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June Restaurant Sales and Employment Trends

Black Box Sales, Traffic

Black Box released same-restaurant sales and traffic estimates for the month of June last week that showed a strong acceleration versus a weak performance in the month of May. Same-restaurant sales grew to +2.1% up 100 basis points (bps) sequentially, and 200 bps YoY and same-restaurant traffic decreased -1.5%, an 80 bps sequential improvement, and up 20 bps YoY.

 

June Restaurant Sales and Employment Trends - June Chart 1

June Restaurant Sales and Employment Trends - June Chart 2

 

It appears that restaurants are continuing to raise prices despite declining commodity prices. While this is a short term benefit to margins, long term it is testing the elasticity of their customers.  As you can see from the chart below, there is a clear divergence between the operators taking price and a decline in traffic. In June there is a minor uptick in traffic, and it will be interesting to see if this negative trend continues to reverse.

June Restaurant Sales and Employment Trends - June Chart 3

 

Knapp June Sales Trends

Knapp reported that comparable restaurant sales in June 2015 were +1.3% for same-store sales and -1.3% for guest counts.  This represents a +20 and +60 basis point sequential improvement, respectively, for the month.  On a 2-year basis, sales accelerated to +0.2% and traffic matched May’s 2-year average, down -2.0%. 

 

Employment Growth Slowing

The month of June was a mixed bag of results for employment. Employment growth continues to be largely attributable to the 25-34 YOA (+2.55%) and 55-64 YOA (+2.21%) which accounted for 39% and 34% of the growth, respectively. The downward trend is concerning, especially given that a large portion of the growth is in the 55-64 YOA cohort, with a considerable amount of that employment being part time.

 

 

June Employment Growth Data:

  • 20-24 YOA +1.07% YoY; +32.6 bps sequentially
  • 25-34 YOA +2.55% YoY; -86.1 bps sequentially
  • 35-44 YOA +1.04% YoY; +26.9 bps sequentially
  • 45-54 YOA -0.35% YoY; -62.5 bps sequentially
  • 55-64 YOA +2.21% YoY; -40.1 bps sequentially

 

June Restaurant Sales and Employment Trends - June Chart 4

 

Thoughts from our macro team on June Retail Sales

Sequential slowdown on the Headline # in June – we knew the headline would decelerate sequentially given the slowdown in auto sales off of 10Y highs in May but this was worse than expected.

 

Headline: Down -0.3% MoM and decelerating on both 1Y/2Y

 

Headline: ex-Autos & Gas: Down -0.2% MoM, decelerating YoY and flat sequentially on a 2Y basis

 

Notables:   

  • Gas:  Gas prices were up ~3% in June which translated to a +0.8% gain in Gas Station sales
  • Auto’s:  Auto’s & auto parts down -1.1% MoM.  Vehicle sales were down -3.5% to 17.1mm units in June – down from May’s gangbusters 17.7MM figure (a 10Y and post-recession high)… vehicles sales were out on 7/1 so we already knew this
  • Industry Momo: 9 of 13 Industries decelerated sequentially on a YoY basis
  • I/S:  We’ll get the I/S ratio’s a bit later but those continue to deteriorate with Inventories growing at a premium to sales

 

 

Words from our fearless leader (CEO) Keith McCullough on June Retail Sales

 

US Retail Sales “miss” (vs. sell side expectations) confirms our #LateCycle slowing view.

 


YUM | Delivered a Mixed Bag of Results

China is turning around and showing sequential improvement while KFC and Taco Bell continue to post very impressive numbers.  YUM remains on the Hedgeye Restaurants Best Ideas list as a LONG, we are very focused on the progress China is making as well as the struggles Pizza Hut is having.

 

Yesterday after the close, YUM reported adjusted Q2 EPS of $0.69 versus consensus of $0.64, representing a 5.5% decline versus last year. In the release, management just as in Q1 reiterated its full-year EPS growth goal of “at least 10%,” with the street currently projecting 12.9% growth for the year.

 

Management continues to stand behind all of their brands with a disruptive innovation plan and strong value for the customer. We continue to disagree with their affection for the U.S. Pizza Hut business, the division reported another flat quarter in Q2 pulling the two year trend lower. Management stated during the call a slew of problem areas for the business starting with tired assets, weak ecommerce and customer experience, while still trying to figure out their value play. Looking at the problems, the U.S. based Pizza Hut business could be a CAPEX black hole while management figures out how to fix it or realizes it needs to be sold.

 

With activist stockholders now in the mix, they will not settle for poor performance long, and we anticipate their voice getting louder in the near future.

 

Below, we provide a brief update on each operating division.

 

China same-store sales declined -10% in the quarter, coming in below consensus estimates of -8.4%. Restaurant level margins of 14.6% surpassed consensus estimates by 115 basis points. KFC and Pizza Hut same-store sales declined -12% and -4%, respectively, reflecting continued recovery from adverse supplier publicity in July 2014. Despite the top line miss, the productivity initiatives that the management team has undertaken have been beneficial to the bottom line. In 2H15 as sales trends accelerate, expectations are for significant flow through and further margin improvement.

