Takeaway: Prices at the grocery store are rising faster than they are at restaurants. Here's what that means.
We have a favorable data point for restaurants, says Hedgeye's Restaurants sector team.
The restaurant value spread, which measures the difference between food at home and food away from home, has widened over the past three months.
In the past, we've seen evidence that when this spread widens, same-store sales for many restaurants improves.
Check out this chart below.
- We removed PBPB from our Investment Ideas list as a short in a note last week. CLICK HERE to access the note.
- We are removing MCD and BKW from our Investment Ideas list as shorts, due to the improvement we are seeing in same-store sales trends across the sector.
09/29/14 Monday Mashup: BLMN, SBUX and More
10/01/14 PBPB: Closing Best Idea Short
10/02/14 Restaurant Sector Valuation
10/02/14 Bullish on Bloomin'
Events This Week
Wednesday, October 8th
- YUM earnings call 9:15am EST
- RT earnings call 5:00pm EST
Thursday, October 9th
- PLKI Investor Day 9:00am EST
Friday, October 10th
- DRI Annual General Meeting 9:00am EST
Chart of the Day
A favorable data point for restaurants: the restaurant value spread, which measures the difference between food at home and food away from home, has widened over the past three months.
Recent News Flow
Monday, September 29th
- SONC announced the hiring of industry veteran Harold Ceron as senior VP to lead company drive-in operations. Ceron comes to SONC from 7-Eleven where he served as Managing Director, Europe and Latin America. Prior to 7-Eleven, Ceron spent nearly 20 years at Yum! Brands.
- BAGL was acquired by JAB Holding Company for $20.25 per share in cash. Greenlight Capital agreed to tender its shares in support of the transaction.
- DFRG announced the opening of its newest Del Frisco's Grille in North Bethesda, Maryland, making it the 14th Del Frisco's Grille in the system.
- RRGB announced it is two weeks away from opening its two newest restaurants in Bronx, NY and South Florida.
- DIN Applebee's launched the #FanFavoriteSweeps campaign to give one fan a trip to Phoenix. The challenge requires contestants to snap a selfie with their favorite 2 for $20 dish from a menu that includes: Grilled Chicken Wonton Tacos, Quesadilla Burger, Bourbon St. Chicken & Shrimp, Shrimp 'N Parmesan Sirloin and Crosscut Ribs.
- COSI announced a planned rights offering from which it expects to receive ~20.0M.
- WEN launched the #BBQ4Merica campaign to help spread awareness of their new BBQ offerings, including its new BBQ Pulled Pork Sandwich, BBQ Pulled Pork Cheeseburger and BBQ Pulled Pork Cheese Fries.
- BAGL was downgraded to hold from buy at Jefferies.
Tuesday, September 30th
- PNRA was added to the US 1 list at Bank of America Merrill Lynch with a $185 PT.
- DRI proxy advisory firm Egan Jones reaffirmed its recommendation that shareholders vote "FOR ALL" of Darden's director nominees.
- PZZA introduced its latest menu addition, the Ultimate Meats Pizza, featuring pepperoni, salami, sausage, Canadian bacon and hickory smoked bacon. The Ultimate Meats Pizza can be had for just $12 through October 26th.
- BJRI opened its newest restaurant in Cedar Park, TX. The restaurant Is approximately 7,400 square feet, seats 225 guests and features BJ's extensive menu.
Wednesday, October 1st
- PNRA upgraded to buy at Wunderlich Securities with a $185 PT.
- Restaurant Sector upgraded to bullish from cautious at Stifel Nicolaus.
- NDLS announced new fall limited time only items, including the new Buffalo Chicken Mac & Cheese and the new Fig & Pig Flatbread. The company also added the Alfredo MontAmore to its permanent menu and announced it will celebrate National Noodle Day on October 6th with its "Lucky Bowl" giveaway.
Thursday, October 2nd
- DRI reported September comps (Olive Garden +0.6%, LongHorn +3.2%) and guided 2Q EPS to the upper end of its original $0.26-$0.28 range.
- LOCO celebrated the grand opening of its first Houston, TX restaurant.
- KKD announced CFO Douglas Muir will retire in CY15 and plans to remain in his current role until a successor is in place and to provide support during the transition.
Friday, October 3rd
- CBRL declared a quarterly dividend of $1.00 per share payable on November 5, 2014 to shareholders as of October 17, 2014. The board also authorized a new $25 million share repurchase plan.
