In our newest biweekly product, we look at valuations across the restaurant industry categorized by specific sub-sectors. While these posts will primarily consist of charts, we have a few notable callouts in this week’s addition:
- For the most part, we've seen a healthy correction in early 2014 across most of the industry.
- Rising coffee prices and slowing domestic traffic trends at SBUX led to a notable correction in the valuation of the Coffee Category.
- Rising cheese prices led to a notable correction in the valuation of the Pizza Category.
- Rising seafood, beef and produce prices have not yet led to a notable correction in the valuation of the Fine Dining Category. We believe this day will soon come and have positioned accordingly – short DFRG.
- From both a historical and relative perspective, the Fast Casual Category looks like the most attractive one in the restaurant space as PNRA, PBPB and NDLS have struggled of late. FRGI is an intriguing story that we intend to familiarize ourselves with over the coming weeks. It appears, to some extent, that the Street has not yet acknowledged it as a true fast casual competitor.
Please note that the valuation tables below include the minimum, maximum and average valuations from 2010 and on.
Casual dining category
family/fine dining category
fast casual category
Takeaway: TGT issues apology to Canadian guests & prices $2bil bond offering. UA opening 30,000 sq.ft. 'Brand House' in Midwest.
EVENTS TO WATCH
- PIR - Earnings Call: 11:00am
TGT - Target trying to woo back Canadian consumers with video apology
- "Target has taken to YouTube in order to apologize to Canadians, using the voices of its employees to take responsibility for a disappointing first year in the country. The two-and-a-half-minute video features interviews with Target employees reflecting on the problems the company has faced and promising improvement in the future."
VIDEO LINK - https://www.youtube.com/watch?v=vIBqv2BDU4E
Takeaway: At least TGT finally recognizes that it has a brand problem in Canada. Whether or not this plea for forgiveness actually works is for the consumer to decide. But, we don't think execution is the only thing to blame for TGT's underwhelming results North of the border. The fact is that Canadian marketplace can't support the revenue projections the company set. In order the hit the $6bil revenue target in FY17, TGT Canada would have to eclipse the US store share of wallet in 4 years. Consensus estimates have come down about $1.3bil since we published our report in late April and are now under $4bil, but we think numbers are still too high.
TGT - Target Sweetens Yields on $2 Billion Bond Sale
- "Target Corp. increased yields to sell $2 billion of bonds on Tuesday, as the retailer continues to deal with the fallout from a customer-data breach late last year."
- "The company priced five-year bonds to yield 2.348% and 10-year bonds to yield 3.553%, 0.60 percentage point and 0.90 percentage point more than comparable U.S. Treasurys. Earlier in the day, Target shopped the bonds to yield about 0.50 percentage point and about 0.80 percentage point more."
- "Target said it planned to use proceeds from the sale for general corporate purposes and to buy back existing debt, which carried higher interest rates. Concurrently with Tuesday's bond sale, the retailer offered to buy back bonds maturing between 2028 and 2038."
UA - Under Armour is bringing "Brand House" concept to Chicago
- "Under Armour said today it will open its sixth so-called 'Brand House' in Chicago in March of 2015 at 600 N. Michigan Ave., literally a stone's throw from a large Nike brand store at 669 N. Michigan Ave."
- "Under Armour's new Chicago shop will be housed in a 30,000-square-foot space...The new Chicago store will be the sixth specialty retail outlet Under Armour has opened and the largest to date."
WMT, COST, AMZN - Big Retailers Agree to List Unit Prices on Websites
- "Some of the country’s largest supermarkets and drugstores have agreed to display prices by unit of measurement, as well as by item, on their websites and mobile apps, to help customers slice though the confusion that sometimes arises from different packaging and discounts."
- "Major retailers including Walmart, CVS and Costco have agreed to the deal, brokered by the office of New York’s attorney general, Eric T. Schneiderman."
- "Mr. Schneiderman had aimed even wider but was rebuffed by one online retailing giant, Amazon.
- 'Amazon refused to participate in this consumer-oriented initiative,' Mr. Schneiderman’s office said in a statement."
WMT - Wal-Mart Advances Made in USA Plan
- "Wal-Mart Stores Inc. is determined to give a boost to apparel and textile production in America."
- "In town for the Commerce Department’s SelectUSA summer conference, Michelle Gloeckler, Wal-Mart’s senior vice president of home and the executive leading the U.S. manufacturing initiative, told WWD that fostering more apparel and textile production is key for the retail giant’s Made in America initiative."
ZQK - Julien David Teams with Quiksilver
- "The designer, best known for his laid-back city suits, has teamed up with U.S. surfwear brand Quiksilver. The three-year partnership will span six capsule collections and is to include men’s board shorts, wetsuits, rashguards and T-shirts."
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Our un-elected central planning overlords at the Fed should be taking down their U.S. growth estimates today. Bank of England, on the other hand, is basically chirping group-thinking economists, telling them to take up their expectations for a rate hike; not surprisingly, the Pound loves that ($1.694 vs USD, +8% year-over-year); the FTSE likes it too – We like it.
After last week’s ramp, oil prices holding strong; WTI crude up another +0.3% this morning to +$106.68/barrel, all but assuring you that the new year-to-date highs you saw in U.S. CPI yesterday (May +2.1% year-over-year) are going to continue higher in June #InflationAccelerating.
