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Hedgeye CEO Keith McCullough Warns About Bull on Fox Business: Beware of "Rainbows In Puppy Land"

Outspoken Hedgeye CEO Keith McCullough minced no words and pulled zero punches discussing the bull market run on Fox Business' "Opening Bell' earlier this morning, reminding viewers of the 'fetal position' many were in just a month ago.


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%

  

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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.

 

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Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT

 


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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


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.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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