Takeaway: Management commentary on October and CY4Q13 comps.
BBRG: MARGINAL AT BEST
Management Commentary - “Still, given our year-to-date results and more cautious outlook on the fourth quarter, we are revising our full year outlook as Jim will review.”
“Now, turning to our outlook, we are updating our annual expectations based upon the results to-date and the more conservative view regarding the fourth quarter. Specifically, we although have lowered our range for revenues to between $410 million and $413 million and our comparable sales estimate to between minus 3% and minus 3.5%.”
Commentary on the month of October: “As of last weekend, the BRIO was negative 2.9% and the BRAVO! was slightly better than that.”
HEDGEYE – The Hedgeye Restaurant Dashboard is a flashing red sell signal. What would you pay for a casual dining company with little to no revenue growth, low returns, and burning cash?
BJRI: STRUGGLING TO ADJUST TO THE NEW ENVIRONMENT
Management Commentary - “Based on the continued sluggish economy and the industry data we are seeing today, we expect the casual dining industry in general to remain challenging for at least the end of this year and most likely into early next year.
However, as I previously mentioned, we have seen our recent comparable restaurant sales trends improve. To date, through the first three weeks of October, our comparable restaurant sales are down just slightly at minus 0.5% or so. More importantly, we are seeing this improving trend despite having less menu pricing in October than we have had all year. Our current menu pricing is a little over 1%. So, for the first three weeks of October, we are seeing about a 200 bps improvement in our guest traffic, compared to the third quarter.
I do want to remind everyone that this is only for the first three weeks of October and it is always difficult to ascertain a trend in the restaurant business after a few weeks. Also, our most productive sales time in the fourth quarter starts in December and October tend to be a slower overall period for us.”
HEDGEYE – BJRI reported 3Q13 same-store sales of -2.2%; on a 2-years basis, same-store sales declined 210 bps to +0.1%. Expectations are for accelerating trends in 4Q13 on more difficult comparisons. The Hedgeye Restaurant Dashboard remains bearish on BJRI. While management is bullish on the long term outlook for the company, its growth prospects have diminished significantly over the past two years. A healthy Chili’s has been taking market share from BJ’s and management has not responded to the increased competitive threat. We believe the company needs to significantly slow down unit growth in order to fix the profitability of the company.
BLMN: THE BAR IS HIGH
Management Commentary - “We exited Q3 with strength which, which continues and expect all four of our concepts to positively contribute to make Q4 our strongest core domestic comp of the year.”
“…this is a choppy environment and we exited Q3 with real strength which has continued through Q4 and we’re very, very pleased and that’s continued across all of our concepts. As we look at Q4, we feel very good about what we’re seeing and the levers at our disposal.”
“The company is revising its comparable restaurant sales growth expectations for 2013 from at least 2.0% with positive traffic to at least 1.5% with positive traffic.”
HEDGEYE – BLMN reported 3Q13 same-store sales of -0.3%; on a 2-year basis, same-store sales declined 50 bps to +1.7%. BLMN has set the bar very high for 4Q13, with expectations for +2.0% or better same-store sales. Given industry conditions, we generally believe the company will have a difficult time delivering next quarter.
BWLD: TAKING CONTROL OF THE “SPORTS BAR“ THEME SEGMENT
Management Commentary - “For the first four weeks of the fourth quarter, same-store sales are trending at 5.3% at company-owned restaurants and 3% at franchise locations. For comparison purposes, same-store sales trends for the first four weeks in the fourth quarter last year were 3.8% at company-owned restaurants and 5.6% at franchise locations, and for the full fourth quarter of 2012 were 5.8% at company-owned and 7.4% at franchise locations.”
HEDGEYE – BWLD reported 3Q13 same-store sales of +4.8%; on a 2-years basis, same-store sales accelerated 90 bps to +5.5%. Expectations are for decelerating trends in 4Q13 on easier compares. We have stayed away from making a call on BWLD for the better part of this year. BWLD screens favorably on the Hedgeye Restaurant Dashboard. Lower wing prices are helping margins, while sales trends appear to be holding up better than most. BWLD has captured a significant opportunity in the “Sports Bar” theme segment of the casual dining space.
