Government Statistics Aside, What's Happening on Main Street?
While economists predict and pundits comment on broad economic trends, including retail sales and employment, in the real world, away from numbers massaged by the Bureau of Labor Statistics and other agencies, company results are coming through daily. About 70% of the US economy is dependent on consumer spending, and we follow many of the companies participating in this sector. We comment below on the highlights of company reports and, more importantly, their expectations for the coming quarters. Keep in mind that publicly held companies have become fairly skilled in "managing expectations", "under-promise and over-deliver", etc.
Also noteworthy is that many companies report "non-GAAP" and /or "adjusted earnings". Rhetorically, I ask: Why pay large sums to accounting firms for audited results when the reports are massaged by management and accepted, to varying degrees, by investors? If GAAP earnings are not the standard, by what shall we judge results and prospects?
My commentary below is designed to highlight "reality" rather than "hope". I have been admittedly skeptical relative to the supposed economic recovery. I will try to control my bias and present a balanced view of the history and prospects of the described companies. It is also worth remembering that Q4'15 and Q1'16 represent relatively easy comparisons, since the weather a year ago was so abnormally frigid. Q2'16 and Q3'16 should be more normalized comparisons.
Two Mid-Cap Restaurant Companies
Del Frisco's Restaurant Group (NASDAQ:DFRG) reported Q4'15 on 3/1.
The headlines referred to Q4 adjusted earnings of $0.36, meeting the $0.36 estimate. (Yahoo reports) Q4 total comp sales were down 2.2%. Sales of $114.1M met estimates. Management updated their forecast to $0.83-0.86 in '16 versus $0.89 estimated by analysts. Details reported in their release included comp sales down 1.6% at Del Frisco's Double Eagle Steak House, down 1.8% at Sullivan's Steakhouse and down 4.5% at Del Frisco's Grille (their expansion vehicle). GAAP net income was $0.34 versus $0.23. Restaurant level EBITDA, a non-GAAP measure was up 3.7%. In the release, management admitted disappointment in Q4 and is putting in place various initiatives.
While DFRG is "pleased with the class of 2015... Grilles are slowing pace to 2-3 Grille openings and 1 Del Frisco's DE Steakhouse," which "enables us to [devote] more time and resources to existing restaurants."
They are also working on a smaller, more efficient Grille prototype. More fourth-quarter results included closings of two Grille locations. Traffic trends were negative in Q4, down 2.4% at Del Frisco's DE (0.8% increase in average check), down 2.1% at Sullivan's (0.3% increase in average check) and down 0.7% at the Grille (average check was down 3.8%).
For calendar '16, projected overall comp sales were a positive 0-1.5%. Color from the conference call included: Away from oil related markets, sales were better at Del Frisco's DE, and two stores not in the comp base helped overall EBITDA. Sullivan's was also hurt in the oil related markets. At the Grille, only 9 of 20 stores are in the comp base, and two bad ones are now closed. The overall decline in traffic in Q4 was the smallest in 10 quarters, and it turned positive in Q1'16. Cost of sales was down in Q4, partially offsetting other deleverage.
The 2015 class of stores, and early 2016 as well, have gotten "off to a great start." ... "2016 is a transitional period." Sales results varied widely at Del Frisco's DE and Sullivan's, down DD in oil related markets and up DD at some others. Expansion at the Grille has been slowed, and menu has been modified including new offerings at lunch. (not normally a very profitable daypart). Cost of sales overall was 120 basis points lower, while other operating expenses increased by 160 bp. D&A increased by 80bp and G&A decreased 30bp. Looking ahead, their "cautious" stance expects comps of 0-1.5% positive, slowest in Q1, then improving.
In their second fiscal period, all three concepts had positive sales and traffic. In January and February, weather has admittedly helped. 1.3% pricing will be taken in Q2. An effort will be made to reduce the footprint of the Grille from 7,400 to 6,500 square feet. Commodity relief will be more than offset by higher labor (and benefit) costs. In terms of share repurchase, nothing was done in Q4. Our conclusion: a lackluster Q4, lots of worthwhile initiatives, but overall a cautious outlook.
Chuy's Holdings Inc. (NASDAQ:CHUY) reported Q4'15 quarter on 3/1.
