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Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities)

The restaurant industry macro picture is continuing to deteriorate. According to Black Box Intelligence numbers, restaurant traffic growth has been negative for nine straight months, going back to February 2015. In this type of environment one must be very selective on LONG calls, while we continue to see a growing number of SHORT opportunities. Commodity deflation will be an interesting dynamic in 2016. It will help the margins of many restaurant companies, especially those focused on beef, as we highlighted in our THOUGHT LEADER call regarding #BEEFDEFLATION. But on the other hand, the consumer will see a widening divergence between the cost to eat out and the cost to cook for themselves.  

 

Black Box Sales, Traffic

Black Box released same-restaurant sales and traffic estimates for the month of October that showed a steep deceleration sequentially as the YoY trend continues to deteriorate. Same-restaurant sales posted negative growth for the first time since June 2014, posting a down -0.2% number, which is a 100bps sequentially decline. Same-restaurant traffic decreased -2.8%, a 50bps sequential decline, and down 320bps YoY.

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 1

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 2

 

Restaurant price increases were down slightly in October. As you can see from the chart below, the convergence between the operators taking price and a decline in traffic that we had been seeing deteriorated in October as traffic trends began to turn south.

 Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 3

 

Knapp October Sales Trends

Knapp reported that comparable restaurant sales in October 2015 were -0.7% for same-store sales and –2.9% for guest counts.  October comparable restaurant sales represent a 170bps sequential slowdown, additionally traffic was down 220bps sequentially.  On a 2-year basis, sales slowed to +0.6% and traffic declined -1.4%. 

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 4

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 5

 

Consumer confidence slowing

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 6

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 7

 

Employment Growth Continuing to Slow

In the month of October we saw a marked deceleration in the employment trend, driven by a decline within the 20-24 YOA cohort. The downward trend that we were concerned about seems be getting worse. This continued slowdown across age cohorts points to troubling labor picture.

 

October Employment Growth Data:

  • 20-24 YOA -0.35% YoY; -151.3bps sequentially
  • 25-34 YOA +1.73% YoY; -50.9bps sequentially
  • 35-44 YOA +1.15% YoY; +9.8bps sequentially
  • 45-54 YOA +0.05% YoY; -7.4bps sequentially
  • 55-64 YOA +1.78% YoY; +54.5bps sequentially

 

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 8

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 9

 

Commodities

In 2016, as many restaurant companies have been speaking to, we are headed for commodity basket deflation. With major proteins such as beef expected to have down years, this could be a great tailwind for restaurant companies. In addition to beef, corn, wheat, live hogs and soybeans are trending below year-ago levels.

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 10

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 11

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 12

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 13

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 14

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 15

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 16

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 17

Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities) - CHART 18

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


The Biggest Stock Market Risk Summed Up In One Word

 

In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough answers a subscriber's question on what he considers the biggest risk to U.S. stocks right now.

 

 

Subscribe to The Macro Show today for access to this and all other episodes. 

 

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The Bear Case Against Chipotle | $CMG

Takeaway: Our Restaurants analyst sees an additional 25%+ downside risk even after Friday’s -12% fall.

The news for Chipotle investors continues to go from bad to worse.

 

Last week, a CDC press release warned consumers that Chipotle’s E.coli outbreak had spread beyond just the Pacific Northwest to cities nationwide. The announcement raised fresh concerns about Chipotle's (CMG) food quality controls and sent the stock reeling Friday, dropping 12% on the day. CMG is down about 25% from its August high.

 

The Bear Case Against Chipotle | $CMG - chipotle 2

 

Prior to the CDC’s warning shot, Restaurants analyst Howard Penney hosted an institutional conference call outlining their Best Idea Short call on Chipotle. (For those who missed it, click here to watch a brief excerpt.) On the call, Penney expressed concerns about Chipotle’s supply chain and quality controls as well as a more challenging real estate environment with quality locations harder to find.

 

Another underappreciated risk are Chipotle’s marketing tactics. The company claims that its food is entirely GMO-free. A pending class action lawsuit claims otherwise. Penney posits that CMG is reaching a “Whole Foods-like moment” whereby it loses the trust of its consumer as a result of these misleading marketing tactics. To be sure, burrito lovers are already paying a premium for Chipotle’s seemingly non-GMO products. In other words, a notch against the brand's core marketing strategy could cause a serious breakdown in consumer trust.

