The Habit Restaurants (HABT) is on our Hedgeye Restaurants LONG bench.
HEDGEYE OPINION
HABT defied gravity this quarter, reporting +2.9% same-store sales growth, against a difficult +16.2% YoY comparison (their hardest one this year), walloping consensus estimates of -0.1%. Unfortunately, we did not officially move it to our core LONG ideas due to concerns about the tough compare and how the market would react if there was a miss. The company continues to grow traffic, up +0.8% in the quarter, handedly outpacing the industry. HABT currently trades at 11.38x EV / NTM EBITDA, which we think is a good value. Given the spike after market close, we are going to keep it on the bench for now and wait for a better entry point.
As we wait for that moment we are thinking about a few different things:
- Commodity basket inflation/deflation
- California minimum wage in effect on January 1, 2016
- For the 1H of 2016 HABT will be running 5-6% price, how will this affect traffic?
- LTO’s are performing well, especially salads, will it continue?
- In an environment where most of their competitors are discounting, they are emphatic about not discounting
- What will a healthy MCD system do to the better burger segment?
3Q15 RESULTS
HABT turned in a stellar quarter beating estimates across the board. Revenue totaled $58.6mm in the quarter, narrowly beating consensus estimates of $58.3mm, representing a +25% increase YoY. Company operated same-store sales (SSS), as stated above, increased +2.9% in the quarter versus consensus estimates of -0.1%. The comp was composed of +2.6% price, +0.8% transactions and -0.5% mix. Most impressive was the traffic growth, evidence that they have converted trial consumers they gained as result of winning Best Burger in America about a year ago. Notably, Labor as a percent of sales increased 190bps YoY to 31.3%, driven by higher costs associated with the affordable care act, paid sick leave in California and the extended hours implemented in the quarter. HABT reported net income of $1.7mm or $0.06 per share, representing a $0.01 beat versus the consensus estimate of $0.05.
NOTABLE COMMENTARY
- 47th consecutive quarter of positive same-store sales growth
- seven restaurants opened in the quarter
- LTOs performed well, coupled with digital media campaign, promoted without discounting
- Comps consistent in the quarter, all months were positive, strengthened into September
- 50bps decline in mix driven by a decline in drink and side incidents
- Now above the $2.95 entry level price, management still believes they provide great value to the consumer
- Price is purely a vehicle to protect margins
- Development will be back end loaded in 2016
- Looking into 2016 management is expecting commodity basket deflation in the 1H, with it flat to slightly up in the 2H
- Beef is shaping up to have a favorable year in 2016
- Halloween and Christmas being on a Saturday and Friday, respectively, are expected to have a minor negative impact
MANAGEMENT OUTLOOK FOR 2015
- Total revenue between $228 million to $229 million
- Company-operated comparable restaurant sales growth of approximately 6.0% for the full year 2015, which includes comparable sales growth of approximately 2.0% to 3.0% in the fourth quarter of 2015
- The opening of 26 to 28 company-operated restaurants and three to five franchised/licensed restaurants
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst