Reminder: We will be hosting a Black Book presentation on our SONC LONG case on Tuesday, January 24th at 1:00 PM ET. Key points that will be discussed during Tuesday’s presentation include: SONC’s dynamic technology taking hold; significant competitors fading; and SONC’s push to a 95% franchise model & increased free cash flow.
We have included a link to the original invitation: CLICK HERE
OVERALL: Last week was a big week for the restaurants space from a MACRO perspective, as CPI data was released, and the majority of the data continues to tell the same story. From a macro view, the restaurants space is still facing some fierce headwinds, with CPI- Shelter and CPI- Energy still accelerating, further putting a strain on consumer wallets. We go into further detail below.
Last week was a rough week for restaurants stocks, as all of the sub-sectors we follow finished the week in the red. The final tally was as follow: Coffee -0.33%, QSR -0.51%, Family Dining -0.58%, Pizza -1.19%, and Fast Casual -2.65%. Trumphoria appears to have taken a break last week, as accelerating CPI metrics possibly put a damper on the overall space. As we have reiterated for some time now, restaurant brands are now tasked with rethinking their approach to doing business in an effort to attract customers. Many companies have already turned to aggressive discounting and promotional activity, keeping in mind that customer dollars are now being extended in a manner not seen in a long time.
HIGHLIGHT OF THE WEEK: CPI DATA (FAH VS. FAFH, SHELTER, ENERGY, MEDICAL CARE)
- The FAH vs. FAFH inflation differential has been one of the more popular reasons for the underperformance of large chain restaurants over the last six months, so the release of the December CPI figures were highly anticipated. CPI –Food at Home (FAH) improved by 20bps sequentially to -2.0%, marking the second consecutive improvement in YoY growth. CPI- Food Away From (FAFH) held flat at 2.3% in December.
- The spread between FAH and FAFH narrowed by 20bps to -4.3%, marking the second month in a row that the spread has improved.
- It is also important to note other expenses that will be vying for a share of consumer wallets, expenses that include shelter, energy, and medical care, all of which are comfortably outpacing food inflation. Our Hedgeye Macro team has done an outstanding job of following these trends and the charts below speak volumes.
- Overall, in December Headline inflation YoY growth accelerated for the fifth month in a row, and now sits at +2.1%; Core inflation is YoY growth is up 10bps to +2.2%. Turning to what many view as a key metrics relating to the downturn in the restaurants space, CPI Shelter churned higher to +3.62% YoY; Energy inflation now sits at +5.4% YoY, marking the third consecutive month of growth and the highest since February 2012; Medical CPI now sits at 4.07%, a 10bps increase from November.
- With all three of these key metrics continuing to trend higher, restaurant operators will continue to feel the squeeze as patrons turn their hard-earned dollars to other uses.
- After taking the top spot in our Restaurant Roundup two weeks ago, Fast Casual stocks were the worst performing sub-sector for the second week in a row, finishing the week down -2.65%. All of the names we track in this space finished the week in the red. Sub-sector performance is as follows: ZOES -0.96%, CMG -1.35%, SHAK -1.89%, PBPB -3.41%, NDLS -4.65%, and HABT -4.99%. CMG’s underwhelming performance last week can be partially attributed to a downgrade to neutral from overweight at JPMorgan earlier in the week.
- Family Dining stocks recovered by 124bps and were the third-best performing sub-sector last week, down -0.58%. Two of the companies we follow in the space finished in the red: BOBE -0.58% and DENN -1.05. CBRL was the lone company to finish the week in the green, up +0.06%. Since its downgrade to perform from outperform at Oppenheimer, BOBE has been underperforming the market, which is a reflection of the overall Family Dining space.
- After taking the top spot in last week’s Restaurant Roundup, Pizza stocks we follow pulled back quite a bit and were the second-worst performing sub-sector of the week, down -1.19% for the week. FRSH and PZZA finished the week in the red, down -2.25% and -1.19%, respectively. DPZ had a positive week, finishing the week down up +0.42%. During the week, DPZ was upgraded to overweight at KeyBanc, as the firm cited increased confidence in sustainable transaction growth and long term unit development.