 

The Bear Case Against Chipotle | $CMG - chipotle

 

Compounding all of this lawyerly uncertainty, Chipotle raised prices early last year. That means CMG will soon be bumping up against the previous year’s strong comps while it continues to duke it out in court.

 

Add in higher costs, top-line deceleration, and multiple contraction, and Penney sees an additional 25%+ downside risk from Friday’s -12% fall.

 

 

For more information on how to subscribe to our institutional research ping sales@hedgeye.com.

 


the macro show

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EHS | Sales ↓, Inventory ↓, 1st-Time Buyers ↑

Takeaway: The crawling trend towards housing market normalization continues as 1st time buyers continue to grow while all cash and distressed shrink.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume. 

 

EHS | Sales ↓, Inventory ↓, 1st-Time Buyers ↑ - Compendium 112315 

 

Today's Focus: October Existing Home Sales 

EHS:  Predictably (HERE), EHS in October retreated -3.4% month-over-month, almost fully re-coupling with the Trend in Pending Sales.   After retracing back to cycle highs in September, EHS fell to 5.36MM and decelerated to +3.9% YoY – the slowest pace of growth in 9 months as we begin to traverse steadily steepening comps. 

 

As always – because closings are largely a lagged function of contract signings - we're more interested in next week’s Pending Home Sales data.  PHS for October will provide an important update on the softening demand trend observed over the last two months and whether recent regulatory changes are having a measurable impact.  Notably, any first evidence of TRID related bottlenecks/impacts should be evident in the November EHS (released 12/22) as the first bolus of Post-TRID (implemented Oct 3rd) closings will occur in November.  

 

Inventory & Price:  Units of inventory dropped for a second month, declining -2.28% MoM in October to 2.14 mm.  With sales declining more than supply, inventory on a month-supply basis rose slightly to 4.79-months, marking the 38th consecutive month below the traditional balanced market level of 6-months.  Ongoing supply tightness in the 90% of the market that is EHS remains supportive of improving HPI trends in the nearer-term.

 

1st-Time Buyers:  First-time buyers rose to 31% of the market in October, up from 29% recorded last month and in October of last year.  In contrast to the headline decline (& YoY deceleration), sales to 1st-time buyers rose +3.2% MoM and accelerated +220bps sequentially to +11% year-over-year in October.  So long as the labor/income fundamentals continue to improve across the 20-40YOA demographic, rising headship rates and single-family purchase demand should continue to manifest on a moderate lag. Further, alongside the ongoing improvement in entry level buyer demand, the crawling trend towards housing market normalization continued as all cash sales declined to 24% of transactions (down from 27% last year) while distressed sales fell to the lowest level since 2008 at 6%.

 

 

 

EHS | Sales ↓, Inventory ↓, 1st-Time Buyers ↑ - EHS vs PHS

 

EHS | Sales ↓, Inventory ↓, 1st-Time Buyers ↑ - EHS 1st time buyers

 

EHS | Sales ↓, Inventory ↓, 1st-Time Buyers ↑ - EHS Months Supply

 

EHS | Sales ↓, Inventory ↓, 1st-Time Buyers ↑ - EHS YoY   Units

 

EHS | Sales ↓, Inventory ↓, 1st-Time Buyers ↑ - EHS Inventory Units

 

EHS | Sales ↓, Inventory ↓, 1st-Time Buyers ↑ - EHS LT

 

EHS | Sales ↓, Inventory ↓, 1st-Time Buyers ↑ - EHS Regional YoY

 

EHS | Sales ↓, Inventory ↓, 1st-Time Buyers ↑ - HPI Regional YoY

 

 

 

 

About Existing Home Sales:

The National Association of Realtors’ Existing Home Sales index measures the number of closed resales of homes, townhomes, condominiums, and co-ops. Existing home sales do not take into account the sale of newly constructed homes. Existing home sales account for 85-95% of all home sales (new home sales account for the remainder). Therefore, increases in existing home sales tend to signify increasing consumer confidence in the market. Additionally, Existing Home Sales is a lagging series, as it measures the closing of homes that were pending home sales between 1 and 2 months earlier.

 

Frequency:

The NAR’s Existing Home Sales index is published between the 20th and the 22nd of each month. The index covers data from the prior month.

