We remain cautious on select names in the casual dining sector as we believe sluggish sales trends, decelerating consumer spending and accelerating inflation will continue to pressure margins and, ultimately, stock prices. This raises the question: does the casual dining industry have pricing power?
We continue to like CAKE, PBPB, BLMN and PNRA on the short side and DRI on the long side in the casual dining space. We will be publishing brief updates on all of our favorite ideas – both long and short – in the coming days.
Black Box Intelligence reported that same-store sales grew +0.7% in March 2014, a 140 bps sequential improvement from the -0.7% reported in February 2014. On a two-year basis, sales were positive (+0.6%) for the first time since November 2013. For 1Q14, same-store sales were down -0.3%, a 20 bps sequential deceleration from the -0.1% reported in 4Q13. On a two-year basis, same-store sales declined -0.8% in 1Q14.
Same-store traffic declined -1.2% in March 2014. This represents a significant 200 bps sequential improvement from February, but continues to confirm that casual dining traffic is in secular decline. On a two-year basis, same-store traffic declined -1.6% in March. For 1Q14, same-store traffic was down -2.2%, a 10 bps sequential improvement from the -2.3% reported in 4Q13. On a two-year basis, same-store traffic declined -3.0% in 1Q14.
Food Inflation And Limited Pricing Power
Given the secular decline in traffic, the casual dining industry has limited pricing power to protect against food inflation. With the CRB Foodstuffs Index up +18.6% YTD, we believe the casual dining will experience significant food inflation over the next twelve months, particularly when current contracts expire. How will the industry manage the pressure?
According to Black Box, the per person average check was up +1.8% in March and up +2.0% in 1Q14. This is slightly less than the CPI for food away from home, which is running up +2.25% in 2Q14 and significantly higher than the CPI for food at home, which is running up +0.55% in 2Q14.
As we head into the later stages of 2Q14 and into the fall, we expect to see more companies talk about price increases. We believe raising prices is risky for the industry given the secular decline in traffic and knowing the consumer can find better value at the supermarket.
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Takeaway: It's very rare that you see this much candor from Ralph.
Below is an excerpt of an article that ran in Women's Wear Daily:
- WWD: There’s so much going on at Ralph Lauren right now, not the least of which is the Polo Women’s launch. Why now?
R.L.: "All of a sudden Blue Label looked like Ralph Lauren’s less-expensive line. It needed an identity. So I thought that this is a good time to do Polo, and that the growth potential was fantastic. I built some men’s stores but I didn’t build men’s and women’s. I didn’t put them together. And that’s why I did it. I felt like I was ignoring a whole business that was sophisticated."
- WWD: As the head of a public company, you have to think about succession.
R.L.: "People ask me that all the time. I have a lot of good talent working in my company and we have a team of people; it doesn’t depend on one person, so my business won’t go down the drain if I’m not here tomorrow. I like to think that I’m vital to the company and that I’m exciting and important. I also know that I have built into this company people who are talented, who can do a good job and really understand everything I’m talking about…"
- WWD: You recently brought in Valérie Hermann to oversee luxury. What is your luxury strategy?
R.L.: "My luxury strategy is to almost divide the company on some level. We brought in Valérie as president of luxury so she’s going to look at what stores to show to. When you have a lot of different products sometimes it gets mixed and they use the high price to sell the low price and it doesn’t stand on its own. When you go into a private luxury store in Europe the voice is very clear: This is Gucci; this is Prada… They’re not department stores. So there is a difference.
Department stores are very important, their growth is very important. But at the same time, the specialty stores, the quality level, the voice comes out…"
- WWD: How do you spin off luxury internally? Valérie came in with Jacki [Nemerov, president and chief operating officer, Ralph Lauren Corp.] already here.
R.L.: "They work together. Jacki is a strong executive; she runs a big amount. They’ll work together and talk together; they’re not behind closed doors. [Valérie’s] mission is to build that specialty store sensibility, [make sure] that we’re not in the wrong stores and that we sell in the stores that we believe can carry the clothes. A lot of people say, 'Oh that’s Ralph Lauren; it’s not luxury.' They think you belong in one department. It’s clarity for the brand, it’s like cutting the company in half."
- WWD: How do you deal with it when someone major in the company—Roger Farah, for example—says “I’m retiring” or “I’m leaving?
