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Employment Numbers a Positive for Restaurants

The headline U.S. jobs number surpassed expectations in September, as nonfarm payrolls advanced 248,000 (vs 215,000 estimate) and the unemployment rate dropped 20 bps to 5.9%.  This is the first time in over six years since we've seen the unemployment rate below 6%.  Although the labor force participation rate ticked down 10 bps to 62.7% and wage growth remains anemic, it is indisputable that more jobs in America is a positive for restaurants.  We've seen this reflected in both July and August restaurant sales numbers, which have shown sequential upticks, and are eagerly awaiting September's release.

 

This is the second straight month employment growth has increased year-over-year across our five primary age cohorts.  While we saw strength across the board, we do have several notable callouts:

  • 20-24 YOA: weakest month of growth we've seen in the last 15
  • 25-34 YOA: second strongest month of growth we've seen in the last 19
  • 45-54 YOA: three straight months of growth after 20 straight months of declines
  • 55-64 YOA: strongest month of growth we've seen in the last 21 months

 

While widespread employment growth is positive for all restaurants, September's employment release is particularly positive for casual diners as both the 45-54 and 55-64 YOA cohorts are showing their strongest levels of growth in the last two years.  With that being said, we continue to favor BLMN and BOBE on the long side as a play on potential value enhancing initiatives and are turning cautious on our shorts (DFRG, EAT) heading into earnings season.

 

The release was also a positive for quick-service and fast casual restaurants, as weak growth in the 20-24 YOA cohort is more than offset by another very strong month of growth in the 25-34 YOA cohort. We continue to favor operators with strong margin drivers in place (CMG, JACK, WEN) and those with strong unit level economics and well-calculated expansion plans (KKD, PLKI). 

 

September Employment Growth Data:

  • 20-24 YOA +0.96% YoY; -143.1 bps sequentially
  • 25-34 YOA +2.46% YoY; -14.4 bps sequentially
  • 35-44 YOA +0.88% YoY; +34.2 bps sequentially
  • 45-54 YOA +0.23% YoY; -40.6 bps sequentially
  • 55-64 YOA +3.59% YoY; +97.9 bps sequentially

 

Employment Numbers a Positive for Restaurants - 1

 

Employment growth at full-service restaurants, limited-service restaurants and leisure & hospitality continues to grow, despite seeing a steady deceleration since the highs of mid-2013 likely due to cost pressures these companies are facing on both the food and wage front.

 

Employment Numbers a Positive for Restaurants - 2

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst



THE HEDGEYE MACRO PLAYBOOK

Takeaway: The Hedgeye Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and noteworthy quantitative signals.

CLICK HERE to view the document. In today’s edition, we highlight:

 

  1.  The broad-based weakness across asset classes and why we think that is occurring
  2. What asset classes and style factor exposures we think investors will be increasingly forced to chase going forward
  3. Why the bond market is signalling #GrowthSlowing in the US and not just in Europe

 

Best of luck out there,

 

Darius Dale

Associate: Macro Team


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RH - Stealth Revenue Driver

Takeaway: RH's New Financing program + growth in In-House Interior Design gives us greater confidence in our long-term revenue model.

Last night RH announced a long-term financing program that we think is positive news for its top line. The company already offers a credit card, but that carries a much higher interest rate (24.99%) and is a shorter-term financing bridge for consumers. With the new RH program, consumers can finance purchases at 5.99% for a duration ranging from 24 months to 7-years.

 

RH - Stealth Revenue Driver - chart1 10 3 14

 

There's no question for us that this is a positive for RH's top line. In our latest RH consumer survey, we asked 1,000 consumers how important it is for a furniture store to offer store credit -- on small, medium and large purchases.  Interestingly, it is 'Very Important' to only 13.6% of consumers for 'Small Purchases' and only '18.8% for 'Medium Purchases'. But once we get into the 'Large Purchase' classification, it is 'Very Important' for 41.7% of customers. Even 33.4% of the $100k+ demographic said that it Very Important to their purchasing decision.

 

RH - Stealth Revenue Driver - chart2 10 3 14

 

An interesting note is the screen shot below that 'advertises' consumers to meet with RH designers. This is the first time we EVER saw this advertised by the company. Approximately 40% of RH's business comes from designers, but they are largely third party designers. These are people that are hired by a customer and shop dozens of stores, where they pick and choose assortments that work -- maybe including RH, maybe not.

