Casual Dining Top-Line Risk

According to Knapp Track data, July was the worst month (by at least 100 bps) for casual dining operators from a traffic standpoint (biggest decline on a 2-year average basis as well). Earlier this week, Sanderson Farms commented that foodservice and restaurant demand has been weak with August shaping up like July. Darden’s weaker than anticipated same-store sales results for 1Q09 (ended August 24), particularly at Olive Garden, which has held up relative to other concept, reaffirmed this comment and signals that trends had not yet bottomed in 2Q for the overall industry. According to recent comments by management, some casual dining companies’ guidance may be at risk as they thought trends had stabilized and that the worst was behind them.

Management teams that were optimistic (or at least communicated their expectation that trends would not worsen further in 2H08):
  • MSSR 2Q08 earnings call: “Similar to last quarter we have seen stabilization at our suburban restaurants as well as some Friday day parts and Saturday dinner part which indicates to us that the decline in these guests’ dining frequency has at least plateaued and we do not see further erosion in this consumer base.”

    “We’ve definitely seen, as we said earlier, that middle income, aspirational consumer, we’re no longer seeing a continuation decline of that customer. We’ve also seen continued strong results from the business traveler which I, as you’re aware, hotel occupancies and flights are down but I think because of our national advertising campaign and our price point relative to some of the higher end options in the industry we’re holding up that consumer pretty well. So as we’ve implied earlier we’re definitely seeing stabilization and I think the initiatives we put in place are in fact very improved.”
  • RUTH 2Q08: Although management acknowledged that current trends could persist, guidance assumes an improvement in same-store sales growth. “Coming back to 2008 guidance. We now expect comparable sales declines to be in the minus five range, which is at the low end of our original range. We believe that the above-mentioned cost-cutting initiatives will largely offset the drop in earnings associated with the sales shortfall and, as such, at this time we still believe that we can deliver EPS from continuing operations without an -- within our original guidance range of $0.55 to $0.60, excluding charges associated with our CEO transition. However, if negative sales trends persist at the level we experienced in the first half or if cost savings do not materialize as quickly or as significantly as we expect, we will likely come in below this range. We will update this guidance at the end of the third quarter.

    “I won't -- we won't make any comments about -- on a go-forward basis, if you will. But what the guidance does imply is that we will have improvement in the second half of the year over the first half of the year, in part due to the easier comparison, but also in part to what we believe are very effective marketing initiatives that are in place.”
  • CAKE 2Q08: Relative to comp guidance, management stated, “Really what we’re saying is as of today, best guidance that we have and that contemplates the fact that we started to see some of the consumer slowdown in the fourth quarter of last year, and so really it would just be a nominal lapping of that, if we maintain as of today. “
  • BWLD – The Company was very optimistic about the 2H08. "Same-store sales continue to be strong in July, with increases of over 6% at company-owned and over 2% at franchised restaurants. We are in final preparation for the start of football season, with a redesigned menu rolling throughout the system this week, our HDTV and remodel projects nearing completion, our media and local marketing plans set, and our operations team trained and energized. We expect the purchase of our nine Las Vegas franchised locations to close in late September. With the momentum continuing from the first half of the year, we are confident in our ability to achieve our 15% unit growth, 20% revenue growth, and 25% net earnings growth targets for 2008."


According to the Macau Times, Bill Weidner, LVS COO, stated that his company has so far not made a single dollar in Macau. He also played up LVS’s capital commitment to Macau. This is not a widely discussed topic in the States but all may not be well between Beijing and the US casino companies. WYNN, LVS, and MGM minting hundreds of millions of dollars in cash flow probably does not sit well with China’s power brokers. As I wrote about in my 8/25/08 post, “MACAU: QUID PRO QUO ON VISA RESTRICTIONS”, the flotation of the 6 month visa idea certainly roiled the markets but may have been an effort to extract more aid to Sichuan. Following Macau’s announcement of significant reconstruction aid, I wouldn’t be surprised to see: a) the casino companies kick in some additional cash to the effort, and b) the six month visa idea fade away. Status quo on the visa issue is a big near-term positive for Macau.

Not sure about the trend, but the trade continues higher on the US Macau stocks.

Shorting Japan, Again...

I re-shorted the bounce in the Japanese ETF this morning (EWJ), for three reasons:

1. Japanese inflation (see chart) came in higher again (month over month) at +2.4% y/y vs. +1.9% in June. As the Yen weakens, imported inflation spikes - the chart is plain ugly. This is a 10 year high, as you can see. American wins = Japanese losses.

2. Overnight, Prime Minister Fokuda, was pleading for another 2 Trillion Yen Government bailout program for the economy. This is more of the same - a leader-less socialist government that doesn’t get it.

3. As GDP goes negative, increased government spending is going to intensify the problems associated with Japan's balance sheet. They already hold an untenable position of 787 Trillion in Yen denominated debt. That's 147% of GDP that is setup to stagflate!

It's global this time, indeed.

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Chinese Retail Growth Revisited

I noted on 8/18 that China’s superb 23% retail sales growth needed to be put into context with the sharp decline we’re seeing in other non-Japan Asian nations. The chart below looks at it a different way… It takes retail sales 2 yr trend and subtracts 2-yr CPI growth to show what I think is a more representative view of real underlying normalized spending patterns. Yes, there is still an Olympic-sized bump over the past two months, but over a broader 10-year context, it’s not tough to argue that China is slowing.
Insert Chart Description Here. 2 Sentences Maximum

Europe's Headache: Importing Inflation, Deflating Confidence

Below we have put together a data set that overlays European economic confidence with inflation. In a brave new interconnected world of markets where the US Dollar is strengthening, the Europeans are losing. As the Euro falls from it's all time highs, they will be importing inflation to their socialist tapestry.
  • European Confidence Can Get A Lot Worse...
Chart by Andrew Barber, Director

The Ultimate Sporting Goods Visual

If you care about anything having to do with the Sporting Goods business, and are as concerned about overcapacity as I am, then you have to see this visual.

Historically, the sporting goods retailers have respected geographic boundaries. Now they're starting to step on each other's toes. Next comes an outright dogfight.
Click to enlarge.

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