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HEDGEYE Exchange Tracker | Comping the Comp

Takeaway: 2 of 3 categories remain in contraction Y/Y although we expect futures to turn to positive territory soon as the Grexit marked last October.

Weekly Activity Wrap Up

All three categories remain in negative growth territory Q/Q, although cash equities, with a 7.1 billion 4Q15TD ADV, are positive Y/Y at +2%. Options activity is averaging 16.5 million contracts per day so far in the quarter, a -5% contraction year-over-year and a -9% contraction versus 3Q15. Futures had their best week so far this quarter, coming in with 19.4 million contracts per day, however, the 17.5 million 4Q15TD ADV is -6% lower than last quarter and -9% lower than 4Q14. In October of last year, the potential Greek exit from the European Union drove outsized activity which will have normalized by mid-November. We expect both ICE and CME to have better comps at that point and think that CME especially will finish 2015 strongly (see our most recent CME note here).

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 1

 

U.S. Cash Equity Detail

U.S. cash equity trading came in at 7.4 billion shares traded per day this week. That brings the fourth quarter average to 7.1 billion shares traded per day, a +2% Y/Y expansion but -3% Q/Q contraction. The market share battle for volume is mixed. The New York Stock Exchange/ICE is taking a 24% share of fourth-quarter volume, a +3% year-over-year increase, while NASDAQ is taking a 19% share, a -8% year-over-year decline.

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 2

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 3

 

U.S. Options Detail

U.S. options activity came in at a 17.1 million ADV this week, bringing the 4Q15TD average to 16.5 million, a -5% Y/Y and -9% Q/Q contraction. The market share battle amongst venues continues to be one of losses at the NYSE/ICE, which has lost -9% of its share year-over-year settling at just 18% of options trading currently. Additionally, CBOE's market share has been falling recently and now sits at 26%, -14% lower than 4Q14. NASDAQ, on the other hand, is starting the quarter strongly, increasing its market share by +13% compared to 3Q15, bringing itself only -2% lower than the 24% share it held a year ago. BATS' share has been falling recently but at 8% in 4Q15TD it remains +27% higher than in 4Q14. Finally ISE/Deutsche's 15% share in 4Q15TD remains consistent with 3Q15, which brings it to +10% Y/Y growth.

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 4

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 5

 

U.S. Futures Detail

CME Group volume came in this week at 14.1 million contracts per day and is averaging 12.8 million for the fourth quarter, a -14% Y/Y and -11% Q/Q contraction. However, CME open interest, the most important beacon of forward activity, currently tallies 101.7 million CME contracts pending, good for +9% growth over the 93.7 million pending at the end of 4Q14, an expansion from the prior week's +7%.

 

ICE had its best week so far in 4Q15TD with 5.3 million contracts traded per day. Additionally, at 4.7 million contracts traded per day in 4Q15TD, activity has grown +7% Y/Y and +10% Q/Q. ICE open interest this week tallied 67.5 million contracts, a +14% expansion versus the 59.4 million contracts open at the end of 4Q14, consistent with the prior week.

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 6

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 8

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 7

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 9 

 

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 | Comping the Comp  - XMon 10

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 11

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 12

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 13

 

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 14

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 15

 

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 | Comping the Comp  - XMon19 3

 

 

Please let us know of any questions,

 

Jonathan Casteleyn, CFA, CMT 

  

  

 

 Joshua Steiner, CFA

 

 

 

 


Join Hedgeye For Holiday Cocktails & Appetizers

'Tis the Season…. We hope you can join us at La Biblioteca (622 3rd Avenue at 40th Street – located inside Zengo restaurant) on Wednesday December 9th, from 5-9pm for some holiday cheer!

 

Please RSVP to Kerrie at  if you can join.

 

We look forward to seeing you!

 

-Your Hedgeye Macro Team

 

Join Hedgeye For Holiday Cocktails & Appetizers - he client holiday party DEC2015


SBUX | WHAT WILL SLOW THEM DOWN? | CONFERENCE CALL NOTES

HEDGEYE COMMENTARY

SBUX is a juggernaut! 

