WATCH THE REPLAY BELOW.
Today, July 16th at 1:00PM ET, we invite you to join us live for a conference call on China. Led by senior macro analyst Darius Dale, the call will detail our revised outlook for the Chinese economy, our expectations for monetary and fiscal policy, as well as the associated investment implications.
KEY DISCUSSION TOPICS:
- Correction or Collapse?: Does the recent plunge in Chinese share prices represent an attractive buying opportunity (as several major sell-side and buy-side firms have suggested) or is it a harbinger of another leg down in the Chinese economy and a bearish phase transition across Chinese financial markets?
- Asset Class “Re-rotation” Risk: Our analysis is showing nascent signs of recovery throughout China’s real estate market. Will a continued positive inflection bode poorly for Chinese stocks?
- Renminbi Internationalization Impact: What impact, if any, will China’s push to make the CNY an international reserve currency have on the country’s financial markets and how will the recent crash in Chinese equities impact this drive?
- U.S. Toll Free:
- U.S. Toll:
- Confirmation Number: 13614418
- Materials: CLICK HERE
Also, for those of you who cannot join us live, we will be distributing a replay video of the call shortly after it concludes.
The Hedgeye Macro Team
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BWLD is moving to the Hedgeye Restaurant Ideas List as a SHORT.
Following the 1Q15 EPS miss, it’s now a back end loaded year. The company missed by $0.11 in 1Q15 and the street has now reduced estimated by $0.15-$0.20 for 2015. Is there another round of estimate cuts to come? At this point it looks like the street estimates are $0.20 too high for 2015.
BWLD is down 6.8% year-to-date, versus the average casual dining stock up 7.5%. Year-to-date BWLD is the worst performing restaurant stock we follow that is not considered broken. As of last night’s close, the stock has recovered $8 of the $24 it lost following the 1Q15 earnings miss.
After stringing together 17 straight quarters of positive sales and traffic BWLD is experiencing a significant sales slowdown. In 2Q15 we estimate that BWLD’s “Gap to Knapp” will shrink 220 bps to 2.0%, the lowest level since 2Q11.
What is causing the slowdown in BWLD sales trends?
Has BWLD been too aggressive raising prices over the last 4 years? Since 2Q11 BWLD has been running annual increases of 3% every quarter.
No concept has the ability to take significant price increases over a long period of time and not face a slowdown in traffic.
In 2Q15 the price/mix for BWLD will be 0%! This will be the first time since 2Q13 that this metric is flat or negative.
WHERE IS THE LABOR LEVERAGE?
In 2014, BWLD added about 100bps in labor costs to roll out its Guest Captain experience in the stores. The biggest increases to labor costs were seen in 2Q14 & 3Q14. Ironically, beginning in 4Q14 the company has not been able to make the consensus EPS estimates, despite seeing acceleration in same-store sales trends. While wing prices have increased over the same time, that issue should not have been a surprise.
Looking at the trends for 2Q15, if the Guest Captain initiative is a driver of incremental traffic, why are same-store (traffic/mix) slowing? Going forward, if BWLD has limited pricing flexibility and same-store sales are slowing it will be very difficult to leverage labor costs.
RESTAURANT LEVEL MARGINS
If same-store sales are slowing can the company leverage the incremental labor costs running in the P&L? Therefore, the recovery in restaurant level margins in the 2H15 and 2016 look unlikely.
To offset some of the pressure on restaurant level margins BWLD management needs to get aggressive in cutting G&A to limit the damage to the EPS line.
Estimates for BWLD FY15 have been coming down, but they still seem aggressive. The EPS recovery story in 2H15 will likely not materialize.
BWLD looks to offer good value relative to others in the space, but with estimates too high, the cheap valuation can be deceiving.
At 11.59% of the float, BWLD’s short interest is higher than most casual dining companies.
Sentiment is very positive on the company with 61% of the analysts having BUY ratings. This bias is reflected in the consensus estimates for a recovery in profitability which is unlikely to happen.
HEDGEYE RESTAURANTS IDEAS LIST
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.
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.
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
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
- 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.
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.
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.
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.
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.
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