Link to Report: Monday Mashup
- Key Tickers: YUM, CMG, WEN, KKD, JACK, PLKI, DRI, DFRG, NDLS, CHUY, MCD, PLAY, HABT, CBRL, CAKE
- Key Callout: removing short PNRA from our Investment Ideas list
Link to Report: Monday Mashup
Takeaway: The U.S. market read the favorable jobs report as bad news while the global risk perception decreased as ECB bond buying is set to begin.
Risk perception decreased, as Mario Draghi announced that the ECB would begin buying bonds today, March 9th. In our heatmap below, risk measures on the short term are mixed, while intermediate-term measures are mostly positive.
European Financial CDS - Swaps mostly tightened among European banks last week with Mario Draghi announcing that ECB bond buying will begin today, March 9th.
Sovereign CDS – With ECB bond buying approaching, sovereign swaps mostly tightened over last week. Spanish sovereign swaps tightened by -14 bps to 83 bps, and Portuguese swaps tightened by -17 bps to 118 bps.
Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS was unchanged at 11 bps.
GLPI's offer to buy PNK looks like a good deal for both sets of shareholders
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It was a monster melt-up in USD #Deflation last week, with the Dollar climbing +2.5% to +8.3% YTD. Over on the Burning Euro front, the Euro was torched for another -3.1% weekly loss. It’s down -10.4% YTD.
Perversely, both Japan and Europe are perpetuating Global #Deflation via their burning currency policies.
On a related note, Japan’s “Weimar Nikkei” finally stopped going up every single day. It was down -1% overnight, after being up about that last week.
Japanese GDP? It missed again. But who cares? That only gets them to print moarrr Burning Yens!
Takeaway: Mgmt is getting shadier by the day. YELP may see a short-term reprieve on its stock, but at the cost of a much worse blow-up in 2H15.
YELP’s Local Advertising segment is riddled by an absurd level of attrition, which is becoming increasingly more challenging to overcome as the company presses up against a limited TAM that can’t support its model. We can already see YELP’s model breaking down in its reported metrics. So in response, management is now manipulating that very data in order to hide what’s really going on.
Below are series of suspect moves that management has taken to mask its rampant attrition issues, and overstate the fading strength in its core Local Advertising segment.
The overriding theme is that these suspect moves aren't any more sustainable than its current business model. Management may buy themselves a short-term reprieve on its stock, but are only raising the sell-side bar on an a fading buy-side growth story.
This is how we see the progression of the YELP's earnings releases as we move through the year.
In short, the setup for YELP will become progressively more challenging as we move through 2015 into 2016. Even if the stock pops on the 1Q15 release, it likely ends the year lower than it started once YELP doesn't raise guidance above expectations (likely 2H15).
Let us know if you have any questions, or would like to discuss in more detail.
Hesham Shaaban, CFA
Takeaway: Despite strong industry trends, restaurant stocks are not immune to looming cost pressures.
Editor's note: This research note from Hedgeye's Restaurants team was originally published February 12, 2015 at 13:18. The stock is down over -4% since.
CAKE delivered one of the worst prints we’ve ever seen out of them, missing top line and bottom lines estimates by 177 bps and 2025 bps, respectively. Comps also disappointed, coming in at +1.4% vs the +1.9% consensus estimate. After reading the press release, and seeing the massive level of margin deterioration, we didn’t think it could get much worse – and then the earnings call started.
Management’s commentary on food and labor inflation was critical on a couple of levels: 1) CAKE will be hard pressed to grow margins in 2015 and 2) this is awful news for the small and weak players in the industry.
To the first point, CAKE’s food cost pressures in 2014 were widely recognized due to higher dairy and seafood prices. But the degree to which this line de-levered over the course of the year was astounding. Management conceded that it is considering supplementing its contracting with direct hedging, but to what extent this will help is unknown. While many expected CAKE to be one of the largest beneficiaries of the retreat in dairy prices, beef and, to a lesser extent, chicken are expected to drive 2-3% commodity inflation in 2015. They will have a very difficult time leveraging this line further without delivering a 2%+ comp, a feat they haven’t accomplished in over two years.
Labor inflation was a much less publicized issue throughout the year that the company mainly attributed to unusually high group medical claims. This pressure, however, is expected to continue in 2015 and could be compounded by minimum wage increases in select states across the nation. All in, management expects $10-12 million in wage inflation. We wrote in a bearish Black Book last January that the margin story was over for CAKE and it certainly appears to be. They haven’t driven labor leverage since 1Q13 and probably won’t anytime soon.
To the second point, and we’ll have more on this in a later post, the pressure CAKE is seeing is not limited to them. If a well-established player in the casual dining industry is struggling to control these costs, what does that mean for smaller, rapidly expanding players in the industry? They’re going to feel a bigger impact – and it’s not going to be pretty. Minimum wages increasing and the restaurant job environment is improving. It’s getting increasingly difficult and expensive to retain employees – an issue that, just today, Panera referred to as the “war for talent.” In the coming days, we’ll unveil a list of companies that we believe will have a much more difficult time operating in this environment than consensus expects. And, yes, we’d short all of them.
ANEMIC TRAFFIC GROWTH
“Holiday 2013 was the first in which many traditional bricks and mortar retailers experienced in-store foot traffic give way to online shopping in a major way.”
-Howard Schultz, Chairman/President/CEO/Founder
Howard Schultz made this remark last year on his company’s 1Q14 earnings call – and we think it’s spot on. If it’s not, CAKE’s traffic isn’t doing much to suggest so. Traffic declined -1.2% in 4Q14, marking the ninth consecutive quarter of negative traffic. Management insists it’s not related to the secular decline in mall traffic but, if that’s the case, they need to prove it. The traffic and margin decline we’re seeing suggests this company is operating a broken model and, if it’s to be fixed, it will take significant time and investment.
CAKE guided FY15 EPS to a range of $2.08-2.20 on 1.5-2.5% comp growth, a far cry from the current $2.42 consensus estimate. If they want to hit this range, they’ll need to deliver strong comp growth and, with limited drivers in place, we’re not sure how they do that. Speaking to the lack of incremental leverage in the business model, management actually admitted that it needs to either develop or acquire a growth concept in order to deliver long-term EPS growth in the mid-teens. And you probably already know how we feel about multi-concept operators. This brand is in trouble and, if it weren’t down 10% today, we’d short it. In fact, if it bounces meaningfully, we’d likely jump at the opportunity.
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