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Cartoon of the Day: A Sad Song - bubble cartoon 10.06.2014

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Food for Thought in the Restaurants Sector

Takeaway: Prices at the grocery store are rising faster than they are at restaurants. Here's what that means.

We have a favorable data point for restaurants, says Hedgeye's Restaurants sector team.


The restaurant value spread, which measures the difference between food at home and food away from home, has widened over the past three months.


In the past, we've seen evidence that when this spread widens, same-store sales for many restaurants improves.


Check out this chart below.


Food for Thought in the Restaurants Sector - Restaurant Value Spread



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Monday Mashup: PBPB, MCD and More

Monday Mashup: PBPB, MCD and More - 1

Notable Callouts

  • We removed PBPB from our Investment Ideas list as a short in a note last week. CLICK HERE to access the note.
  • We are removing MCD and BKW from our Investment Ideas list as shorts, due to the improvement we are seeing in same-store sales trends across the sector.

Recent Notes

09/29/14 Monday Mashup: BLMN, SBUX and More

09/30/14 Is the Sales Environment Improving for Restaurants?

10/01/14 PBPB: Closing Best Idea Short

10/02/14 Restaurant Sector Valuation

10/02/14 Bullish on Bloomin'

10/03/14 Employment Numbers a Positive for Restaurants

Events This Week

Wednesday, October 8th

  • YUM earnings call 9:15am EST
  • RT earnings call 5:00pm EST

Thursday, October 9th

  • PLKI Investor Day 9:00am EST

Friday, October 10th

  • DRI Annual General Meeting 9:00am EST

Chart of the Day

A favorable data point for restaurants: the restaurant value spread, which measures the difference between food at home and food away from home, has widened over the past three months.


Monday Mashup: PBPB, MCD and More - 2

Recent News Flow

Monday, September 29th

  • SONC announced the hiring of industry veteran Harold Ceron as senior VP to lead company drive-in operations.  Ceron comes to SONC from 7-Eleven where he served as Managing Director, Europe and Latin America.  Prior to 7-Eleven, Ceron spent nearly 20 years at Yum! Brands.
  • BAGL was acquired by JAB Holding Company for $20.25 per share in cash.  Greenlight Capital agreed to tender its shares in support of the transaction.
  • DFRG announced the opening of its newest Del Frisco's Grille in North Bethesda, Maryland, making it the 14th Del Frisco's Grille in the system.
  • RRGB announced it is two weeks away from opening its two newest restaurants in Bronx, NY and South Florida.
  • DIN Applebee's launched the #FanFavoriteSweeps campaign to give one fan a trip to Phoenix.  The challenge requires contestants to snap a selfie with their favorite 2 for $20 dish from a menu that includes: Grilled Chicken Wonton Tacos, Quesadilla Burger, Bourbon St. Chicken & Shrimp, Shrimp 'N Parmesan Sirloin and Crosscut Ribs.
  • COSI announced a planned rights offering from which it expects to receive ~20.0M.
  • WEN launched the #BBQ4Merica campaign to help spread awareness of their new BBQ offerings, including its new BBQ Pulled Pork Sandwich, BBQ Pulled Pork Cheeseburger and BBQ Pulled Pork Cheese Fries.
  • BAGL was downgraded to hold from buy at Jefferies.

Tuesday, September 30th

  • PNRA was added to the US 1 list at Bank of America Merrill Lynch with a $185 PT.
  • DRI proxy advisory firm Egan Jones reaffirmed its recommendation that shareholders vote "FOR ALL" of Darden's director nominees.
  • PZZA introduced its latest menu addition, the Ultimate Meats Pizza, featuring pepperoni, salami, sausage, Canadian bacon and hickory smoked bacon.  The Ultimate Meats Pizza can be had for just $12 through October 26th.
  • BJRI opened its newest restaurant in Cedar Park, TX. The restaurant Is approximately 7,400 square feet, seats 225 guests and features BJ's extensive menu.

Wednesday, October 1st

  • PNRA upgraded to buy at Wunderlich Securities with a $185 PT.
  • Restaurant Sector upgraded to bullish from cautious at Stifel Nicolaus.
  • NDLS announced new fall limited time only items, including the new Buffalo Chicken Mac & Cheese and the new Fig & Pig Flatbread.  The company also added the Alfredo MontAmore to its permanent menu and announced it will celebrate National Noodle Day on October 6th with its "Lucky Bowl" giveaway.