- JACK Qdoba unveiled a new simplified menu and pricing structure at its restaurants in which "extras" (including guacamole, 3-Cheese Queso and Queso Diablo) will no longer be charged as extra. Guests will now pay a single set price for their favorite entrée and will be able to load on flavor without paying the additional cost.
- SBUX announced that Jeff Hansberry, President of CAP, assumed the role of President of Evolution Fresh effective September 29th, 2014. Hansberry will return to the company's headquarters in Seattle.
The XLY (-0.7%) outperformed the SPX (-0.8%) last week. Both casual dining and quick service stocks, in aggregate, outperformed the XLY.
XLY Quantitative Setup
From a quantitative setup, the sector remains bearish on an intermediate-term TREND duration.
Casual Dining Restaurants
Quick Service Restaurants
Risk Managed Long Term Investing for Pros
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.
Takeaway: The company's new financing program plus growth in in-house interior design gives us greater confidence in our long-term revenue model.
This note was originally published October 03, 2014 at 09:04 in Retail
Last night (Thursday night) RH announced a long-term financing program that we think is positive news for its top line. The company already offers a credit card, but that carries a much higher interest rate (24.99%) and is a shorter-term financing bridge for consumers. With the new RH program, consumers can finance purchases at 5.99% for a duration ranging from 24 months to 7-years.
There's no question for us that this is a positive for RH's top line. In our latest RH consumer survey, we asked 1,000 consumers how important it is for a furniture store to offer store credit -- on small, medium and large purchases. Interestingly, it is 'Very Important' to only 13.6% of consumers for 'Small Purchases' and only '18.8% for 'Medium Purchases'. But once we get into the 'Large Purchase' classification, it is 'Very Important' for 41.7% of customers. Even 33.4% of the $100k+ demographic said that it Very Important to their purchasing decision.
An interesting note is the screen shot below that 'advertises' consumers to meet with RH designers. This is the first time we EVER saw this advertised by the company. Approximately 40% of RH's business comes from designers, but they are largely third party designers. These are people that are hired by a customer and shop dozens of stores, where they pick and choose assortments that work -- maybe including RH, maybe not.
But now RH not only has a massive product assortment (i.e. 3,300 pages), but a stepped-up in-house Interior Design team AND a superior long-term financing program. Add all that up and you get a stealth revenue driver that will build meaningfully. We're not taking up our estimates (which are already high on the street by a country mile) but these factors give us more confidence that the company will get there.
Note: Using the z-score in the tables below as a coefficient of variation for standard error helps us flag the relative market positioning of the commodities in the CRB Index. It is not intended as a predictive signal for the reversion to trailing twelve month historical averages. For week-end price data, please refer to “Commodities: Weekly Quant” published at the end of the previous week. Feel free to ping us for additional color.
1. CFTC Net Futures and Options Positioning CRB Index: The Commodities Futures Trading Commission (CFTC) releases “Commitments of Traders Reports” at 3:30 p.m. Eastern Time on Friday. The release usually includes data from the previous Tuesday (Net Positions as of Tuesday Close), and includes the net positions of “non-commercial” futures and options participants. A “Non-Commercial” market participant is defined as a “large speculator.” We observe the weekly marginal changes in the overall positioning of “non-commercial” futures and options positions to assess the directionally-biased capitulation risk among those with large, speculative positions.
The Sugar, Soybeans, and Coffee markets experienced the most BULLISH relative positioning change in the CRB week-over-week.
The Cotton, Silver, and Copper markets experienced the most BEARISH relative positioning change in the CRB week-over-week:
2. Spot – Second Month Basis Differential: Measures the market expectation for forward looking prices in the near-term.
- The Corn, Natural Gas, and Live Cattle markets are positioned for HIGHER PRICES near-term
- The Lean Hogs, RBOB Gasoline, and Silver markets are positioned for LOWER PRICES near-term
3. Spot – 1 Year Basis Differential: Measures the market expectation for forward-looking prices between spot and the respective contract expiring 1-year later.
- The Corn, Wheat, and Sugar markets are positioned for HIGHER PRICES in 1-year
- The Lean Hogs, Live Cattle, and WTI Crude Oil markets are positioned for LOWER PRICES in 1-year
4. Open Interest: Aggregate open interest measures the amount of opened positions in all actively traded futures contract months. Open interest can be thought of as “naked” or “directionally-biased” contracts as opposed to hedgers scalping and providing liquidity. Most of the open interest is created from large speculators or participants who are either: 1) Producers/sellers of the physical commodity hedging their cash market exposure or 2) Large speculators who are directionally-biased on price.