CAKE: A STRONG, DOMINANT PLAYER
Management Commentary - “As to comparable sales, while the industry is still weak, we are outperforming on a relative basis, and we expect this to continue in 2014. Economic forecasts continue to show a slow rate of growth. Nonetheless, we think it’s reasonable to set the high end of our comparable sales range at 2%, which does represent a sequential acceleration from 2013.”
HEDGEYE – CAKE reported 3Q13 same-store sales of +1.7; on a 2-years basis, same-store sales decelerated 40 bps to +1.3%. Expectations are for accelerating trends in 4Q13 on more difficult compares. We recently removed CAKE from the Hedgeye Best Ideas list, but continue to feel that CAKE is one of the strongest, best positioned companies in the restaurant space. The Hedgeye Restaurant Dashboard continues to flash a positive bias, and we will be looking to add the stock back to the Best Ideas list on weakness.
CHUY: SMALL REGIONAL PLAYER
Management Commentary - “What’s the one thing we’ve been able to hang our hat on for a while right now is the consistency of our traffic comps and specifically our same-store sales. As we finish the last year, in the fourth quarter, we had our best quarter of 2012 which really finished the year in the fourth quarter of 2012 up around 3.1%. We’ll continue that trend all year luckily, for us and then that’s about – a third of that is customers, the rest is price and we’re seeing that through the one period in the fourth quarter that trend continues. And, again, we’re up against our best quarter from a year ago though.”
HEDGEYE - CHUY reported 3Q13 same-store sales of +3.1; on a 2-years basis, same-store sales accelerated 30 bps to +2.3%. Expectations are for accelerating trends in 4Q13 on more difficult compares. CHUY’s is a strong regional player in the casual dining segment. The company must continue to grow into a very large multiple. The Hedgeye Restaurant Dashboard has a positive bias on CHUY.
DFRG: WEAK PLAYER IN THE UPSACLE SEGEMNT
Management Commentary - “Turning to our outlook, we are fine-tuning some of our full year guidance, which I’ll remind you is a 53-week fiscal period that concludes with a 17-week fourth quarter that began on September 4th. First, in view of our year-to-date performance, particularly at Sullivan’s, and continued macro uncertainty, we are lowering our expectations for total comparable restaurant sales to positive 1% to 1.5% on a 52-week versus 52-week basis.
This does imply stronger comparable sales growth in the fourth quarter versus earlier in the year, but we remain cautious given the current macro environment. Despite this caution, we do have several favorable factors within our control in the fourth quarter. In addition to the blended 1.8% price increase previously mentioned, we do have additional patio seating versus last year that we can better utilize in the cooler fall season as well as some additional private dining seats as we enter the holidays. Additionally, barring any late season weather concerns, we will have a favorable comparison relative to last year’s Hurricane Sandy impact in the Northeast.”
HEDGEYE – On a consolidated basis, DFRG reported 3Q13 same-store sales of -0.3%; on a 2-years basis, same-store sales accelerated 160 bps to +1.7%. Expectations are for accelerating trends in 4Q13 on easier compares. The Hedgeye Restaurant Dashboard is flashing a negative signal on DFRG. We would stay away.
DIN: CLIPPING COUPONS; NO GROWTH
Management Commentary - “And finally onto our revised guidance for the year. Applebee’s domestic system-wide same restaurant sales are expected to range between minus 0.5% and plus 0.5%. IHOP domestic system-wide same restaurant sales are expected to range between plus 2% and plus 3%, reflecting a continuation of IHOP’s positive momentum.”
“…I think the environment is lumpy and bumpy, and I think it will continue to be lumpy and bumpy. So I don’t think we were particularly surprised at any time this year. We said at the beginning of the year it’s going to be lumpy and bumpy. We focus almost exclusively on what we can do to differentiate both brands, both innovatively, creatively and working with our franchisees. So that has been our maniacal focus.”
