OVERALL: Last week was a solid week for Restaurant companies that we follow, as all but one of the sub-sectors finished the week in the green. The final tally was as follows: Coffee -2.71%, Family Dining +0.33%, QSR +0.44%, Pizza +0.92%, and Fast Casual +1.84%. With earnings season upon us, we have had some big names report earnings, and figures continue to reflect the bleak restaurants space, as sales and traffic continue to lag. Additional information can be found in our earnings notes; links can be found at the conclusion of this Restaurants Roundup report.
HIGHLIGHT OF THE WEEK: SHORT DineEquity (DIN)
- As you may recall, we presented our DIN SHORT thesis on December 6th, 2016, in which we stated that the company’s business fundamentals were deteriorating, franchisees were struggling, and financials were strained/significant off balance sheet issues.
- Shares of DineEquity are 27% below their 52-week high, and down ~18% since our Black Book presentation. With traffic pressure in a sluggish trend, DIN has not helped itself, as the company has failed to appropriately re-invest in the brand. This lack of investment has made its food offering stale and uncompetitive in the market.
- Mix this all together, and you have the perfect storm, as evidenced by the precipitous decline in DIN’s stock price. This is still a great SHORT, as we see significant additional downside from here.
HIGHLIGHT OF THE WEEK: Bob Evans Farms, Inc. (BOBE)
- Following an announcement that the company would be selling its Bob Evans Restaurants segment for $565 million and acquiring Pineland Farms Public Potato Company for $115 million, shares traded up as much as +20.8%. BOBE finished the week up +15.08%.
- Proceeds from the sales will be used to pay down debt and pay a one-time ~$7.50 dividend. In addition, the Board increased its share repurchase authorization to $100 million through 2017.
- The transaction officially makes BOBE a pure-play packaged food company, which would make it a potential acquisition target given its size and management’s 1.0x-2.0x leverage target.
HIGHLIGHT OF THE WEEK: GDP and Hedgeye CPI estimates
- Real gross domestic product increased at an annual rate of 1.9% in 4Q16. This represents a 160bps sequential decline.
- It is important to note that current-dollar personal income increased by $152B in 4Q16, compared to a $172.3B increase in 3Q16. According to the U.S. Bureau of Economic Analysis, this deceleration in personal income is attributed to a deceleration in wages and salaries.
- Additionally, disposable income increased $130.2B, or 3.7% in 4Q16, compared to a $141.5B increase, or 4.1%, in 3Q16. As it relates to the restaurants space, this sequential decline in disposable income has been reflected in the continued slowing of comparable sales and traffic. Consumer pockets are being stretched in various directions, and restaurants are feeling the brunt of this.
- On 1/27/17, our Macro team released a note chronicling the recover in U.S. economic growth (please contact us if you would like the full note). A key excerpt from the report was as follows: “Specifically, we believe headline CPI should peak in Q1 before trending marginally lower throughout the rest of the year. Our model is currently forecasting a quarterly average headline inflation rate of +2.68% YoY for 1Q17.” There comment is illustrated below…
Restaurants Rundown…
- After relinquishing the top spot in our Restaurant Roundup last week, Fast Casual returned to the top of the leader board as its stocks were the best performing sub-sector, finishing the week up +1.84%. It was an even split, as half of the companies that we track in this space finished the week in the red and the other half finished in the green. Sub-sector performance is as follows: NDLS +6.71%, PBPB +3.33%, CMG +2.92%, SHAK +0.75, ZOES +0.46%, and HABT finished the week flat (CMG reports 4Q16 earnings on February 2, 2017).
- Family Dining stocks were the fourth-best performing sub-sector this week, finishing the week up +0.33%. Two of the companies we follow in the space finished in the green: CBRL +0.33% and BOBE +15.08. DENN was the lone company to finish the week in the red, down -0.57%. As we highlighted above, BOBE’s performance is attributed to the Company selling its restaurant group and acquiring Pineland Farms Potato Company, making BOBE a pure-play packaged food company.
- The Pizza sub-sector bounced back this week, after a sluggish performance in our last Restaurants Roundup report. The pizza companies we follow finished the week up +0.92%, with all companies within the group finishing in the green. Performance is as follows: PZZA +0.64%, FRSH +0.92%, and DPZ +2.48%. DPZ appears to still be riding the wide created by its upgrade to overweight at KeyBanc.
- QSR finished the week in the middle of the pack, up +0.44% overall. The majority of the companies we follow in this subsector finished in the green. QSR, PLKI, WEN, and YUM were notable gainers with performances of +2.80%, +2.31%, +1.82%, and +1.94%, respectively. Notable decliners were JACK -1.41%, TAST -1.51%, BOJA -1.78%, and FRGI -3.89%. Quick service companies continue to use aggressive discounting and promotions to offset significant traffic and labor headwinds plaguing the space. However, as we discussed in our most recent Black Book, brands like SONC +0.31%, that use very limited promotions are well-position going forward, as these businesses will not have to reposition themselves once commodities reverse direction.