Tickers: IGT, MGM, LVS, PENN, GLPI, HLT, MAR, NCLH, RCL
- Wed Oct 8 & Thurs Oct 9: Todd Jordan in Macau
- Wed Oct 8 HT Investor Day
GTK:IM & IGT – announced an extraordinary GTECH shareholders’ meeting has been called for November 4, 2014, to approve the common cross-border merger of GTECH and Georgia Worldwide - which will then set the stage for Georgia Worldwide to acquire IGT.
Takeaway: Merger appears to be moving toward closing faster than the anticipated Q1 2015 closing.
GENS:SP – (Singapore Business Review) Genting Singapore is struggling to stay afloat as its ultra-rich gamblers vanish, with the article noting the casino's VIP volumes are driven mainly by mainland Chinese. However, these players are disappearing due to the lack of junkets in the island, who extend credit and collect debt from VIPs.
Takeaway: Recently touted as a relatively safe haven investment opportunity by some sell-side analysts, Singapore looks risky to us with macro economic pressure on Mass and shrinking VIP volumes.
MGM, 2282:HK, 27:HK and 880:HK – (Macau Business Daily) Some 800 gaming SJM Holdings Ltd., MGM China Holdings Ltd. and Galaxy Entertainment Group workers participated in industrial action on Friday and Saturday. Following a series of protests and movements demanding a lift in their wages yet not met, these workers, primarily dealers and supervisors, decided to walk off the job by taking collective sick leave and working to rule during National Day Golden Week, according to Cloee Chao, secretary general of the gaming labor union Forefront of Macau Gaming. Ms. Chao told Business Daily that half of the workers are from SJM’s Grand Lisboa, while some 200 are from MGM, with the remaining from the StarWorld Hotel of the Galaxy Group.
Takeaway: We understand that despite the industrial action, casino floor activities continued without interruption.
LVS – Sands Bethlehem is embarking on a two-year expansion plan that looks to double its hotel to 600 rooms, add a convention center that can handle 500 people and bring in a Bass Pro Shops that will draw up to 3 million visitors a year. More immediate, the restaurants will be reprogrammed with a new celebrity chef offering to compliment the current Emeril Lagasse programming. Additionally, new policies will be implemented to reduce the loitering by bus riders from the Asian neighborhoods of New York.
Takeaway: Mr. Juliano reprogramming Sands Bethlehem in an effort to make Bethworks more appealing as new casinos threaten to cannibalize patrons and revenues.
PENN & GLPI – The former Argosy Sioux City casino has been sold to an Illinois company that plans to move the riverboat down the Missouri River next week to Wood River, Illinois. Financial terms were not disclosed.
Takeaway: The final end to this embroiled riverboat.
HLT – announced it has entered into an agreement with Anbang Insurance Group Co. Ltd. (“Anbang”), under which Anbang has agreed to purchase the Waldorf Astoria New York for $1.95 billion. As part of this long-term strategic partnership, Anbang will grant Hilton Worldwide a management agreement to continue to operate the property for the next 100 years, and the hotel will undergo a major renovation to restore the property to its historic grandeur. Hilton Worldwide intends to use the proceeds from the sale to acquire additional hotel assets in the U.S. in one or more transactions as part of a like-kind exchange under Internal Revenue Code Section 1031. These acquisitions will be finalized and announced at a later date. Hilton disclosed LTM EBITDA of $59 million and Adjusted EBITDA of $61 million as of June 30, 2014.
Takeaway: In an unexpected move, Hilton management sells the Waldorf New York for >30x EBITDA. While removing a growthy development opportunity, the sale appears to be the right financial decision - a huge multiple while retaining a management contract.
MAR – while protesting the ruling, MAR announced it was fined $600,000 for violating the FCC's open airwaves rules when it protected its Wi-Fi network at Gaylord Opryland, while using FCC-authorized equipment to protect the property's network from external, cyber-attacks and identity thefts.
Takeaway: Not material to MAR nor RHP as the equipment was previously removed, the fine was fully reserved, an no other legal actions are pending.
NCLH – Crystal Cruises, one of the world's top-rated cruise lines, has announced that one of its ships, the Crystal Serenity, will traverse the fabled Northwest Passage on this Pacific-to-Atlantic voyage, beginning from Seward, Alaska, through the north part of mainland Canada and the Arctic Ocean to New York City. The cruise sails from Aug. 16 to Sept. 17, 2016, will cover 900-miles during the 32-day luxury cruise and fares start at $19,975 double occupancy.
