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    MARKET EDGES

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The restaurant space is seeing a rise in short interest despite activism and buyout rumors.

With a group of investment bankers working overtime to sell the company, CPKI’s second preannounced results for 2Q10 were a little better than the first.  The recent release detailing 2Q10 results showed improved EPS in a range of $0.15 to $0.17 (vs. prior guidance of $0.10 to $0.15 given on 6/21/10 - down from the original guidance of $0.24 to $0.26 communicated on 5/6/10).

2Q10 same-store sales came in at -5.9% (vs. prior guidance of -6.0% to -7.0%) and 3Q10 same-store sales through July 11th improved to -0.6%, according to management.  This significant sequential improvement is partly attributable to the fact that the company’s 2Q10 results were negatively impacted from lapping the strong results from last year’s Thank You Card Program which ran during 2Q09 and benefited comps by about 1.4%.  CPKI will be launching the program again during the third quarter on July 28.

Notably, CPKI was one of the restaurant stocks with the biggest increases in short interest over the past month.  Other notable increases in short interest ahead of earnings season are BWLD, EAT and RRGB. 

RRGB is being pressured by an “activist” as the fundamentals continue to be severely challenged for the company.  Pressing the short here is not a good bet from a risk/reward perspective. 

JMBA has seen short interest accelerate to the upside ahead of news detailed in The Wall Street Journal today.  An article titled, “McDonald’s Smoothie Launch May Juice Up Entire Category” discusses the launch of McDonald’s smoothies nationwide and the impact on the smoothie category.  Jamba Juice Chairman and CEO James White said, “their advertising will expand interest in the category”.

We will be releasing our restaurant Industry “sigma” positioning by the end of the day, but BWLD is currently operating in the quadrant we call “Trouble Brewing.”  I continue to believe that there are several issues that will plague the company for some time.

Over the past month, EAT saw the third biggest increase in short interest at 31.9%.  As a percentage of the float the absolute short is still low at 7%, but it’s up 1.68% in the last month.  Over the weekend, Barron’s described the CEO of DIN as a canny operator, but she is doing nothing of consequence to alter the operation within the four walls of the Applebee’s concept.  The company’s ability to do anything other than sell off stores is limited by the leveraged balance sheet.  This offers an ongoing market share opportunity for EAT.

Brinker is on the other side of the table with enough liquidity to buy back 20% of the equity value of the company and is making big strides to improve restaurant level margins and the overall guest experience.  Apparently, the market likes leverage more than cash!  Over the past month EAT is down 5.8% and DIN is up 2.6%.

RESTAURANT INDUSTRY – SHORT INTEREST, CPKI, AND MORE - short interest

 

Howard Penney

Managing Director