 

The company reported a very strong end to FY15 quarter and looks like FY2016 will be another strong year.  In the US, food sales are accelerating and Mobil Order & Pay is driving incremental transactions.  Globally, the company is growing same-store sales and adding more stores to the base.  

 

The bar was set high coming into this quarter and now has been set even higher going into 1Q16.  Despite the company providing EPS guidance slightly below street estimates, the trend in transaction growth, which is the most important metric, points to continuing growth.

 

The quote by CEO Howard Schultz says it all “Starbucks occupies a front-row seat at the intersection of the physical and digital worlds like no other company anywhere in or out of retail.”  Mobile Order & Pay is the key to driving future growth at SBUX.  On the other side of the coin, I do not believe that the trends we are seeing in food sales have long-term sustainability.   

 

Currently the stock is trading at 18.13x EV/NTM EBITDA, which puts SBUX at a significant premium to its global peer group.  While it may deserve the premium, the stock is priced for perfection and nothing lasts forever. 

SBUX | WHAT WILL SLOW THEM DOWN? | CONFERENCE CALL NOTES  - CHART 1

 

4Q15 CALL - MANAGEMENT COMMENTARY

  • GLOBAL COMP STORE SALES - Starbucks same-store sales increases of 8% globally, 9% in the U.S., a 4% increase in global traffic. 4Q15 represented the 23rd consecutive quarter of global comp store sales growth of 5% or more. The company served over 72mm more customer occasions from our global comp store base than we did the year before
  • REVENUES AND EPS - 4Q15 reported revenues of $4.9B and non-GAAP EPS of $0.43 FY15 revenues of $19.2B and non-GAAP EPS of $1.58

 

STRATEGIES

  • Partners - And the investments we make in our partners pay tangible dividends in the form of more satisfied and engaged partners, deeper connections among partners, and with customers and improved in-store efficiency, all of which contribute to an elevated in-store Starbucks experience for everyone, partners and customers alike.  Noteworthy is that today we are seeing improvements in partner attrition, a direct result of our partner investments at a time when the industry overall is actually moving in the opposite direction
  • Our comp results are strongest where we are having our greatest success in reducing turnover
  • And our newest class of stores is performing at the highest level in our history, generating first-year average unit volumes of $1.4mm, up nearly 20% from only three years ago, while also delivering record profitability and returns on investment
  • At the same time, we continue to open new Starbucks stores and introduce dynamic new best-of-class store designs and formats like our express stores and drive-thrus, while meaningfully growing comps and without any net cannibalization of existing Starbucks stores operating in the same trading area
  • Starbucks occupies a front-row seat at the intersection of the physical and digital worlds like no other company anywhere in or out of retail

 

PARTNERSHIPS

  • The partnerships we’ve recently announced with The New York Times, Spotify and Lyft are the first of many partnerships that will enable us to increasingly leverage and monetize the platform and our other technology investments
  • Through these investments and the best-of-class mobile and digital experience that Starbucks delivers, we believe that we are building an unassailable position that will only strengthen and become more relevant as today’s increasingly mobile-first consumer economy evolves

 

NEXT-GENERATION OF FEATURES AND MOBILE PAYMENT

  • But despite our industry-leading position in mobile and digital today, we are continuing to push the envelope and now have line of sight on the next-generation of features to excite and delight our customers and our partners
  • Mobile payment now accounts for 21% of all transactions in our U.S. company-owned stores, and although we only completed the rollout of Mobile Order & Pay across our system 7500 U.S. company-owned store portfolio in September, we were already operating at a run rate of over five million transactions per month
  • We have seen the pattern of accelerated adoption of Mobile Order & Pay with each successive region and market we enter play out over and over again.  And I’m pleased to report that we are seeing it again in terms of this pattern, accelerated adoption, repeat in the early days of our recent international launches of Mobile Order & Pay in both the U.K. and Canada
  • My Starbucks Rewards Program
  • Membership in our fast growing and industry-leading My Starbucks Rewards program, our loyalty program, continues to grow, and we now have over 20mm members in countries around the world
  • And two weeks ago, we launched delivery in the Empire State Building to favorable customer and media response, and we’ll be launching delivery in Seattle in conjunction with Postmates later this quarter
  • We have begun deployment in 150 stores in the U.K. and more than 300 stores in Canada, while framing plans to continue rolling out Mobile Order & Pay in key markets around the globe
  • We launched the Starbucks mobile app, both the iOS and Android versions in France and Germany
  • We’re on track to deploy in Poland, Czech Republic, and Kuwait this year