 

 

  

Joshua Steiner, CFA

 

Christian B. Drake


Crash! Boom! Bang! [Commodity Crash Continues]

Takeaway: In case you hadn't noticed, commodities are in a bear market.

The crash continues...

 

Crash! Boom! Bang! [Commodity Crash Continues] - z crash

 

In a note to subscribers this morning, Hedgeye CEO Keith McCullough (once again) highlighted the developing commodity bear market:

 

"The crash in Copper (-1.8% this am to $2.02) continues and Oil is down another -3%, testing $40 WTI (again) – hardly the green shoots a supply/demand bull is looking for, but I’m probably being too bearish looking at fact vs fiction."

 

It's no coincidence that the Copper and Oil price crash coincided during a week of U.S. dollar strength. The U.S. dollar index was up +0.6%, and +10.3% YTD, after ECB President Mario Draghi said, "We will do what we must to raise inflation as quickly as possible." That sent the Euro -1.2% on the week to -12% YTD.

 

This strong dollar event is just as deflationary a force as it was during the summer.

 

Consequently, things like Copper have plummeted. Copper is off 28% year-to-date.

 

Crash! Boom! Bang! [Commodity Crash Continues] - copper 1

 

It's happening all throughout commodities. The CRB index is down 20% year to date.

 

Crash! Boom! Bang! [Commodity Crash Continues] - 11.23.15 EL chart

 

Here is a look at some other commodities:

  • Wheat prices dropped another -1.6% on the week, taking it back into crash mode at -20.8% YTD 
  • Nickel deflated another -5.1% week-over-week, taking its crash to -41.5% YTD
  • Oil (WTI) continued to crash, closing down another -1.2% week-over-week at -30.9% YTD

 

***In related news, Saudi Arabia announced earlier this morning that it is ready to work with other countries to stabilize the price of Oil.

 

Crash! Boom! Bang! [Commodity Crash Continues] - Oil cartoon 11.20.2015

 


Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

11/18/15 CAG | SMOOTH MOVES

11/13/15 NUS | SHOW ME THE MONEY!

11/13/15 NUS | BLACK BOOK PRESENTATION REPLAY

11/10/15 HAIN | THE COMPETITIVE ISSUES ARE JUST BEGINNING

11/05/15 BDBD | ADDING IT TO THE LONG BENCH

 

SECTOR PERFORMANCE

Food and organic stocks that we follow underperformed the XLP last week. The XLP was up +2.6% last week, the top performers on a relative basis from our list were Amira Natural Foods (ANFI) and Smuckers (SJM) posting increases of +10.6% and +6.9%, respectively. The worst performing companies on a relative basis on our list were United Natural Foods (UNFI) and WhiteWave Foods (WWAV), which were down -5.9% and -4.5%, respectively.

Monday Mashup - CHART 2

 

XLP VERSUS THE MARKET

Monday Mashup - CHART 3

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLP is BEARISH in the TRADE duration, but BULLISH in the TREND duration.

Monday Mashup - CHART 4

 

Food and Organic Companies

Monday Mashup - CHART 5

Monday Mashup - CHART 6

Monday Mashup - CHART 7

Monday Mashup - CHART 8

 

Keith’s Three Morning Bullets

US stocks had their 3rd up day in the last 13 (Friday) and volume was -14% vs. it’s 1yr avg:

 

  1. USD – another #StrongDollar week in the bag (+0.6% USD Index to +10.3% YTD) after Draghi Devaluation sent the Euro -1.2% on the wk to -12% YTD – this is as deflationary a force as it was in the summer-time – FICC markets get that – Equities, not so much
  2. COMMODITIES – crash in Copper (-1.8% this am to $2.02) continues and Oil is down another -3%, testing $40 WTI (again) – hardly the green shoots a supply/demand bull is looking for, but I’m probably being too bearish looking at fact vs fiction
  3. UST 2YR – spike continues to 0.93% this morning as the Fed abandons the “data dependence” thing and goes with whatever the SP500 is doing instead – USD and short-term rates say DEC hike – so does the Yield Spread, compressing 9bps last wk, which reads as a hike perpetuating both #Deflation and #GrowthSlowing

 

SPX immediate-term risk range = 2040-2108; UST 10yr Yield 2.18-2.36%

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


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