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EAT: Tough Crowd

If the market’s reaction to Brinker’s EPS release yesterday is any indication of what’s to come, look out.  EAT, despite delivering a meaningful top line, bottom line, and same-store sales beat, traded down -1.78% on the day.  Suffice to say, expectations are high heading into earnings season and those that underperform will likely be punished.

 

EAT had a strong quarter, but the street was likely disappointed with the lack of leverage in the business model given such strong comps.  Cost of sales, in particular, driven by burger meat, cheese, avocado, and salmon, drove some of the margin pressure in the period – but it was still down 6 bps y/y.  In 3Q15, Brinker will be lapping a very difficult comparison on this line, suggesting that the 26 bps y/y improvement analysts expect  won’t be happening. 

 

Continued sales momentum, labor leverage, and prudent capital allocation should help management offset these pressures, as they maintained full year EPS guidance range of $3.00-3.15, which would be good for 11-16% growth.

 

EAT: Tough Crowd - 1

 

In our view, Chili’s culinary vision (Fresh Mex, Tex Mex) and guest experience (service, Ziosk) initiatives are on point and should help play into the company’s goal of changing consumers’ mindsets around the brand.  This approach is in contrast to that of some casual dining chains that have turned to a promotional/discounting strategy to drive traffic.  While the former may take longer to yield results, it is undoubtedly a more admirable and sustainable approach than the latter.  Whether this approach will even the playing field with fast casual or not is still to be determined, but management appears confident in that assertion.

 

Outside of the well-guided initiatives to drive same-store sales and traffic, Brinker’s capital allocation strategy remains best in class:

  1. Invest in the business
  2. Manage debt levels
  3. Keep some cash on hand
  4. Return remaining cash to shareholders through dividends or share repurchases

With YTD cash flow from operations at $162 million and over $78.4 million of available cash on the balance sheet, EAT’s capital discipline remains an important part of the story.

The Good

  • Revenues of $742.9 beat consensus estimates by 87 bps
  • Adjusted EPS of $0.71 beat consensus estimates by 331 bps
  • Significant same-store sales beats across the board
  • 2% traffic growth resulted in the best two-year average number (+0.1%) since 1Q13
  • System-wide rollout of tabletop technology from Ziosk is complete
  • Reimage program is 95% complete
  • Tabletop gaming revenue and retail revenue led to double digit growth on the other revenue line
  • Revenue from tabletop tablets offsets the cost
  • Significant labor leverage from higher sales and an adjustment to lower employee health insurance expense
  • Maggiano’s posted record high delivery and banquet sales
  • Repurchased 1.1 million shares in the quarter for about $60 million
  • Repurchased an additional 600,000 shares since the end of the quarter for about $36.2 million
  • On the weather front, should provide more upside to comps in 3Q15 than 2Q15
  • YTD cash flow from operations is $162.5 million
  • Ended the quarter with $78.4 million of available cash on the balance sheet

The Bad

  • Cost of sales came in much higher than anticipated due in large part to burger meat, cheese, avocado, and salmon inflation
  • Expect continued commodity pressure, particularly in the third quarter which has a difficult comparison
  • Restaurant expenses came in above estimates due to tabletop device rentals, credit card fees, and higher pre-opening expense
  • Operating margins down 18 bps y/y due to the aforementioned headwinds
  • Facing some headwinds internationally

 

EAT: Tough Crowd - 2

 

EAT: Tough Crowd - 3


MCD: A New Beginning

The first email we received from a client following the news of Thompson’s departure yesterday posed a simple question: “Should I chase MCD tomorrow?”

 

The answer was quite simple as well: “There is no need to chase it.”  The issues at MCD run deep and will take a lot of time to fix.  However, with that being said, we are moving MCD onto the Long Bench of our Investment Ideas list. 

 

As we’ve said many times, the only way to begin fixing McDonald’s was to get a new CEO.  Getting a new CEO is a step in the right direction, but where we go from here is still unknown.

Thoughts on the Announcement

  1. We like the choice of Steve Easterbrook as the new CEO.  We’ve known him for years and believe he is capable of turning the company around.  The first thing he must do is scrap the current turnaround plan and get a fresh start.  Can he, or will he, do that is the question.
  2. The timing of his departure presents some challenges to effecting change in 2015.  The marketing plans and product pipeline for 2015 are firmly in place.  McDonald’s is a big ship that will take a while to turn around.  Nothing will happen in the intermediate-term.
  3. Anything short of massive changes in the way MCD thinks about its current menu and store operations will fall short of the desired results.  This speaks to the mandate Mr. Easterbrook has been given by the board.
  4. The board of MCD is part of the problem the company faces.  The average age of the board is 64 and the average tenure is 13 years.  Andrew McKenna, non-executive Chairman of the Board of Directors, who announced the changes, is 84 years old.  There are two other board members that are in their 70’s.

The changes at MCD must run deep – starting from the board all the way down to store operations.

 

More to come.


Keith's Macro Notebook 1/29: Commodities | UST 10YR | S&P500

 

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


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Earnings Season: Not Good

Client Talking Points

COMMODITIES

Commodities are down another -1.3% yesterday to 215 is a fresh new multi-year closing low for the 19 component CRB Index. Oil is already -16.5% year-to-date and Copper (down another -1.6% this morning) isn’t far behind at -13.4% - this has been a clean cut phase transition to #deflation expectations that will be very difficult for any central planner to reverse.

UST 10YR

But don’t confuse Draghi’s move with results where it matters; inflation expectations are falling faster now (Down Euro = Up Dollar à #Deflation Risk) with the CRB Index dropping -1.3% yesterday to multi-year lows. Copper is getting smoked to -10.2% year-to-date this morning, and Oil signaling a lower-low of support down at $44.82.

S&P 500

The SPY broke our intermediate-term TREND line of 2022 again yesterday. This is the 3rd time it has snapped that line since the mid-DEC lows. With massive Euro QE old news now… and no more year-end markups, what is the catalyst to get this puppy back to those nosebleed DEC 29th all-time closing highs of 2090? It’s definitely not earnings.

Asset Allocation

CASH 52% US EQUITIES 4%
INTL EQUITIES 3% COMMODITIES 2%
FIXED INCOME 32% INTL CURRENCIES 7%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1.  Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.

TLT

As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT). We believe the TLT has plenty of room to run. We strongly believe the dynamics in the currency market are likely contribute to a “reflexive deflationary spiral” whereby continued global macro asset price deflation and reported disinflation both contribute to rising investor demand for long-term Treasuries, at the margins.

HOLX

Hologic (HOLX) is a name our Healthcare Sector Head Tom Tobin has been closing monitoring for awhile. In what Tom calls his 3D TOMO Tracker Update (Institutional Research product) of U.S. facilities currently offering 3D Tomosynthesis, month-to-date December placements signaled a break-out quarter after a sharp acceleration in October and slight correction to a still very high rate in November. We believe we are seeing a sustained acceleration in placements that will likely drive upside to Breast Health throughout FY2015. Tom’s estimates are materially ahead of the Street, but importantly this upward trend in Breast Health should lead not only to earnings upside, but also multiple expansion and a significant move in the stock price.

Three for the Road

TWEET OF THE DAY

Memo to $MCD CEO Mr Easterbrook: Your turnaround plans should resemble a store remodel, but this is one is a major "scrap and rebuild"

@HedgeyeHWP

QUOTE OF THE DAY

The quality of an individual is reflected in the standards they set for themselves.

-Ray Kroc

STAT OF THE DAY

Apple has now sold over a billion iOS devices, ringing in 74.5 million iPhone sales in its most recent quarter.


January 29, 2015

January 29, 2015 - Slide1

 

BULLISH TRENDS

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January 29, 2015 - Slide5

 

 

BEARISH TRENDS

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January 29, 2015 - Slide13


CHART OF THE DAY: The Hedgeye “Avoid, Sell, Short” List

CHART OF THE DAY: The Hedgeye “Avoid, Sell, Short” List  - 01.29.15 Chart

 

Editor's note: This is a brief excerpt from today's Morning Newsletter by CEO Keith McCullough. 

 

  1. Energy Stocks (XLE) got smoked for another -3.9% down day yesterday as Oil/Nat Gas continue to crash
  2. Financials (XLF) underperformed a -1.3% SPY, closing -1.8% on the day at -6.2% YTD
  3. Industrials (XLI) “outperformed” at -0.9% on the day but are down the same as SPY YTD at -3.1%

 

Since all 3 of these S&P Sectors remain on our “avoid, sell, short, etc.” list (they are both late-cycle and carry explicit Global #Deflation risks), I’ll just reiterate that call this morning – because it’s easy to.



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