prev

MCD – GOT JAVA?

Including today’s performance MCD is down about 1% year-to-date and has underperformed the S&P 500 by roughly 5.0%. 

 

The underperformance is testing the willpower of the BULLS as we are headed into a very tenuous time for the company - the reporting of 1Q11 EPS.  Before we learn about earnings, we will get one more monthly reading on same-store sales trends for February. 

 

Yesterday, Bloomberg ran an article that highlighted one of primary our concerns for MCD, which is that the advertising strategy for the company has moved too far away from the core customer and is now too focused on selling a drink rather than a burger.

 

The article focused on Ronald McDonald and the company’s move away from using him as part of the advertising strategy.  While I agree with the premise of the article, the focus on Ronald McDonald misses the point.  Kid’s meals have been declining in importance for 20 years as evidenced by the removal of most playgrounds from suburban MCD stores six years ago.  In addition, Happy Meals have become an afterthought on the marketing calendar.  Ten years ago you would hear rumors that one market or another ran out of a particular toy in the middle of a promotion; that doesn't seem to happen anymore.

 

Lastly, when was the last time you heard management give credit to a Happy Meal promotion for increased same-store sales growth?

 

We have seen in some markets that MCD has been pushing to sell the basic Happy Meal for $2.99 instead of $3.50 to help improve sales; this price reduction won't be implemented nationally because with rising food costs and the cost of toys, the Happy Meal becomes a money loser for franchisees.  Since Happy Meals are a low profit sale for the company, it’s just not a focus.  In addition, a parent can spend less by ordering off the dollar menu. 

 

As I highlighted in the MCD Black Book, the dollar spend on beverages has shifted significantly over the past three years.  Advertising on beverages as a percentage of the company’s total U.S. marketing spend has gone from 3% in 2008 to 43% in 2010.  As hard as MCD tries, they are not going to be as successful as Starbucks in creating that third place.  Consumers are just not going to use the restaurant the same way. 

 

Domino’s new and inspired pizza launch is the most recent example of a successful new product that can’t “comp the comp.”  MCD’s smoothie/frappe launch will fall prey to the same phenomenon.  To recall, I estimate that the incremental frappe and smoothies sales combined contributed about 5.7% of the reported 2Q10 3.7% U.S. comp growth and 5.9% of the 5.3% growth in 3Q10.  If my estimates are close to being correct, that would imply a decline in the company’s core business of about 2.0% and nearly 1% in 2Q10 and 3Q10, respectively. 

 

Given MCD’s consistently strong performance, a negative comp for MCD is a bigger deal than it is for Domino’s (DPZ has only reported five quarters of positive domestic company-operated comp growth after eight quarters of declines).  MCD has spent significant time and effort trying to grow its beverage franchise.  With the “hot” part of the McCafe strategy already a bomb, any concern about the “cold” side will have an outsized impact. 

 

MCD has one more month of easy comparisons in the U.S. in February.  Come March, the comparisons get much more difficult and we would not be surprised to see the company report negative monthly comp growth.  And, the comparisons get increasingly more difficult during the summer months when MCD laps its smoothie/frappe launch from last year.  I am currently modeling negative U.S. same-store sales growth in Q2, Q3 and Q4 of 2011.  Even if my estimates prove overly bearish, MCD’s U.S. comp momentum will likely slow in 2011.

 

Howard Penney

Managing Director


TALES OF THE TAPE: WEN, DIN, MCD, PEET, GMCR, DPZ, CBRL, MSSR

Notable news items/price action from the past twenty-four hours.

  • WEN reported $0.01 ex-items versus the Street, in line with prior guidance from January 26th.  The company is guiding below the street on EBITDA but assuming the sale of Arby’s.  Affirming Wendy’s longer term target of 10% to 15% EPS growth, beginning in 2012.
  • WEN is to reopen stores in Japan, a market it quickly exited in 2009.  The company sees at least 71 stores in Japan in five years.
  • DIN reported 4Q EPS of $0.59 versus consensus $0.64.  Earnings included a $7.7M charge related to the default of an IHOP franchise.  Guidance for FY11 is for Applebee’s domestic system-wide same-store sales performance to range between 1% and 3% and company-operated restaurant level-margin of between 14.8% and 15.2%.
  • MCD traded poorly yesterday as headlines highlighted a decrease in its advertising spend and the movement of the brand from its core business to lattes and other beverages.  This is all confirmative of my Black Book of mid-January.
  • PEET continues to trade strongly following an upgrade yesterday that boldly stated that a deal would be done between PEET and GMCR by March 6th for Peet’s to enter the k-cup market.
  • DPZ gained on strong volume. 
  • CBRL gained 60 bps on accelerating volume following a difficult fortnight of trading.  Gasoline prices have been pressuring this stock.
  • MSSR traded down sharply on very high volume yesterday.  The stock was downgraded this morning.   On Tuesday, 4Q EPS came in at $0.22 ex-items versus $0.24.

