Category: INO.com Contributors

Restaurant Stocks: "David vs Goliath"

Posted on by Taylor Dart

It’s been a rough year thus far for the restaurant industry, with a pullback in traffic, higher costs due to commodity/wage inflation, and a challenging environment for some companies from a traffic standpoint.

The result is that much of the group has become un-investable, and some names are looking worse by the month, including Red Robin (RRGB), which will post its third straight year of heavy net losses in FY2022.

Given this backdrop, the best strategy is to focus on the industry leaders and those with proven business models enjoying unit growth and still enjoying strong restaurant-level margins.

However, in a sector where there are still several names with these attributes, it’s tough to decipher which are the best to own. In this update, we’ll compare newly public restaurant operator First Watch (FWRG) with long-time franchiser Dominos Pizza (DPZ) and see which is the better name to own in the current environment.

Scale & Business Model

Dominos and First Watch are akin to David and Goliath from a scale standpoint, with Dominos being the largest pizza company globally with ~19,300 restaurants and First Watch being an emerging breakfast chain with ~450 restaurants.

The differences in the business model are also night and day, with Dominos being a 98% franchised model with a significant international footprint and First Watch being a primarily company-owned company model, with just 22% of its restaurants being franchised currently.

While Dominos’ operators have seen some headwinds due to elevated cheese prices and difficulty securing drivers from a margin standpoint, Dominos is more inflation-resistant than First Watch, given its franchised model where operators bear the brunt of higher costs.

The good news is that First Watch still has very respectable restaurant-level margins, even if they dipped 440 basis points in the most recent quarter. Besides, this margin erosion was largely due to a conservative pricing approach to maintain its value proposition. Plus, as its alcohol mix grows and it’s rolled out to 100% of the system, we could see some additional benefit from a margin standpoint.

That said, Dominos is the clear winner from strictly a margin standpoint, with 30% plus gross margins and double-digit operating margins vs. First Watch at 21% and 4%, respectively, on a trailing-twelve-month basis.

Domino’s Pizza - 1 / First Watch - 0 Continue reading "Restaurant Stocks: "David vs Goliath"" →

Inflation Continues To Spiral Higher

Posted on by The INO.com Team

Key reports released last week in both the United States and the Eurozone revealed what global citizens have been acutely aware of. Inflation continues to spiral higher and at a staggering level.

This prompted Credit Suisse to issue a dire global economic outlook, saying that the “worst is yet to come”.

US Inflation Gauges

The Commerce Department released the latest inflation numbers vis-à-vis the PCE that revealed that the Core PCE jumped 0.6% in August. It shows that inflation is still intense and increasing.

The preferred gauge used by the Federal Reserve, the PCE (Personal Consumption Expenditures Price Index) revealed that inflation accelerated even more than expected in August. On a year-over-year basis, the core PCE which omits food and energy costs increased 4.9%, above projections of 4.7%. Continue reading "Inflation Continues To Spiral Higher" →

The Dollar Has Hit The First Target

Posted on by Aibek Burabayev

The king currency has finally hit the first long-term target of $114 that was set in the summer of a distant 2019 when it traded around $96.

That aim wasn’t clear then as the dollar index (DX) looked weak in the chart. The short-term structure was similar to a pullback after a heavy drop.

The majority of readers did not believe the DX would ever raise its head as you can see in the 2019 ballot results below.

Ballot Votes

However, I had found a bullish hint in a very big map, and I warned you “Don't Get Trapped By Recent Dollar Weakness”.

Back in August, you had already been more bullish on the dollar as you voted the most for the target of $121.3 in the earlier post. This confidence is due to the certain position of the Fed, which resolutely fights the inflation, lifting the rate aggressively round by round.

Let me update the visualization of the real interest rate comparison below to see if the dollar still has fuel to keep unstoppable.

