PNRA: Thoughts Into the Print (1Q15)

Takeaway: PNRA remains on our Investment Ideas list as a long.

No Edge On The Quarter

This was likely a tough winter for Panera, considering its exposure to the Northeast, but same-store sales estimates of +2.2% seem to reflect this as they lag Black Box industry same-store sales of +3.0%.  While we believe initiatives are driving a sales and traffic lift, incremental costs associated with these initiatives are increasing and we, along with the rest of the street, don’t have the greatest clarity around the potential impact of this.


Buy It On Down Days

While limited visibility kept us away from the long side for most of 2015, the announcement of several initiatives a week and a half ago tell us that Mr. Shaich is serious about righting the ship.  While visibility is still somewhat limited, we see an asymmetric setup to the upside here.  Estimates have come down 6% and 12% over the past three and six months, respectively, and the stock has underperformed the XLY to a large extent over the past three years.  Importantly, management has a feasible opportunity to reverse this trend.  This is a stock you need to buy on down days.


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Management Commentary Is Paramount

While the recently announced initiatives are certainly a good starting point, they’re far from the endgame here.  Levering up, refranchising, and buying back shares should support the stock over the intermediate-term as management works to operationally fix the business, but we see opportunity to go significantly above and beyond this.  This is the first time management will address the investment community in a public forum since this announcement and additional commentary will be paramount.  We laid out the activist playbook on a Flash Call immediately following this news, but don’t know to what degree management will be receptive of our suggestions.  We believe there’s a significant opportunity to enhance Panera 2.0 (or create Panera 3.0), slow unit growth, aggressively refranchise stores, reduce capital spending, cut excess G&A, and sell off non-core assets such as the distribution business.  We hope to hear about recent developments on any of these fronts on the call tomorrow.


Breaking Down 1Q15 Estimates

Same-Store Sales: The street is looking for 1Q15 EPS of $1.43 (-7.5% YoY) on sales of $659.1 million (+8.9% YoY).  The system-wide comp outlook (+2.2%) represents a 90 bps sequential slowdown in the two-year average. 


PNRA: Thoughts Into the Print (1Q15) - 1



Cost of Sales, Labor Costs, Other Restaurant Expenses, and Restaurant Level Margins: The street expects cost of sales as a percentage of revenues to increase 26 bps YoY.  We suspect PNRA could deliver a slight “beat” on this line considering the rather benign food inflation the industry is seeing to-date.  At this time last year, Panera had 80% of commodity needs locked.  Labor costs and other restaurant expenses as a percentage of revenues are expected to increase 132 bps and 5 bps YoY, respectively.  We are in-line with these estimates.  This would imply restaurant level margins of 16.87%, down 164 bps YoY.  We could see a little bit of upside to this line depending on how cost of sales shake out.  We note that this line has been a source of upside for multiple companies (CAKE, CMG) that have already announced 1Q15 results. 


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G&A Expenses and Operating Margins:

G&A as a percentage of revenues is expected to increase 13 bps YoY to 5.91%.  We have little clarity on this line given the timing of certain initiatives, but wouldn’t be surprised if it proved to be conservative.  Operating margins are expected to decrease 192 bps to 9.15%. 


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Sentiment and Valuation

With a $177 average target price and only 37% buy ratings, the sell-side community remains rather cautious on the name.  Short interest comprises 10.9% of the float.  At only 12.1x EV/EBITDA (NTM), Panera trades at a significant discount to the majority of its quick-service peers.  An accelerated transition to an asset light model should result in immediate multiple expansion.


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Source: FactSet


Monday Mashup

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Recent Notes

04/20/15 Monday Mashup

04/20/15 Flash Call | PNRA: The Activist Playbook

04/21/15 EAT: Becoming A Victim Of Its Own Success

04/22/15 CMG: Rinse & Repeat

04/22/15 YUM: It’s A Win-Win

Events This Week

Monday, April 27

  • ARCO annual general meeting 8:00am EST
  • QSR earnings call 8:30am EST

Tuesday, April 28

  • FRGI annual general meeting
  • DFRG earnings call 8:30am EST
  • PNRA earnings call 8:30am EST
  • BWLD earnings call 5:00pm EST

Wednesday, April 29

  • BLMN annual general meeting
  • PZZA annual general meeting 11:00am EST

Thursday, April 30

  • KONA annual general meeting
  • DIN earnings call 11:00am EST
  • FRGI earnings call 4:30pm EST
  • HABT earnings call 5:00pm EST

