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BOJA | BO’S DILEMMA

BOJA is still one of our Best Ideas on the SHORT side

 

BOJA reported a decent quarter, but the trends in the quarter raise a RED flag for a company trading at a fast casual multiple of 17x EV/NTM EBITDA.

 

The goal of every restaurant company should be to grow long term sustainable increases in traffic trends or customer counts.  For the past three years, positive traffic has eluded BOJA.

 

Thus Bo’s dilemma – the concept can’t increase traffic trends year-over-year without significant discounting.  Bo’s dilemma is shared by nearly every “mature” restaurant concept we know.  In 2Q15, BOJA drove increased profitability by discounting less versus 2Q14, but that resulted in a 90bps drop in traffic in 2Q15.  So we conclude, that given the operators desire to grow traffic long term, the current level of profitability is unsustainable, as the discounting and lower margins will return!

 

The sensitivity to discounting and the company’s inability to drive traffic is troubling.  On an annual basis the company has not been able to drive traffic without discounting for the past three years (the only years we have data for.)  As such, the company should be trading at a significantly lower multiple relative to its peer group. 

 

SUMMARY

BOJA reported a “beat and rise” 2Q15 EPS of $0.23 vs consensus $0.16.  Although the system-wide comps of +4.4% beat the consensus estimate of +3.6%.  A miss came from the company stores reporting +3.3% vs the estimate of +4.1%, which represents 40% of locations.  The franchise same-store sales were +5.1% vs consensus of +3.6%, representing the other 60% of locations.  With sales being a little light the company reported revenue of $114.0M vs an estimate of $114.6M

BOJA | BO’S DILEMMA   - CHART for 2Q15 Earnings Note

 

Less discounting and deflation helped food and supplies decrease to 32.2% vs the consensus estimate of 34.0%.  With labor leverage the company reported restaurant margin 19.1% vs the consensus estimate of 16.3% and “adjusted” EBITDA margin of 17.1% vs consensus of 13.5%.

 

GUIDENCE

  • EPS $0.75-$0.78 vs consensus $0.69
  • The company reaffirms comps up low to mid-single digits
  • Revenue $483.5M-$487.5M vs prior $480M-$487M and FactSet $486.9M
  • EBITDA $74M-$76M vs FactSet $67.3M
  • The company increased new store openings slightly to 50-57 new system restaurants (22-25 company and 28-32 franchise)

Squishy | July Employment

So, the squishy and amorphous “some further [labor] improvement” remains the lift-off bogey for a self-described quantitative, data dependent Fed.  On balance, the July employment data probably met that nebulous criteria threshold.  Speculative angst is free to crescendo into the Sept 17th FOMC announcement.    

 

The Annual Hedgeye Summer party starts in T – 10 minutes and we’re not particularly big on adding to the noise of manic data reporting on employment Friday, so we’ll keep it tight with the summary highlights below.  If you have any specific questions or would like to dig/discuss a particular dimension of the labor market in more depth, let us know. 

