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  • Lets Eat: Restaurant View for Q210

    Lets Eat: Restaurant View for Q210 

     

    Tuesday, July 27, 2010

     

    While we have ample thoughts on the retail group in terms of winners and losers for upcoming earnings and longer-term as we head into 2011, we wanted to shift gears and focus on the restaurant group. Second quarter earnings for the group has been relatively positive so far with Yum! Brands (NYSE:YUM) kicking things off early this month.

     

    Yum posted EPS growth of 16%, ex unusual items, which beat the street by 4 cents. There is very few that would argue that Yum has one of the best in class management teams and their ability to drive +10% annual EPS growth for the foreseeable future seems built proof. Yum raised their CYE EPS guidance to 12% vs. managements prior view of 10% but we note the mixed bag in terms of outlook by the analyst community due to valuation and the need for Taco Bell to recover in order to see stronger results out of the U.S. division. While there is concern on a deceleration in the two-year comp trend for Yum in China, the growth opportunity in one of the fastest global markets remains intact and frankly attractive.  We note the favorable comment on COGS from and was consistent with the Cheesecake Factory on their recent Q2 call as well. Thus, we believe near term the group may have upside from a costing perspective and if you believe that the consumer will dine just as much as last year (i.e. traffic) in the U.S. market then further upside may remain in the group as we enter the second half of 2010. So for Yum, at over 15x 2011 EPS consensus estimates, we will revisit later but remains on our screen. 

     

    CEC Entertainment (CEC) could be a near term play and is expected to report on August 5th with analyst expectations of $0.45 in EPS and and 4% sales growth for the second quarter. CYE are $2.84 in EPS and just under 1% top-line growth. At $36, CEC trades around 11.5x NYE street expectations of $3.11. We note that Sidoti has Free Cash Flow per share estimated at $2.78 for FY10 and a $48 target price. Other positives include: large share repurchase, revamped birthday initiative (driving a higher spend per child), ability to outperform competitors due to mothers favoring wallet share over their children regardless of macro conditions, and possible tailwinds on in-put costs.

    CEC bounced off the 200 SMA twice in July at the $34 level so stop-limits(5%) at our slightly below could be in-order and from an upside perspective we could see CEC testing/breaking through the $40 level, thus +10% upside. 

     

    Cracker Barrel (NASDAQ:CBRL) is another name that we are warming up to. Comp trends, COGS, margins and outlook were all favorable on the last earnings call. Traffic continues to outpace the the industry for 15 consecutive quarters and lower commodity costs and healthcare costs have boosted recent results. Recent investor meetings with management indicated that the oil spill in the gulf has had “no” impact on the business and while commodity prices may turn into a headwind going forward, price increases should off-set any potential impact. Initial CYE in September of 2009 called for revenue +0.5% to +2.5% and EPS of $3.10 at the high-end of the range. The latest guidance by management in May now calls for sales to be +2% and EPS at $3.60 (both on the high-end of the range).

    At $50 we note the stock has bounced off the $46 level for the fourth time in 90-days and in the last 5-days has moved up over 7%. One concern is that at $50 and higher, we believe that there is a P&L hit due to incentive comp pertaining to stock awards. We will side-line CBRL for now and wait to see how the stock trades over the next few weeks. 

     

    The Cheesecake Factory (NASDAQ:CAKE) recently reported Q2 results, beating the street EPS estimate by a penny and posting respectable comps of +1.6%.  Top-line was considered a miss and what is being viewed as a “cautious” outlook by management has sent the stock down more than 5% after reporting just 2-days ago. While the company has been on a historical raise and beat trend, we feel that at 15x NYE estimates that CAKE is likely range bound for now. What attracts us to CAKE is its marketing initiatives to drive traffic and incremental ticket, menu changes that offer value with out sacrificing margin, traffic trends and excellent balance sheet (net cash). However, you can find better value and get paid to wait (dividend yield) in other names (MCD, CBRL). 

     

    Chipotle (NYSE:CMG) recent posted strong results with Q2 comps and EPS well ahead of the street but note that labor cost came in short of expectations for most. This was driven by higher hourly labor costs. We also note managements comment on rising costs and plans not to off set this via pricing. We frankly have noting incremental to add to CMG at this time but note that the stock at 25x NYE is pricey unless you believe in the “Supersized” sustained growth rates it takes to warrant such a premium. 

     

    McDonald’s (NYSE:MCD) seems to be a favorite lately, which is a concern. However, even at 15x, it remains below its historical average. So if your looking for a in vogue fat mac 3% play that continues to beat and recent business trends (July) suggests favorable comps, then this could be interesting. Will see what the new short data reveals and plan to do more work on this name.

     

     

    Name

    Symbol

    Price

    EPS  NYE

    NYE P/E

    P/B

    P/S

    Yield

    Cracker Barrel

    CBRL

    50.06

    4.01

    12.48

    5.22

    0.48

    1.60%

    Brinker 

     

    EAT

    16.42

    1.41

    11.65

    2.44

    0.52

    3.40%

    Darden

     

    DRI

    43.47

    3.76

    11.56

    3.15

    0.84

    3.00%

    Yum! Brands, 

    YUM

    42.14

    2.78

    15.16

    16.92

    1.76

    2.00%

    AFC Enterprises

    AFCE

    9.84

    0.92

    10.70

    N/A

    1.70

    N/A

    Wendy's/Arby's

    WEN

    4.40

    N/A

    N/A

    0.82

    0.52

    1.40%

    McDonald's Corporation

    MCD

    70.87

    4.86

    14.58

    5.33

    3.19

    3.10%

    Burger King

    BKC

    17.70

    1.47

    12.04

    2.08

    0.94

    1.40%

    Chipotle Mexican

    CMG

    148.57

    5.95

    24.97

    6.05

    2.75

    N/A

    Jack In The Box Inc.