HEDGEYE – DIN is a classic asset light model with little or no growth operating in a casual dining segment in secular decline. On a system-wide basis, Applebee’s reported 3Q13 same-store sales of -0.4%; on a 2-years basis, same-store sales accelerated 20 bps to +0.8%. Expectations are for accelerating trends in 4Q13 on easier compares.
EAT: RESHAPING THE CASUAL DINING LANDSCAPE
Management Commentary - “This year’s off to a challenging start, as evidenced by our first quarter results. Consumers continue to navigate the new macroeconomic elements and adjust their allocation of disposable income. And we see this challenging environment continuing in the near term with industry traffic remaining weak.
Of course, we’re not immune to what’s impacting the industry and there remains significant uncertainty around what the coming year might hold for the consumer. But based on the current situation, our best projection sees full-year fiscal 2014 Brinker comparable restaurant sales growth between negative 1% and positive 1%... This sales projection represents an acceleration compared to our first quarter results, but it comes with the background of a second quarter that is off to a good start.”
HEDGEYE – Chili’s reported 1Q14 same-store sales of -1.6%; on a 2-years basis, same-store sales decelerated 20 bps to +0.6%. Expectations are for accelerating trends in 4Q13 on easier compares. We continue to believe that EAT is one of the best run companies in the casual dining space and the Hedgeye Restaurant Dashboard is flashing a moderate positive bias.
KONA: REGIONAL TRENDS SUGGEST A HEALTHY CONCEPT
Management Commentary - “Our Q4 guidance reflects positive same-store sales of approximately 3%, excluding the impact of remodels, as we continue to build upon the positive traffic trends we saw in Q3. The 3% comp guidance is based upon quarter-to-date sales trends and what we forecast for the remainder of the quarter.”
HEDGEYE – KONA reported 3Q13 same-store sales of +2.6%; on a 2-years basis, same-store sales decelerated 100 bps to +1.4%. Expectations are for accelerating trends in 4Q13 on easier compares. The Hedgeye Restaurant Dashboard suggests that KONA’s trends are stable, but we would not own the stock here.
IRG: NOT ON OUR RADAR SCREEN
Management Commentary - On Joe’s Crab Shack: “Positive trend continues into the fourth quarter with positive comparable sales through October in the mid to high single-digits, off to a very good start.”
On Brick House Tavern: “The strong sales trends have continued into the fourth quarter there as well with Brick House comp sales through October also running mid to high single-digits.”
On Macaroni Grill: “Our early fourth quarter results, however, show volatility. It’s inherent to turn around as comp sales have slowed in October.”
HEDGEYE – IRG is just another small-cap restaurant company that should not be public. The Hedgeye Restaurant Dashboard is flashing a red sell signal for IRG.
RRGB: IMPRESSIVE TRAFFIC
Management Commentary - “With only two months left in the year, we’re obviously confident that we’ll exceed our initial 2013 guidance we issued back in February. And believe that we have the initiatives in place to outpace our peers in the fourth quarter. The overall outlook for casual dining, however, is fairly pessimistic in the near term with consumer confidence down and little expected improvement in employment, retail sales or discretionary spending in restaurants.
Based on the 4.2% comparable sales growth for the first three quarters of the year, we expect comparable sales growth for the full year to end somewhere close to 4%, implying about 3.5% growth in the fourth quarter. We remain concerned about the weak industry trends, the one less weekend and fewer shopping days between Thanksgiving and Christmas compared to last year, and an intensifying competitive environment. Further, remember we rolled off 90 basis points of price in October, so Q4 will be carrying 140 basis points of price increases.”
“So, I think really fourth quarter for us, we expect to be a little bit of the same, still continued choppiness, we expect competitors and we’ve seen some competitors get even more aggressive, so we’re a little bit nervous about that. And just with the fewer shopping days and I’m not sure when the political noise will heat back up for the January fight, but that starts hitting into December again. We are just being pretty cautious on our outlook.”