R.L.: "Roger is one of the very good talents. I’d say that Roger really helped me have a successful company, someone I have great respect for. If he decides to go, then hopefully he’s built enough people behind him. Jacki was a licensee first and then I asked her to come here because I thought she was great. She’s now COO. She and Christopher Peterson who is [chief financial officer] work very well together; they’re both very smart. Roger’s not out of the company. He’s vice chairman. He’s here, but not as full-time as he was. But you need talent."
Takeaway From HEDGEYE's ALEC Richards:
It's very rare that you see this much candor from Ralph. He addressed a number of topics in this one-on-one, but we found the comments on growth drivers (Polo & International), succession plans, and the C-Suite particularly notable.
Editor's Note: This is a complimentary research excerpt from Hedgeye Retail Analyst Alec Richards. Follow Retail Sector Head Brian McGough on Twitter @HedgeyeRetail.
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Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor". If you'd like to receive the work of the Financials team or request a trial please email .
European Financial CDS - Swaps across Europe's banking system were little changed (median change = 0 bps), but the Greek banks continue to tighten notably, dropping an average of 40 bps in the past week and 185 bps in the past month. This morning's news that GS & MS will be leading a secondary offering for National Bank of Greece doesn't hurt either.
Sovereign CDS – Sovereign swaps mostly widened over last week. Irish sovereign swaps tightened by -2.7% (-2 bps to 71 ) and Spanish sovereign swaps widened by 7.1% (6 bps to 93).
Euribor-OIS Spread – The Euribor-OIS spread was unchanged week-over-week at 13 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk.
The table below lists our current investment ideas as well as a list of potential ideas we are in the process of evaluating (watch list). We intend to update this table regularly and will provide detail around any material changes.
Consumer Staples outperformed the broader market last week, falling -0.5% versus the S&P500 at -2.6%. XLP is down -0.5% year-to-date vs the SPX at -1.8%.
For a sixth straight week, XLP is bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up. This is a material shift as the sector traded bearish TRADE and TREND for the majority of the year-to-date.
The Hedgeye U.S. Consumption Model shows a worsening outlook over recent weeks, with only 4 of the 12 metrics flashing green.
Despite the bullish quantitative set-up for the sector, we continue to believe that the group is facing numerous headwinds, including:
- U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating, and Q2 2014 theme of #ConsumerSlowing
- The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
- The sector is loaded with a premium valuation (P/E of 18.8x)
- Less sector Yield Chasing as Fed continues its tapering program
- The high frequency Bloomberg weekly U.S. Consumer Comfort Index has not seen any real improvement over the past 6 months, and declined to -31.9 versus -30.0 in the prior week
Top 5 Week-over-Week Divergent Performances:
Positive Divergence: LVMUY 5.7%; ADM 3.2%; K 3.0%; DEO 1.8%; EL 1.8%
Negative Divergence: HLF -9.9%; STZ -7.5%; HAIN -7.4%; DF -7.3%; JAH -6.1%
Last Week’s Research Notes
- WWAV: LONG WHITEWAVE
- BNNY: INTERMEDIATE-TERM DOWNSIDE
- Walmart’s Organic Push Hits BNNY, HAIN, KRFT, SJM & Others
- Just Charts: Secular Headwinds Remain
Earnings Calls This Week (in EST):
Tuesday (4/15): NESN (2:30am); KO (9:30am)
Thursday (4/17): PEP (8am); PM (9am)
In the charts below we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we can offer one. As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).
BUD – held its newfound bullish TREND this wk = $103.52 support
DEO – still doesn’t look like BUD – bearish TREND resistance remains overhead at $127.42
KO – bearish TREND resistance intact up at 39.39
PEP – bullish TREND confirmed w/ $82.29 TREND support
GIS – bullish TREND confirmed now for a month – support = $49.96
MDLZ – hanging on to bullish TREND support of $34.07
KMB – still the best looking long on this list; TREND support = $106.56
PG – finally chases down the Yield Chasing style factor the market craves – what was TREND resistance of $80.51 is now support, but needs to hold to confirm
MO – confirming the bearish to bullish TREND reversal now for a month w/
TREND support = $36.45
PM – making a run (on no volume) at TREND resistance of $84.21 – must chase yield!