Friday, May 1

  • RUTH earnings call 8:30am EST
  • YUM annual general meeting 9:00am EST


Recent News Flow

Monday, April 20

  • BWLD launched the B-Dubs Fast Break Lunch program, available weekdays between 11:00am – 2:00pm at U.S. locations and 11:00am – 3:00pm at Canadian locations.  The program offers food choices tailored for guests looking to eat a quick lunch.  Under the program, guests can select from one of seven entrees alongside one of seven sides.  BWLD will advertise for the program through a national radio campaign in addition to its social and digital channels.
  • JMBA Chairman, President and CEO, James D. White, presented at the Franchise Times Franchise Finance and Growth conference.
  • RRGB introduced the new Spring Chicken Burger and The Oh, My Darlin’ adult cocktail for the spring season.
  • PLAY announced that Patricia H “Trish” Mueller has been appointed to the board as an independent director.  Ms. Mueller has served as Senior VP and CMO of The Home Depot since February 2011 and has held prior roles at The Sports Authority, American Signature, Value Vision, and ShopNBC.
  • RUTH announced that Mark Osterberg, Principal Accounting Officer, has notified the company of his pending departure, effectively immediately.  Current CFO, Arne Haak, will assume the responsibilities of Principal Accounting Officer.  In addition, Michael Hynes, Controller and Director of Accounting, has been promoted to VP of Accounting.  Mr. Osterberg will continue to serve as an advisor to the company.

Tuesday, April 21

  • PLKI announced the pending retirement of R. William Ide, III, who has reached the mandatory retirement age for board members.  Mr. Ide has served on the company’s board of directors since 2001 and will not stand for re-election at the annual shareholder meeting this year.

Thursday, April 23

  • JMBA celebrated “25 Years of Healthy Living” with a free juice and smoothie giveaway from 9:00am – 11:00am to guests across the nation. 
  • DNKN announced that John Costello, President, Global Marketing and Innovation, will retire in mid-2016.  Mr. Costello will continue to serve in his current position until he retires, but will transition to a more strategic role focused on the evolution of the company’s brands with a particular focus on the international businesses.
  • DNKN announced that its board of directors declared a quarterly cash dividend of $0.265, payable on June 17, 2015 to shareholders of record on June 9, 2015.

Friday, April 24

  • PZZA announced its latest limited-time offer, all-new Garlic Knots, that will allow guests to pair a large two topping pizza with new Garlic Knots.  Guests that order online will receive a $1 discount.  The LTO will run through May 24.



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Sector Performance

The XLY (+3.2%) outperformed the SPX (+1.8%).  Quick service stocks, in aggregate, outperformed the XLY, as casual dining stocks underperformed.

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Quantitative Setup

From a quantitative perspective, the XLY remains bullish on an intermediate-term TREND duration.

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Casual Dining Restaurants

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Quick Service Restaurants

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European Banking Monitor: Grexit Fears Continue to Push Greek FInancials Swaps

Key Takeaway:

Risk measures are currently neutral (intermediate term) to positive (short-term). The obvious flash point is Greece, which continues to play chicken with the EU. That said, while the probability of Greece's exit from the Eurozone continues to rise, the expected fallout from Grexit appears to continue to fall.


European Financial CDS - Swaps mostly tightened in Europe last week. However, with the continued absence of a deal for Greece's bailout, bank swaps in that country widened between 298 bps and 639 bps.


European Banking Monitor: Grexit Fears Continue to Push Greek FInancials Swaps - chart1 financials cds


Sovereign CDS – Sovereign swaps mostly tightened over last week. Spanish and French sovereign swaps tightened the most, by -5 bps to 100 and -3 bps to 38, respectively.


European Banking Monitor: Grexit Fears Continue to Push Greek FInancials Swaps - chart2 sovereign CDS


European Banking Monitor: Grexit Fears Continue to Push Greek FInancials Swaps - chart3 sovereign CDS


European Banking Monitor: Grexit Fears Continue to Push Greek FInancials Swaps - chart4 sovereign CDS


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 spread tightened by 2 bps to 10 bps.


European Banking Monitor: Grexit Fears Continue to Push Greek FInancials Swaps - chart5 euribor OIS spread



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Keith's Macro Notebook 4/27: China | Euro | S&P 500

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Retail Callouts (4/27): NKE, KSS, TGT, JWN, M, JCP, FL

Takeaway: NKE product flow issues. Free shipping across the board in 18-24mo. M growth strategy not a ringing endorsement of dept. store environment.