Chuy's has been one of the most consistent performers in the last couple of years, and the valuation at almost 30x '16 earnings reflects that. They reported (Yahoo reports) $71.0M of sales versus estimates of $70.4M, with comps up 3.2% vs. an estimate of 2.8%. Adjusted EPS was $0.18 vs. an estimated $0.13. They guided to $1.01 to $1.05 in '16 vs. an estimated $1.04. The Bloomberg headline read: "CHUY beats by $0.05, beats on revenues". GAAP earnings, for what it's worth, was $0.01/share versus $0.14 a year ago. Q4'15 included a $4.4 million pre-tax non-cash loss on asset impairment of three restaurants. (I wish I could ignore my stock picking losers in reporting results to my investors). Restaurant level EBITDA increased 34.5%. Four new restaurants opened during Q4, bringing the annual growth in units to 17%. Traffic was flat, with average check up 3.2%, but affected negatively 60bp by holiday shifts due to Halloween and Xmas. Total restaurant operating costs were lower by 270 bp, including lower commodities and labor efficiencies as well. Occupancy costs were higher. Not much to dislike, other than the closing of three restaurants, but, hey, everybody makes mistakes. The conference call provided the following color: The Company is "pleased with the initial results" of the class of 2015 stores. Operating initiatives focusing on food waste, labor scheduling and manager rationalization, along with commodity deflation helped improve EBITDA by over 200 bp. New stores are improving margins faster than has been the case historically. 2016 will see 11 to 13 new stores. 2016 guidance includes new pricing of about 1.5% in Feb'16. Looking ahead, commodity prices are expected to be flat to up 2%, and overall cost of sales to be up 10 bp over 2015. There were certain labor reductions in 2015 that will not be repeated and "looking out to 2016, we expect some labor pressure". Occupancy expenses were up 40 bp in 2015, consistent with our expectations for most restaurant companies. Comp sales in 2016 are estimated to be about 2%. Apparently, new stores are coming into the base at a "lower margin", "to stabilize in 2018". Oil related markets have apparently not hurt sales at CHUY, as opposed to Del Frisco's. It was noted that 2016 is unlikely to see the same sort of margin improvement as in 2015. Conclusion: This is a well-managed, consistently expanding, well regarded restaurant chain with lots of opportunity for further growth. While not "shooting the lights out" in terms of traffic and sales, earnings per share are likely to progress further and, without a significant stumble, create an even higher valuation for the stock.
Our Conclusion in the Restaurant Space: DFRG is doing fine, CHUY's a bit better. In terms of a window into the economy as a whole, there's nothing to indicate we are close to an "escape velocity."
Two Off-Price Retailers
Dollar Tree, Inc. (NASDAQ:DLTR) reported Q4'15 on 3/1.
This operator of thousands of dollar stores, now including their recently acquired Family Dollar locations, has had an outstanding long term record of improving sales and earnings. Their fourth quarter, with $5.37 billion of sales (Yahoo reports) hit the midpoint of their guided range with a "modest" 1.7% same store sales increase on a constant currency basis for their Dollar Tree stores (on top of a firm 5.6% increase in '15). GAAP net earnings per share were down 2.9%, and "adjusted" earnings per share were down about 15%. We need not itemize the various adjustments affecting this situation, especially considering the effects of the substantial recent acquisition. Rather we want to focus on management's commentary relative to recent sales trends and prospects going forward. The formal release said nothing in this respect but during the conference call management indicated: Q4 reflected a "difficult consumer environment". "Dollar Tree continues to be part of the solution for millions of consumers as they strive to balance their household budgets….values at Dollar Tree are better than ever...our customer satisfaction scores have improved...sales were positive each month (ed.not by much)...we're focused on customer engagement, friendly and informed associates…for the first quarter we are forecasting …a low single digit same store sales increase...for the full fiscal year…low single digit same store sales increase…through all retail cycles consumers are looking for value…….in a sort of tough economy we are up against a fairly difficult comparison….as far as current trends….we've given you our first quarter guidance and any color on that is we're on track".
Most of the management discussion revolved around integration of Family Dollar Stores into the Dollar Tree Corporation, substantial synergies to be realized, and we suggest that our readers should read the transcript for more detail. Our Conclusion: DLTR is as well-equipped as any retailer serving the value oriented customer. They have every expectation of continuing to generate high returns on invested capital but given no indication that a revived consumer is going to make their life any easier.
Ross Stores, Inc. (NASDAQ:ROST) reported their Q4'15 on 3/1
ROST is another "best of breed" retailer, as the largest off-price apparel and home fashion chain in the US, with 1274 locations. This value oriented retailer has also had an outstanding long term operating record. Fourth quarter (Yahoo reports) sales were up 7% YTY to $3.25 billion and EPS was up 10%. Comp sales were up 4% on top of 6% a year earlier. Once again, rather than dwell on the details, we are more concerned with company indications of sales trends, past, present and future.
In the formal release, management indicated: "our sales and earnings….exceeded our expectations despite the highly promotional holiday selling environment….as we enter 2016, we continue to face ….an increasingly uncertain and volatile macro-economic and retail environment.
As a result, while we hope to do better, we believe it is prudent to maintain a somewhat cautious outlook…for the fiscal year ending 1/28/17, the Company is projecting same store sales to grow 1% to 2%...for the first quarter, comp sales are forecast to be up 1% - 2%, vs. 5% LY". During the conference call management went further: ..."it doesn't appear that the retail landscape will get any less competitive or promotional in 2016...it's prudent to maintain a conservative posture…where business was difficult, it's apparel and home….this year seems to have gotten off to an especially wobbly start in terms of the economy….over the next few years as the economy or if the economy picks up, we may see more expense pressures...including higher wage rates….concerns and questions about the overall economy…don't know to what degree that will impact retail and our business over the coming 12 months."
Our Conclusion: Once again, management discussed a long list of issues such as inventory management, departmental performance, competitive pressures, etc., and our readers can peruse the transcript on their own should they have an interest.
What's Really Happening on Main Street? - Our Conclusion
It didn't get any easier for consumer driven companies in Q4 and there is no sign, up until just a few days ago, that household purse strings are being loosened. "Best of Breed" companies such as Dollar Tree and Ross Stores will continue to prosper, even if sales and earnings decelerate somewhat. Less prominent companies, with strong balance sheets, such as Del Frisco's and Chuy's will survive and even prosper to varying degrees. However, the overall environment continues to be far from forgiving and there is not yet any indication that this situation is abating.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.