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Short interest has been coming down over the past couple of weeks, particularly in the casual dining category.  The shorts have been continuing to press the bets on CHUX, EAT, BOBE, and MRT.  There has been a strong reduction of short interest in DIN, BWLD, CAKE, RRGB, and CBRL.  BWLD’s commodity cost outlook is favorable in the short-term (a rare situation in this space with the food prices having increased so much of late). 

CHUX continues to struggle within the over-crowded Bar & Grill category while Brinker continues to work on transforming their back-of-the-house operations to ultimately boost margins in the next six months. 

Overall, it is not surprising that short interest has come down so much.  Restaurant stocks have been handily outperforming the S&P 500 over the past number of months and the covering of short positions has aided the rally.  It is worth monitoring the trend in the CRB Foodstuffs Index, however, and the relationship between the index and casual dining margins.  On a year-over-year basis, the index is at a higher level than the prior peak of 2008 when casual dining average margins saw significant (~200 bps) compression.  I will be posting on this in more detail later today.

In the QSR space, the average level of short interest, 5.6%, is far lower than the 10.4% average short interest in the casual dining category.  The coffee stocks that had been experiencing a sharp uptick in short interest, PEET and GMCR, have seen the shorts back off which could imply that investors have shifted focus from the coffee cost squeeze that was so strong it forced Starbucks into raising prices.  DPZ, BKC, BAGL, CMG, and SONC were pressed by the shorts on a two week basis.  DPZ remains expensive at 9.2x EV/NTM EBITDA.  The short interest uptick in SONC has only come about over the past two weeks versus the other names (DPZ, BKC, BAGL, and CMG) seeing a sustained increase.   CMG’s short interest is at 12.5%, behind PEET and GMCR at 19.5% and 16.4%, respectively.  With commodities at their current level, CMG’s margins could be vulnerable given the company’s generally uncontracted food cost basket. 


Howard Penney

Managing Director