Starting to make a stealth series of higher lows (vying for its 3rd consecutive up week at +6% YTD); if the Fed freaks on housing (MBA mortgage application awful again this morning) and/or growth, we think Gold continues higher in 2014.
|FIXED INCOME||30%||INTL CURRENCIES||22%|
Top Long Ideas
Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration. The first survey tool measures 3-D Mammography placements every month. Recently we have detected acceleration in month over month placements. When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner. With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.
Construction activity remains cyclically depressed, but has likely begun the long process of recovery. A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating. Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms. As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.
Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.
Three for the Road
TWEET OF THE DAY
42 days since $SPX has had a +/- move of 1% (2nd longest streak in 15yrs)
QUOTE OF THE DAY
The strength of a family, like the strength of an army, is in its loyalty to each other.
STAT OF THE DAY
Today in 1940, Winston Churchill gave his "Finest Hour" speech.
“Measure what is measurable, and make measurable what is not.”
According to legendary theoretical physicist Stephen Hawking, Galileo likely bears more responsibility for the birth and development of modern science than anyone. This is a heady compliment from one of the most prominent physicists of the modern era. In terms of measuring accomplishments, Hawking is probably right.
While he was well versed in physics and mathematics, Galileo (like the artist Banksy, Galileo was known mononymously) was best known for his work in astronomy. Among other things, he confirmed the phases of Venus, discovered the four largest satellites of Jupiter, and discovered sunspots. Galileo could literally see in the stars things that his contemporaries could not.
As insinuated in the quote at the beginning of this note, Galileo was truly one of the first modern thinkers to establish and vigorously defend the idea that laws of nature are governed by mathematics. In other words, if it could be measured, Galileo measured it. And if it could be counted, Galileo counted it.
This lesson of measuring and counting can also be applied very directly to a less scientific profession, that of investing. The more we can quantify any investment, the better decisions makers we become. Anecdotes are convenient shortcut for the less informed. Math doesn’t lie, people do. As Galileo also advised:
“If I were again beginning my studies, I would follow the advice of Plato and start with mathematics.”
Wise advice, indeed
Back to the Global Macro Grind...
Speaking of outer space, an increasing macro risk we see, especially heading into the summer driving season, is that oil prices are potentially “going to the moon” due to the heightened conflict in Iraq. Iraq currently produces about 3.3 million barrels per day, but it is the second largest exporter after Saudi Arabia in OPEC.
On a percentage basis, over the next five years Iraqi is projected to see the most production growth globally. Net-net, Iraq is the key global swing producer and also has the fifth largest reserves. In the world of commodities, what happens on the margin matters and the Iraq oil industry plays squarely on that margin.
Of course, to the punditry that is arguing commodity inflation is temporary in nature, this adds fuel to the fire. The heightened tensions in Iraq are clearly “temporary” in nature. Currently, the CRB index is up +10.5% in the year-to-date and 16 of 19 of its key components are up as well. For those of us that, like Galileo, like to count things, that means that 84% of componentry of the CRB index is up on a “temporary” basis this year.
As well, for those of us that work in the hallowed halls of Wall Street, or for those that eat iPhones, this might not matter much. But for the median American consumer who has pre-tax income of $47,000, you can be damn skippy it does matter. Assuming those consumers also drive, then accelerating oil prices are only going to accelerate the vise like grip that commodity inflation has on their pocket books.
Coincident with accelerating commodity prices domestically is the fact that real weekly earnings, released yesterday morning, turned back to negative in May. At down -0.10% year-over, this is the worst reading, assuming you believe negative earnings growth is bad, since January of 2013. Food, energy and shelter prices are inflating and real income is turning negative. Clearly, this is an elixir for a strong economy (#SarcasmAlert).
Luckily enough, given the high correlation between many commodities and the U.S. dollar, our policy makers do have a choice, which is to implement strong dollar policy. Seemingly, this has worked for the United Kingdom, where its rational, and Canadian, central banker Mark Carney has protected the currency and the pound is now up 8% year-over-year versus the U.S. dollar. Subsequently, the U.K. economy has outperformed.
Sadly, about the only meaningful move we can expect out of the Federal Reserve later today is that they will once again have to take down their U.S. GDP estimates. Nothing new there though as the Federal Reserve’s economic projection have been about the best lagging, or some instances just wrong, economic projections that devalued U.S. dollars can buy.
Clearly, though, any concerns we may have are misplaced. In fact, this morning, Portugal is selling 12-month t-bills at 0.364% versus the prior level of 0.617% and 3-month t-bills at an average yield of 0.18% versus the prior yield of 0.432%. The Spanish government even got a better deal, selling five year paper at a yield of 1.402% with a bid-to-cover of, are you ready for this, 2.32x! Aye carumba!
Meanwhile, in the most recent U.S. Investor’s Intelligence poll, a mere 22.3% of respondents expect a correction in U.S. equity markets . . . but, hey, the Utility subsector of the SP500 is up +12.7% on the year-to-date, that must be healthy for the U.S. economy. Right? Or maybe the hockey heads at Hedgeye are just seeing stars.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.44-2.66%
Brent Oil 110.23-113.98
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
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