 

RH - Stealth Revenue Driver - CHART4 10 3 14

 

But now RH not only has a massive product assortment (i.e. 3,300 pages), but a stepped-up in-house Interior Design team AND  a superior long-term financing program. Add all that up and you get a stealth revenue driver that will build meaningfully.  We're not taking up our estimates (which are already high on the street by a country mile) but these factors give us more confidence that the company will get there.


Retail Callouts (10/3): KATE, NKE, LULU, Luxury

Takeaway: Adding KATE to Best Ideas list as a long. LULU finally goes mobile. Hong Kong lux market at risk.

QUIZ OF THE DAY

Yesterday's Question: What does this date, 10/2, signify in Nike’s history?

Answer: 10/2 is the day (10/2/96) that Lance Armstrong learned that he had cancer, and marked the day that 'changed his life forever'. Nike subsequently created the Livestrong Brand -- which was initially largely comprised of those yellow wrist bands. But Nike, who can capitalize on a commercial trend better than anyone, subsequently turned this into a $200-$300mm business across apparel, footwear and equipment -- and the company made a marketing splash every year on October 2. Needless to say, that business is now a big goose egg. Perhaps the peak was when Dick's Sporting Goods missed a quarter for having excess inventory of Livestrong treadmills. 

 

 

COMPANY HIGHLIGHTS

 

KATE - Best Idea Long 

We are adding KATE Long to the Best Ideas List - CLICK HERE for full note

 

LULU - LULU introduces new iOS App

 

Retail Callouts (10/3): KATE, NKE, LULU, Luxury - chart3 10 3 14

 

Takeaway: LULU released it's first iPhone app last night where customers can actually shop. They've dabbled in the mobile space 2 times in the past, but each was unrelated to the actual merchandise sold in its stores. Dot.com sales represent nearly 20% of sales at LULU to date, and it's been able to grow that segment exponentially without this extra piece of technology which is standard across nearly every other brand and retailer in the marketplace. If anything, this is an opportunity for LULU to cater to a segment of the population moving away from stores and desktops.

 

Not-So-Golden Week Looms for Hong Kong Retailers

(http://www.bloomberg.com/news/2014-10-02/not-so-golden-week-looms-for-hong-kong-retailers.html)

 

  • "Imagine a Christmas shopping season with closed stores and customers stranded because cabs are nowhere in sight."
  • "For retailers of Fendi bags and Rolex watches in Hong Kong, that’s the type of nightmare unfolding as pro-democracy protests wreak havoc during one of the busiest times of the year, the China National Day holidays known as Golden Week. Demonstrators are occupying shopping areas from Causeway Bay to Tsim Sha Tsui, and are disrupting transportation and shutting stores."

 

Takeaway: Despite the seriousness of the situation, we're hard pressed to think that any US companies are going to miss the quarter because of the situation in Hong Kong. But Chinese tourists accounted for 75% of the Hong Kong's 54mm tourist visits last year. That will be materially crimped this year. In all likelihood, a vast majority of the Chinese tourists will spend that money elsewhere. If they want a Kors bag, they're going to get a Kors bag.

 

 

OTHER NEWS

 

RSH - RadioShack Said to Reach $590 Million Refinancing Agreement

(http://www.bloomberg.com/news/2014-10-02/radioshack-said-to-reach-refinancing-deal-with-standard-general.html

 

  • "RadioShack Corp., the electronics chain trying to stave off bankruptcy, reached an agreement with a consortium led by Standard General LP to refinance about $590 million of loans to re-stock ahead of the holidays, a person familiar with the matter said."
  • "Standard General, a New York-based hedge fund, will lead a group of lenders to refinance debt outstanding under a $535 million asset-backed revolving credit line from GE Capital, the lending arm of General Electric Co."

 

WTSL - The Wet Seal, Inc. Announces Departure of Chief Financial Officer

(http://ir.wetsealinc.com/releasedetail.cfm?ReleaseID=874394)

 

  • "The Wet Seal, Inc., a leading specialty retailer to young women, announced that the Company's Chief Financial Officer, Steve Benrubi, has resigned and will remain with the Company through December 1, 2014, to assist with the transition. The Company will commence a search for a new Chief Financial Officer."