DX Monthly vs Real IR

Source: TradingView

The real interest rate differentials are shown on the scale B: blue line for U.S. - Eurozone, orange line for U.S. – U.K. and the red line for U.S. – Japan. Continue reading "The Dollar Has Hit The First Target" →

Sugar-Coating the Likelihood of a Recession

Posted on by Matt Thalman

Does anyone remember when then President Donald Trump told the American population that the Covid-19 lockdowns and spread of the virus that caused the pandemic would all be over by Easter? Or when referring to Covid-19, that it was “the flu”?

During the first few weeks of the pandemic, President Donald Trump downplayed the severity of the virus to not panic the American population. In hindsight, perhaps the early days, especially when the country was in lockdown, it would have been more beneficial to not sugar-coat the virus and the timeline of when the government would lift the lockdown restrictions.

Had President Donald Trump told people the virus would kill hundreds of thousands of people, perhaps we could have stopped the virus from spreading during the lockdowns.

If President Trump hadn’t given a timeline for the lockdowns and the pandemic seeing brighter days, perhaps the government wouldn’t have lost its creditability with so many Americans during the summer of 2020 and its continued response to the pandemic.

Our current situation with the Federal Reserve and its chairman Jerome Powell, is very reminiscent of the early days of the Covid-19 pandemic.

Back in the winter and early spring, Powell told us that inflation was “transitory” and wouldn’t last. He even said current inflation wouldn’t need aggressive monetary policy changes to fall. Then, even when Powell began to raise interest rates, he told Americans that there was a high probability of a soft landing, referring to the idea that the Fed could bring down inflation slowly and gently.

Powell continued to tell us this summer that raising interest rates gradually and methodically would lower inflation but not put the economy in a recession.

Fast forward to just a week ago, and Powell tells us that the “chances of a soft landing are likely to diminish.” Inflation has hardly moved even though the Fed has raised interest rates five times, starting in March 2022. At that time, the Fed increased rates by 0.25%, 0.50% in May, then a 0.75% bump in June, July, and September.

Powell also said at the most recent Fed press conference following its announcement of the September rate hike that “we have to get inflation behind us. I wish there were a painless way to do that. There isn’t." Continue reading "Sugar-Coating the Likelihood of a Recession" →

2 Apparel Stocks Bucking The Trend

Posted on by Taylor Dart

It’s been a rough past month for the S&P-500 (SPY), with the index down 15% in less than 30 trading before Wednesday’s rally.

The continued weakness can be attributed to the view that a 4.0% terminal rate for the Federal Funds Rate may not be enough to bring inflation to its knees, given how sticky inflation has been to date and with supply chain issues remaining in place.

Higher rates result in growth stocks becoming less attractive, given that higher discount rates must be used to discount future cash flows. At the same time, there is a greater risk of a hard landing, which does not paint a rosy picture of 2023 earnings for S&P-500 companies.

However, while many stocks are seeing declining earnings with pressure on profit margins, quite a few companies are bucking the trend, and given the general market weakness, they’ve found themselves trading at extremely attractive valuations.

Two names that stand out are Capri Holdings (CPRI) and Deckers (DECK), which both hail from the apparel industry group and are on track to grow annual earnings per share at double-digit levels this year.

Just as importantly, they’re expected to see new all-time highs in annual earnings per share next year as well. Let’s take a closer look below:

Capri Holdings (CPRI)

Capri Holdings is a global fashion company with three iconic brands: Versace, Jimmy Choo, and Michael Kors. While luxury brands might be considered the last thing that one is shopping for in a recessionary environment, they benefit from a very affluent customer base that’s seeing much less pressure than lower-income consumers to their discretionary budgets.

Meanwhile, from an industry standpoint, the personal luxury goods market continues to grow at an impressive rate. Based on recent research, sales are expected to grow 10% from FY2019 levels this year and are forecasted to increase another 20% from FY2022 to FY2025.

Given that Capri owns some of the strongest brands, it’s in great shape to capture some of this growth. In fact, its long-term goal is to increase total revenue to more than $8.0BB, up from FY2023 estimates of $5.85BB. This is expected to be driven by the following: Continue reading "2 Apparel Stocks Bucking The Trend" →