Two Post Earnings Consumer Bargains

With the price of gas still below $2.50 a gallon and spring in air retailers were supposed to reap the benefits of a boost in consumer spending. Many failed to live up to these heightened expectations and suffered steep losses following their second quarter earnings reports.

I’ve scoured through financials and charts and these two companies’ shares now being offered at discount prices with technical set ups that offer good risk/reward entry points.

Fiesta Grill (FRGI)

Fast food and casual dining companies were supposed to be among the biggest beneficiaries of cheap gas. But while industry numbers showed respectable same store sales growth in the 5%-7% growth and revenues up 10%-15% many the stocks got slammed. Everyone from market darling Chipotle (CMG) to my beloved Pollo Loco (LOCO) fell more than 10% following earnings that most met heightened expectations.

Another casualty was Fiesta Restaurant Group (FRGI) which owns and operates over 350 fast casual restaurants under the Pollo Tropical and Taco Cabana brand names. The locations are focused in Florida, Texas and Georgia and also in Latin America and the Bahamas. When the company reported Q2 results on April 30th it showed revenues increased 12.7% to $163.9 million, comparable restaurant sales increased 6.4%, net income increased 20.4% to $10.5 million and earnings per share increased 18.2% to $0.39.

All metrics were better than expected yet shares extended their recent decline hitting a low of $47.50 or down some 25% in just six weeks from their March high despite offering growth at a reasonable valuation. After a brief bounce back to $52.50 shares slipped back to this key support level at $47.50.

FRGI 051815

The sector and FRGI now looks pretty washed out and offers a very attractive risk/reward entry point.

The Trade:

I’m targeting the purchase of the September $50 calls for $3.40 a contract.

I have an initial upside target of $58 a share which would bring the value of the calls to at least $8 for a 160% gain. Use a close below $47 as a stop loss for managing risk.

SuperValue

Supervalue (SVU) has a huge footprint of over 2,000 grocery stores in 41 states. It focuses on the value conscience customer with wholesale distribution and multiple grocery store independent operators, regional chains, and the military. Some of the better known chains include Save-A-Lot, Cub Foods and Shop & Save.

A few years ago that segment was falling out of favor as both shoppers and investors favored the higher growth, higher margin brands such as Whole Foods (WFI) and Sprouts (SFM). But the tides seem to be turning. Whole Foods recently got slammed and the company’s plan to open a “value” or low cost locations has been met with skepticism.

Meanwhile, Supervalue is already several years into cleaning up its act.   Back in 2010 the company embarked on a series of asset sales managed to trim the company’s debt load from around $7.6 billion in fiscal (February) 2010 to a recent $2.7 billion. And the company has managed to generate profits in each of the last two fiscal years, after generating losses in the prior three years. Cost cuts and better merchandising strategies get the credit.

But despite positive results in the most recent quarter shares have declined some 25% over the past month as investors that had profited from the turnaround apparently decided to take profits and the lower than expected results from other grocers such as Whole Foods and Kroger (KR) weighed on the sector.

SVU 051815

If you dig through the company’s most recent conference call, you’ll hear a lot about many small transformations that should set the stage for better operating margins in coming years. For example, the company is investing heavily in private-label goods, which tend to have even better margins for grocers than branded goods. SUPERVALU is also making a strong push into ethnic goods, which is a savvy move as many of its stores are located in neighborhoods with a strong Hispanic presence. Lastly, the company is closing several dozen underperforming stores each year, and opening a similar number in underserved communities.

The recent drop makes this once again a clear value stock with a turnaround plan already well under way. The company continues to retire debt and currently trades at just 10x forward earnings. I see significant upside over the next 6-8 months.

The Trade:

The stock has suffered some technical damage and may need a few quarters to get investors to buy back in to the turnaround story. I want to look use LEAPs as a low cost way to leverage up gains.

I’m targeting the $9 calls with the January 2016 expiration at $1 per contract

I think the stock can get back to the old highs near $12 a shares which would give the calls a minimum of a $3 value for a 200% gain.

Earnings have created some bargains. Time to go shopping in these two names.

— Steve Smith

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About the Author: Steve Smith