- QSR finished down -0.51% overall, with half of the companies that we follow in the space finishing in the red. SONC, WEN, FRGI, and QSR were notable decliners with performances of -3.90%, -2.88%, -2.35%, and -2.33%, respectively. The quick service space continues to face significant traffic and labor headwinds, and stock performance continues to reflect this, as many view this space with cautious optimism.
COFFEE
- Coffee was the best performing subsector, finishing the week down -0.33%, reflecting a 159bps decline from its performance in our previous Restaurants Roundup report.
- PNRA was the lone company to finish the week in the green, up +1.55%. As we reported in our last Restaurants Roundup report, PNRA drew some of the most interest at the ICR conference, as many are taking notice of the industry-leading initiatives the company has undertaken. Also, PNRA reported that their menu is now 100% clean. Meaning that its entire U.S food menu and portfolio of Panera at Home products are now free of all artificial flavors, preservatives, sweeteners, and colors from artificial sources. Additionally, PNRA was upgraded to buy from neutral at Goldman Sachs, further showing that the industry is confident in the company’s ability to delivery on their initiatives.
- Leading the way down were SBUX and DNKN, each finished the week down -0.33% and -1.58%, respectively.
- From a MACRO perspective, coffee finished the week strong amid continued gains in the Brazilian real and a recently downgraded Brazilian output forecast.
CASUAL DINING
- Casual Dining was down -1.20, as the majority of the casual dining companies we track finished the week in the red, once again. RT continues its cold-streak and finished the week down -6.70%, after a performance of -15.79% in last week’s Restaurants Roundup report, bringing its monthly performance to -38.71%.
- Other notable decliners were BJRI, WING, RRGB, EAT, and BLMN, each finishing the week down -2.78%, -1.70%, -1.65%, -1.48%, and -1.27%, respectively. EAT’s poor performance can be partially attributed to BMO Capital Markets reiterating their underweight rating, noting that the company has under-invested and increased investments could hurt earnings.
- A notable gainer was BBRG, who finished week up +8.11%, on news that TAC Capital, a holder of a 14.9% stake in the company, has recommended three directors to BBRG’s Board of Directors.
ARTICLES OF INTEREST
SONC BOLSTERS BOARD OF DIRECTORS
Following its annual shareholders meeting, the nation’s largest chain of drive-in restaurants announced the election of Steven A. Davis to its board of directors. Mr. Davis brings over 30 years of restaurant and retail experience to the Company, most recently serving as chairman and CEO of Bob Evans Farms, Inc. Most notably, Mr. Davis has significant experience in the areas of marketing, M&A, real estate, auditing and finance, all of which should benefit SONC as the company aggressively refranchises and expands its footprint.
MCD TURNS TO BIG MAC TO BOOST SALES
Seemingly returning to its roots, MCD is marketing the creation of two new Big Mac sizes, in what is an effort to boost sales growth. The first of the new additions is the “Grand Mac”, which includes two patties totaling a third of a pound of beef and has ~900 calories. The second of the new additions is the Mac Jr., marketed as an easy-to-hold/on-the-go version of the Big Mac. The Mac Jr. has one beef batty and is ~480 calories. The Company hopes that return to its core menu items will give the brand a much-needed boost, after losing momentum as of late.
RECENT NOTES
1/17/17 CMG | THA CROSSROADS
1/13/17 RESTAURANTS MACRO NOTE | LOOKING INTO OUR CRYSTAL BALL…
1/12/17 ICR CONFERENCE 2017 (DAY 3) | “WHAT THEY WANT, WHERE THEY WANT IT”
1/11/17 ICR CONFERENCE 2017 (DAY 2) | PEAS IN A POD
1/9/17 CMG | C ONSUMER SURVEY RESULTS NOT POSITIVE ENOUGH TO CHANGE OUR MINDS
1/6/17 MCD | MCCAFE 2.0 IS STARBUCKS ENVY 2.0
1/6/17 WHY RESTAURANTS ARE STARVING
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