 

Kevin R. Johnson, President and Chief Operating Officer, Starbucks Corp.

OPERATING HIGHLIGHTS

REVENUES, BEVERAGE PROGRAM AND SALES

  • Americas posting 4Q15 same-store sales of 9% and revenues growth of 11%.  In Fy15 it opened 612 net new stores over.  “Our beverage program, fueled by innovation such as our new Cold Brew and strong core beverage performance, drove six points of comp growth and delivered increased food attach rates.
  • Sales of iced beverages, including Teavana Shaken Iced Teas, grew 20% YoY
  • And our limited-time offering line-up with the new and improved Pumpkin Spice Latte, Salted Caramel Latte, and Toasted Graham Latte performed well ahead of our initial expectations
  • FY2015 Teavana branded tea beverages generated nearly $1B of sales through Starbucks stores in the U.S., up 12% over last year
  • And we will be bringing Teavana branded, handcrafted tea beverages to CAP and EMEA in FY2016
  • Food revenue grew 19% in the quarter, contributing three points of comp growth, including attach
  • Our breakfast sandwich platform, which has now doubled in size from just three years ago, is increasingly resonating with our customers, and our lunch program is accelerating
  • You may recall that last year, one in seven Americans received a Starbucks Gift Card over the holidays, generating over $1.6B in card loads in our Q1 FY2015This year, we’ve reimagined our card mall, expanded the program to include all U.S. company operated stores, and we’re introducing a limited offering of premium cards We’re also bringing back the opportunity for customers to win something that isn’t for sale: Starbucks for Life
  • Noteworthy is that total card loads in the U.S. and Canada, including reloads and activations, in FY2015 totaled $5.1B, up 19% year-on-year

 

CHINA ASIA-PACIFIC SEGMENT

  • China Asia-Pacific segment delivered comp growth of 6%, driven entirely by increased traffic, with revenue growing 110% or 18% excluding the impact of approximately $287mm from the ownership change in Starbucks Japan and negative impact of FX.  Operating income grew 25%
  • Store growth continues with 838 net new stores in FY2015.  The new class of company-operated stores in CAP is outperforming the prior class, generating record AUVs and profit, results that demonstrate the accelerating strength and relevance of the Starbucks brand across the region.
  • There are now over 1,800 stores in 95 cities throughout China
  • There are over eight million MSR customers in China, giving confidence to having 3,500 stores in China by the year 2019
  • Traffic growth in China continues to outpace CAP segment traffic growth overall. 
  • Traffic comps in China accelerate throughout the quarter with continued strong momentum into October
  • Japan delivering another solid quarter of comp sales growth
  • And now with full ownership, SBUX will accelerate growth and leverage all mobile and digital capabilities
  • Company operated stores we acquired in Japan last year will be included in the global and CAP comp basis during Q1 FY2016

 

EMEA’s

  • Excluding approximately $40mm of FX headwinds and the transfer of 41 stores from company-owned to licensed, EMEA revenues increased approximately 8% in Q4
  • Every major EMEA market posted positive comps in Q4, with the U.K., France, and Germany posting particularly strong comp growth
  • Comparable store sales in EMEA grew 5% despite ongoing macroeconomic challenges in several markets in the region with a 3% increase in traffic, representing EMEA’s 10 consecutive quarter of positive comp growth
  • EMEA licensed markets are continuing to perform exceptionally well, with Turkey and the Middle East in particular continuing to outperform, further supporting our license-focused growth strategy
  • By Q4, nearly 69% of our 2,362 EMEA stores were licensed, up from only 54% four years ago
  • EMEA delivered 37% increase in operating income over Q4 last year

