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Restaurants relish the mild winter

February 24, 2012: 11:47 AM ET

Last year, when snowmageddon swept the country, restaurant chains suffered. This year expect to hear a much more pleasant story in first quarter earnings calls.

By Howard Penney and Rory Green, Hedgeye

Ski resorts may be struggling this winter, but the retail industry is cheering the unseasonably mild weather. The broader retail sector, including restaurants, is set to benefit from significant weather-related tailwinds in their first quarter numbers, especially as they compare to numbers from last year's harsh conditions. Here we examine one metric, snow coverage, both nationally and by selected regions, in order to contemplate just how significant the weather sales lift might be and which restaurant companies may benefit most.

Nationally, as the first chart shows below, this year to-date has seen far less snow coverage than during the same time period in 2011. The average coverage across the United States so far this year was 28.54% versus 48.41% last year. Additionally, on the weekends, as the second chart below indicates, the difference between 2011 and 2012 was consistent with the total picture. This is important as weekends are crucial to restaurants from a traffic perspective.

We have broken out three regions, the Midwest, the East Coast, and the South. The National Operational Hydrologic Remote Sensing Center, the source of the snow coverage data, divides the country into many regions with some of the dividing lines running through state lines. Therefore, in our conclusions as to which companies will derive the most benefit from weather changes in the three regions, we are forced to approximate.

In the Midwest, the first quarter so far has seen far less snow coverage than during the same time period in 2011 -- the average coverage is 16.45% versus 51.19% last year. Additionally, on the weekends, the difference between 2011 and 2012 was consistent with the overall picture. Panera Bread Company (PNRA) and Buffalo Wild Wings (BWLD) are two companies with significant percentages of their system in this region. It is difficult to reconcile the regions assumed in the snow coverage data with actual state lines but we estimate that Panera and Buffalo Wild Wings have roughly 30% and 45% of their system units in this region, respectively. During its recent earnings call, execs at Buffalo Wild Wings were asked about the weather impact on its 1Q to-date performance (+12.9% comps) but management did not address the topic. Considering the high level of exposure the company has to the Midwest, and the data shown in the charts below, we contend that the impact of weather on Buffalo's top line has likely been significant. Cracker Barrel (CBRL) is another concept heavily exposed to the Midwest, with roughly 35% of its system in the region.

In the Eastern Coastal region too, this year has seen far less snow coverage than last year -- 2.65% coverage versus 19.61%. Again, doing our best to reconcile the regions in the map, above, with state lines, we believe that Ruby Tuesday (RT) and Panera should benefit from the improved weather this year with roughly 33% and 22% of their systems in the region, respectively.

While it may seem strange to conduct research on snow coverage in the South, we believe that it will be meaningful for the restaurant companies that were impacted by last year's harsh conditions. On Saturday February 5th, 2011, The New York Times ran a story with the headline, "Snow and Ice Paralyze Texas From Rio Grande to Oklahoma Border." In states such as Texas, where such weather is less common than in other areas of the country, we contend that its impact on consumers' willingness to get in the car and go out to eat is likely severe.

The comparison to last year's snowfall is much the same in the southern region -- 2.65% average coverage versus 19.61% last year. PFCB and SONC are two companies that are set to see a 1Q benefit from this year-over-year improvement in weather in Texas. P.F. Chang's (PFCB) has 32% of its Pei Wei units in Texas. Sonic (SONC) and Chili's (EAT) have roughly 27% and 14% of their systems, respectively, in the Lone Star State.

We are sure that restaurant companies will be less keen to discuss the weather as they have been in previous years. Panera was an exception during its earnings call a couple of weeks ago, highlighting the 3.5% expected increase in same store sales from the positive weather impact. We expect benefits of similar magnitude for many of the restaurant companies – particularly those highlighted in this story– during this quarter. In order to get specifics, however, we may need to wait until next year when weather is a headwind once again.

Follow Howard Penney on Twitter @hedgeyeHWP

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Hedgeye

Hedgeye, a real-time investment research firm founded in 2008 by former Carlyle-Blue Wave portfolio manager Keith McCullough, operates as a virtual hedge fund. Staffed by research analysts from across Wall Street, Hedgeye offers fundamental, macro and sector analysis, present picks in a transparent way to its clients. It has built a stable of subscribers, which includes hedge funds and mutual funds, and recently launched a retail investor product.

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