- This increased margin pressure is most likely the driving force behind the company's decision to continue to increase its menu prices. Although the company maintains that its average check of $8.70 continues to offer great value in an environment that caters to the entire family, its declining traffic trends would indicate otherwise. CRBL, however, continues to increase its prices further (average check up 3.8% in June), leading to a 5% decline in traffic.
- CBRL is obviously not alone in terms of weakened traffic trends as the casual dining sector overall has experienced negative traffic every month since February 2006, but CBRL's customers may be more sensitive to rising menu prices as 87% of the company's restaurants are located along interstate highways making the increase in gas prices more relevant to them.
- SONC recently highlighted that its overly aggressive price increases caused a fall off in traffic, forcing the company to be more conservative with its pricing strategies going forward. We have not heard any such acknowledgement out of CBRL yet and in the meantime, traffic trends continue to fall. During CBRL's recent 3Q08 conference call, management defended its pricing strategy, saying, Our thinking on pricing continues to be geared toward providing a great value to our guest, while covering the dollar cost inflation pressures. We believe this strategy is working for us and although guest traffic declined 3.3% in the quarter, our traffic continues to run ahead of the industry as measured by the Knapp-Track index. I would just add that Knapp-Track is running negative as well.
Unlike Bernanke's deflated cheap money 2% Fed Funds rate, the Aussi rate is 7.25%, and earning the Australian population who soberly saves a respectable return on cash.
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The quarter just preannounced should be taken into context. Not only does it only account for only about 14% of annual earnings, it also represents the easiest compare of the year. Starting in 3Q, both revenue and capital intensity metrics get much more challenging on a year/year basis. This ignores FX risk, which is noteworthy in that over 30% of sales are outside the US.
Also, VFC previously guided to a down 10% quarter. Now guidance is to beat this by 10-12%, including a tax benefit. Not exactly a solid high-quality beat.
VFC Guidance: Expect strong revenue comparisons and a resumption of double-digit earnings per share growth in the second half of 2008, driven by the exceptional profitability in our growing international businesses, continued growth in our retail revenues and profits, the seasonal benefit to revenues from our fast-growing Outdoor business and improved results across our coalitions.
Now we face promise of an EPS growth ramp in 2H that is baked into estimates (consensus calls for 14% growth), which also coincides with VFC having to anniversary recent acquisitions.
At the same time, only 2.3% of the shares are held short, and VFC has been a perennial favorite among the sell side. In fact, there are no sell ratings, and the 'buy rating ratio' of 67% is as high as it has been in over 5 years.
While it may not seem expensive at 7-8x EBITDA, it's tough to ignore that it has seen 4-5x in the past. Granted, it was a more asset-based and commodity-driven model during those periods. But even high quality names like Ralph Lauren are at 8x EBITDA. Others in the space are much much cheaper.
From a quantitative standpoint, my Partner Keith McCullough like the risk/reward to the downside to the extent it holds $75. Fundamentally, I can't point to any datapoints on the horizon that will accelerate this business model above and beyond hurdles already set in place.
The problem, of course, is local stagflation. With reported inflation running close to +27% year over year, the real growth in this country is getting harder and harder to find.
The best thing central bankers can do is raise interest rates, and finally, they are.
The problem is, of course, that these data points continue to be alarming. Consider the top 2 from this morning's news run:
1. UBS and Swiss bankers being issued a "John Doe Summons" in order to unearth Americans with "secret" banking accounts (i.e. Tax Fraud)??
2. Legg Mason "entering agreements to protect 3 money market funds"??
Without wasting any more keystrokes, I think you can come to your own conclusions on how dire the state of affairs has become in this country.
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