TALES OF THE TAPE

There are plenty of reasons for optimism and pessimism.  Optimism is winning for now

Looking at the price action yesterday, I had to scratch my head.  MSSR and MRT were up on big volume following their earnings releases the day prior.  Although McCormick and Schmick’s saw a 100 bp improvement in two-year average same-store sales, the 4% decline in comps was below expectations.  Furthermore, guidance for the year was lowered across the board; revenue guidance was lowered by $10 million and EPS guidance was lowered by 5 cents on both sides of the range.  Management said that the guidance revision was “based upon the impact of the Gulf oil spill on the second quarter and the uncertainty of the potential effect the publicity centered around the Gulf oil spill may have on our business for the second half of the year”.  Since the earnings call, there have been several positive news items emerge about the progress being made to “kill” the Macondo well in the Gulf of Mexico.  With certain areas of the Gulf of Mexico being given permission to resume commercial fishing, perhaps this incrementally positive news is being taken on board by investors.  However, public perception of Gulf sea food safety will likely take some time to recover, irrespective of FDA assurances. 

MRT saw a deceleration in two-year average top line trends when adjusted for the 2% Easter-related calendar shift.  The 7.1% headline number certainly was an upside surprise, and the 5.1% underlying comp was about in line with Street expectations.  In terms of the guidance management provided, however, it seems that they might have a difficult time meeting it.  3Q and fiscal year guidance assumes significant improvement in two-year average trends.  To accomplish a 4% same-store sales number in 3Q (the low end of the +4% to +6% guidance), two-year trends need to sequentially improve 310 bps from the 7.1% print (410 bps from the underlying 5.1%).  The low end of the full year +4% to +6% comp guidance target will require an additional 400 bps in two-year average trend improvement in 4Q. 

Despite the +7% to +8% same-store sales growth during the last two weeks of July, the recent choppy nature of sales at MRT (as described by management during the earnings call) is a reason for concern.  Based on management commentary during their recent earnings call, there is nothing specific that seems to support the notion that comps will level out at a strong level rather than the “soft” levels seen in late June and early July.  It is possible that there are initiatives or strategies that management did not disclose, but as yet the source of their confidence is unclear.  It is possible that the improvement in business travel reported by some lodging companies, and cited by Morton’s, has buoyed investor sentiment toward companies with exposure to this group.  The relative outperformance of PFCB yesterday lends credence to this view – about 30% of the Bistro’s tickets are driven by business spending.

In other news, an article on nrn.com entitled “Consumer Rank Favorite Restaurant Chains” had some interesting data points on the consumer.  Specifically, the article says that the Market Force survey indicates that one in four consumers plan on eating out more in the coming months and they are driven to brands showcasing strong consumer service elements. 

 TALES OF THE TAPE - stocks 85

Howard Penney

Managing Director