This stock market loves retail. You can tell, as buyers are coming right back to the group after further reflection about lower oil prices. Investors were enamored of retail before gasoline plummeted, based on better-than-expected employment growth. Now, after a moment's hesitation, they are starting to go gaga again because of gasoline prices that have been cut in half and heating bills that have plummeted thanks to big drops in natural gas and propane, plus incredibly easy comparisons versus a storm-addled nation. It doesn't hurt that there's no strong dollar worry among these companies; in fact, some benefit from cheaper imports because of the strong dollar. Others benefit from what looks to be a peak in food inflation, although that thesis has its doubters when it comes to both meat and poultry.
But which ones do we really buy? Which ones should be avoided? How do we pick them? Which retailers are right? I have the answers in this two-part piece.
First, you can just go buy the Market Vectors Retail ETF (RTH). But that means you are buying a lot of Wal-Mart (WMT) with only 71% domestic, a ton of Amazon (AMZN), which has simply way too much overseas and a model that doesn't lend itself to the weather or gasoline, and a chunk of a newly internationalized Walgreens (WBA), as well as Costco (COST) and TJX Cos. (TJX), which have meaningful international exposure. It just doesn't work as a proxy, even as I am sure investors can't resist because of the ascension of all exchange-traded funds over individual stock-picking.
Or you can pick among the best of the best, not just pure retail but also restaurants, which seem to get a disproportionate share of the new purchasing power as well as a shot in the arm from a resurgent consumer confidence factor.
Which ones make the cut? Going in alphabetical order, let's start with Buffalo Wild Wings (BWLD) and its always underestimated yet totally bankable CEO, Sally Smith. This company has devolved into a hedge fund playground, as the guessing game of when higher poultry prices will crush earnings is continually played out. The hedge funds should be more focused on the crowds watching sporting events and the amount of beer served, where the real money is. BWLD has a lot of room to expand, it has a menu filled with all sorts of expensive beers vs. what the company pays for them, and (don't I know it as the owner of Bar San Miguel) a rabid fan base that seems to grow year over year. It's really a terrific proxy for the consumer and its only drawback is the multiple, 35x earnings, expensive even with lots of growth.
Speaking of expensive, Chipotle (CMG) never got cheap all year. Why should it be? It's the best and on the strength of the highest same-store sales of any major restaurant, or retailer for that matter, it traveled to $693 from $531. I can't say it didn't skip a beat because it did trade down to $477 when it didn't raise expectations enough in the spring. But that contained enthusiasm came right at the time that sales exploded, aided by changes that allowed more customers to chow down at lunch -- improved throughput -- and it sent the stock into the stratosphere. The nation is still under-Chipotled, and this could be the year we start seeing growth to the Shophouse Southeast Asian Kitchen concept -- I am calling it a concept because it just hasn't grown into much else in the last few years, as the company wants it to be kink-less before a true rollout. Chipotle was hurt by all sorts of food costs, avocados and beef being the big troublemakers. Both peaked in the first half and now will make easier comparisons. Chipotle benefits from the biggest trend out there: the drive to be more natural and organic, which is something that's been stoked by a brilliant series of inexpensive videos, augmented by terrific, and cheap, social media, and the trend is only accelerating. You can always wait for a break in the stock to get in but I think the next quarter has easier sales comparisons and food costs -- but not menu prices -- are about to head lower.
Let me just say up front, as a veteran customer of this well-run chain, I am not a huge fan of Cracker Barrel (CBRL). It's the polar opposite of Chipotle in ethos. It prides itself in dishes like its apple pie with cheese a la mode. I haven't seen much natural and organic here. But I have seen a fabulous set of roadside locations that makes this chain the go-to cheap gasoline play. Sometimes it is better to be lucky than good.
DineEquity (DIN) was at $78 when oil started its huge rollover in October and quickly jaunted to $103. This dual concept (think Applebee's and IHOP) restaurant chain led by the terrific Julia Stewart, oddly, holds itself out as the number one restaurant social media user. It's working. You know what else is working? It's beautiful franchise model that spews cash, allowing it to pay down debt aggressively. I expect even more of that to occur in 2015. And it's high-coupon debt, so it's additive every time the chain removes a slug of it. Like Cracker Barrel and several other chains covered here, it doesn't have much float. In a world where portfolio managers covet anything domestic, that helps, not hurts, those who already own DineEquity, even as it frustrates large institutional buyers.
Here's one that could really take off in 2015: the $1.5 billion Fiesta Restaurant Group (FRGI). Fiesta had a real up and down and then up year in 2014, starting at $52 in January, trading down to $36 in the spring and then rallying right back and then some to $59 by year's end. What I like about FRGI is that it's caught the fancy of customers in two different trends, Caribbean, with Pollo Tropical, and Mexican, with Taco Cabana. The former's building out a national footprint and the latter is seeing a turn in its same-store sales. Start getting to know CEO Tim Taft; he's a seasoned restaurant expert who has put this relatively unknown chain on the map and is now ready to accelerate openings. The same-store sales for Pollo Loco are almost as strong as Chipotle's, which is saying something, and it isn't reflected in the stock.
My domestic restaurant sector stocks are rounded out by the best performer, one that I believe can repeat a run of the magnitude that took this stock to $79 from $49 over the course of the year: Jack in the Box (JACK). The flagship company's been a big winner despite its burger orientation because of an aggressive, terrific remodeling effort. But I am far more excited about the turn in Qdoba, its formerly ne'er do well Mexican division. I've long been a fan of the food of Qdoba but management's finally gotten the chain to go positive, and I think that JACK should do with Qdoba what McDonald's (MCD) did and spin out the division. Qdoba would be able to participate in the market's love of Mexican food, and Jack in the Box would become the burger joint to own -- at least until Danny Meyer's Shake Shack comes public.
If I had to buy any one of these, I would put my money on JACK if only because, while it has run a lot, it has the ability to break itself up into two divisions and the market would love it and lap up the change, sending both stocks dramatically higher.