Thursday, October 2nd

  • DRI reported September comps (Olive Garden +0.6%, LongHorn +3.2%) and guided 2Q EPS to the upper end of its original $0.26-$0.28 range.
  • LOCO celebrated the grand opening of its first Houston, TX restaurant.
  • KKD announced CFO Douglas Muir will retire in CY15 and plans to remain in his current role until a successor is in place and to provide support during the transition.

Friday, October 3rd

  • CBRL declared a quarterly dividend of $1.00 per share payable on November 5, 2014 to shareholders as of October 17, 2014.  The board also authorized a new $25 million share repurchase plan.
  • JACK Qdoba unveiled a new simplified menu and pricing structure at its restaurants in which "extras" (including guacamole, 3-Cheese Queso and Queso Diablo) will no longer be charged as extra.  Guests will now pay a single set price for their favorite entrée and will be able to load on flavor without paying the additional cost.
  • SBUX announced that Jeff Hansberry, President of CAP, assumed the role of President of Evolution Fresh effective September 29th, 2014.  Hansberry will return to the company's headquarters in Seattle.

Sector Performance

The XLY (-0.7%) outperformed the SPX (-0.8%) last week.  Both casual dining and quick service stocks, in aggregate, outperformed the XLY.


Monday Mashup: PBPB, MCD and More - 3


Monday Mashup: PBPB, MCD and More - 4

XLY Quantitative Setup

From a quantitative setup, the sector remains bearish on an intermediate-term TREND duration.


Monday Mashup: PBPB, MCD and More - 5

Casual Dining Restaurants

Monday Mashup: PBPB, MCD and More - 6

Monday Mashup: PBPB, MCD and More - 7

Quick Service Restaurants

Monday Mashup: PBPB, MCD and More - 8

Monday Mashup: PBPB, MCD and More - 9


Howard Penney

Managing Director


Fred Masotta


Restoration Hardware: Stealth Revenue Driver

Takeaway: The company's new financing program plus growth in in-house interior design gives us greater confidence in our long-term revenue model.

This note was originally published October 03, 2014 at 09:04 in Retail

Last night (Thursday 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.


Restoration Hardware: 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.


Restoration Hardware: 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.


Restoration Hardware: 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.

Commodities Weekly Sentiment Tracker

Note: Using the z-score in the tables below as a coefficient of variation for standard error helps us flag the relative market positioning of the commodities in the CRB Index. It is not intended as a predictive signal for the reversion to trailing twelve month historical averages. For week-end price data, please refer to “Commodities: Weekly Quant” published at the end of the previous week. Feel free to ping us for additional color.    



1.       CFTC Net Futures and Options Positioning CRB Index: The Commodities Futures Trading Commission (CFTC) releases “Commitments of Traders Reports” at 3:30 p.m. Eastern Time on Friday. The release usually includes data from the previous Tuesday (Net Positions as of Tuesday Close), and includes the net positions of “non-commercial” futures and options participants. A “Non-Commercial” market participant is defined as a “large speculator.” We observe the weekly marginal changes in the overall positioning of “non-commercial” futures and options positions to assess the directionally-biased capitulation risk among those with large, speculative positions.


The Sugar, Soybeans, and Coffee markets experienced the most BULLISH relative positioning change in the CRB week-over-week.

The Cotton, Silver, and Copper markets experienced the most BEARISH relative positioning change in the CRB week-over-week:


Commodities Weekly Sentiment Tracker - chart1 CFTC Net Fut. and Options


2.       Spot – Second Month Basis Differential: Measures the market expectation for forward looking prices in the near-term.

  • The Corn, Natural Gas, and Live Cattle markets are positioned for HIGHER PRICES near-term
  • The Lean Hogs, RBOB Gasoline, and Silver markets are positioned for LOWER PRICES near-term

Commodities Weekly Sentiment Tracker - chart2 spot 2nd month basis


3.       Spot – 1 Year Basis Differential: Measures the market expectation for forward-looking prices between spot and the respective contract expiring 1-year later.


  • The Corn, Wheat, and Sugar markets are positioned for HIGHER PRICES in 1-year  
  • The Lean Hogs, Live Cattle, and WTI Crude Oil markets are positioned for LOWER PRICES in 1-year  

Commodities Weekly Sentiment Tracker - chart3 spot  1yr basis


4.       Open Interest: Aggregate open interest measures the amount of opened positions in all actively traded futures contract months. Open interest can be thought of as “naked” or “directionally-biased” contracts as opposed to hedgers scalping and providing liquidity. Most of the open interest is created from large speculators or participants who are either: 1) Producers/sellers of the physical commodity hedging their cash market exposure or 2) Large speculators who are directionally-biased on price.


Commodities Weekly Sentiment Tracker - chart4 Aggregate Open Interest         


Ben Ryan



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