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EAT: Earnings Recap

Brief Analysis: We removed EAT from our Investment Ideas list as a short on October 9th, 2014.  We thought this was a prudent move given the current sales momentum we are seeing across the restaurant industry.  To be clear, we wanted to get the 1QF15 release out of the way, and were mistaken in doing so.  Brinker's comp sales outpaced both Knapp and Black Box by notable margins and surpassed consensus expectations, but weren't strong enough to drive enough leverage through the P&L.  In addition, two-year average comps and traffic declined sequentially, suggesting that management is not doing enough to move the needle.

 

Brinker has prided itself over the past four years on methodically driving operating leverage in their business model, but we believe these days are abruptly coming to an end, even despite management's decision to maintain guidance for a 25-50 bps improvement in restaurant operating margin in FY15.  We believe this will be difficult to achieve and think management is (almost solely) relying on cost of sales to moderate for this to happen.

 

Despite covering our short a couple of weeks ago, our short thesis has not changed.  In fact, if anything, our conviction in it has strengthened.  Unfortunately, we missed today's move, but we'd be looking to short the name once again into any strength.  We think the margin story is played out here and management will be hard pressed to drive leverage moving forward.  The street is banking on the FY16 free cash flow story to come through for them as capex begins to wind down.  We suspect, however, that this will disappoint as management is forced to allocate additional dollars to reinvest in the business.

 

Comps: Brinker delivered system-wide comp growth of +2.4%.  Chili's company-owned comps grew +2.6%, comprised of +1.8% of pricing, +0.7% of mix-shift and +0.1% of traffic.  Traffic, while positive for the first time in the past seven quarters, saw its two-year average decline 30 bps sequentially to -1.7%.  Total revenues of $711.018 million (+3.84% y/y) beat consensus estimates by 25 bps.

 

EAT: Earnings Recap   - 1

 

EAT: Earnings Recap   - 2

 

EAT: Earnings Recap   - 3

 

Margins: Cost of sales declined 28 bps y/y driven by favorable menu pricing, menu item changes, efficiency gains from new fryers and improved waste control.  However, significant pressure from beef, cheese, avocados, and seafood resulted in significantly lower leverage than management had anticipated.  Labor costs increased 18 bps y/y driven by higher bonuses and increased wage and payroll taxes, partially offset by lower health insurance expenses.  Restaurant expenses increased 30 bps y/y driven by equipment charges associated with tabletop tablets and higher credit card fees.  As a result, restaurant margins declined approximately 30 bps in the quarter.  Management reaffirmed its guidance for a 25-50 bps improvement in this line in FY15.

 

Earnings: Adjusted EPS of $0.50 (+16.3% y/y) fell in-line with expectations.

 

What We Liked:

  • Respectable system-wide comp growth of +2.4%
  • Chili's comps outpaced Knapp and Black Box by 210 bps and 100 bps, respectively
  • Reimage program is about 90% complete
  • Installation of Kiosk tablets in all franchise restaurants will be completed next month
  • Repurchased 1.1 million shares for $53.3 million in the quarter; repurchased another 712,000 shares for $37 million since then, bringing the outstanding share authorization down to $576 million
  • Announced a 17% increase in quarterly dividend from $0.24 to $0.28

What We Didn't Like

  • Two-year average traffic declined 30 bps sequentially to -1.7% at Chili's
  • International franchise comps were down -0.5% driven by soft sales in Puerto Rico
  • Menu innovation hasn't really moved the needle on traffic
  • Restaurant level margins down despite a fairly strong comp
  • Food costs will likely continue to present a challenge for management given their unpredictable nature
  • Seemingly little to no leverage left on labor cost and other restaurant expenses lines

 

Call or email with questions.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


Cartoon of the Day: Absolute Zero

Cartoon of the Day: Absolute Zero - 0  cartoon 10.21.2014

 

You can thank your unelected central planners for zero interest rate policy for the foreseeable future.