 

CHANNEL DEVELOPMENT REVENUE GROWTH

  • Channel Development Q4 revenues grew 14% over last year to $457mm
  • Continued competitive pressures in at-home coffee categories
  • Pleased with the strength of packaged coffee sales in the quarter, which combined with K-Cup sales were the primary drivers of Channel Development revenue growth?
  • Total K-Cup portfolio continues to gain share despite increased pricing pressure and additional new market entrants
  • Starbucks is now the share leader in both premium roast and ground and the entire K-Cup segment for Q1 ever
  • Stars down-the-aisle loyalty program driving incremental purchases of roast and ground in FY2016, and expanding the Stars program to include select Starbucks K-Cup SKUs
  • Foodservice saw 8% revenue growth YoY
  • Internationally, we’re seeing strong growth in the China Asia Pacific ready-to-drink sales
  • On track to launch ready-to-drink through grocery and convenience store channels in 10 Latin American markets with our long-term business partner, PepsiCo, in 2016

 

MSR CUSTOMER

  • This quarter the active MSR customer base in the U.S. increased by 28% year-on-year and active mobile users in the U.S. and Canada has grown 32% year-on-year
  • Mobile payments in October represented over 21% of U.S. tender
  • Launching Delivery Pilots in New York City and Seattle
  • In the coming weeks, going to launch a rich digital music experience, both in-store and out of store, integrated in our mobile app through our partnership with Spotify

 

Scott Harlan Maw Executive Vice President and Chief Financial Officer, Starbucks Corp.

FINANCIAL HIGHLIGHTS

  • GAAP operating margin in Q4 was 19.7% and non-GAAP operating margin was 20%, up nicely from Q3, but down 50BPS from Q4 of last year, due to the impact of partner and digital investments and the change in ownership of Starbucks Japan, partially offset by sales and cost of goods sold leverage
  • In Q4, Americas’ operating income increased 13% y-over-y to $840mm – $841mm on an 11% increase in revenues to $3.4B.
  • Americas operating margin expanded 40BPS to 24.8%
  • Strong sales leverage resulting from a 9% increase in U.S. comps was the primary driver of the margin expansion, more than offsetting approximately 160BPS of impact related to increased partner and digital investments in Q4
  • GAAP operating income in our CAP segment reached a record $130mm in Q4, a full 25% increase over the prior year
  • CAP GAAP operating margin declined to 19.9% from 33.5%, primarily due to the impact of the ownership change in Starbucks Japan
  • Excluding the 15.5 percentage points of financial impact from the ownership change in Starbucks Japan, CAP’s operating margin increased by 190BPS, driven primarily by operating savings in the region
  • EMEA results in Q4 were particularly strong, once again demonstrating increasing momentum in the business and continued progress against our plan to significantly improve segment profitability over time
  • EMEA achieved record operating income for the quarter, and when excluding unfavorable FX impact of nearly $5mm, EMEA operating income increased by almost 50% y-over-y to $58mm
  • And EMEA’s Q4 operating margin of 17.2% exceeded expectations and marked the segment’s fifth consecutive quarter of double-digit operating margin
  • EMEA’s 510 basis point improvement in operating margin in Q4 over the prior year was driven primarily by sales leverage, including the impact of our ongoing portfolio shift to more licensed stores and gains on the sales of certain assets
  • Channel Development grew operating income of 15% over the prior year in Q4 to $197mm
  • Operating margin totaled 43.2%, a 20 basis point increase over the same quarter last year, reflecting a significant increase in income from our North America coffee partnership with PepsiCo and improved cost of goods sold efficiency, primarily offset by higher coffee costs and marketing costs
  • The effective tax rate for Q4 2015 reflects an incremental tax benefit related to certain additional domestic manufacturing deductions to be claimed in our U.S. consolidated tax returns These deductions are retroactive to fiscal-year 2010 and lowered our tax rate for Q4 of 2015 by 7.3% relative to Q4 of 2014, resulting in a GAAP effective tax rate of 27.2% for the quarter
  • FX negatively impacted both Starbucks’ revenue and non-GAAP EPS growth by roughly 3 percentage points in Q4 and 2 percentage points for the full year
  • In FY2015, returned a record $2.4B of cash to shareholders through a combination of dividends and share buybacks, up over 50% from 2014 levels
  • The board has approved a 25% increase in our quarterly dividend to $0.20 per share
  • After adjusting to reflect the change in ownership of Starbucks Japan, our return on invested capital increased over 200BPS in 2015