    JACK

    20.51

    2.16

    9.50

    2.04

    0.47

    N/A

    California Pizza 

    CPKI

    17.19

    0.77

    22.32

    2.07

    0.62

    N/A

    Cheesecake Factory 

    CAKE

    24.26

    1.57

    15.45

    2.67

    0.88

    N/A

    P.F.Chang's 

     

    PFCB

    44.02

    2.29

    19.22

    2.84

    0.81

    1.60%

     

     

     

                          Short Interest

    AFCE  3.5%

    CAKE15.8%

    CBRL  9.8%

    CEC  4.9%

    CMG  9.9%

    MCD14.5%

    WEN  2.4%

    Yum  1.8%



    Disclosure: Currently do not have a position in the any of the stocks mentioned.
    Tags: YUM, APO, CBRL, CAKE, CMG, MCD
    Jul 27 4:30 AM | Link | Comment!
  • Gymboree: This Baby Rocks
    Gymboree (GYMB), one of the best children's apparel retailers in the U.S., is considered by a number of analysts and insitutional investors as one of the top young children's retailers in the U.S. So what makes Gymboree so special?  Best in class management team, multiple growth strategies, and a strong balance sheet seem to be sending a compelling vibe to Wall Street. 
     
    While Gymboree is not imune to fashion risk or mistakes on merchandising, management has a keen eye on product and execution. Crazy 8 is on track to grow up and  become an accreative growth vehicle. Gymboree wisely took the last 2-years to focus on cost reductions but also invested in positioning the company for future and profitable growth. 

    Crazy 8 is Gymborees newest concept, which is a value oriented children's apparel retail store. Management plans to open 75-100 new stores in 2010 compared to their prior guidance of 50 doors. This will bring the projected door count for Crazy 8 to 170 at the end of 2010 and management believes this concept could be as big as 600 doors. We have been early believers that Crazy 8 will be a meaningfull contributor to earnings in 2010 and beyond. However, the bears have feared that this lower price pointed concept will weight on operating margins. Even with dilution in operating margins for 2010 and 2011, we note certain analysts calling for $0.10 in EPS contribution for 2010 and over $0.20 in 2011 from Crazy 8. Further, if management can take advantage of a larger foot print and product costs, we think Crazy 8 can narrow the gap in operating margins. 
     

     

    Gymboree announced on their lastest earnings call its plan to expand internationally. Canada would be an ideal market for Gymboree to test over the next 48-months and is likley a 200 door opportunity for Gymboree and Crazy 8.  We note that Children's Place, one of Gymborees key competitors, has a presence in Canada and we expect management to clarify its International strategy later this year. Gymboree currently has 2 stores in Austrailis and has a franchise agreement in the Middle East. Managements ability to communicate the market size and opportunity for international expansion would likely be viewed positive by investors and analysts. 

    Fourth quarter results of 2009 were impressive. While same store sales were down 2%, we note that gross margins improved 330bps to 46.7%. EPS was $1.11 compared to $1.00 the prior year. Managment expects first quarter of 2010 comps to be up mid-single digits, gross margins to improve 200bps and EPS to be $0.90 to $0.94 compared to $0.74 the prior year. Long-term annual growth targets by management are for sales to grow mid-single digits, with low-single digit square footage growth and same store sales growth, and EPS around 15%. 

    Earnings Est EPSCurrent Qtr 
    Apr-10
    Next Qtr 
    Jul-10
    Current Year 
    Jan-11
    Next Year 
    Jan-12
    Avg. Estimate0.940.403.844.33
    No. of Analysts12111311
    Low Estimate0.900.313.644.00
    High Estimate0.980.453.954.59
    Year Ago EPS0.740.413.413.84
    Overall square footage growth is estimated to be up over 10% in 2010 and is likely a sustainable rate of growth over the next 5-years. Currently Gymobree has 960 stores with 629 Gymboree brand stores (primarily in malls), 140 Gymboree brand outlets, 72 Crazy 8 stores, and 119 Janie & Jack stores.
     
    At the end of 2009, Gymboree had over $8 in net cash per share with no debt. With ample liquidity and the ability to self fund its growth needs through future cash flow, Gymboree has a tough decision - what to do with all this cash? We would expect managment to continue its share repurchase program and plan to date Gymboree has repurchased $36 million of a $40 million plan. Beyond funding the companies growth needs, there is always acqusitions or a special dividend.

    The company recently revised 2010 EPS guidance and is now looking at $3.82 compared to analyst estimates of $3.84. For 2011 analysts are looking for $4.33 in EPS which values implies a forward p/e of 12.3x. This seems compelling when you look at the projected growth rate in both sales and earnings for Gymboree. Jim Chartier at Monness, Crespi, Hardt & Co. points out, "We are raising our price target to $60 (from $50) based on 14x our FY11 EPS estimate of $4.26. We believe a higher valuation multiple is justified given the company's low double digit square footage growth and increased visibility on margin expansion potential." Using the same 14x multiple and taking the high end of the analyst estimates at $4.59 you can see investors looking for this "baby" to reach for $64.26. 

    Keep in mind that management said Q2 EPS could be down due to tough compares and there is there constant debate of product cost issues heading into for Spring 2011. 

    Disclosure: Currently Mellon Advisors or Eric Martin does not own GYMB or PLCE.
     

    Disclosure: Acquired initial position 3/25/10
    Tags: GYMB, Gymboree
    Mar 29 1:32 PM | Link | Comment!
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