 

subscribe to cartoon of the day

 

Selling Opportunity: SP500 Levels, Refreshed

Takeaway: There have been some fantastic selling opportunities in 2014. This looks like one of them.

I’m on the road today seeing investors in NYC and I am trying to explain what just happened in the last month in the most simple terms I can. “So” here’s the summary:

 

  1. Consensus chased the all-time #bubble high in SEP to > 2011 SPX
  2. Then freaked out and sold low (130-150 handles lower) last week
  3. And is now chasing a no-volume bounce to lower-highs, saying last week was the “bottom”

 

I for one have a harder time getting from its “it’s not a bubble”, to the fetal position, to “we’ve bottomed” (in 3 weeks) but that’s just me!

 

In terms of levels, here are the lines that matter to me most:

 

  1. Intermediate-term TREND resistance = 1967
  2. Immediate-term TRADE resistance = 1943
  3. Immediate-term TRADE support = 1830

 

Oh, and that’s with an immediate-term risk range for the VIX of 15-29! In other words, if the SPX were to drop over 100 points, in a day (from here), I’d consider that within the band of probable outcomes at Hedgeye.

 

There have been some fantastic selling opportunities in 2014. This looks like one of them.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Selling Opportunity: SP500 Levels, Refreshed  - SPX


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Our Take on Existing Home Sales

Takeaway: Here's an excerpt from a note to institutional subscribers from earlier today where our analysts dove into the existing home sales report.

As we've highlighted, there's limited usefulness in the Existing Home Sales (EHS) report on the sales side since the data is well-telegraphed by the Pending Home Sales report a month earlier. We show this in the 1st chart below, where we've offset the EHS data by one month to show its correlation to PHS on a 1-month lag.  

 

Despite the limited real-time utility in terms of demand trends, there is value in the data on inventory and the composition of sales (first-time buyers, cash buyers, investor share). This month we flag the still-anemic level of first time homebuyers (29% vs 2001-2008 average of ~40%).

 

Our Take on Existing Home Sales - chart2

 

Our Take on Existing Home Sales - chart3

 

TOTAL EXISTING HOME SALES:  Total EHS resumed its uptrend in September after stumbling in August. Sales rose 2.4% MoM to 5.17mn SAAR. Meanwhile, the year-over-year rate of change slowed to a decline of 1.7%, an improvement vs the 5.3% decline in August. From a growth perspective, the YoY comps get progressively easier through the balance of the year as we lap the rising rate environment of 2H13. 

 

For comparison, pending home sales have advanced +11.6% since the trough in March vs +12.6% for EHS and, given the recent pattern highlighted above, its likely we see a modestly worse sequential EHS print in October.  


YELP: Thoughts into the Print (3Q14)

Takeaway: 2Q14 showed signs of deterioration, but 2015 remains the key inflection point. Till then, we need to fade the noise in between.

KEY POINTS

  1. DON’T GET BAITED: Certain metrics will be optically appealing, but largely misleading after considering the details behind them.  After the 2Q14 call, management introduced some new metrics, which are meaningless since there is no supporting detail behind them.  Expecting more of the same; be careful.
  2. 2015 IS AROUND THE CORNER: Consensus estimates are outside the realm of reason.  YELP will need an acceleration in new account growth and historically low attrition to hit consensus estimates, which are calling for 46% revenue growth.  Our bull case is calling for 31%; bear case for 23%. 

 

DON’T GET BAITED

  1. Rising Customer Repeat Rate is NOT good: This is a measure of customer MIX, not retention.  We suspect this number to rise from a slowing contribution of new accounts.
  2. ARPU Should Surge for the Same Reason: Customer Repeat Rate and ARPU are directly correlated.  That is because the higher the Customer Repeat Rate, the less new customers signed intra-quarter that have paid less than a full-quarter of revenue.  In short, ARPU is a reflection of MIX as well
  3. Careful with Cohort Growth: YELP reported an acceleration across each of its 3 main cohorts last quarter, yet incurred a sharp deceleration in its remaining cohorts.  We suspect management has redeployed more of its salesforce to focus on the early cohorts, which if true, speaks volumes to its realistic TAM.
  4. “Subscription/Contract-Based Advertisers" Means Nothing: That is because management will not provide detail into what’s included in this metric; specifically the contribution from SeatMe, which management stopped providing account metrics for in 2Q14.
  5. 4Q14 Guidance Could Go Either Way: We thought its last guidance raise was an ill-advised move, and we're not expecting upside to 3Q14.  We can't say how management will approach 4Q14: it can choose to make a bet on its accelerated sales rep hires (up 63% y/y in 2Q14), or rebase expectations heading into 2015.  The latter would be the smarter move.