COFFEE
- After finishing in the top spot in our last Roundup, Coffee was the worst performing subsector this week, finishing the week down -2.71%, reflecting a 238bps decline from its performance in our previous Restaurants Roundup report.
- SBUX drew the most attention this week as it reported 1Q17 earnings after the close on Thursday evening. Starbucks stock finished the week down –2.71% after comps decelerated and missed analysts’ estimates (Consolidated SSS: +3% vs FactSet +3.8%; Americas SSS: +3% vs FactSet +3.9%; Revenue: $3.88B vs FactSet $4.05B). However, the company did report EPS that was in-line ($0.52 vs FactSet $0.52). We released a detailed note following the call; please refer to the “Recent Notes” section below.
- After a positive showing in our last Restaurants Roundup report, PNRA gave back all of its gains, finishing the week down –3.24%.
- DNKN bounced back this week and finished the week in the green, up +1.39%.
- Rabobank recently raised its forecast for Robusta coffee futures by up to $140/ton, to $2,060/ton for 2Q17. The company cites the potential for a boost if the speculation that Brazil will be reimporting beans comes to fruition.
- From a commodity perspective, coffee settled higher after a very choppy trading week, aided by a jump in the Brazilian real.
MACRO
- According to reports, tax refund delays could potentially disrupt early Q1 results for some major retailers. Additionally, this could have major implications in the restaurants space, as customers’ spending capacity would be stretched even thinner, further putting more strain on restaurant sales and traffic.
- According to a report from the Wall Street Journal, online retailers have forced mall landlords to walk away from struggling properties. It is worthy to note that Knapp-Track and other industry sources have reported slowing mall traffic due to e-commerce. The report notes that in the period from January to November 2016, 314 loans secured by retail property were liquidated, which is 11% more than in the same period a year earlier. This will pose issues for the restaurants space as a great number of restaurants are located either in or near malls and shopping centers. A link to the full article can be found HERE.
- Staying with the theme of malls, specialty food manufacturer, Lance Colony Corp. (LANC) noted a soft earnings outlook in the foodservice channel. LANC’s COO Dave Ciesinski offered the following commentary, “if you look at the fall the trends were soft, when we got into December the trends seemed to get really soft. And there are a number of theories that are running around. One is that with the advent of more online shopping, there are fewer people in malls hitting casual dining places. We are encouraged to see that January has seemed to rebound some and we are sort back to the trends we were looking at in the fall. But that's the general story of it.” Management also went on to say that they expect casual dining to be soft in back half of 2017, meaning that we could see a considerable recovery in casual dining trends after an abysmal December, with trends still remaining soft for the next six months.
CASUAL DINING
- Casual Dining was down -0.18, as the majority of the casual dining companies we track finished the week in the red; this brings the space’s performance to -6.42% for the month. Once again, RT finished the week in the red, down -4.31%, after a performance of -6.70% in last week’s Restaurants Roundup report. This brings its monthly performance to -37.51%.
- Other notable decliners were CHUY, EAT, DIN, and RRGB, each finishing the week down -1.35%, -5.67%, -7.40%, and -7.50%, respectively. EAT’s poor performance can be attributed to the Company missing on earnings earlier this week. 2Q17 EPS was $0.71 vs FactSet $0.74 on a revenue shortfall, with comps of -2.9% vs consensus -1.3%. More detail on this can be found in our note; please refer to the “Recent Notes” section below.
- For the second week in a row, BBRG was a notable gainer for the group, finishing the week up +5.00%, on news that the Company formally acknowledged receipt of the letter sent to the Board of Directors by TAC Capital.
ARTICLES OF INTEREST
CATTLE FUTURES DROP, WHILE WHOLESALE BEEF REMAINS DEFLATIONARY
With a tightening animal supply, cattle futures have experienced a steep acceleration after bottom in mid-October. According to the Bloomberg report, cattle futures in Chicago have rallied 23% since October 2016, while the price for wholesale beef has continued to fall. This reversal will undoubtedly be detrimental for margins, so we will keep an eye on this going forward.
Christina Bell Vaughan, a company veteran, has been named President of Sonic Restaurants Inc. Vaughan originally joined Sonic in 2002 and most recently served as vice president of franchise operations, overseeing the central region of the United States. Most notably, she led the company’s effort to convert all 3,500 units to a new POS (point-of-sale) and implement its proprietary POPS (point-of-personalized-service) technology.
BOB EVANS RESTAURANTS SOLD TO PRIVATE EQUITY GROUP
This past Tuesday, Bob Evans Farms Inc. disclosed that it had reached a deal to sell Bob Evans Restaurants to Golden Gate Capital for a reported $565 million. This would leave only the company’s packaged foods division, BEF Foods, under control of the parent company, and shows a commitment to the packaged food division, which sells sausage and side dishes at grocery stores. Management believes that this will result in higher returns for shareholders, and allow for Bob Evans Restaurants to proceed in a much more focused manner.
RECENT NOTES
1/27/17 SHIFTING THE BOTTLENECK
1/25/17 EAT | INSULT TO INJURY
1/23/17 MCD | MORE MOUNTAIN TO CLIMB
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
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
