the Central Government and the current Hong Kong leadership.

 

Over the summer, Beijing completely misread the situation thinking that its version of a seemingly democratic process would be sufficient to keep the Hong Kong people at bay. Yet the proposal was so far off the mark and without any room for negotiation that a tipping point was reached.

 

While Beijing is known for digging in and using all means necessary to obtain its will, it appears the people of Hong Kong are willing to do the same this time around. There is no quick solution given Hong Kong Chief Executive CY Leung’s unwillingness to work for the Hong Kong people he supposedly represents. Leung’s administration has fantastically mismanaged this situation.

 

The Central Government needs this win. A loss of face isn’t the primary concern: The very survival of the Communist Regime is at stake in the eyes of China’s leaders. No progress is being made at containing unrest in Xinjiang Province where Uyghur separatist are claiming the region.

 

To add to Beijing’s woes, the Chinese economy is cooling quickly. Fixed assets investment is slowing both sequentially (as of AUG) and on a trending basis – as are retail sales, exports and imports. Manufacturing PMI and consumer confidence are also slowing on a trending basis as of SEP and AUG, respectively. Additionally, the property market is in dire straits, as Darius Dale details in a note yesterday titled, “DEFCON 2.5: The “China Overhang” Is Likely To Continue”.

 

Already, we have seen a few, albeit small, public gatherings in large cities supporting the protesters in Hong Kong. What if demonstrations spread beyond Hong Kong?

 

In the last few days, the world has experienced an unprecedented crack-down on social media and freedom of speech to prevent just that from happening. But we know very little about it in the United States. One would need to live in the PRC to experience it. It’s hard for us to imagine what the internet looks like when one only gets to see a carefully selected portion of it. Overnight, there are reports of a Trojan virus aimed at infiltrating the iPhones of HK protesters. Make no mistake, this is a first rate electronic communications war being played out in front of us.

 

How will the world react to all of this? The United Kingdom, as former colonial masters, surely has a moral responsibility. But the West is and will be reluctant to take a stand against China. Cross-strait relations also play a factor: Beijing continues to strive for a unified China, inclusive of Taiwan. The wrong action in Hong Kong could further alienate the Taiwanese people.

 

Unless the protesters get tired we will all be watching this for some time. There will be economic impact. But the big changes will play out in the long term.

 

Can democracy thrive in Hong Kong? And will this lead to a softening of the regime in Beijing?

 

The people of Hong Kong appear ready to find out.

  • CASH: 58
  • US EQUITIES: 2
  • INTL EQUITIES: 8
  • COMMODITIES: 4
  • FIXED INCOME: 26
  • INTL CURRENCIES: 2

Our levels

UST 10yr Yield 2.46-2.55% (bearish)

SPX 1957-1986 (neutral)

RUT 1090-1026 (bearish)

EUR/USD 1.26-1.38 (bearish)

WTIC Oil 90.16-94.42 (bearish)

 

Michael Blum

President and Resident of Hong Kong

 

The Hong Kong Government Has Already Lost - CHINA High Frequency GIP Data Monitor


Cartoon of the Day: Deflation (Got #Quad4 Yet?)

Cartoon of the Day: Deflation (Got #Quad4 Yet?) - Deflantion cartoon 10.02.2014

 

Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.


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%

Draghi Disappoints on Delivering the “Drugs”

Key Take-Aways:

  • As expected, the main three interest rates remained unchanged
  • Draghi did not deliver or hint at the need for the “drugs” (sovereign QE program)
  • We believe the market is finally calling Draghi’s bluff – namely that QE and currency debasement will not produce sustainable economic growth (following the announcement European equities fell further and the EUR/USD is up small and near our oversold TRADE level of $1.26)
  • The meeting centered around outlining the terms for the ABS and covered bond purchasing programs – as expected the ECB will accept (with lenient conditions) countries with ABS rated below BBB-
  • Again we see Draghi in “wait and watch” mode (admittedly significant action has been taken since June’s first rate cut); however, we’re doubtful that the combo (ABS, covered bonds, and TLTRO) will successfully deliver sustainable credit growth to the “real” economy (target SMEs) over the intermediate term. This is, in part, due to the unwillingness of banks to lend (given weak regional and country growth outlooks) and the lack of structural reform at the country level to spur a business climate of confidence and entrepreneurship.
  • Witness the first TLTRO tranche (issued on 9/18) in which only €82.6B was drawn by participating banks (well below consensus estimates of €150B – €300B) 
  • We expect Draghi to remain challenged to revert the strong levels of disinflation across the region
  • Hedgeye’s bearish bias on the EUR/USD (etf FXE) and select European equities remains (for more join today’s 4Q Macro Themes call at 1pm EST – ping for access)

 

On ABS and covered bond purchase programs:

  • Programs will last at least two years
  • ABS purchases to start in fourth quarter 2014
  • Covered bonds purchases to start in the second-half of October

--For more details on terms and conditions see the ECB’s release

 

Other Selective Commentary:

  • Draghi reiterated the ECB’s willingness to take the balance sheet up by ~€1Trillion (to 2012 levels)
  • Draghi reiterated the need for balance sheet adjustment from public and private sectors so that the combo of measures (ABS, covered bonds, and TLTRO) could have hopes at success
  • Draghi said the 10bps M/M drop in Eurozone CPI (to 0.3% in SEPT Y/Y) was due primarily to declining oil prices

Draghi Disappoints on Delivering the “Drugs” - zz. ecb rates

Draghi Disappoints on Delivering the “Drugs” - vvv. eur usd 10.2

 

Matthew Hedrick

Associate


One-Minute Video | McCullough: We Haven’t Seen This Bearish Market Signal In Over 18 Months

In this brief excerpt from today's Morning Macro Call, Hedgeye CEO Keith McCullough warns investors that the Russell 2000 and S&P 500 are both bearish trend and tail in our model for the first time in at least 18 months.


LABOR MARKET - THE SEVEN MONTH ITCH

Takeaway: We're 7 months into the sub-330k claims environment. The last 2 cycles lasted 31 (2007) and 45 (2000) months before the market top.

Below is the detailed breakdown of this morning's initial claims data from Joshua Steiner and the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact 

 

The next big update on likely Fed direction will be tomorrow's employment report for the month of September. Expectations are relatively high, with consensus looking for a sequential acceleration of over +70k net new jobs to 215k; admittedly, off a disappointing 142k print last month.

 

Last month, in conjunction with our macro team, we published a note that looked at the historical relationship between ADP and NFP (that note can be found here).

 

We found that ADP tended to move in the same direction sequentially as NFP 64% of the time across the 160-month history of the ADP series. For reference, yesterday's ADP print came in at 213k, up sequentially from the 202k in August (revised from 204k). While it appears that consensus is set up right directionally, our analysis revealed no strong correlation on magnitude of sequential change. 

 

Where Are We In the Grand Scheme?

The initial jobless claims data this morning is reasonably strong. SA rolling claims continue to trend lower, coming in just under 295k this week. As the first chart below shows (courtesy of Christian Drake of our Macro Team), the data has now been sub-330k for 7 months. Looking back historically at the last two cycles, rolling SA claims ran at sub-330k for 45 and 31 months, respectively, before the corresponding market peaks in March, 2000 and October, 2007.  

 

LABOR MARKET - THE SEVEN MONTH ITCH - IC 330

 

The Data

Prior to revision, initial jobless claims fell 6k to 287k from 293k WoW, as the prior week's number was revised up by 2k to 295k.

 

The headline (unrevised) number shows claims were lower by 8k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4.25k WoW to 294.75k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -6.5% lower YoY, which is a sequential improvement versus the previous week's YoY change of -5.9%

 

LABOR MARKET - THE SEVEN MONTH ITCH - 2 normal  1

 

LABOR MARKET - THE SEVEN MONTH ITCH - 3 normal  1

 

LABOR MARKET - THE SEVEN MONTH ITCH - 6

 

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT



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