  • Payrolls | Best Before the Crest:   NFP and private payrolls slowed both sequentially and in rate of change terms.  May/June get a net positive revision of +14K.   While moving past peak rate-of-change in payroll growth does not herald an imminent roll in the eco cycle, the reality is that we’re late cycle in the current expansion and the labor party is always best before the crest.    
  • Unemployment Rate | Less Bad:  The Unemployment Rate was flat sequentially at +5.3% but the internals were largely positive as the participation rate held steady and the labor fore rose with the chg in employment > chg in unemployed.  The U-6 rate (underemployment rate) dropped a tick to 10.4% with PT involuntary workers declining -180K.  
  • Wages |  Up … But Not Really:   Both Total Private & Nonsupervisory Worker wage growth accelerated sequentially but the gain just represents more oscillation above & below middling.  Not what Team Janet wants to see although they’ve been making an attempt at quasi-marginalizing the trend in wage growth on policy decisions (see March Speech to review that commentary) 
  • Hours Worked | Prepare the Punditry:    This will probably be the favorite pundit talking point – and with some justification.  Average weekly hours worked rose by a tenth to 34.6hrs; the first increase in 5-months.   Income = Hours worked * earnings per hour, so why a longer average work week is good for aggregate incomes is straightforward (& that lowly tenth adds up to something material when applied across an employment base of 142MM).  Further, people working more hours is tantamount to more workers working the same hours – a concept termed “Job Equivalence” or “Labor Usage”  - so you’ll hear the case made that the +215K NFP gain is equivalent to something like a ~350K gain when factoring in the increase in hours worked and taking a job equivalence perspective of the data.  
  • Income | Wages Weak, Income ↑:  In a Keynesian economy, spending is king and the capacity for consumption flows from changes in the aggregate consumer P&L.  One could take two, somewhat divergent, views of this morning’s wage & income data:
    • Wage Growth:  Private hourly Wage growth at 2.1% YoY was better sequentially but below estimates for +2.3% and does nothing to offset the disappointment from the slowdown reported in the ECI last week.  Policy makers disappointment extends yet another month as wage inflation remains in RoC purgatory. 
    • Aggregate Income Growth: On net, the July data will be good for the aggregate income figures when they are reported for July.  Again, the math is trivial:  Flat Employment Gains + ↑Hours + ↑Wage growth = ↑ Aggregate DPI/Salary & Wage growth.  In short, the aggregate consumer P&L improvement will remain ongoing with the savings rate remaining the swing factor for actual HH spending growth.    
  • Housing:  On the supply side, resi construction employment rose by +6K with industry remaining in healthy expansion.  On the demand side, employment growth in the key housing demographic of 25-34 year olds decelerated to 2.3% YoY in July.  Inclusive of the July deceleration, growth in the cohort continues to run at a premium to the broader average and the trend for the cohort remains one of ongoing improvement. 
  • Energy | Eye of the Storm? The Challenger Job Cut data released yesterday showed ~9K in announced cuts in the sector in July.   The BLS data was more equivocal.  The Oil and Gas extraction industry – for which we have data thru July – showed employment rising by 0.5K.  Across the broader sector aggregate – for which we have data thru June – showed net employment falling -5.7K, marking a 7th consecutive month of net decline for a cumulative total of 79K.  Should strong-dollar led energy price deflation continue, we expect a re-acceleration in energy sector job loss as 2015 hedges roll off and commodity price exposure becomes more acute. 

Squishy | July Employment - Employment Summary Table July

 

Squishy | July Employment - 25 34 YOA Employment

 

Squishy | July Employment - Resi Construction Employment

 

Squishy | July Employment - Energy   of NFP

 

Squishy | July Employment - Oil Industry Employment Thru July

 

Squishy | July Employment - Oil Industry Employment Thru June

 

Squishy | July Employment - Challenger

 

Squishy | July Employment - NFP growth vs Earnings Growth

 

Squishy | July Employment - NFP YoYpng

 

 

Christian B. Drake

@HedgeyeUSA



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HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth

Takeaway: Cash equity volume continues to widen its y/y expansion, now up +19% in the new 3rd quarter.

Virtu (VIRT) stock hit the skids this week with the FX category declining by -43% sequentially with just flat year-over-year growth. This will not be good enough for a stock trading in-line with the exchange group with higher risk in its trading operations. We continue to see downside, with fair value up to 40% lower in the worst case scenario (we got a -10% correction in shares this week). Our latest research report is HERE.

 

Weekly Activity Wrap Up

U.S. cash equity volume continues to widen its lead with the largest year-over-year growth among the major product categories, now running higher by +19% thus far in the new 3rd quarter. U.S. equity options activity is also putting up high activity levels at +9% Y/Y growth. U.S. futures trading is currently in the midst of a summer lull at 17.0 million contracts daily, which is down -6% year-over-year. The important open interest tally continues to favor our Best Idea long view on CME Group (CME), with the big Chicago exchange's trading backlog up now +22% y/y (it was up +19% last week).

 

HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon1

 

U.S. Cash Equity Detail

U.S. cash equity trading finished the week at 7.0 billion shares traded which is blending to a 6.8 billion daily average thus far for the 3rd quarter of 2015. This is +19% year-over-year growth for U.S. stock activity. The market share battle for volume is mixed, with the New York Stock Exchange/ICE standing pat at 24% market share but with NASDAQ's still sporting market share 200 bps lower than last year, a -6% decline.

