BEST IDEAS LIST ADJUSTMENTS & UPDATES
GRUB – We have added GrubHub (GRUB) to the Hedgeye Restaurants Best Ideas List as a SHORT. GRUB’s business model is challenged, and we see considerable downside to management’s lofty top line and margin goals given what we are seeing in the competitive landscape as there are various players in the on-demand delivery space. From our research GRUB is under-investing in delivery and its commission model is unsustainable at its current rate.
DPZ – We have added Domino’s Pizza (DPZ) to the SHORT bench. DPZ is the juggernaut of the restaurant space from a technology and convenience standpoint. Despite this, we believe that there is line of sight to their monopoly in the delivery business ending. Their once niche space has now become crowded with other players and DPZ is no longer the only game in town, as nearly everything that travels well can be delivered to your doorstep! Stay tuned!
MCD – We have moved McDonald’s (MCD) from the LONG bench to the SHORT bench. Our decision to move MCD to the SHORT bench is based upon the belief that the company will be unable to drive U.S. same-store sales in 2017. Their announcement to double down on McCafe this year could cause operational issues, similar to the issues faced when the company first tried to complete with Starbucks in the espresso-based drink category. We, along with a great majority of consumers, view MCD as a burger/food company, and it would be prudent for the brand to focus on their core business going forward.
EAT – We have moved Brinker International (EAT) from the LONG bench to the SHORT bench. This move is a reflection of what we are seeing in the overall restaurant space, an industry now characterized by deep discounting and aggressive promotions, trends that we do not see dissipating anytime soon. Couple that with rising labor costs and increasing healthcare costs, and you have a perfect restaurant storm. In addition, the RT debacle on last Thursday is more evidence of the struggles in Casual Dining.
SBUX – We have added Starbucks (SBUX) to the SHORT bench. SBUX has seen an impressive period of company expansion and investor enthusiasm since bottoming in late 2008, moving from ~$5/share to over $60 in 2016; and innovation is now at the forefront for the company. However, we see labor cost increases putting pressure on margins and protectionist rhetoric by President-elect Trump possibly stagnating overseas growth.
JE (LON) – We have added JUST EAT plc to the LONG bench. JE (LON) is an online food order and delivery service headquartered in the UK and operating in 13 countries in Europe, Asia, and the Americas. Touting over 60,000 restaurant partners, JE (LON) is the world’s leading online food order and delivery service, and shows no signs of slowing down anytime soon. With the on-demand food delivery space in an arms race, JE has positioned itself to take on all comers.
OVERALL: Seems like stocks took a break from the #TrumpTrade last week, as the majority of the sub-sectors we follow finished the week in the red. Pizza and Fast Casual were the only sub-sectors to finish the week in the green, coming is at +2.67% and +3.92%, respectively. It is evident that consumer dining has not accelerated post-election, and the investment community is positioning itself accordingly, as there were at least 10 ratings downgrades from six different firms over the course of the week.
- Fast Casual stocks were once again the best performing sub-sector, finishing the week up +3.92%. There were various strong performances in the space last week: CMG +5.60%, ZOES +7.38, and NDLS +8.54%; NDLS showed no effects of its downgrade by UBS.
- Family Dining stocks were the worst performing sub-sector last week, down -4.52%. All of the names we follow in the space finished in the red: DENN -1.56, CRBL -4.52%, and BOBE -6.30%. BOBE was negatively affected by a downgrade to perform from outperform at Oppenheimer.
- Pizza stocks we follow were the second-best performing sub-sector of the week, up +2.67% for the week. FRSH and DPZ finished the week in the green, up +3.32% and +2.67% respectively. PZZA finished the week down -0.50%.
- QSR finished down -0.79% overall, with half of the names we follow in the space finishing in the red. TAST and FRGI led the way down, finishing the week -6.56% and -6.20%, respectively. The big mover in the space was BOJA, as it finished the week up +10.46%...
STOCK HIGHLIGHT OF THE WEEK – Bojangles, Inc. (BOJA):
Bojangles, Inc. hit a new 52-week high and led the entire restaurant group. Since the beginning of the calendar year, BOJA stock has ticked up +10.50% and has moved +8.42% over the last five trading days. Over the last quarter, the stock has surged +31%, ~20% for the past six months and approximately +30% over the last year. BOJA was upgraded to a buy a few months ago and has not looked back since. Despite the black cloud hanging over the restaurants space, BOJA has been a bright spot.
COFFEE
- Coffee was the third-best performing subsector, finishing the week up +1.46%.
- SBUX was the big gainer in the coffee space, finishing the week up +2.90%. DNKN finished the week down -1.85%, after a downgrade during the course of the week. PNRA finished the week in the green, up +1.46%. PNRA is well positioned as delivery will drive comps going forward and investments, though restraining profit growth in the immediate term, will push the business forward in the medium to long term.
- From a MACRO perspective, coffee pulled back from its two-week high as the Brazilian real amalgamated recent gains.
CASUAL DINING
- Casual Dining was down -3.49%, as all but one the casual dining names we track finished the week in the red. RT and RRGB led the way down at -17.65% and -13.39%, respectively. Ruby Tuesday’s significant decline can be attributed to the company reporting weak 4Q comps and restaurant margins (Comps came in at -4.1% and restaurant margin contracted by 410bps).
- BJ’s Restaurants, Inc. (BJRI) and Buffalo Wild Wings (BWLD) both finished the week in the red, down -8.65% and -2.04% respectively. Both names were downgraded during the course of the week.
- Other notable decliners were WING (down -4.46% after a downgrade to hold from buy); CAKE (down -2.56% after a downgrade to underperform from hold); TXRH -5.27%; and BLMN down -3.44%.
GENERAL RESTAURANT THOUGHTS (KNAPP-TRACK)
- Knapp-Track released their casual dining comparable restaurant sales and comparable guest counts last week. The report states that comparable restaurant sales were -2.6% for November 2016, with only 1 of 11 regions having positive casual dining comparable sales. The best performing region was the Pacific Northwest and the worst performing region was Texas.
- According to the report, the national average for comparable guest counts in November 2016 was -4.7%, with all 11 regions tracked having negative comparable restaurant guest counts. The best performing region with regard to comparable guest counts was the Pacific Northwest and the worst performing region was the Middle Atlantic.
ARTICLES OF INTEREST
FRSH | PAPA MURPHY’S CEO RESIGNS
According to a statement released by the company last Thursday, CEO Ken Calwell has resigned and the company has named chairman Jean Birch interim CEO while it searches for a permanent replacement. The decision comes on the heels of the company’s recent same-store sales challenges, an issue faced by many in the space. Despite this move, FRSH insists that the brand has laid the appropriate groundwork for many of its long-term strategic initiatives and believes that the company has reached a key inflection point.
RECENT NOTES
1/6/16 MCD | MCCAFE 2.0 IS STARBUCKS ENVY 2.0
1/6/16 WHY RESTAURANTS ARE STARVING
12/21/16 DRI | SMOOTH SAILING BUT BIG WAVE APPROACHING
12/20/16 DIN | AND BOOM GOES THE DYNAMITE
12/15/16 THANK YOU | 4Q16 REVIEW AND PLANS FOR 1Q17
12/14/16 RRGB | SHEDDING MORE LIGHT…
12/13/16 CMG | AND THE BEAT GOES ON…
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
