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Adding more Del Frisco’s to our plate following several bullish data points

Adding more Del Frisco’s to our plate following several bullish data points

Key points inside this issue

  • We are scaling into shares of Del Frisco’s Restaurant Group (DFRG) following several bullish data points from last week. Our price target for DFRG shares remains $14.
  • Our price target on Amazon (AMZN) remains $2,250
  • Our price target on United Parcel Service (UPS) shares remains $130
  • Our price target on Chipotle Mexican Grill (CMG) shares remains $550
  • Our price target on Costco Wholesale (COST) remains $250
  • I am reviewing our current price target of $130 for shares of McCormick & Co.
  • Last week’s podcast – Lithium Ion Batteries: The Enabler of the Digital Lifestyle
  • Last week’s Thematic Signals

Last Friday we received a number of positive data points for restaurant spending, which coupled with the latest US Department of Agriculture report on falling beef prices has me using the recent weakness in our Del Frisco’s Restaurant Group (DFRG) shares to improve our cost basis. Since adding DFRG shares to the portfolio, they’ve fallen nearly 10% since the end of August and just over 3% since we added them to our holdings despite favorable economic and industry reports. Part of that downward pressure came from Stephens throwing in the towel on its bullish stance on the shares last Wednesday. It would appear that Stephens jumped the gun given the favorable data that emerged later in the week.

Let’s review all of those data points…

 

August Retail Sales

The August Retail Sales report saw its headline figure come in at +0.1% month over month missing expectations of +0.4% and marked the slowest gain since February suggesting persistently high gas prices could be taking a bite out of consumer spending. With prospects for higher gas prices ahead following last week’s greater than expected crude inventory drawdown reported by the Department of Energy and the greater than expected jump in Total Consumer Credit for January, it would appear that Middle-Class Squeeze consumers slowed their spending in August vs. July. Hat tip to Tematica’s Chief Macro Strategist, Lenore Hawkins, and her coverage of those data points in last Friday’s Weekly Wrap. If I’m reading it, so should you.

Turning to the year over year view, August retail sales rose 6.2%, led by a more than 20% increase in gas station sales due to the aforementioned gas prices, and continued gains in Nonstore retailers (+10.4%) and food services & drinking places (+10.1%). Over the last three months, these last two categories are up 9.9% and 9.5% year over year, even as gas station sales are up nearly 21% by comparison. Those figures bode extremely well for our Digital Lifestyle positions in Amazon (AMZN) and United Parcel Service (UPS), our Clean Living holding that is Chipotle Mexican Grill (CMG) and Del Frisco’s Restaurant Group, a Living the Life company.

The report also offered confirming context for our shares in Costco Wholesale (COST) as its August same-store sales handily beat those contained in the August Retail Sales report. Also inside this latest missive from the U.S. Department of Commerce, grocery store sales rose 4.3% year over year in August, which keeps me bullish on our shares of McCormick & Co. (MKC) even as they hover over our current $130 price target.

In terms of areas reporting declines in August Retail Sales Report, we continue to see pressure at Sporting goods, hobby, musical instrument, & bookstores (-3.9%) and Department Stores (-0.7%), continuing the trend of the last few months. With Amazon continuing to flex its business model as well as its own line of private label products, including fashion, sportswear, and apparel, as well as continued digital commerce gains at Walmart (WMT) and its Bonobos brand, we see these retail categories remaining challenged in the coming months.

 

August restaurant data from TDN2K

On Friday we also received figures from TDn2K’s Black Box Intelligence that showed August same-store restaurant sales rose +1.8%, the best highest since 2015. TDn2K’s data is based on weekly sales from over 30,000 locations representing more than 170 brands and nearly $70 billion in annual sales. More positives for our positions in Chipotle and Del Frisco’s. I’ll tuck this data point away as well as the July and eventual September one to compare them against same-store sales quarterly results for out two restaurant holdings.

 

US Department of Agriculture

The most recent data published on Friday by the US Department of Agriculture showed cow prices were down 13.6% year over year in July, continuing the trend of double-digit year over year declines that began this past May. I see this as confirmation of deflationary beef prices that bode well for both margins and EPS gains at both Del Frisco’s and to a lesser extent Chipotle.

Later this week, I’ll look for further confirmation of beef deflation leverage when Darden Restaurants (DRI), the parent of Capitol Grill reports its quarterly earnings.

 

Scaling into Del Frisco’s shares

The net result of these three Friday data points has me adding to our Del Frisco’s Restaurant Group shares at current levels. If our Chipotle shares were lower than our entry point, I’d be doing the same, but they aren’t – if they do fall below the $473 layer, all things being equal I’d look to repeat today’s actions but with CMG shares.