HEDGEYE – RRGB reported 3Q13 same-store sales of +5.7%; on a 2-year basis, same-store sales accelerated 80 bps to +3.4%. Expectations are for decelerating trends in 4Q13 on difficult compares. The company has done an amazing job delivering positive traffic in 3Q13 in light of the challenging environment. The Hedgeye Restaurant Dashboard is flashing green on RRGB.
RT: THIS COMPANY IS GOING AWAY, SLOWLY
Management Commentary - “We anticipate same-restaurant sales to be down high single digits in the second quarter, with sequential improvement in the third and fourth quarter, including positive same-restaurant sales in the fourth quarter, reflecting traction from our new menu offerings and marketing campaign.”
HEDGEYE – RT reported 3Q13 same-store sales of -11.4%; on a 2-years basis, same-store sales decelerated 90 bps to -4.8%. Expectations are for accelerating trends in 4Q13 on easier compares. The Hedgeye Restaurant Dashboard is flashing a sell on RT. This company is in serious trouble and will likely need to close more than one hundred stores as part of a massive restructuring.
RUTH: A KEY PLAYER IN UPSCALE STEAK
Management Commentary - “Our comparable sales growth trends have slowed modestly in the fourth quarter, in part we believe due to financial uncertainty around the government shut down. Despite this, we are pleased to note that thus far in the fourth quarter, our comparable sales trends have remained positive in the low-to mid-single-digit range.”
HEDGEYE – RUTH reported 3Q13 company-owned same-store sales of +4.2%; on a 2-years basis, same-store sales decelerated 20 bps to +5.1%. Expectations are for decelerating trends in 4Q13 on easier compares. The Hedgeye Restaurant Dashboard is flashing a positive bias on RUTH.
TXRH: AMAZING PERFORMANCE, BUT WE REMAIN SKEPTICAL
Management Commentary - “Our top-line momentum has continued with comparable sales growth of 3.4% for the first four weeks of the quarter.”
“…we continue to be very focused on balancing short-term pressures with long-term positioning. As such, we are likely looking at implementing somewhere around a 1.5% menu price increase in December.”
HEDGEYE – TXRH reported 3Q13 same-store sales of +2.8%; on a 2-years basis, same-store sales decelerated 120 bps to +3.4%. Expectations are for accelerating trends in 4Q13 on more difficult compares. The Hedgeye Restaurant Dashboard is flashing a negative bias on TXRH. A significant increase in capital spending in 3Q13 is raising a red flag.
Source: Company Releases, Unofficial Bloomberg Transcripts
Below, is our Hedgeye Sales Monitor for the casual dining sector. Same-store sales are color coded green, if above, or red, if below, the sub-sector's mean. 2-year averages are color coded green, if accelerating, or red, if decelerating, on a sequential basis.
Takeaway: This a brief excerpt from Hedgeye CEO Keith McCullough's morning research.
The British Pound is up another +0.4% versus the US Dollar this morning after another solid acceleration in UK Services PMI to 62.5 in October (versus 60.3 in September).
10-year Gilt Yields are up 10 basis points in two days. And they should be.
Reality check: Bank of England Governor Mark Carney is not Mervyn King. And Carney is not going to be like Janet Yellen either. #StrongPound.
>>>CLICK HERE for Hedgeye CEO Keith McCullough's morning conference call on Europe.
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In preparation for IGT's F4Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.
- We are pleased with our success at DoubleDown and we expect that the transaction will be accretive on a GAAP basis in the first quarter of fiscal 2014.