Takeaway: Any one interested in sailing over the North Pole?
RCL – asked permission to keep the casinos, souvenir shops and other services open after the cruise ships dock at Vietnamese ports. Royal Caribbean is planning to increase its business in Vietnamese ports. They are aiming to bring 25,000 cruisers a year with bigger cruise ships visiting Chan May Port in Thua Thien – Hue province. After cruise ships dock at Vietnamese ports, many passengers opt to stay on the ship and the cruise line would like to offer more entertainment onboard.
Takeaway: RCL attempting to capitalize on Asian's wanting to challenge their luck rather than disembarking for a land tour.
Macau Gross Gaming Revenue for September 2014 – according to the DICJ total GGR was HKD24.819bn, down by 11.74% year-over-year and and down 11.47% versus August 2014. On a year-to-date basis, total accumulated Gross Gaming Revenue was HKD267.904bn, an increase of 5.87% year-over-year.
Takeaway: Modestly better than last week's indicated down 13% year-over-year
Macau Golden Week Visitation – total visitation through October 5th was 775,913, an increase of 14.4% year-over-year while total visitors from Mainland China were 632,646 an increase of 13.9% year-over-year.
Takeaway: Decent increase in visitation but far short of prior year's 20%+ year-over-year increase in Mainland visitation.
Macau Smoking Ban – (GGRAsia) Only 12 of Macau’s casinos and slot-machine parlors are offering smoking lounges on their mass floors to gamblers, the government confirmed in a statement over the weekend. That means 16 gaming venues have had to adopt a default position - to go completely smoke-free on their mass floors, including the so-called premium mass areas, at 12.01 am on Monday.
Takeaway: The start of a new day in Macau gaming.
Europe Slowing – on September 16th, Thomas Cook Group commented that despite strong late summer 2014 booking, the firm was seeing recent weakness in consumer confidence across Germany. Today, Disney commented that 2014 results for the company will be negatively impacted by lower attendance at Euro Disney.
Takeaway: Another warning salvo that Europe is/could be slowing. Not good for CCL and RCL.
Massachusetts Gaming Referendum – (Boston Globe) a recent poll by the newspaper indicated widespread gaming support and opposition to repeal gaming legislation by 53% oppose repeal and 38% support repeal.
Takeaway: Would appear voters are siding with WYNN, MGM, and PENN - most positive for PENN since their new casino is scheduled to open early next year in Plainville.
Mohegan Sun at Pocono Downs Expansion – in an effort to attract more visitors and make the property more of a family destination, the company is planning an expansion to include The Ultimate Sports complex that will have two large indoor sports domes with seven artificial turf fields and a snow park will feature snow-flex skiing and snowboarding mountain. A timetable for the project has not yet been established, the expansion is expected to be completed within the next three to five years.
Takeaway: Competition to become more family friendly as well as programming to drive non-gaming visitation.
Ski Resort Consolidation – Deer Valley Resort near Park City announced Friday in a news release that it has agreed to buy Solitude Mountain Resort in Big Cottonwood Canyon. Deer Valley will take over the resort in 2015. Terms of the sale were not disclosed. Deer Valley officials said they will continue to allow snowboarding at Solitude. Deer Valley is one of only three U.S. ski resorts that bans snowboarding.
Takeaway: No bid from the publicly traded operators.
Slowing Mergers & Acquisitions – Graton Resort & Casino has decided not to pursue its opportunistic refinancing, citing market conditions. Bank of America, Wells Fargo, and U.S. Bank had shopped a $950 million loan package for Graton Resort, including a $500 million, six-year TLB that was talked at L+425-450, with 1% LIBOR floor, offered at 99. The debt package also included a $100 million revolver and $350 million A term loan that was talked at L+350, offered at 99.5. Graton wasn’t facing any near-term maturities. The issuer in 2012 placed a $375 million, six-year term loan that cleared at L+750, with a 1.5% LIBOR floor, along with $450 million of 9.625% secured notes due 2019. Graton Resort & Casino, which opened in November 2013 outside of Rohnert Park, Calif., is owned by the Federated Indians of Graton Rancheria and is operated by Station Casinos. It is an upscale Las Vegas-style casino and entertainment destination catering to the San Francisco-area market. A 200-room hotel is being added to the site.
Takeaway: The large SGMS loan may have flooded the market and doused demand.
Hedgeye remains negative on consumer spending and believes in more inflation. Following a great call on rising housing prices, the Hedgeye
Macro/Financials team is turning decidedly less positive.
Takeaway: We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.
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