(Restaurants Ideas List)
BEST IDEAS LIST ADJUSTMENTS & UPDATES
TXRH – We have moved Texas Roadhouse (TXRH) from the SHORT bench to the LONG bench. TXRH has had a good run as part of the #TrumpTrade and we believe that this trend is best positioned to continue. Texas Roadhouse is 83% company-owned, and this will better allow them to take full advantage of the Trump tax plan. Additionally, with the expected appointment of Andrew Puzder, it can be assumed that restaurant operators will feel some relief, as Puzder himself is a restaurant executive.
DRI – We have removed Darden Restaurants (DRI) from the SHORT bench. Staying on the #TrumpTrade theme, DRI has been one of the biggest beneficiaries, and we do not see an end in sight. Also, DRI has a 2.8% dividend yield, which will keep this name rising above its peers, not to mention its recent market perform reiteration at Sanford C. Bernstein.
OVERALL: Seems like the #TrumpTrade as back in full effect, as restaurant stocks were back with a vengeance last week.
- Fast Casual stocks were the best performing sub-sector, up 6.3%. Leading the charge was NDLS, up 19.28%, and ZOES also had a strong showing, up 11.28% after a sluggish performance in the previous week. Meanwhile, CMG was the only stock that declined for the week, down -7.51%.
- Family dining stocks were the second-best performing sub-sector, up +5.85%. BOBE led the way, up 19.51% after reporting strong earnings (EPS of $0.56 vs. Consensus $0.45; benefitting from lower costs) and the announcement that it has hired JP Morgan to review strategic alternatives. Additionally, the company had its price target increased by Maxim Group, from $58.00 to $62.00.
- Pizza stocks we follow were the second-worst performing sub-sector of the week, up +0.64% for the week. DPZ finished the week in the red, down -2.64%, while PZZA finished the week up +2.16% after a price target increase to $101 from $91 at Longbow Research, who believe that an impressive comp beat in Q4 will drive meaningful upside in shares.
- QSR finished up +4.09%. SONC, a name on our LONG bench, rebounded in a big way, finishing the week up +11.97%. WEN also had a strong showing, up +9.51%, after holder Trian acquired an additional 3.7M shares, raising its stake to 23.45%. Additionally, Guggenheim downgraded WEN to neutral.
STOCK HIGHLIGHT OF THE WEEK – LONG McDonald’s Corporation (MCD): MCD was a notable gainer last week, up +2.55% on news that the Company would keep up to a 25% minority stake in the sale of its China and Hong Kong unit. Initially, it was reported that the Carlyle Group and Citic Group would be buying a stake in the China and Hong Kong business worth $3B. However, revised reports have the stake valued at $1B - $2B. In addition, MCD is planning a big push to improve its $4B McCafe brand, an effort that would require all operators to install new $12,000 machines to improve the quality of the beverages.
COFFEE
- SBUX was the big gainer in the coffee space, after a very impressive Investor Day on Wednesday, December 7th where management displayed impressive technology capabilities coming down the pike, among other things. Company stock finished the week up +2.69%.
- DNKN and PNRA both declined last week (last week, only seven stocks in the Restaurants space declined). In addition, Panera Bread (PNRA) named Company veteran, Blaine Hurst President, effective Monday, December 12, 2016, following the resignation of Drew Madsen for personal reasons.
- From a MACRO perspective, after rebounding last week, coffee is resuming losses amid a pullback in the Brazilian real.
CASUAL DINING
- Casual Dinning was up +5.15%, adding to its big gains and getting to back to where it was immediately following the election. However, EAT and DIN were two notable underperformers, as the discounting wars have accelerated.
- PLAY finished week up +20.28, hit a new 52-week high and led all restaurant shares after better than expected earnings and guidance.
- Ruby Tuesday (RT) finished the week up +16.72% and BBRG finished up +7.69%, rebounding quite a bit after finishing at the bottom of the pack in the previous week. Other notable gainers were BJRI, DFRG, WING, and CHUY.
- RRGB, a Best Idea LONG, finished the week up 5.55% 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 finally been baked into the stock price.
BWLD | MARCATO APPLIES MORE PRESSURE
Marcato Capital Management LP, owner of 5.2% of Buffalo Wild Wing stock, has sent a letter to BWLD franchisees stating that it would be prudent for the company to sell most of its 608 company owned units to franchisees. This letter is another item in what is becoming a lengthy list of actions on the part of Marcato. In a filing in August, the activist said that it would be inappropriate for the board to appoint new board members without consulting its major shareholders; however, BWLD went ahead and added three new members to the board, without consulting any of their major
SALES TRENDS
- Knapp-Track and Black Box released their restaurant sales and traffic figures this week and things seem dire for restaurants.
- Knapp-Track estimates for the month of November were as follows: Comparable restaurant sales of -2.6% and comparable guest counts of -4.4%.
- Black Box estimates for November comparable sales came in at -1.3%,while traffic was down -3.3%. California was the best region, with sales flat and traffic down -3.1%, while Texas was the worst region with sales down -3.6% and traffic down -4.9%.
MACRO FOCUS
- The preliminary December consumer confidence reading from the University of Michigan Consumer Sentiment index came in at 98.0. This reading is only one-tenth of a point lower than the most recent peak in January 2015, the highest level for the index since 2004.
- It should be noted that the surge was largely attributed to consumers’ initial reactions to Donald Trump’s victory in the Presidential election.
ARTICLES OF INTEREST
CKE RESTAURANTS HOLDINGS CEO EXPECTED TO BE LABOR SECRETARY
Andy Puzder, CEO of CKE Restaurants Holdings, is rumored to be named Labor Secretary. Puzder has been a critic of the current Obama administration, harping that increases in minimum wage and the requirement for employers to provide healthcare coverage are costing jobs.
RECENT NOTES
12/9/16 RESTAURANTS MACRO NOTE | FUNDAMENTALS STILL MATTER!
12/8/16 SBUX | STRATEGIC HURDLES REMAIN, BUT CLOSING OUT THE SHORT
12/7/16 PLAY | COVERING THE SHORT
12/6/16 CMG | CHASING GHOSTS
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
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
