PNRA: Unconvincing, But That's Okay

Panera delivered a sub-par print after the close yesterday and held a mediocre earnings call this morning.  Management commentary wasn’t quite what we were looking for, but that’s okay.  If anything, this strengthens the case for further change within the company.  We continue to recommend buying the stock on down days.


PNRA: Unconvincing, But That's Okay - 1


Soft Headline Numbers

System-wide, company, and franchise same-store sales of +0.7%, +1.5%, and -0.1% fell well short of consensus estimates of +2.4%, +2.6%, and +2.0%, respectively.  The lack of flow through was significant, as operating margin declined 180 bps (exclusive of the one-time refranchising charge).  Labor was the most significant driver of the decline, as structurally higher wage rates and the investment of additional labor hours associated with the startup of Panera 2.0 across select locations weighed down margins.  Food and paper inflation added notable pressure in the quarter as well.  As a result, 1Q15 EPS of $1.41 fell short of the $1.43 consensus estimate.  Despite the miss, management maintained full-year EPS guidance of flat to down mid-to-high single digits versus the prior year.


PNRA: Unconvincing, But That's Okay - 2


PNRA: Unconvincing, But That's Okay - 3


Management Could’ve Done More

We believe management could have said more on the call to convince investors that the strategic initiatives they are taking are the right ones.  The general tone of the call was rather unconvincing as management delivered a trust us story as opposed to laying out a clear, concise strategic roadmap.  While we do believe the investments the company is making will benefit the brand over the longer-term, we question to what extent they are prudently allocating their capital.  We also believe there are a number of initiatives that management can undertake in order to create shareholder value.  To review, Panera could:

  • Sell off non-core assets
  • Slowdown the rollout of Panera 2.0 and begin molding a concept of the future
  • Slow unit growth and cut capital spending
  • Cut excessive G&A spending
  • Aggressively refranchise stores

Management offered up very little on these fronts, but we are in the early innings of the story here.  So while they could’ve said more on the call, it is plausible to consider that they are just beginning to vet these potential value enhancing initiatives.


Asymmetric Risk/Reward Setup

We continue to believe PNRA represents an asymmetric risk/reward setup, with our conservative base case scenario calling for 18% upside over the next 1-2 years.  To contrast, our bear case calls for -8% downside.  On a relative basis, the stock is among the cheapest in the quick service/fast casual category trading at 12.2x EV/EBITDA.  With only 37% buy ratings, the sell-side is not sold on the name which makes this one of our favorite contrarian plays in the entire restaurant space.


PNRA: Unconvincing, But That's Okay - 4


PNRA: Unconvincing, But That's Okay - 5

Jordan: What to Make of $WYNN’s Disastrous Results and Steve Wynn’s Comments


During this segment of today’s Macro Show, Hedgeye Gaming, Lodging & Leisure Sector Head Todd Jordan goes deep on what’s going on inside the gaming industry around the globe, with special attention paid to Steve Wynn’s comments following Wynn Resorts latest earnings call (which was a bit of a disaster).



Takeaway: Another Q beat and raised FY guidance despite FX headwinds. Solid demand from both group and transient. Dividend policy could happen in 2H.


  • Occupancy growth was strong
  • Strong demand from small groups and company meetings
  • Transient demand: strong corporate and rack-rate business
  • Group: expect strength will continue into seasonally strong Q2.  Continue to track up in mid-single-digits in 2015.
  • F&B grew in mid-single-digits in 1Q.  Japanese F&B outlets drove majority of gains.
  • Announced sale of Hilton Sydney - AUD$442 (15x EBITDA multiple).  Will use proceeds to pay down debt.
  • Hilton has > 20% room share globally
  • Fundamentals of cycle remain strong.  
  • Outlook: US - maintain mid-to-high single digit REVPAR forecast
  • NY: strong demand tempered by supply
  • Mid-single-digit REVPAR growth, Mexico offset by Brazil and Argentina.
  • Europe:  positive Germany, geopolitical concerns weighing on France and Eastern Europe
  • Egypt: mid-single digit growth
  • Asia-Pacific:  high-single digit REVPAR growth; Japan robust, Beijing/Shanghai positive; soft in HK and Singapore
  • China 2015 REVPAR outlook: +6-8% REVPAR growth
  • $15m beat in 1Q due to normal calendar timing 
  • Incentive growth:  high teens forecast
  • Timeshare EBITDA decline:  accelerated sales that were booked in 2014 was offset by timing of sales efficiency.  78% of intervals sold by 3rd parties.  Supply:  5 yrs of intervals at current pace. 80% capital light.
  • Corporate/other segment: in-line with their expectations
  • US REVPAR grew 6.5% (gateway cities (Chicago/San Francisco strong)
  • Bad weather: overall impacted US REVPAR by 1%; 50bps in January, 300bps in February
  • Europe REVPAR:  +5.5% 
  • London - lower than expected group business and soft demand
  • 3.9x - net debt/EBITDA
  • Paid down additional $100m in debt post Q - YTD, paid down $325m