 

HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon2

 

HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon3

 

U.S. Options Detail

U.S. options activity remains significantly higher, both quarter-over-quarter and year-over-year. 16.7 million contracts traded this week which is blending 3Q15 activity to 17.2 million contracts per day, up +14% quarter-over-quarter and +9% year-over-year. The market share battle amongst venues continues to be one of losses at both the NYSE/ICE and NASDAQ. NYSE has lost 400 basis points of share year-over-year settling at just 18% of options trading currently. NASDAQ has shed 300 basis points of share, good for a -14% loss from last year as ISE/Deutsche Boerse and BATS mop up volume and share.

 

HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon4

 

HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon5

 

U.S. Futures Detail

CME Group volume has been relatively low the last couple of weeks. In the most recent 5-day period ending August 8th, activity levels were 12.7 million contracts at the big futures exchange, blending 3Q15 volume to a 12.7 million average level, a -6% year-over-year decline. CME open interest, the most important beacon of forward activity, continues in strong fashion with 102.6 million contracts pending, good for +22% year-over-year growth, further improvement from the prior week's +19%.

 

Activity levels on the futures side at ICE hit 4.7 million contracts this week, with 3Q15 blending to a 4.3 million daily average. That is also a -6% year-over-year decline. ICE open interest this week tallied 71.7 million contracts, a -5% year-over-year contraction, worse than the prior week's -4% level.

 

HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon6

 

HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon8

 

HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon7

 

HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon9

 

Monthly Historical View

Monthly activity levels give a broader perspective of exchange based trends. As volatility levels, measured by the VIX, MOVE, and FX Vol should rise to normal levels after the drastic compression this cycle, we expect all marketplaces to experience higher activity levels.

 

HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon10

 

HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon11

 

HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon12

 

HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon13

 

HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon14

 

HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon15

 

Sector Revenue Exposure

The exchange sector has broadly diversified its revenue exposure over 10 years as public entities with varying top line sensitivity to the enclosed trading volume data. The table below highlights how trading volumes will flow through the various operating models at NASDAQ, CME Group, ICE, and Virtu:

 

HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon19 3

 

 

 

 We recently presented our investment thesis on the Exchanges. To summarize,

  • Long CME:  Financially oriented CME Group (CME) is enjoying a long awaited boom in activity, as trader counts and open interest in Treasuries, Eurodollars, and FX products are swelling. The decade long concentration on trading energy and commodities is over and with steeply shaped forward curves and more profitable opportunities, financial products are seeing rapid adoption. 
  • Short ICE: We see collateral damage from the ongoing rapid price decline in energy and commodity markets. As a result, these important products at ICE will be less active than the Street expects, as commercial hedging and speculative energy trading dries up.

We think CME has $5 per share in earnings power in the out year and the stock will revisit near $140. As outlined in our presentation deck and replay below, a CME long position can also be paired with a short ICE position, with favorable fundamental exposures on each side of the trade.

 

Separately, recent IPO Virtu (VIRT) is being valued incorrectly by the market. Our main qualm is that the company takes intraday prop risk, but has no tangible equity capital to cover any potential trading losses. Shares of VIRT are currently on our Best Ideas list as a short with a fair value in the mid-teens (30-40% downside).

 

Hedgeye Exchange Black Book Replay HERE

Hedgeye Exchanges Black Book Materials HERE

 

HEDGEYE Exchange Tracker | Trending Cash Equity Volume Expanding Y/Y Growth - XMon20

 

 Please let us know of any questions,

 

Jonathan Casteleyn, CFA, CMT 

  

  

 

 Joshua Steiner, CFA

 

 

 

 


Video | History: Why People Are Angry

On The Macro Show today, Hedge CEO Keith McCullough discusses how unsatisfied people are and how this gives birth to the hard right and the hard left. He also talks about what has him excited in the upcoming U.S. presidential election.

 

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Special free edition

 

On this morning's edition of The Macro Show Hedgeye CEO Keith McCullough discussed the slowing jobs market and the U.S. economy remaining in a #LateCycle slowdown.

 

In addition to our economic commentary and analysis Keith and Director of Research Daryl Jones wade in on last night's Republican presidential debates winners and losers. 

 

 

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