REMINDER: We will be hosting a Black Book presentation on our DIN SHORT case tomorrow, December 6th at 11:00 AM ET. Key points that will be discussed during tomorrow’s presentation include: DIN’s business fundamentals deteriorating; franchisees are struggling; and financials are strained/significant off balance sheet liabilities. In addition, we will also take a look at why the current financial trends are unsustainable.
We have included a link to the original invitation: CLICK HERE
OVERALL: Last week restaurant stocks took a pause from the #TrumpTrade, as there are signs that it is losing some steam.
- Family dining stocks were the best performing sub-sector, up +1.02%. Bucking the trend was DENN, down -4.2% on the week.
- COFFEE stocks declined -0.38%. DNKN was the only stock up on the week, and PNRA was down 1.6%. SBUX was a significant decliner, down -2.2%.
- STOCK HIGHLIGHT OF THE WEEK – SHORT Starbucks (SBUX): SBUX was a notable decliner, down -2.2% on news that longtime CEO Howard Schultz has finally stepped down. Schultz will continue with the company as executive chairman to help rollout the company’s high-end Reserve roastery and retail initiatives. Schultz stepping down came as a surprise to most analysts, despite the company being very transparent that such a move was imminent. With COO Kevin Johnson, a long-time technology executive, taking the reins, management will continue to be scrutinized, as we still view SBUX as a coffee company, not a technology company.
- QSR declined -1.47%, with FRGI up on the week due to rumors of a sale. Both SONC (fundamentals) and BOJA (secondary) down -9% on the week (SONC, a name currently on our LONG bench, taking a big hit after a downgrade at Longbow).
- Pizza stocks were down -2.18%, with both DPZ and PZZA down hard.
CASUAL DINING
- Casual Dinning was down -2.36%, giving back some of the big gains since the election.
- Del Frisco’s Restaurant Group, Inc. (DFRG) finished up +5% as the best performing restaurant stock of the week. The stock benefited from an upgrade and an insider buy (CEO Abdallah disclosed a purchase of 10K shares). Other notable decliners were BLMN, RRGB and BJRI.
- RRGB, a Best Idea LONG, finished the week down -3.1% versus the XLY. It appears that the technology revamp finished late last month, in which the Company rolled out the new DineTime platform and ConnectSmart Kitchen technology, has not been sufficiently baked in.
- BBRG finished at the bottom of the pack, down -8.5% versus the XLY last week. This performance reflects the Street’s overall caution surrounding stock, as many view it as a HOLD/SELL.
- Fast Casual stocks declined -4.39% with every stock big down last week. ZOES was hit the hardest, down -7.47%.
- YUMC finished down -5% after starting the week with an underperform rating at CLSA.
TRAFFIC
- Overall, restaurant traffic continues to see a noticeable decline. Pressures from cyclical headwinds, which includes high price gap to grocery stores, increasing healthcare costs, increasing rent, and historically low interest rates, have negatively affected traffic trends.
- Secular headwinds include an increase in online sales and the corresponding decline in foot traffic that has followed.
COMMODITY MOVES
- Coffee recovered from a three-month low against the background of a firmer Brazilian real.
- However, we would note that big crops of Arabica coffee in Brazil and Colombia could push prices lower.
MACRO FOCUS
- Friday’s employment report was the big focus of the day, as November nonfarm payrolls came in in-line with a gain of 178K jobs versus Street expectations for ~180K. The unemployment rate dropped to 4.6%, which is the lowest level since August 2007 (much of the decrease was attributed to a 226K decline in the civilian labor force).
- Average hourly earnings showed a m/m decline of -0.1%, the first decline since December 2015.
ARTICLES OF INTEREST
SBUX | COO JOHNSON TO REPLACE SCHULTZ AS CEO
In a move that the company had hinted at for quite some time, Howard Schultz has officially stepped down as CEO. COO Kevin Johnson will take over as CEO of Starbucks in April, at which time Schultz will become executive chairman, focusing on innovation, design and development of Starbucks Reserve Roasteries, expansion of the Reserve retail stores, and the company’s social impact initiatives.
DOL | TO CHALLENGE OVERTIME RULES FREEZE
U.S. Department of Labor Secretary Thomas Perez has filed an appeal to challenge the injunction issued by a federal judge in Texas last week, which had put a hold on changes to federal overtime regulations. The appeal will not immediately lift the injunction, but shows that the DOL is willing to fight for the labor rules change, despite much pushback from industry groups who say that the steep increase would significantly raise labor costs and put employers in a precarious situation.
MCD | THE BRAND LOSES ANOTHER TOP EXECUTIVE
McDonald’s faces another executive departure, as their Chief Digital Officer, Atif Rafiq, has taken a similar job with Volvo Cars. Jim Sappington, Executive Vice President of Operations, Digital, and Technology will take on the responsibilities left behind by Mr. Rafiq. Mr. Rafiq’s departure comes at a time where the company is aggressively expanding its digital platform, which includes mobile order and pay and their “Experience of the Future” locations, and on the tail end of numerous other executive changes.
COMMODITIES | PRICES TO KEEP FALLING, WITH BEEF LEADING THE WAY
Overall, commodity prices are expected to continue to fall in 2017, helping restaurants offset the higher costs of labor and rent. Beef is expected to lead the way, with SpenDifference calling for a double digit decline in the coming year, with ground beef falling ~7%-8%, and some cuts of beef plummeting as much as 15%. Pork and boneless chicken breast are expected to fall, with the latter expected to see a 1% drop. However, an increase in the export of dark meats is expected to push prices up 7%. Much of the protein cost decreases are attributable to a ramping up of beef production.
RECENT NOTES
11/23/16 JACK | COVERING THE SHORT
11/22/16 DIN | ADDING TO THE SHORT BENCH
11/11/16 RESTAURANTS MACRO NOTE | FADE THE RALLY PART 2
11/10/16 BWLD BLACK BOOK REPLAY | COMING AROUND THE ACTIVIST CORNER
11/10/16 POSITION MONITOR | FADE THE RALLY
11/8/16 CMG | Q&A
11/7/16 BJRI | YOU CAN’T TOUCH THIS
11/4/16 SBUX | REMINISCING
11/3/16 THOUGHT LEADER CALL | THE IMPACT OF MEDIA FRAGMENTATION
11/3/16 RRGB | SEEING THE LIGHT
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