  • We are scaling into shares of Del Frisco’s Restaurant Group (DFRG) following several bullish data points from last week. Our price target for DFRG shares remains $14.
Retail Sales Data for the Month of May Confirms Several Thematic Investment Themes

Retail Sales Data for the Month of May Confirms Several Thematic Investment Themes

This morning we received the May Retail Sales Report, which missed headline expectations (-0.3% month over month vs. the +0.1% consensus) as well as adjusted figures that exclude autos sales for the month (-0.3% month over month vs. +0.2% consensus). Despite the usual holiday promotional activity, retail sales in May were the weakest in 16 months due in part to lower gasoline prices, which had their biggest drop in over a year. In our view, the report confirms the challenging environment for brick & mortar retailers, despite those lower gas prices, while also affirms our decision not to participate in the space with the Tematica Select List as there were some bright spots below that headline miss.

Almost across the board, all retail categories were either essentially flat or down in May compared to April. The exception? Nonstore retail sales, clothing, and furniture — and nonstore obviously mostly comprised of online retailers since the Sears catalog isn’t in the mailbox too often these days. Comparing May 2017 retail sales to year-ago levels offers a different picture – nearly all categories were up with a couple of exceptions, the most notable being department stores. Again, more confirmation to the “why” behind recent news from mainstays of U.S. mall retailers like Macy’s (M), Michael Kors (KORS), Gymboree Corp. (GYMB) and Sears (SHLD).

Some interesting callouts from the report include that year over year, nonstore retail sales rose 10.2% percent, which brings the trailing 3-month year over year comparison for the category to 11.4%. This data simply confirms the continued shift toward digital commerce that is part of our Connected Society investing theme and is a big positive for our positions in Amazon (AMZN), Alphabet (GOOGL) and United Parcel Service (UPS).

We only see this shift to digital accelerating even more as we head into Back to School shopping season in the coming weeks and before too long the year-end holiday shopping season. While it is way early for a guesstimate on year-end holiday spending, eMarketer has published its view on Back to School spending this year and calls for it to grow 4 percent year over year to $857.2 billion. If that forecast holds, it will mean Back to School spending will account for roughly 17 percent of eMarketer’s 2017 retail sales forecast for all of 2017.

Not ones to be satiated with just the headlines, digging into the report we find more confirmation for our Connected Society investing theme – eMarketer sees e-commerce related Back to School shopping growing far faster, increasing 14.8% to $74.03 billion in 2017. As we like to say, perspective and context are essential, and in this case, should that e-commerce forecast hold it would mean Back to School e-commerce sales would account for 8.6% of total retail sales (online and offline) for the period, up from 7.8% last year.

 

The Connected Society Won’t Be the Only Theme In Play for Back to School Shopping

Given the last several monthly retail sales reports, as well as the increasing debt load carried by consumers, we strongly suspect our Cash-strapped Consumer theme will also be at play this Back to School shopping season, just like it was last year. In its 2016 findings, the National Retail Federation found that “48% of surveyed parents said they were influenced by coupons, up five percentage points from the prior year, while others said they planned to take advantage of in-store promotions and advertising inserts, and 53% said they would head to discount stores to finish prepping for the new school year.”

With consumer credit card debt topping $1 trillion, consumers are likely to once again use coupons, shop sales and hunt for deals, and that bodes very well for the shift to digital shopping. With Amazon increasingly becoming the go-to destination for accessories, books and video, computers and electronics, office equipment, sporting goods and increasingly apparel, we see it continuing to gain wallet share over the coming months.

 

Food with Integrity Theme Seen in Retail Sales Report As Well

Getting back to the May Retail Sales report, another positive was the 2.2% year on year increase in grocery stores compared to data published by the National Restaurant Association that paints a rather difficult environment for restaurant companies. The latest BlackBox snapshot report, which is based on weekly sales data from over 27,000 restaurant units, and 155 brands) found May was another disappointing month for chain restaurants across the board. Per the report, May same-store sales were down -1.1% and traffic dropped by 3.0% in May. With that in mind, we’d mention that last night Cheesecake Factory (CAKE) lowered its Q2 same restaurant comp guidance to down approximately -1%. This is a reduction from prior guidance of between 1% and 2%.

Stepping back and putting these datasets together, we continue to feel very good about our position in Food with Integrity company Amplify Snacks (BETR), as well as spice maker McCormicks & Co (MKS) as more people are eating at home, shopping either at grocery stores or online via Amazon Fresh and other grocery services. Paired with the shifting consumer preference for “better for you” snacks and food paves the way for Amplify as it broadens its product offering and expands its reach past the United States. As we shared in yesterday’s weekly update, United Natural Foods (UNFI) should also be enjoying this wave, but the company recently lowered its revenue guidance, so we’re putting UNFI under the microscope as we speak and we could very well be shifting our capital soon.