Retail Callouts (4/27): NKE, KSS, TGT, JWN, M, JCP, FL - 4 27 chart2





NKE - Nike Delays Online Releases for Several Upcoming Models 



Takeaway: This struck us as a little strange. And maybe it's just the cost of having a greater presence online. The fact is that Nike deals with product flow issues all the time. But, with consumers becoming more dependent on the Nike site, mobile app, and retail stores -- these types of issues become a lot more visible to the consumer. Nike was pretty cagey in how it dealt with the delay, but it seems to be a short term hiccup in sourcing rather than a statement about the company's e-comm direct capabilities.

Retail Callouts (4/27): NKE, KSS, TGT, JWN, M, JCP, FL - 4 27 chart3


Free Shipping: Retail’s New Battleground



Takeaway: Free shipping = an offensive weapon for retailers to gain market share. We've seen it used sporadically from players in the department store/mass channel. Most notably Target who over the Holiday eliminated the free shipping threshold all together, and then in February cut its free shipping  threshold from $50 to $25. Over the next 18-24 months it's likely we see free shipping across the board. That will manifest itself during this Holiday season when retailers make a free shipping offensive play.

We've seen retailers, most notably KSS, talk about how a $25 shipping threshold isn't sustainable from a profitability perspective. We agree with the company on that. For Nordstrom, it makes sense to offer free shipping and returns given the basket size, but for the mid-tier's bps dilutive. The problem is that a) consumers want it (in chart below its nearly 2x as important as any other online shopping feature), and b) if one domino falls, all others will have to move accordingly.

Retail Callouts (4/27): NKE, KSS, TGT, JWN, M, JCP, FL - 4 27 chart1


M - Macy’s Bag of Tricks for Growth



Takeaway: Add an 8,000 sq. ft. specialty concept in mid-tier markets to the list of new initiatives at M. Along with an off-price concept and the acquisition of Blue Mercury, we have to wonder what M sees in the department store space that would make these new initiatives attractive. Not a ringing endorsement from a company who has long been considered the best in breed. We bumped Macy's down from the core short list to the bench a few weeks back. This one is all about timing. We still think that the group (including M) will see a 1000bps sequential deceleration in growth. But for the next few months the catalysts are likely positive. And with M, unlike KSS or JCP, there's real estate value support.





KSS - Kohl’s keeps up with Apple Watch app



FL -  New TV Spot Featuring Manny Pacquiao


AMZN - Amazon comes to your wrist



TGT - Target, Sports Authority to carry folding bikes



ANF - A&F Drops ‘Sexualized’ Marketing



The Great One joins Sears Canada brand team



Retail sales surging at O’Hare Airport after redevelopment



LEISURE LETTER (04/27/2015)




  • April 28 (4:30pm) - WYNN 1Q CC: ; pw: 20173922

  • April 29 (1:00pm)  -  HOT 1Q CC: ; pw: 17589434

  • April 29: New Hampshire House vote on 2 casino bill (SB 113)

  • April 30 (9:00am) - HST 1Q CC:

  • April 30 (10:00am) - MAR 1Q CC: ; pw:  99597993

  • April 30 (5:00pm) - BYD 1Q CC: ; pw: 3858748

  • May 4 (11:00am) - MGM 1Q CC: ; pw: 1535291

  • May 5 (11:00am) - HYATT 1Q CC ; pw: 17020089

  • May 7 (8:30am) - MPEL 1Q CC ; pw: MPEL


Macau March visitation - March 2015 visitation fell 14% YoY, the worst comp since July 2009. The decline was steeper for Mainland China visitation which dropped 18%. The decline was most pronounced in Beijing, Zhejiang and Tianjin. Guangdong visitors also fell 10% YoY in March.



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Takeaway: LVS confirmed that base mass is now in sharp decline - down 21% YoY in Q1 for the company.  Now we know that visitation was at least partly to blame.  This is a damaging statistic for long term bulls.


Summit Ascent - Summit Ascent, a company controlled by Lawrence Ho, registered losses of HK$78.9 million in 2014, a reduction of HK$600,000 compared to the previous year when the company’s losses amounted to HK$79.5 million. According to the filing of the Group with the Hong Kong Stock Exchange this figure was primarily “attributable to non-cash share-based compensation benefits of HK$84.2 million”.  The opening of the integrated resort in Primorye, Russia is nearing completion and slated to open this year.  The casino is expected to have 25 VIP gaming tables, 15 mass-market baccarat tables and 800 slots.