 

GUIDENCE

  • Consistent with our long-term goals, expect 10% or greater revenue growth on a 52-week basis with the 53rd week adding approximately two points to this growth
  • expecting 2016 global comp growth to be somewhat above our long-term mid-single-digit guidance range
  • Consolidated operating margin will increase slightly from 2015 on both GAAP and non-GAAP bases, reflecting strong revenue growth, sales leverage and increased operating efficiency and performance, partially offset by the impact of increased partner and business investments
  • Expect to see our operating margin in the Americas increase moderately above 2015, reflecting strong sales and COGS leverage, offset by the impact of our investments
  • Expect to see flat to slightly down operating margins in CAP from 2015 levels as increasing sales levels in China, Japan and across the region is offset by the last bit of impact from the acquisition of Starbucks Japan and the continuing impact of negative FX headwinds
  • Q1 CAP margin is expected to be lower by several points than Q1 of 2015, primarily due to lapping the impact of the change in our ownership of Starbucks Japan and the negative impact of FX.
  • FY2016 expect CAP comps to land in the mid-single digits, including the impact of adding over 1,000 stores in Japan into the calculation
  • And projected revenue growth in CAP will be in the mid-teens, reflecting excellent growth in all of our major markets and a small benefit from the change in Japan ownership, partially offset by ongoing FX headwinds
  • Expect our operating margin in EMEA to approach 15% for the year, as we continue to realize the benefits of increased momentum in key markets, strong execution by the team, and the ongoing business model shift from company-owned to licensed stores
  • And sales leverage will drive moderate margin expansion in our Channel Development segment, though less than the very strong 180 basis point expansion we saw in 2015
  • Expect GAAP EPS in the range of $1.84 to $1.86 and non-GAAP EPS in the range of $1.87 to $1.89, including the 53rd week we will report on in Q4 2016
  • the 53 week adds approximately $0.06 to our 2016 EPS estimate
  • Our expectations of comp growth being somewhat above mid-single digits is factored in to our 2016 EPS estimate
  • Expect the y-over-y increase in global partner and digital investments in 2016 will be between $100mm and $125mm, impacting our EPS growth rate by approximately 3 points
  • Our total global investment in these areas in 2016 will land between $250mm and $275mm, compared to approximately $145mm in FY2015
  • The majority of the 2016 initiatives will be in the U.S., but will also include global investments in certain increased partner benefits, digital and technology investments, and G&A costs
  • FX is expected to impact revenue growth by 1 percentage point and EPS growth by 2 percentage points
  • Commodities impact is slightly favorable for the year, now with over 90% of our 2016 coffee costs locked
  • And finally, our effective tax rate for 2016 will be between 34% and 35%
  • Given all these inputs, when adjusting our 2016 non-GAAP EPS range for the extra week by subtracting the $0.06, our growth rate vs. 2015 non-GAAP EPS of $1.58, will be at or slightly above 15%
  • For Q1, 2016 we are targeting GAAP EPS in the range of $0.43 to $0.44 and non-GAAP EPS of $0.44 to $0.45, representing a lower growth rate than the full year as significant FX headwinds in Q1 of 2016 will impact non-GAAP EPS growth by four full points
  • Given Q1, 2016 growth rate, we expect non-GAAP EPS growth in the remaining three quarters of 2016 to be in the middle of our long-term guidance range
  • Contributing to our revenue growth in FY2016 will be the addition of approximately 1,800 net new stores globally
  • In 2016, 70% of our net new stores will be outside of the U.S. with the entire Americas segment accounting for a total of 700 stores, split roughly evenly between company-owned and licensed
  • Our China/Asia Pacific segment will drive roughly half of our new store growth with 900 net new stores, two-thirds of which will be licensed
  • And our EMEA segment is targeting 200 net new stores in FY2016, virtually all of which will be licensed
  • Finally, CapExs in FY2016 are expected to be approximately $1.4B.
  • In 2016, Starbucks will deliver approximately $21B in revenue, operate close to 25,000 stores, and generate an operating margin approaching 20%

