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PLKI: World-Class Quarter

Popeyes Louisiana Kitchen, Inc. (PLKI) continues to be on our Investment Ideas list as a long.

 

PLKI delivers time and time again.  For better or worse, it’s precisely what we’ve come to expect from CEO Cheryl Bachelder and the rest of the management team.  But, let’s be clear, no one expected Popeyes to post global, domestic and international same-store sales growth of +7.3%, +7.2% and +8.3%, respectively.  That’s approaching rock star status. 

 

Popeyes has now outperformed the chicken-QSR and overall-QSR segments for 26 and 12 consecutive quarters, respectively.  Perhaps more impressive, the company increased its market share of the domestic chicken-QSR segment by 250 bps year-over-year to 23.7% as menu innovation, media and messaging continue to resonate with consumers.

 

If you’re late to the game (we added PLKI to our Investment Ideas list as a long back in April), the recent run-up in the stock makes for a difficult time to get involved.  After all, no one wants to chase these things.  But, we firmly believe this is a stock you want to own over the long haul.  We’d view any notable selloff as a strong entry point.

 

The fact of the matter is, this is one of the best run companies in our space.  We have ample visibility into the company and its operations given its asset-light model, diversified revenue steam and stable cash flows.  Given 3Q results and current, underlying momentum, we believe Popeyes is well-positioned to outperform in 4Q and deliver upon its annual long-term guidance of 1-3% same-store sales growth, 4-6% unit growth and 13-15% adjusted EPS growth.

 

We believe a considerable growth opportunity lies ahead for the brand, both domestically and internationally, and management has a stringent, calculated plan to capitalize on this.  Franchisee profitability remains at the forefront for Popeyes, an approach that has clearly paid dividends for management, employees and customers.  The day we see the team deprioritize this is the day we turn bearish on the stock.  Fortunately, we don’t see this happening anytime soon.

 

The Good

  • Global SSS +7.3%; two-year +6.2%
  • Domestic SSS +7.2%; two-year +6.2%
  • International SSS +8.3%; two-year +6.7%
  • Domestic SSS have outpaced the chicken-QSR and overall-QSR segments for 26 and 12 consecutive quarters, respectively
  • Menu innovation, value and messaging around the Cracked Pepper Butterfly Shrimp, Tear’N Tenderloin Chicken and Beer Can Chicken offerings were very well-received
  • Popeyes market share of the domestic chicken-QSR segment increased 250 bps y/y to 23.7%
  • 77% of the domestic system is in the new image; 80% will be by year-end
  • Company-operated restaurant operating profit grew 190 bps y/y to 19.6% of sales driven by lower food and commodity costs, improved labor controls and increased leverage on occupancy and other expenses
  • G&A expenses as a % of system-wide sales decreased 20 bps y/y to 2.6%
  • Free cash flow of $35.9 million
  • Company repurchased 247,741 shares of common stock for approximately $10 million
  • Guided up full-year same-store sales, share repurchases and adjusted EPS

The Bad

  • Total revenues of $54.9 million missed estimates of $55.5 million

 

PLKI: World-Class Quarter - 1

 

PLKI: World-Class Quarter - 2

 

PLKI: World-Class Quarter - 3

 

Feel free to call, or email, with questions.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


INITIAL CLAIMS - STILL FALLING BUT AT A SLOWER PACE

Takeaway: Claims are falling but at a slower pace.

Credit Quality Tailwinds

Jobless claims experienced an especially sharp deceleration in recent weeks. The NSA rolling series was better y/y by -20.6% in the October 24 week and by -19.7% the week of Halloween.  The most recent November 7 week continued that trend, although at a slightly less extreme -17.4% y/y rate. Rolling SA Claims, meanwhile, came in just above the recent 281k post-crisis low at 285k. Overall, the labor market continues to hum along steadily. 

 

As we've been flagging in recent weeks claims currently sit at the all-time low of the last three economic cycles (2006, 2000 and 1988). Following each of those lows, claims rose dramatically. While these are in some ways the best of times, they are also the most dangerous.

 

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The Data

Initial jobless claims rose 12k to 290k from 278k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 6k WoW to 285k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -17.4% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -19.7%

  

INITIAL CLAIMS - STILL FALLING BUT AT A SLOWER PACE - 2

 

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INITIAL CLAIMS - STILL FALLING BUT AT A SLOWER PACE - 19

 

Yield Spreads

The 2-10 spread rose 2 basis points WoW to 183 bps. 4Q14TD, the 2-10 spread is averaging 185 bps, which is lower by -14 bps relative to 3Q14.