 

2015 IS AROUND THE CORNER

Our analysis has always pointed to 2H14 as the period when the model would start breaking down.  While we saw signs of deterioration in 2Q14, the 3Q14 guidance raise was much higher than we expected, and makes us wonder if we were too early in calling the inflection.  However, 2015 remains the key inflection point.  Consensus growth estimates are so aggressive that it really doesn’t matter what happens in 2014. 

 

Their mistake is simple: If you don’t understand the attrition element to the story, you can’t understand the excessive number of new accounts required to hit 2015 estimates.  YELP will need to produce both an acceleration in new account growth and historically low attrition to hit consensus estimates, which are calling for 46% revenue growth.  Our bull case is calling for 31%; bear case for 23%. 

 

For more detail, see note below.  Let us know if you have any questions, would like to discuss in more detail, or would like to see our slide deck on YELP.

 

Hesham Shaaban, CFA

@HedgeyeInternet

 

YELP: Winter is Here 

07/31/14 07:40 AM EDT

http://app.hedgeye.com/feed_items/37093

 

 

  


WATT YOU SHOULD REALLY TAKE AWAY FROM YESTERDAY'S ANNOUNCEMENT

Takeaway: Today we offer our thoughts on existing home sales and Mel Watt's announcement yesterday about expanding mortgage credit availability.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume. 

 

WATT YOU SHOULD REALLY TAKE AWAY FROM YESTERDAY'S ANNOUNCEMENT - compendium

 

A Brief Comment on the FHFA Annoucement Yesterday:

ITB, the home construction ETF, has rallied ~6% over the last two trading days (Friday and Monday) in response to news that FHFA is going to expand mortgage credit availability. On Friday, stories ran in both the Wall Street Journal and Bloomberg previewing a coming announcement from FHFA Director, Mel Watt, about boosting mortgage credit availability. Yesterday, we got the announcement. Director Watt spoke at the MBA conference and laid out two changes that would be implemented. First, Fannie Mae and Freddie Mac would lower the down payment needed to 3% from 5%, effectively raising the minimum LTV (with mortgage insurance) from 95% to 97%. Second, Fannie and Freddie would rein in some of the mortgage putback provisions that have scared lenders into excessive underwriting conservatism from an originations perspective. 

 

Regarding the first point, raising allowable LTVs two points, to 97% from 95%, will have little impact on the market. This is because the FHA already enables buyers to purchase homes with just 3.5% down payments. Much of the market that this would intend to address is already squarely served by the FHA. The GSEs are not relaxing FICO or DTI requirements, just lowering down payment standards to a level already available in the market through FHA.

 

On the second point, mortgage putback issues have been a major problem for banks for several years now. Post the housing crisis, banks have been extremely cautious in who they extend credit to largely out of fear that the loan will be put back to them for even a minor defect. Both JPMorgan and Wells Fargo, the two largest originators in the country, have spoken publicly about these issues many times. To that end, we think some further clarity around putbacks will help, on the margin, but is unlikely to cause banks to significantly expand the underwriting box. Remember that banks still have to comply with QM, which is where much of the pressure comes from.

 

Taken together, these two initiatives are positives, but we would argue small positives. We don't think this changes the landscape of mortgage finance in a material way over the intermediate term. We would also flag the timing of the announcement as interesting with midterm elections now less than 3 weeks away. Nothing sways voters like a last minute hat-tip to inflate the value of their primary asset.