 

TALES OF THE TAPE: WEN, DIN, MCD, PEET, GMCR, DPZ, CBRL, MSSR - stocks 33

 

Howard Penney

Managing Director


CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL

Initial Claims Fall to 368K

The headline initial claims number fell 23k to 368k (20k after the 3k downward revision to last week’s data).  Rolling claims fell 13k to 388.5k. On a non-seasonally-adjusted basis, reported claims dropped 33k WoW.  In most years, this week of the year sees an uptick in non-seasonally-adjusted claims.  This year, that increase has not occurred, and the strength is showing through in the seasonally adjusted series. 

 

We are now seeing claims enter the 375-400k range where unemployment can begin to come down. Claims will need to hold this level and improve further in order to see any real movement in the unemployment rate, but this is clearly positive on the margin. It is worth noting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9%, it's 11%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11% actual rate as opposed to the 9% reported rate.

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - 1

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - 2

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - 3

 

One of our astute clients pointed out the relationship between the S&P and initial claims shown below.  We show the two series in the following chart, with initial claims inverted on the left axis.

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - 4

 

In the table below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - 5

 

Joshua Steiner, CFA

 

Allison Kaptur


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

THE M3: MACAU GOVT ASKS FOR LVS DETAILS; SANDS SUIT AGAINST JACOBS; WYNN; S'PORE GST

The Macau Metro Monitor, March 3, 2011

 

 

MACAU GOVERNMENT ASKS SANDS CHINA FOR REPORT ON US INVESTIGATION macaubusiness.com, Macau Daily Times

Secretary Tam said the Macau government has asked Sands China for a “detailed report” on the LVS investigations. Tam added that Sands China’s operations in Macau appeared to have proceeded “without problems” in recent years.  DICJ Director Neves said DICJ has received a report from Venetian Macau regarding the investigation. Venetian Macau stated that the case will not affect company operations and the company will cooperate fully with investigations. SJM CEO Ambrose So said he was aware of the investigation and stressed that SJM operations abide by local laws and follow the operating guidelines of a listed company. He said it is still too early to comment on whether the case will affect the development of Macau’s gaming industry in future. 

 

Meanwhile, Sands acting CEO Leven said that Sands China has dropped its CEO search and will maintain its current structure, with president and COO Edward Tracy leading the operation supported by Chief Casino Officer President David Sisk.  Nevertheless, Sands China is still looking for a representative to liaise with the government. “The person would have some government experience,” Leven remarked.

 

SANDS CHINA FILES CRIMINAL SUIT AGAINST JACOBS Macau Daily Times

Sands acting CEO Leven said, "Sands China has filed a criminal complaint (on Jan 21) in Macau for defamation and with evidence of extortion” against Steven Jacobs.  Leven confirmed he was aware of talks between Jacobs and representatives from Caesars Entertainment on a possible partnership in Macau, but he argues he told Jacobs a decision like that couldn’t be made without the involvement of Adelson. Leven said, “Gary Loveman eventually came to see us and did have a conversation with us. We talked about it, possibly for one of the sites here [on Cotai] – 3, 7 or 8 at the time – and then we tested it with some people here in Macau. The comment that we got [here in Macau] was they [Caesars Entertainment] wouldn’t get the licence. I delivered that message back to Gary Loveman. It never got to a negotiation, it was just a matter of enquiry."

 

WYNN POINTS OUT SOME KNOWN-UNKNOWNS Intelligence Macau

While it is a concern, IM says its smart for Wynn Macau to disclose in its annual report that it cannot guarantee that its room operators are always going to be in full compliance with Macau gaming regulations.  Room operators, given their murky backgrounds, are difficult for anyone, even the most compliance-minded concessionaire, to manage perfectly.  But it is interesting that Wynn Macau decides to disclose this risk in the midst of the LVS investigation.


GST FINE THE WAY IT IS, SAYS THARMAN Strait Times

Finance Minister Tharman Shanmugaratnam rejected calls by opposition Parliament member Low Thia Khiang to cut the goods and services tax (GST) from 7% to 5% or tweak it to combat inflation.  Tharman said this is not the solution since the bulk of GST is collected from higher-income groups and foreigners, so cutting the rate would benefit them more.


CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL

Initial Claims Fall to 368K

The headline initial claims number fell 23k to 368k (20k after the 3k downward revision to last week’s data).  Rolling claims fell 13k to 388.5k. On a non-seasonally-adjusted basis, reported claims dropped 33k WoW.  In most years, this week of the year sees an uptick in non-seasonally-adjusted claims.  This year, that increase has not occurred, and the strength is showing through in the seasonally adjusted series. 

 

We are now seeing claims enter the 375-400k range where unemployment can begin to come down. Claims will need to hold this level and improve further in order to see any real movement in the unemployment rate, but this is clearly positive on the margin. It is worth noting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9%, it's 11%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11% actual rate as opposed to the 9% reported rate.

 

 CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - rolling

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - raw

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - NSA

 

One of our astute clients pointed out the relationship between the S&P and initial claims shown below.  We show the two series in the following chart, with initial claims inverted on the left axis.

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - s p

 

Yield Curve Remains Wide

We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 1Q is tracking 42 bps wider than 4Q.  The current level of 278 bps is slightly wider than last week (274 bps).

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - 2 10 spread

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - spreads QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - subsector perf

 

 

 

Joshua Steiner, CFA

 

Allison Kaptur



GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next