A quick look at short interest in the restaurant industry.
In the casual dining space, the shorts keep pressing the bets on BWLD, PFCB, BOBE, RUTH, CHUX and CAKE.
I continue to be bearish on BWLD because of the brand’s positioning losing steam with the consumer and the company continues to press on with an aggressive growth platform. In the short-term, lower chicken prices will keep margins and earnings in check.
BOBE is facing a very difficult commodity environment and is struggling to get the top line going - never a good combination.
RUTH could see an increase in red meat costs as we head toward 2011 and the sales trends will be more difficult from 4Q onwards. 2Q and 3Q09 comps were -23.4% and -24%, respectively, with the next three quarters (4Q, 1Q10, and 2Q10)seeing trends improve to -11.2%, -0.5%, and +2.9%, respectively. As the easy comps become difficult compares, it will be interesting to see if the top line can keep up. Also a concern is the rising cost of beef which could see significant inflation year-over-year in 4Q.
CHUX has a new management team but the bearish case remains powerful given the company’s relative position within the struggling bar and grill category.
In the QSR space, those exposed to MCD taking share, increased wheat costs, and increased coffee costs all saw an uptick in short interest for the most recent two weeks of data. JACK, DPZ, PEET, PNRA, TAST, BAGL, MCD and CBOU were all pressed by the shorts on a two week basis. SBUX remains the Teflon Don of the coffee space but sooner or later they may also have to take up pricing if coffee costs maintain their current trajectory.
Being short on JACK is an interesting call given that exposure to MCD and the company’s regional exposure serve to keep sales trends sluggish. Additionally, commodity pressure is coming to bear on their bottom line. At the same time, they are high on my list of potential companies that could go private. At 6.0x EV/EBITDA, there is nearly $8 of upside and only $2 of downside from its current price, all else being equal.
AT 9.2x EV/EBITDA DPZ is expensive. Additionally, same-store sales trends are going to slow and commodity prices are on the rise. The street is not all that bullish on DPZ and the days to cover is high putting it closer to a potential long. Their business really needs to fall off a cliff in order for the stock to work on the short side.
PNRA is an interesting one. The days to cover is high but the street loves this stock. What’s not to love with double digit same-store sales trends? PNRA is currently goosing the company with a significant increase in their marketing budget. The timing of the spending will be the key to getting this potential short right. Two key commodities - wheat and oil - are breaking out to the upside which is negative for the stock.
MCD as a short? Given how many frappes and smoothies MCD is selling, they should be posting better same-store sales. Unfortunately for MCD, it has an average check problem. For the time being this is not that big of an issue. Come 4Q10 if/when sales slow and commodities prices are in the rise, MCD could have a problem.
BAGL, TAST, and CBOU: shorts press on rising wheat prices (BAGL), the McDonald’s momentum (TAST) and rising coffee prices (CBOU).
Howard Penney
Managing Director