 

 

Today's Focus: September Existing Home Sales 

As we've highlighted, there's limited usefulness in the EHS report on the sales side since the data is well-telegraphed by the Pending Home Sales report a month earlier. We show this in the 1st chart below, where we've offset the EHS data by one month to show its correlation to PHS on a 1-month lag.  

 

Despite the limited real-time utility in terms of demand trends, there is value in the data on inventory and the composition of sales (first-time buyers, cash buyers, investor share). This month we flag the still-anemic level of first time homebuyers (29% vs 2001-2008 average of ~40%).

 

WATT YOU SHOULD REALLY TAKE AWAY FROM YESTERDAY'S ANNOUNCEMENT - ehs vs phs

 

WATT YOU SHOULD REALLY TAKE AWAY FROM YESTERDAY'S ANNOUNCEMENT - ehs vs phs long term line

 

TOTAL EXISTING HOME SALES:  Total EHS resumed its uptrend in September after stumbling in August. Sales rose 2.4% MoM to 5.17mn SAAR. Meanwhile, the year-over-year rate of change slowed to a decline of 1.7%, an improvement vs the 5.3% decline in August. From a growth perspective, the YoY comps get progressively easier through the balance of the year as we lap the rising rate environment of 2H13. 

 

For comparison, Pending home sales have advanced +11.6% since the trough in March vs +12.6% for EHS and, given the recent pattern highlighted above, its likely we see a modestly worse sequential EHS print in October.  

 

REGIONAL:  The South and West regions registered strong sequential gains in sales while the Northeast saw a modest gain and the Midwest declined a full 5.6% MoM.  Sales across all regions but the South remain negative on a YoY basis. The South is now up +1.4% vs the same period last year. 

 

INVENTORY:  On a unit basis, existing home inventory declined -0.4% MoM, marking the 2nd month of sequential decline in supply since December of last year.  On a months supply basis, inventory was slightly lower sequentially at 5.34 months in September and up +7.8% YoY

 

OTHER:  The share of first time homebuyers remains anemic, coming in at 29% in September. First time homebuyers have been sub-30% now for 17 of the last 18 months. The share of first time homebuyers was generally above 40% from 2001-2008 and briefly hit 50% in 2010 in response to the government's homebuyer tax credit programs. Meanwhile, cash sales remain at 24% of transactions in September, down from 33% in September last year. 

 

WATT YOU SHOULD REALLY TAKE AWAY FROM YESTERDAY'S ANNOUNCEMENT - EHS long term

 

WATT YOU SHOULD REALLY TAKE AWAY FROM YESTERDAY'S ANNOUNCEMENT - ehs by region long term 

 

WATT YOU SHOULD REALLY TAKE AWAY FROM YESTERDAY'S ANNOUNCEMENT - EHS BY REGION 

 

WATT YOU SHOULD REALLY TAKE AWAY FROM YESTERDAY'S ANNOUNCEMENT - ehs inventory long term 

 

WATT YOU SHOULD REALLY TAKE AWAY FROM YESTERDAY'S ANNOUNCEMENT - ehs months supply short term line 

 

WATT YOU SHOULD REALLY TAKE AWAY FROM YESTERDAY'S ANNOUNCEMENT - ehs months supply long term column 

 

 

About Existing Home Sales:

The National Association of Realtors’ Existing Home Sales index measures the number of closed resales of homes, townhomes, condominiums, and co-ops. Existing home sales do not take into account the sale of newly constructed homes. Existing home sales account for 85-95% of all home sales (new home sales account for the remainder). Therefore, increases in existing home sales tend to signify increasing consumer confidence in the market. Additionally, Existing Home Sales is a lagging series, as it measures the closing of homes that were pending home sales between 1 and 2 months earlier.

 

Frequency:

The NAR’s Existing Home Sales index is published between the 20th and the 22nd of each month. The index covers data from the prior month.

 

Joshua Steiner, CFA

 

Christian B. Drake



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 80.32%
  • SHORT SIGNALS 78.48%
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