- I think those (new) markets will develop perhaps a little bit slower than we thought, though my comment last period was in anticipation of multiple quarters. As we enter new markets, we do expect that there may be some downward pressure on ARPU as DAU picks up, and we did see a pickup in DAU. I think the positive surprise for us this quarter is that it didn't damage ARPU, and actually we're seeing incredibly strong conversion rates continue in our domestic markets. Over time, I still expect that there may be some pressure on that ARPU number as we further penetrate the international markets, but we didn't see that materialize in this quarter which was a great surprise.
- We are confident that we maintained our industry-leading ship share in the replacement market this quarter.
- I think we are starting to see some signs of improvement.
- I think in the game ops side, we've seen a lift in our installed base in the international marketplace.
- Despite ongoing challenges in certain regions, there is still significant potential in our international business as we leverage our investments in localized content and infrastructure improvements.
- I would put in the great opportunity in South America for us, if we can tackle the structural issues of really getting product to market there efficiently, effectively for our customers.
- In Asia, great opportunities there for us.
- In Europe, it's just very spotty. It kind of comes and goes in Europe by country and by product type. The VLT part of that business in Europe seems to be growing a bit faster and with more health than the traditional casino business.
- I would say Europe growing the slowest, the other two growing about the same.
- Gaming operations capital expenditures are expected to decrease year-over-year as we remain focused on disciplined capital deployment.
- We are striving to improve yields through a variety of initiatives. As we mentioned earlier this year, we are increasing our MegaJackpots team, leveraging our franchise titles, launching direct-to-player marketing efforts, and introducing Game Changers, a value-oriented product in the MegaJackpots category. We are beginning to gain traction from these initiatives as demonstrated by the enduring popularity of Wheel of Fortune brand in new titles like Wheel of Fortune Triple Wild Spin.
- We're holding up on margins which again is what we were focused on is when you see these gross gaming revenue trends coming, and you don't see an end in sight, the focus has to move from the revenue line to profit
- At IGTi, revenues were up 26% year-over-year, excluding the prior year impact of our former European online poker network. We continued momentum in this business, both in our existing markets where we attracted 15 new partners since a year ago and are excited about new markets like New Jersey, where our prospects to partner with some of our land-based customers, we're working on now.
- We have about $520 million remaining on our board-authorized repurchase. We continue to target using that authorization over the next two to four years, which is consistent with what we've said in the past.
- We haven't really seen a significant change in the tenor of those conversations.
- The volume has not picked up as far as the volume of the voice from the customer on concern about their budget. So I would say the volume is there. The people we're hearing from are different than they were a year ago or different than they probably even were a quarter ago.
- We think our last shipments into – less meaningful shipments relative to the, if you will, the replacement cycle will conclude next quarter. Again that's pending timing of orders and customer demand which is not something we control. But we would expect that to significantly taper off after Q4 FY 2013 and currently expect that Q4 will be less robust than this quarter was.
- We haven't really seen a significant change in the tenor of those conversations.
In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance
- WORSE - PNK missed our Street low adjusted EBITDA estimate as trends deteriorated in September.
- BETTER: Mgmt said they are even more confident that they will realize more than the targeted $40MM in synergies than they were last quarter
- We still believe that we are going to be able to not only meet the goal of $40 million in synergies, but we believe that, from what we've had exposure to up to this point, we're going to be able to exceed that.
- There is a large portion of that that is entirely driven by combination of public company costs, i.e., one board, one set of financials, as well as integrating the teams in effectively, mostly down in Las Vegas. We have done an enormous amount of work on this, and while there is some effect on the margin by virtue of Lumiere, the reality is that the scale of the company and our ability to realize savings through better procurements, a better marketing program that will look to do best practices, really remains largely unchanged.
- WORSE: Operating environment continues to be challenging. September was a disaster and was the prime contributor to the big earnings miss. However, revenues in October have been sequentially better.
- In terms of guest behavior, in the second quarter, we saw trips decline at a greater rate than spend per trip. Meaning that people came less often, but their spend per trip was pretty much in line with historical levels.
- Midwest it is a little bit more pronounced than down South, but nonetheless it's softness that we're seeing pretty much across the portfolio.