 

IMPORTANT COMMENTS FROM Q&A

“And I think if you go back a year ago, we were at 5% and 1%. And if you look at 9% and 4% in the U.S. and what we’ve done sequentially throughout the year and you couple that with the inherent momentum and attachment that we’re seeing from mobile payment, Mobile Order & Pay, and specifically the integration, as Kevin talked about, and the attachment of loyalty, we have enough visibility in the business to be transparent with you that we believe that we’re going to see some incrementality in our overall comp.”

 

“we’re seeing incremental transactions from Mobile Order & Pay, particularly in our busiest stores. We’re pleased with the results across all the tiers of our stores. You know, ticket right now is holding steady and is doing quite well consistent with our other MSR ticket, and we haven’t even added the feature of suggested selling and suggested pairing, which we’re going to do in H1. So, we expect to see that increase on top of the incremental transactions that we’re seeing.”

 

“In fact, if you look at the comps, three points of our comp growth came from food. Our breakfast sandwich business has doubled in the past three years. Lunch is accelerating.”

 

“We now have evenings program deployed in 100 stores, so it’s early days on evenings, but we’ve seen growth in every day part as a result.”

 

“On the beverage side, that accounted for 6% – six points of comp growth.”

 

“We know that MSR customers on average spend three times as much as non-MSR customers, and we’ve grown the number of active MSR customers by 28% year-on-year.”

 

“let me just be very clear that our business in China and across CAP remains very, very strong. We’ve seen no systemic slowdown in our business in China. In addition, what we saw during the quarter was that comps actually accelerated month to month. And in China, we see that comps are continuing to accelerate into the month of October”

 

“And when you break down the total growth across CAP and really across China, 75% of our revenue growth is being driven by new stores, 25% is being driven by comp, and what we continue to do is focus”

 

“The strength of breakfast sandwiches, as Kevin mentioned earlier, we’ve seen that business double over the last three years.”

 

“We’ve seen food grow through that 3% comp to 20% of the mix in U.S. stores, and we see that increasing over time to the mid-20%s, but obviously beverage will still drive it. And we’ll just keep investing, keep learning, and keep growing it.”

 

“Mobile payment is not going to become obsolete. Although mobile ordering is a form of mobile payment and we are going to see a significant number of transactions morph over.”

 

“In terms of data on percent of transactions or percent of tender that’s Mobile Order & Pay, since we just finished the rollout in the U.S. late in the quarter, we don’t have a full run-rate of quarter, so we’re still watching that advance. I think Adam gave you some color on some of the locations that are seeing high usage of that. But each wave of deployment we have made has been adopted faster than the prior wave.”

 

“This is Adam. Howard mentioned that we’re seeing a five million mobile order per month run-rate already. And while we’re not breaking out specific percentages, there is a range of mobile order numbers across a number of store tiers particularly in our busiest tiers and we are seeing significantly more incremental transactions, incrementality in our busiest stores. We are seeing, internationally, our latest wave that went out for Canada and U.K. saw even a faster adoption than the New York wave, which was faster than the previous wave. So we’re getting better at getting faster customer adoption and it bodes well for Mobile Order & Pay globally.”

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


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RUTH | #BEEFDEFLATION

Ruth’s Hospitality Group (RUTH) is on our Hedgeye Restaurants LONG bench.