 

Warren Buffett admits Tesco investment ‘a huge mistake’

(http://www.ft.com/intl/cms/s/0/27963a92-4a36-11e4-8de3-00144feab7de.html?siteedition=intl#axzz3F4wExOvy)

 

  • "Clean-up in Aisle 7. Billionaire investor Warren Buffett, staring at an $800m spillage from his stake in Tesco, admitted that his holding in the UK supermarket chain was a 'huge mistake'."
  • "The chairman of Berkshire Hathaway, which is Tesco’s fourth-largest investor with a 3.97 per cent stake, made his mea culpa on Thursday, contributing to the gloom surrounding the retailer as it deals with plunging profits and an accounting scandal."

 

Sur La Table CEO names former Bath & Body Works chief as new CEO

(http://www.chainstoreage.com/article/sur-la-table-ceo-names-former-bath-body-works-chief-new-ceo)

 

  • "Kitchenware retailer Sur La Table has appointed industry veteran Diane Neal as its new CEO. She succeeds Jack Schwefel, who has left the company to pursue other opportunities after serving as Sur La Table’s CEO since 2007."
  • "Neal served as CEO and president of Bath & Body Works from 2007 to 2011. She currently serves on the boards of several retail companies, including Abercrombie & Fitch Co. and Fossil Group Inc. Neal also held leadership positions at Gap and Target."

 

AMZN - Amazon Warehouse Workers Want to Be Paid for Waiting in Line

(http://www.businessweek.com/articles/2014-10-02/security-checks-paid-as-work-supreme-court-will-decide)

 

  • "Amazon.com warehouses are full of stuff people like. To cut down on theft, workers who box and ship it are required to pass through security checkpoints after their shifts, waiting in lines that can take almost 30 minutes to get through."
  • "On Oct. 8 the Supreme Court will hear arguments about whether that time counts as work. In 2010 two former employees of Integrity Staffing Solutions, a temp agency that supplies workers at many of Amazon’s U.S. warehouses, sued the company demanding back pay for the time they spent in security lines after clocking out at Amazon warehouses in Nevada. The security checks, the plaintiffs argued, were required by Integrity and therefore part of the job."

 

HD - Home Depot extends e-commerce capabilities westward

(http://www.retailingtoday.com/article/home-depot-extends-e-commerce-capabilities-westward)

 

  • "Home Depot is extending its e-commerce capabilities westward with the opening of a dedicated online fulfillment center in California."
  • "Located in Perris, California, the 858,953-sq.-ft. facility will initially employ approximately 150 people, and eventually employ up to 300. It is one of three new DFCs opening across the US in addition to the company’s existing network."

 

UA - Under Armour to build new DC in Nashville suburb

(http://www.chainstoreage.com/article/under-armour-build-new-dc-nashville-suburb?ad=news)

 

  • "Under Armour plans to build a new one million-sq.-ft. distribution and warehouse facility in Mount Juliet, Tennessee, a suburb of Nashville. This will be Under Armour's third distribution center in the United States, with the original warehouse in the company's hometown of Baltimore, Maryland, and the other located in Rialto, California."

Draghi Drugs and the S&P 500

Client Talking Points

DRAGHI

ECB President Mario Draghi, poor guy is “frustrated” now that neither the economic data (SEP Services PMIs slowing in Europe) nor the equity markets are cooperating with his “communication tools” – this may very well be how this epic central planning experiment ends – when people realize that 0 + moarrr 0 doesn’t = something greater than 0.

EUROPE

Germany’s stock market is closed today but got slammed -2% on the Draghi Drugs being impotent – inclusive of this morning’s no-volume bounce, now we have all of the major European Equity Indices (EuroStoxx600, DAX, FTSE, CAC, MIB Index) signaling bearish TREND @Hedgeye w/ #EuropeSlowing.

S&P 500

Maybe bad news would be good for spooz today, who knows – but what was intermediate-term TREND support of 1963 SPX is now resistance and there is no support to the 1910-1915 range if the market decides that bad is bad; employment reports are lagging indicators anyway.

Asset Allocation

CASH 60% US EQUITIES 2%
INTL EQUITIES 8% COMMODITIES 4%
FIXED INCOME 24% INTL CURRENCIES 2%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.

TLT

Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.

RH

Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road

TWEET OF THE DAY

TREASURIES: 10yr 2.44% = down 9bps on the wk, -59bps for the YTD - crusher yr to be long the Long Bond $TLT

@KeithMcCullough

QUOTE OF THE DAY

Continuous effort -- not strength or intelligence -- is the key to unlocking our potential.

-Liane Cardes

STAT OF THE DAY

The UK Services PMI slows to 58.7 in SEP vs 60.5 in AUG and France's Services PMI slows to 48.4 SEP vs 49.4 AUG.


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