After Buffalo Wild Wings (BWLD) earnings call last night we want to cover the short call here and move it to the short bench.
Our underlying thesis for the BWLD short was that 2015 earnings estimates were too aggressive. While that turned out to be correct, the better than feared “miss and cut” is reason enough for the stock to rally. We would note that management will be raising prices excessively to compensate for increasing costs, an issue that may haunt them in the future. For the time being, consumers don’t seem to be bothered by the aggressive pricing the company has taken over the past three years.
As we said, last night BWLD announced 2Q15 earnings, reporting EPS of $1.12 versus consensus estimate of $1.27. Restaurant sales came in under estimates at $401.9 million versus consensus of $404.4 million, a ~17% increase YoY including some newly acquired restaurants. BWLD did beat the comps; Company owned stores reported SSS of +4.2% versus consensus of +3.8%, while Franchise locations reported an increase of +2.5% versus consensus of +2.1%. The comps are largely built up by 3.8% pricing at company owned stores (franchisees price at their own discretion). Margins have been under pressure as wing prices are up 26% YoY, and wage rates have been increasing significantly in certain markets.
Margins across the board are worse sequentially. BWLD Cost of Sales increased 3.9% to 29.3%, although slightly below consensus estimates of 29.5%. Restaurant level margins are down 7.4% YoY to 18.8% versus estimates of 19.1% as labor and food costs weigh on the P&L.
Bottom line, management cannot expect to be able to raise prices at these rates to cover the accelerating costs. Furthermore, it is still unclear whether the addition of the guest experience captain is adding value and making up for the extra expense. We expect the football season may keep this stock afloat in the near term but these rising prices will take its affect in the long run, and we will revisit the short at that time.
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The “reflation-trade,” “global growth is back” crowd is getting smoked again as everything levered to inflation expectations underperforms.
The Energy (XLE), Materials (XLB), and Industrials (XLI) sectors are down -9%, -8%, and -3% in July vs. a flat S&P 500 as widening risk ranges and heightened volatility premiums manifest in commodities markets. These markets may look oversold, but given the awful Q1 Q/Q SAAR GDP print, Q2 may look like a notable acceleration on Thursday for the Q/Q SAAR navel-gazers.
If rate hike expectations are pulled forward, strap your seatbelts and look out below (again) in the short-term for commodities and their related sectors.
Kinder Morgan, Inc. (KMI) published its 2Q15 10-Q on 7/24. We didn't find anything earth-shattering in the filing, and a boring 10-Q is a good 10-Q... That said, there were some interesting segment / asset-level data points that deserve mention.
Detail on Shell Acquisition......“On July 15, 2015, we purchased from Shell US Gas & Power LLC (Shell) for $200 million its 49% interest in a joint venture, ELC, that was formed to develop liquefaction facilities at Elba Island, Georgia. The purchase gives us full ownership and control of ELC. Shell continues to subscribe to 100% of the liquefaction capacity.”
Hiland EBDA Contribution Disclosed......KMI disclosed that the Hiland G&P assets contributed $36MM of EBDA to Natural Gas Pipelines and the Hiland Double-H crude pipeline contributed $12MM of EBDA to Products Pipelines in 2Q. Assuming $20MM of annual G&A, that puts the acquisition multiple at 18x current EBITDA.
G&P Weakness Hits Natural Gas Pipelines......Natural Gas Pipelines EBDA was down YoY on an organic basis (ex. Hiland), with the commodity-sensitive G&P assets weighing on the segment:
CO2 S&T EBDA Down 32% YoY......In our view, the market under-appreciates KMI's oil price exposure in its CO2 S&T business. In 2Q15, S&T EBDA was down 32% to an implied $79MM (~$320MM annualized):
Weak Bulk Terminals Volumes Bodes Poorly for Future EBDA......Bulk transload volumes were down 22% YoY, while Gulf Bulk EBDA was actually up $6MM (+32%) due to "increased shortfall revenue from take-or-pay coal contracts.” MVCs for KMI's major coal export customers, BTU and ACI, likely expire around 2020 - 2021 (see KMI's 2012 10-K), though with those coal companies' unsecured bonds currently trading ~10 - 30 cents on the dollar, those contracts could be at risk of default / renegotiation. See this presentation for more on KMI's coal exposure.
Commodity Hedges......KMI's commodity derivatives disclosure is poor, though it looks as though the significant QoQ change was a ~30MMbbls increase in NGL fixed price swaps. KMI also added some natural gas basis swaps. As of 6/30/15, KMI's commodity derivatives were marked on the balance sheet at $317MM, net.
YTD Equity Issuance......"During the six months ended June 30, 2015, we issued and sold 62,079,878 shares of our Class P common stock pursuant to the equity distribution agreement, and issued an additional 968,900 shares after June 30, 2015 to settle sales made on or before June 30, 2015, resulting in net proceeds of $2,599 million."
2015 CapEx Guidance Revised Slightly Lower......"Sustaining" CapEx: $603MM, down from $614MM prior; "discretionary" CapEx: $4,098MM, down from $4,179MM prior.
Link to 7/16 Note: KMI 2Q15 Recap & Valuation Update
Link to Updated Valuation Sheet: KMI Valuation Tear Sheet (Excel)
From Hedgeye research this morning:
Following yesterday’s -8.5% plunge, the Shanghai Composite failed to take advantage of several pledges of continued support out of the Chinese brass to close down -1.7% on the day. After rallying +17.6% off the lows on the back of heavy-handed policy intervention, the mainland’s benchmark equity bourse has dropped -11.2% over the past three days. Looking eerily similar to the chart of the NASDAQ in 2000, we continue to think the A-Shares have a healthy degree of downside from here amid margin calls and asset class re-rotation risk.
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