Examining short interest in the restaurant space yields some interesting observations.
The data referred to in this post and shown in the chart below is reflective of short interest as a percentage of shares out as of the most recent release date of August 24th. The settlement date of this data is August 13th, which was after the bulk of restaurants calendar 2Q earnings had been reported. I have some thoughts and observations to share.
- QSR has been pressed by the shorts with the past six weeks showing upticks in short interest data. Casual Dining shows a diametrically different trend; shorts have been easing off.
- Coffee retailers have been pressured recently by rising coffee prices and this is reflected in the heavy and sustained shorting of PEET and GMCR over the past two months.
- SBUX has remained largely immune to this trade, having reaffirmed guidance and demonstrated strong top line trends of late.
- Along with the coffee retailers, CMG, JACK, and DPZ round out the top five gainers in terms of short interest in the most recent two weeks of data. CMG, PEET and GMCR are the three most highly valued QSR stocks on an EV/EBITDA NTM basis (according to Factset estimates).
- CMG can only maintain its recent high level of outperformance for so long and an upswing in commodity costs could impact the stock significantly.
- DPZ’s top line performance will be difficult to sustain and dairy prices have been rising of late (as have foodstuffs in general).
- JACK continues to be inundated by bad news. Unemployment and California’s continuing woes are the main pain centers for the stock and investors are continuing to short that stock despite the low valuation.
- BWLD, which has seen the shorts ease most recently (though short interest is still up sharply over the last two months), has been benefitting from the lower commodity outlook despite the unsustainable nature of their unit growth remaining a strucutral problem for the company
- PFCB stands out purely because of the elevated level of short interest (highest absolute level among the casual dining names) and it ticked up in the latest release.
- Back in July, writing on short interest, I wrote that for RRGB “pressing the short here is not a good bet here from a risk reward perspective” in light of news that an “activist investor” was pressuring the company.
- Knapp track figures for the casual dining restaurants improved in July on a two-year average basis after declining for the three prior months, which might help explain the recent decline in short interest on average for the group.
Howard Penney
Managing Director