Q & A

  • M&A possibilities:  will not comment and will look at opportunities 
  • HOT's M&A rumor:  not surprising
  • They're seeing REVPAR acceleration
  • Hard not to feel very good at this time. Nothing to suggest there is a problem.
  • Talking about launching a new midscale entry-level franchise brand (where Hampton brand used to be)
  • FX impact outlook:  slightly worse but not by much
  • Curio/Canopy:  competitive world but faring well. Highest avg market share: 15-25% above previous market share
  • Large conversions: Doubletree and Curio
  • Corporate travel:  HLT believes there is no cutback; instead, they are increasing volumes and paying higher rates
  • NY down in REVPAR (5% of HLT's US exposure); outlook for 2015: feels good about April.
  • Outbound visitation: Europe was declining from Germany/France. Spain was up. China meaningfully up. 
  • European visitation into US lower due to stronger $
  • Early summer bookings show strength in Europe visitation
  • Ex FX guidance:  $25-35m FX-adjusted raise in EBITDA (at midpoint)
  • Franchise rates:  should move up over time (+10bps in 1Q, have gone from 4% to 4.7% over past couple of years)
  • Cypress hotel will become a Curio
  • Believe transient/group will both be in the 6-7% growth range
  • Mid-scale segment:  more supply there. 
  • Timeshare: consumer demand up.  VPG up 20% in 1Q 2015 (opened a high-priced product in Hawaii). For 2015, expect VPG up 10% and high-single digit growth in tour.
  • F&B:  sees stabilization trends
  • Internal vs external brand build:  De minimus investment (millions of $, not tens of millions of $), infinite return (Curio: single million $)
  • Why no recent Blackstone secondaries? Up to Blackstone. HLT believes pattern established last year will continue in 2015.
  • Thinking about dividend policy program in 2H 2015 but also want to be investment-grade at same time.
  • Flattish mgmt fees because of FX headwinds
  • Not in peak of the cycle because of occupancy gains
  • China Tier 1 cities: Shanghai/Beijing will have good year.  Rate/occupancy pretty balanced for 2015.

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Fed Day Live on HedgeyeTV @ 2:15pm EST

Watch live analysis of the FOMC Statement at 2:15PM ET below.



Fed Day Live on HedgeyeTV @ 2:15pm EST - Bob Rich Hawkish or Dovish


Topics of discussion:


  • What is the likely direction of long-term interest rates from here?
  • Can the U.S. dollar continue grinding higher amid consensus long complacency and an easier Fed?
  • Is the “Reflation Rally” in energy, EM and commodity currencies over or does it have legs?
  • Will 2015 be a “sell in May and go away” year?
  • What is an appropriate gross and/or net exposure to have as we traverse the next 3-6 months?


There will be a Q&A session at the end of the prepared remarks. Simply enter your question(s) anonymously into the chat to have Keith and the team address them.


-The Hedgeye Macro Team

Lower for Longer | 1Q15 GDP

Summary:   1Q GDP was expectedly soft at just +0.2% QoQ while accelerating to +3.0% on a year-over-year basis given the easy comp dynamics.  Consumption growth was a relative positive although the large rise in the savings rate drove the weakest print in household spending growth in a year.  Energy related Investment got cut in half and the confluence of strong dollar, flagging export demand, and relative domestic economic strength drove a widening trade gap and a -1.25% contribution to growth from net exports.  Expect the Fed to acknowledge the softening but maintain policy flexibility by highlighting residual seasonality, externalities and firming inflation expectations.   


Lower for Longer | 1Q15 GDP - UNITED STATES


The Data:  C + I + G + NX

  • C: +1.9% QoQ and contributing +1.31 = strongest part of report but also weakest in a year with goods consumption flagging alongside the largest sequential increase in the savings rate since (the fiscal cliff impacted) 2012. 
  • I:  +2.0% QoQ and contributing  +0.34 =  Residential fixed investment softened in conjunction with the severe weather in 1Q while Non-Residential investment declined -3.4% QoQ alongside a halving in energy related investment and ongoing reticence by corporate management to accelerate capex into decelerating global growth, past peak margins and percolating labor cost inflation.  Inventory accumulation was a sizeable support to total investment spending, contributing +0.7 to headline
  • G:  -0.8% QoQ and contributing -0.15 on the quarter.  
  • NX: Contributing -1.25 with exports -7.2% QoQ and Imports +1.8% = strong dollar/slumping export demand/relative economic strength driving a widening trade gap = lowest exports contribution in a year


Savings Rate:  Income ↑, Savings ↑, Spending ↓:  Savings Rate ticked up to +5.5% in 1Q15 vs. +4.6% in 4Q14.  Aggregate incomes continue to increase but the rising savings rates continues to mute the translation to realized household spending growth. 


Inflation:  Price softening modestly sequentially but core prices are stabilizing and Fed will looks towards the firming data/outlook


Real Final Sales (GDP less Inventory Change), Gross Domestic Purchases (GDP less exports, including imports), Real Final Sales to Domestic Purchasers (GDP less exports less inventory change) = all decelerating sequentially 


Lower for Longer | 1Q15 GDP - GDP 1Q15 Table



POLICY:   The net of domestic 1Q Macro data = lower for longer – something the market has been pricing in as we traversed the quarter. 


The Fed will moderate its assessment of economic conditions/momentum but will refrain from translating that into an explicit policy conclusion.    A host of factors are rhetorically supportive of the Fed’s “transient” view of 1Q weakness including residual seasonality, firming inflation expectations, resumption of west coast port activity, a retreat in the dollar’s ascent and probable sequential improvement in the April employment report. 


Residual seasonality in 1Q has been the new normal (ave GDP by Quarter chart below), breakevens have rallied, Core CPI/PCE/Billion prices project have stabilized, the weather drag has reversed (as evidenced in the March/April housing data) and each instance of marked sequential deceleration in net monthly employment gains over the last five years has been followed by a strong rebound in net hiring. 


In short, the sequential deceleration in the 1st quarter was real but its magnitude was likely overstated and the Fed has enough fodder to keep its prospective policy path largely unchanged as its data dependency engine trolls for disconfirming/confirming 2Q data.     


Lower for Longer | 1Q15 GDP - Energy Structure Investment


Lower for Longer | 1Q15 GDP - Residual Seasonality


Lower for Longer | 1Q15 GDP - inflation expectations


Lower for Longer | 1Q15 GDP - Net Investment


Christian B. Drake



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