- The impact has been more pronounced at the lower tiers
L'AUBERGE BATON ROUGE
- SAME: The property continues to grow the market with the hotel producing the 2nd highest REVPAR at the company. Mgmt believes the market remains underpenetrated.
- PREVIOUSLY: We continue to see strong guest acquisition and growing loyalty among our guests. Repeat visitation is very strong, with over 55% of our guests returning for multiple trips. The hotel continues to be a good story, with occupancy now in the mid-90s consistently. And our regional high end business continues to grow every month, although at a lower pace than we had originally anticipated.
L'AUBERGE LAKE CHARLES RENOVATION
- SAME: PNK has completed the renovation of their standard hotel rooms and have received very favorable guest feedback.
- PREVIOUSLY: The second phase of the renovation will begin this fall after the busy summer season.
HORSESHOE CINCINNATI IMPACT
- WORSE: While mgmt seems optimistic on Belterra's ability to withstand the Cincinnati competition, we would note that their 3Q gaming revs fell 15% and the promotional environment remains fierce.
- PREVIOUSLY: The impact of Horseshoe Cincinnati has been less than anticipated so far.
BOOMTOWN NEW ORLEANS
- SAME: The additional guestrooms have helped the property. Mgmt sees more upside ahead.
- PREVIOUSLY: Finally, in New Orleans, we continue to see an improvement in the operating performance of this property
- SAME: The project budget remains $209 million, excluding license fees, original acquisition costs, and capitalized interest, and is scheduled to open in May 2014.
- PREVIOUSLY: The facility is well underway and we're excited about bringing the property into our portfolio in the second quarter of 2014.
CORPORATE EXPENSE RUN RATE
- MIXED: While mgmt said on an apples-to-apples basis, corporate expense fell $4MM YoY, it is not entirely clear. The accounting change made comparisons difficult.
- We've been running right around $5 million or so, call it mid-$5 millions on the current set of portfolio, and that's the set we have that clearly we're working through that as it relates to the combined company.
- So while I don't expect if we were to, without the acquisition, that that number will change in any material way in that $5 million to $5.5 million per quarter, certainly we'll recalibrate that and give you some parameters once we complete the acquisition.
Takeaway: We think FNP is a 3-bagger, but it won't get there tomorrow. Our thoughts ahead of the print.
Even after the big move we still think that FNP is a BIG idea, with 3x upside over a 3-4-year time period. That said, we’re neither here nor there on tomorrow’s print. Here’s our thinking into tomorrow…
- FNP remains one of our favorite TAIL ideas, as we think that 1-2 years out the stock starts with a 4 (versus $27.66 today).
- But we don’t feel strongly about it one way or another headed into tomorrow’s print.
- This company gives guidance based on what it thinks it can hit, not on what it can beat. Our point is that if we want to get sucked-in to the game of ‘beat by a penny/miss by a penny’, this can literally go either way.
- There’s not likely to be an announcement on the sale of Lucky or Adelington with the release, though we’ll likely get added color on terms surrounding the previously announced sale of Juicy. All in, don’t expect any thesis-shifting strategic announcements.
- Our bigger picture call is simple. Kate Spade (which accounts for all of FNP’s EBIT) is going from $700mm in revenue at a 12% EBIT margin (with leverage), to $3-4bn in revenue at a debt-free 20% margin. We think people have the revenue trajectory partially correct, but they’re still way too low on the margin. In the end, consolidated EBIT will go from break-even (currently hurt by divisions that are on the block) to $800mm. The stock is expensive on earnings today, but is trading at 3.4x its $900mm EBITDA number.
- The punchline on this name is that an 8x EBITDA multiple on our $900mm EBITDA number gets us to a stock of about $75 vs the current $27.66. It won’t happen overnight, as we all know stock moves aren’t linear, but will grind higher quarter after quarter, year after year.
- This has been and will continue to be the perennial ‘I missed it’ stock for investors, who subsequently watch it go up another 25% in their face.
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