 

INITIAL CLAIMS - STILL FALLING BUT AT A SLOWER PACE - 15

 

INITIAL CLAIMS - STILL FALLING BUT AT A SLOWER PACE - 16

 

Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT

 


Cartoon of the Day: Curious Aliens

Gambling central bankers across the globe are torching their currencies, inflating dangerous bubbles, and threatening markets and economic stability around the world.

Cartoon of the Day: Curious Aliens - Monetary policy cartoon 11.07.2014


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 80.65%
  • SHORT SIGNALS 78.64%

Macro Notebook 11/13: Japan | Oil | Russia

 

Hedgeye Macro Associate Christian Drake shares the top three things in Keith's macro notebook this morning.


This Will Be One of the Big Things That Matter (In the End)

Our macro team’s #Quad 4 deflation call continues to manifest itself in both Oil prices and Energy related countries, stocks, and bonds.

 

In the end, this will be one of the big things that will have mattered.

 

This Will Be One of the Big Things That Matter (In the End) - q4

 

Brent is seeing follow through selling after having a -2.6% down day yesterday (down a whopping -29% year-to-date) while WTIC down -0.4% to $76.85 is looking at lower-lows.

 

#Quad4. It matters.


THE HEDGEYE MACRO PLAYBOOK

Takeaway: Our Macro Playbook is a daily 1-page summary of our investment themes, core ETF recommendations and proprietary quantitative market context.

INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

  1. iShares National AMT-Free Muni Bond ETF (MUB)
  2. iShares 20+ Year Treasury Bond ETF (TLT)
  3. Vanguard Extended Duration Treasury ETF (EDV)
  4. Health Care Select Sector SPDR Fund (XLV)
  5. Consumer Staples Select Sector SPDR Fund (XLP)

Short Ideas/Underweight Recommendations

  1. SPDR S&P Regional Banking ETF (KRE)
  2. iShares Russell 2000 ETF (IWM)
  3. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
  4. iShares MSCI France ETF (EWQ)
  5. iShares MSCI European Monetary Union ETF (EZU)

 

QUANT SIGNALS & RESEARCH CONTEXT

 

  • Trending Deflationary Pressures Abound: As you are likely well aware by now, our #Quad4 theme calls for a continued slowing of both real GDP growth and headline CPI in the U.S. over the intermediate term. One of the ways we arrive at our forecast(s) for domestic disinflation is by outright deflation in the commodity markets. Looking to our Tactical Asset Class Rotation Model (TACRM), Commodities as a primary asset class continues to screen bearishly via a “DECREASE Exposure” recommendation. Its Passive Trend Follower Asset Allocation signal of 7% represents a -44% delta from its TTM average and is only in the 14th percentile of readings since the start of 2008. From a market breadth perspective, 39% of the 23 ETFs comprising this asset class have a Volatility-Adjusted Multi-Duration Momentum Indicator reading below -1x, which indicates a clear trend of negative volume-weighted price momentum across multiple durations. Cocoa (NIB), Crude Oil (BNO, USO), Gasoline (UGA) and Gold (GLD) are leading the charge lower… Over the least ~7Y, we have anchored on commodity prices to inform our view of the 2nd derivative of CPI given that there has been no directional up or down trend in traditional CPI drivers like wage inflation – which continues to be flat-lined around +2% YoY as it has been for the past ~5Y. Outright deflation remains a key intermediate-term risk coming off the 2011-12 bubble highs in commodity prices.

 

THE HEDGEYE MACRO PLAYBOOK - CRB YoY vs. CPI YoY

 

THE HEDGEYE MACRO PLAYBOOK - US CPI vs. HRM COMMODITY PRICE SAMPLE

 

THE HEDGEYE MACRO PLAYBOOK - US CPI vs. HRM COMMODITY PRICE SAMPLE 2013 14

 

***CLICK HERE to download the full TACRM presentation.***

 

TRACKING OUR ACTIVE MACRO THEMES

#Quad4 (introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.

 

Early Look: Oh, Snap! (11/13)

 

#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.

 

Top Ten Reasons to Stay Short the Euro (11/5)

 

#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.

 

Early Look: Battlefield’s Vortex (11/11)

 

Best of luck out there,

 

DD

 

Darius Dale

Associate: Macro Team

 

About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today.


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