 

HEDGEYE OPINION

Traffic is the name of the game. In FY15 RUTH has experienced choppy traffic trends, in Q1 they were down -0.5%, Q2 up +0.7%, and now Q3 down -0.5%. Management eluded that traffic has turned to the positive LSD range in October; we’ll look to see if this positive trend continues through the end of the quarter. Beef prices are looking to moderate further over the next year, confirming our beef deflation call (CLICK HERE to view). YTD beef prices for RUTH are down 2%, and with heard size and slaughtering expected to increase, prices will continue to go down. Management is expecting beef deflation of 2-3% in 4Q15. RUTH played the beef market perfectly, deciding to buy at market, instead of contract, allowing them to capture significant savings.  We like RUTH on the LONG side, but remain skeptical on the overarching macroeconomic trends that are affecting the restaurant industry right now.

 

3Q15 EARNINGS RESULTS

It was a decent quarter on the face, but with price up +3.0% and traffic down -0.5%, we need to see traffic growth in order to be fully convicted in the near term. Nonetheless, RUTH beat top line estimates, reporting revenue of $80.3mm versus $79.3mm. Company-owned same-store sales were +3.3% versus consensus estimates of +2.8%, breakdown of the comp was price +3.0%, mix up +0.8% and traffic down -0.5%. Strong comps coupled with lower than expected food costs resulted in a bottom line beat of $0.01, reporting EPS of $0.08 versus consensus estimates of $0.07.

 

Notably, management spoke to some weakness in oil and tourist regions but nothing substantial. They are still seeing robust strength in California and Florida, which are two of their bigger markets.

 

RUTH | #BEEFDEFLATION - CHART 1 replace

 

TRAFFIC VS. PRICE

As we stated we are keeping RUTH on the LONG bench. The relationship between Traffic and Price at RUTH is a concerning one. Below is a chart of Traffic versus Price, management needs to figure out a balance in which they can cover their increasing costs through price while driving traffic. Lower beef prices should alleviate some commodity basket pressure, giving them the ability to keep price increases to a minimum. Management stated price in Q4 is expected to be only 2%, which will help curb the divergence between these metrics.

 

RUTH | #BEEFDEFLATION - CHART 2

 

RESTAURANT REVITALIZATION

RUTH is currently rolling out a new menu with innovative items designed to drive incremental traffic and average check. Early tests results were positive and the new menu has been rolled out to 52 locations as of the end of Q3, all corporate locations will carry the new menu by the end of 1Q16.

 

Management is also embarking on a restaurant redesign project, which will take place over the next 3-5 years, aimed at improving the guest experience. Changes will include an expanded bar area, revamped dining room and enhanced private dining spaces. They have remodeled two locations thus far and plan to remodel eight to ten next year.  

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 

 


The Final Countdown | Income Growth = Past Peak

Takeaway: If you’re the band Europe, you sing The Final Countdown, it’s what you do.  If you’re an economic cycle, you cycle.  Income & Consumption Growth are now past peak.   

 

 

Reading through consensus economist reactions to yesterday’s advance GDP release for 3Q, the basic, collective conclusion was this: 

 

Bad:  Global Headwinds, Energy and broader Industrial Sector Activity

vs.

Good:  Continued strength in domestic, private sector demand

 

Right ... But Also Wrong:  That conclusion isn’t inaccurate.  Consumption was again good on an absolute basis (we knew that ahead of the GDP print) while export and industrial activity continued to flag (also a known-known).  

 

Indeed, looking at Real Final Sales or Real Final Sales to Domestic Purchasers – which strips out exports and inventories and is meant to be a cleaner read on underlying domestic, private sector demand – the numbers remained solid (but decelerating) and better than the headline.   

 

REMEMBER, IT'S ABOUT BETTER/WORSE:  The liability in taking an absolutist view of the data is that macro trades on better/worse, not good/bad. 

 

As we highlighted (again) in our latest quarterly themes deck, Consumption growth peaked in 1Q15 and the slope of the line has now been negative for two quarters.  In employing a rate-of-change-centric view of the data, going from great-to-good is bad  – or should at least serve as a red flag.

