Estimates Are Heading Higher

Black Box numbers indicate same-store sales increased +2.2% in September, in what was yet another bullish release for the restaurant industry.  This same-store sales gain represents a 10 bps sequential improvement over a strong August.  Traffic declined -0.2%, representing a 30 bps improvement over August.  All told, these are the best monthly, and quarterly, numbers we've seen since 1Q12. 


Although we're not insinuating this is the defining turning point in the industry, particularly in regards to casual diners, we'd be remiss not to respect the data.  Easy comparisons in 4Q14 set the industry up for continued momentum heading into what looks to be a strong finish to the year.  Importantly, this recovery is not geographically constrained.  Black Box reported September sales improved in 159 markets, while only declining in 29.  This is the best up/down ratio we have seen since we started tracking the data back in 2011.


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With that being said, we're confident that a vast majority of restaurant companies will have same-store sales estimates revised upward in the coming months.   As it stands, estimates for both 3Q and 4Q appear conservative.  Below, we take a look back at what consensus same-store sales estimates were at the beginning of 3Q and compare them to current estimates.



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As you can see, despite three months of sequential improvements in industry sales numbers, the majority of estimates have been revised down since the nascent days of July.  This signals to us that there is currently a disconnect between estimates and reality.  We expect this gap to close over the coming weeks, but all indications suggest we will see a fair amount of upside surprises as earnings season progresses.  We covered our two remaining casual dining shorts (DFRG, EAT) for this reason in a note yesterday.


Current estimates across many sub-sectors of the restaurant industry suggest a sequential decelerations in two-year trends in 3Q14, clearly inconsistent with recent data points.  Lower gas prices, lower food away from home prices, increasing disposable income, strong employment trends and improving consumer confidence are all current tailwinds to the industry.  Stocks should rise simultaneously with increasing estimates.  We've been very active on the short side throughout 2014, but believe it is prudent to cover and look for better entry opportunities in a month or two.  We continue to have a healthy short bench that we will begin picking from when we feel the time is right.


Sub-Sector Same-Store Sales Estimates

3Q and 4Q numbers must, and will, be revised upward.  Current estimates are too low across nearly all sub-sectors.


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Call with questions.


Howard Penney

Managing Director


Fred Masotta


VIDEO | Macau: Doubling Down on Bearish Thesis

In this exclusive interview Todd Jordan gives his insights from Macau.



David and Todd walk thought their 3 pronged negative thesis on Macau gaming (VIP slowdown as a result of a corruption crackdown, Mass deceleration and mass margin contraction) and the threat of further shrinking Mass margins. Todd highlights specific risks for LVS and MPEL and positives Galaxy.


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Keith's Macro Notebook 10/10: Oil | XLY | UST 10YR

Retail Callouts (10/10): DG, FDO, AMZN, NKE, ZQK

Takeaway: Shorting DG is still the best way to play FDO merger. AMZN finally going brick & mortar. Nike’s full court press. Finally a ZQK activist.



FDO - 4Q14 Earnings


Takeaway: Sales were in line, (comps +0.3% vs 0.1%E), but Gross Margins missed considerably (32.9%A vs. 34.3%E), EPS missed by 5.5%, and inventories grew at twice the rate of sales.  But best of all was the company's guidance or lack thereof. We'll paraphrase here…[1Q will be challenging, but the investments made in '14 will set up an accelerated rate of sales and margins throughout the year. But in light of the merger, we won't give any more guidance].


The way we see it, when there are two companies who are in a bidding war to buy your company, that's exactly when most retailers would pull every lever possible to print the best (and perhaps inflated) earnings number imaginable in order to get the best price for shareholders. That clearly was not the case here. That tells us that either 1) it actually was the case, and the real earnings stream would have been much lower, 2) FDO is so married to the idea of merging with DLTR that it is putting up worse numbers to discourage a DG bid, or 3) FDO is simply not managing the outcome (we have a hard time with that).


We still think that the best way to play this is to short Dollar General. IF DG 'wins' FDO, then it actually loses as it will be paying close to 13x EBITDA for a marginal asset. If it 'loses' then it gives up the equity value gained since it joined the bid, and the stock goes back to the low $50s. 