Equinox- Equinox Holdings, the New York company that runs Equinox fitness clubs is launching a hospitality brand intended for health-conscious travelers willing to pay for high-end fitness facilities and amenities while on the road. 

Equinox expects to open its first hotel in 2018 at Related Cos.’ Hudson Yards development under way on Manhattan’s west side. The hotel’s Yabu Pushelberg-designed property will include indoor and outdoor swimming pools and at 60,000 square feet, the largest ever Equinox gym, the company says. A Los Angeles hotel is slated to open in 2019.


Equinox eventually expects to open as many as 75 hotels world-wide. Related, which is the company’s majority owner, expects to invest or raise “several billion” dollars for Equinox hotels over the next few years, a Related spokeswoman said.


Takeaway: The idea isn't new but with the recession behind us in the US, why not? The luxury customer is alive and well.


RCLRoyal Caribbean's Majesty of the Seas is in an unexpected dry dock, prompting the cancellation of the ship's next cruise, which was slated to depart Monday. RCL spokeswoman Cynthia Martinez says repairs will "resolve an issue that is causing a small amount of bio-friendly oil to leak."  


Passengers booked on the subsequent sailing -- a four-night Bahamas cruise from Miami, scheduled to depart April 27 -- will receive full refunds, as well as future cruise certificates equal to 100 percent of the cruise fares paid for the canceled voyage.


Takeaway: Another ship incident for RCL. No wonder legacy (pre-2006) ship pricing stinks.


Control tourist measure - A new measure intended to alleviate crowd congestion in popular tourist spots will be tested during this week’s Labour Day holiday, Secretary for Social Affairs and Culture Alexis Tam Chon Weng said.  


Tam said one of the suggestions he proposed was that the China National Tourism Administration (CNTA) and the Macau Government Tourist Office (MGTO) co-operate in managing the number of IVS arrivals during peak travel times. He added that while the central government agreed with his suggestions, it would have to talk to relevant entities in the mainland before any of the proposals could be implemented.

Tam said that in the meantime MGTO officials will test tourist flow control measures during the three-day Labour Day holiday which begins on Friday.


According to Tam, visitors entering from the mainland will receive SMS messages alerting them of overcrowded tourist spots, in the expectation of diverting them to other areas. He said he was confident that the measure will see positive results. 


Takeaway: You don't really need control if visitation is falling.


Junket watch - US-based International Union of Operating Engineers (IUOE) has sponsored the launch of a website called Macau Gaming Watch. The organization, which claims to represent over 2,000 stationary engineers in Nevada and previously launched the now-defunct website CasinoLeaks-Macau, calls the new site “independent” and “critical,” and aims for it to be “the first-stop source for people investigating gaming in Macau." 


The new site has released information on Macau junkets and VIP gaming operators, including the “Neptune Guangdong Group” and “Hoi Fong” Entertainment. Drawing on the “recent tumult” in Macau’s gaming industry, the IUOE said that it is now expanding its research to explore more elements of the industry. “The site will initially look into Wynn Macau’s junkets. However, we will later explore the junket/VIP operators at other casinos as well,” it says.


The IUOE, declaring itself a shareholder of Wynn Resorts Ltd, has also launched a website called Cotai Land Deal. The site has presented its ongoing research as a real estate transaction of the Wynn Macau’s Cotai land, with key documents and findings.



New Hampshire - Gov. Maggie Hassan on Friday afternoon changed her position and announced her support for legislation that would allow for two casinos in New Hampshire. The casino bill is up for a vote Wednesday by the New Hampshire House. Activists on both sides of the issue said Friday they are expecting a close vote, with neither side predicting victory.


The legislation on Tuesday was amended by the House Ways and Means Committee to delay the licensing of a second casino until at least one year after the completion of a performance audit of the first casino. The bill initially allowed for a simultaneous licensing process.


SB 113 would permit two casinos – a large casino of 2,000 to 3,000 slot machines and 80 to 160 table games that would require a minimum investment. And a casino of 750 to 1,000 slots and 25 to 80 tables requiring a $125 million investment. 


Takeaway: This is the closest NH has been on legalizing casinos and could provide a little spark to very weak slot demand.


Oregon - The Oregon House on Thursday waved along legislation targeting state-sponsored video gambling, approving a bill that would map out Oregon Lottery terminals in relation to each location's "socioeconomic status." HB 3317 now heads to the Senate About 2,500 retailers, according to state data, offer video gambling.


Takeaway: This study, if approved, may result in some VLT reduction in Oregon.


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.