 

In our modern consumption economy where household spending accounts for ~69% of GDP and the balance of expenditure buckets are in retreat, negative 2nd derivative trends in the singular source of demand strength are not inconsequential. 

 

So, can the domestic consumption train re-accelerate?

 

DON'T OVERTHINK IT:  Broadly speaking, the drivers of Consumption aren’t overly complicated.  In short, consumer spending growth is a function of the growth in income, the marginal propensity to consume or save that income, and the net change in household credit. 

 

Together, growth in disposable income and the change in the savings rate explain most of the change in nominal consumption (PCE) growth.  Indeed, over the last 30+ years, the multiple regression between PCE growth vs. nominal Disposable Income growth and the change in the Savings Rate produces an R-squared >0.94. 

 

Because its convenient (and largely agrees with the data), let’s assume both credit growth and the savings rate stay largely static from here and income growth remains the predominate driver of spending growth.  In other words, the forward slope of income growth determines the path of consumption growth.  

 

INCOME GROWTH | THE OUTLOOK: This morning we got the detailed household income and spending data for September.  Decelerating growth in aggregate hours and flat wage growth in the September employment report translated into a deceleration in income growth. 

 

Aggregate private sector salary and wage growth decelerated to +3.8% YoY – a -50bps deceleration relative to August and well below the TTM pace of +5.1%.  Indeed, aggregate private sector income actually declined -11bps month-over-month.    

 

Given the slowing trend in payrolls and progressively steeper income and consumption comps, it looks increasingly likely that aggregate income growth is now past peak as well. 

 

If you’re the band Europe, you sing The Final Countdown, it’s what you do.  If you’re an economic cycle, you cycle. 

 

Is a recession immediately imminent …  the balance of lead labor market data doesn’t suggest that, but we are in the twilight of the current expansionary cycle and the slope of the line across a growing number of indicators has gone negative.   

 

Our annotated summary table along with the longer-term income & consumption cycle charts are below.

 

Enjoy the weekend.

 

The Final Countdown | Income Growth =  Past Peak - IS Sept

 

The Final Countdown | Income Growth =  Past Peak - Income   Consumption Growth

 

The Final Countdown | Income Growth =  Past Peak - PCE Growth

 

The Final Countdown | Income Growth =  Past Peak - Salary   Wage Grwoth LT

 

The Final Countdown | Income Growth =  Past Peak - PCE vs Income   Savings 3D

 

Christian B. Drake

@HedgeyeUSA


See LinkedIn? Hedgeye Internet Analyst Strikes (Again) | $LNKD

Takeaway: It pays to listen to Hesham Shaaban.

Some people pigeonhole our Internet & Media analyst Hesham Shaaban as being perennially bearish. The truth of the matter is he has a host of names he likes on the long side. Take LinkedIn. He added it to his Best Ideas list back in July. Shares of LNKD are rocketing higher today up 12%.  The stock has gained 14% since he added it versus the S&P 500 which is down 0.6%.

 

Not too shabby.

 

See LinkedIn? Hedgeye Internet Analyst Strikes (Again) | $LNKD - 10 30 2015 lnkd chart 2

 

Heading into last night’s earnings release, Shaaban was looking for a “clean beat and raise” of LinkedIn's forward guidance. That’s exactly what shareholders got. (Editor’s Note: LNKD is also on Hedgeye’s Investing Ideas list of top thirteen top holdings.)   

 

Here’s a snippet of what he said ahead of the print:

 

See LinkedIn? Hedgeye Internet Analyst Strikes (Again) | $LNKD - 10 30 2015 lnkd 3q15

 

And Shaaban's update today:

 

“No lumps of coal in guidance this time. The transition that spooked the Street in 1Q15 was due to a massive investment in its salesforce… We see that ramp as a coiled spring.

 

Incidentally, Shaaban correctly called Pandora's (P) move lower just last week (see here). Shares have tumbled even lower this week down 6%, after plunging 38% last week. 

 

***If you're interested in learning more about how you can subscribe to our institutional research please email sales@hedgeye.com.

 


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