Retail Callouts (10/10): DG, FDO, AMZN, NKE, ZQK - chart1 10 10 14


AMZN - Amazon to Open First Brick-and-Mortar Site



  • "Amazon’s space at 7 West 34th St., across from the Empire State Building in Midtown, would function as a mini warehouse, with limited inventory for same-day delivery within New York, product returns and exchanges, and pickups of online orders."
  • "The Manhattan location is meant primarily to be a place for customers to pick up orders they’ve made online, but will also serve as a distribution center for couriers and likely one day will feature Amazon devices like Kindle e-readers, Fire smartphones and Fire TV set-top boxes, according to people familiar with the company’s thinking."


Takeaway: It's only taken 20 years. This door looks more like an Urban fulfillment center than  an actual store, but the framework could be in place for an actual retail presence. We have a hard time imagining what an AMZN store would look like. The breadth of the product offering is limitless, so selecting the right SKU representation at retail would be an interesting case study to watch. But, if any company has the information to make that happen it's AMZN. They've been studying shopper's behavioral habits since they set up a network of computers on retrofitted doors. Most likely AMZN will set up a presence to hawk its own items (Kindle, tablet, phones, set-top boxes, etc.), which would make sense given that most retailers have pulled the items from shelves in response to AMZN's bullying. We're not sure how sustainable that is given that outside of the Kindle - AMZN has been spinning its tires trying to find traction. In light of the news flow around SHLD this week, we think this article is worth a read ( It's more provocative than probable, but thought provoking nonetheless.


 NKE, Adi - Louisville’s Rick Pitino Says Shoe Companies Overinfluence Recruiting



  • "At issue, Mr. Pitino said, is the relationship between major sportswear makers and basketball programs for high-school students, from which top-flight colleges and universities recruit players. Coaches of youth programs affiliated with a specific shoe company tend to encourage athletes to attend colleges with the same sponsor, Mr. Pitino said."
  • "The Cardinals won the NCAA Division I National Basketball Championship in 2013. Still, Mr. Pitino said he believes rival sportswear maker Nike is 'winning the battle right now' for top high school recruits."


Takeaway: These comments by Mr. Pitino were just too good to pass up. He's basically saying 'thanks AD for signing a 5yr $39mm deal with Adidas this past April. Now nobody wants to come play ball for me." That $39mm,  by the way just so happens to be the 3rd most lucrative deal in all of college sports, behind Notre Dame and the University of Michigan. But, his logic does make sense. Between the Jordan Brand and Nike - NKE owns somewhere between 90%-95% of the basketball footwear market. Plus, college jerseys, footwear and apparel are more important than ever, evidenced by the glut of special jerseys on display on the field every fall Saturday on campuses across America. Nike owns this segment and recruits have taken notice.


ZQK - Quiksilver Shareholder Says Company’s Turnaround Plan is a Failure



  • "The 11-point turnaround plan announced by Andrew Mooney 16 months ago has thus far failed to deliver the desired results and, based on the deterioration in the company's core brands since that time has in actuality had a profound detrimental effect on the financial position and operating performance of the company, in my opinion."
  • "Other investors have come to the same conclusion, since the stock price is down roughly 80% this calendar year. Accordingly, it is time for the Quiksilver board to implement a new strategy in order to preserve shareholder value by commencing a process to sell the company."
  • "…I believe that the company's well known brands, global retail and wholesale presence and supply chain still have value. But, the only way to unlock this value for shareholders, and to maximize shareholder value consistent with the board's fiduciary duties, is to immediately pursue the sale of the company through a competitive bidding process."


Takeaway:  These are the guys (Consac) that pushed for a sale of Vitacost and Bebe. Regardless of who is calling for a sale, it's near impossible for anyone to argue with their logic. Quiksilver simply should not be a stand-alone public company. With barely $300mm in equity value, the market seemingly agrees. The most surprising thing to us is that companies like VF Corp and Kering don't see what we do.




GIII - Cyber Attacks Spread: Bass & Co. Latest Hit



  • "The company said it discovered that an unauthorized person had connected a small data capture device to one of the cash registers in its store on International Drive in Orlando [Fla.].' The device recorded information from payment cards, including cardholders’ names, card numbers, expiration dates, verification codes and e-mail addresses, if they were provided.  Just one register was targeted in the attack."