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"The spike in the U.S. 2-year continues to 0.93% this morning as the Fed abandons the “data dependence” thing and goes with whatever the SP500 is doing instead," wrote Hedgeye CEO Keith McCullough in a note to subscribers early this morning. "The US Dollar and short-term rates say December hike – so does the Yield Spread, compressing 9bps last week, which reads as a hike perpetuating both #Deflation and #GrowthSlowing."
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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 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.
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%.
Consumer confidence slowing
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
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.
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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.
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.
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.
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