 

YUM | Delivered a Mixed Bag of Results - YUM CHART 1 

 

 

Taco Bell same-store sales increased 6%, 240 basis points above consensus estimates of 3.6%. Restaurant level margins of 23.0% increased 530 basis points YoY and beat consensus estimates of 19.84% by 316 basis points. Breakfast (launched in 2Q14) continues to be a key part of this growth story, but management stated that through innovation and value they are growing in all dayparts. Taco Bell remains a growth story as they are currently largely located in the U.S. with minor operations in Latin America and Canada, which by the way are performing great as well. International unit growth is a key priority for management on this business.

 

YUM | Delivered a Mixed Bag of Results - YUM CHART 2 

 

KFC same-store sales increased 3%, slightly below consensus of 3.1%. Restaurant level margins of 15.3% surpassed estimates of 13.99% by 131 basis points. Continues to be a strong brand internationally, the team opened 122 restaurants in the quarter, including 89 (73%) units in emerging markets.

 

YUM | Delivered a Mixed Bag of Results - YUM CHART 3 

 

Pizza Hut same-store sales were once again flat, coming in below consensus estimates of 1.4%. Restaurant level margins of 9.9% grew 220 basis points YoY and exceed the streets estimates by 163 basis points. The business is clearly still struggling, especially in the U.S., where they are having trouble attracting new customers. Management has stated the brand is in need of capital to improve the asset base and customer interaction. Internationally, assets are in much better condition and so is the business performance. The division opened 66 new international restaurants in 33 different countries, including 33 units in emerging markets.

 

YUM | Delivered a Mixed Bag of Results - YUM CHART 4 

 

YUM | Delivered a Mixed Bag of Results - YUM CHART 5

 


Cartoon of the Day: China Dragon?

Cartoon of the Day: China Dragon? - China cartoon 07.15.2015

 

"So, they nailed another perfect 7.0 in China for said GDP in Q2 (same made-up # in Q1, not 6.87, or 7.11 – 7.0%) ... but the locals didn’t believe that, selling the Shanghai Composite Casino down for a -3% day (-4.2% in the last 2 days and -24.8% in the last month)" - Hedgeye CEO Keith McCullough earlier this morning

 

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Is Chanos Right On China Being One of the Greatest Short-Selling Opportunities In History?

 

After Jim Chanos' remark that there is still more pain to come in China and a tidy 7.0% GDP print, Hedgeye Director of Research Daryl Jones weighs the pros and cons of being short Chinese equity markets on The Macro Show.

 

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Purchase Apps | Holiday Noise

Takeaway: Q3 Housing data is off to an ambiguous start thanks to Holiday volatility. We'll have a better sense for how things are trending next week.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

 

Purchase Apps | Holiday Noise - Compendium 071515

 

Today’s Focus:  MBA Mortgage Applications

Data volatility is notoriously prevalent around holidays and seasonal adjustments are notoriously poor at fully resolving the peri-holiday choppiness in activity.  Superficially, the last two weeks of Purchase Application data appear to support that notoriety. 

 

After rising +6.6% in the week ending July 3rd, Purchase Demand in the latest week declined -7.5%.   We’re inclined to simply call it a wash and wait for next weeks data before attempting to discern any underlying shift in demand to start 3Q. 

 

The Data:  Purchase activity declined -7.5% in the latest week, taking the index back below the 200-level to 196.4.  From a rate-of-change perspective, however, the data was more sanguine as growth actually accelerated +10bps sequentially to +17.0% YoY.  Refinance activity, meanwhile, rose +3.7% with rates on the 30Y FRM contract steady for a second week at 4.23%.   Rates remain -2.3% lower than the corresponding period last year with the current rate of 4.23% comparing to the full year average of 4.35% and the 1H15 average of 3.97%. 

 

In short, the high-frequency Purchase Demand data remains good on an absolute basis and very good on a rate of change basis but the holiday convolutes a clean reading of the trend to start 3Q.  Hurry Up and wait.  

 

 

Purchase Apps | Holiday Noise - Purchase   Refi YoY  

 

Purchase Apps | Holiday Noise - Purchase Applications LT 

 

Purchase Apps | Holiday Noise - Purchase 2013v14v15 

 

Purchase Apps | Holiday Noise - Purchase Index   YoY Qtrly 

 

Purchase Apps | Holiday Noise - Purchase YoY  

 

Purchase Apps | Holiday Noise - 30Y FRM 

 

 

About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 

 

Frequency:

The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.

 

 

Joshua Steiner, CFA

 

Christian B. Drake

 


Yes, Growth Is Slowing

Takeaway: Compares throughout the rest of the summer, and fall, AND holiday, don't get any better.

Editor's Note: The excerpt below is from a research note written yesterday by our Retail Sector Head Brian McGough. If you'd like to learn more about how Hedgeye can help you click here.

*  *  *  *  *

Yes, Growth Is Slowing - z snail

Retail Sales Slowing

 

Expectations were definitely out of whack headed into this Retail Sales print given the big headline miss.

 

Two things:

 

  1. The level of sales growth relative to last year is absolutely positively decelerating. In January we saw 5.4% growth, and we've steadily decelerated to 1.9% in the following five months. 
  2. We're scratching our heads as to why this is a big 'surprise'. Commentary from large and small retailers alike have supported a decelerating growth rate. In addition, while the 2-year run rate in the real discretionary categories is below what we witnessed in 2H14 (4%) it is consistent with what we've seen over the past 3-months. 

The bottom line? Yes, growth is slowing. Yes, we expected it. Compares throughout the rest of the summer, and fall, AND holiday, don't get any better.

 

Yes, Growth Is Slowing - z mcgough retail


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