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MCD will announce sales, along with 2Q11 results, before the market open on Friday, July 22nd.


Recapping the quarter to date, we know April was a strong month beating expectations globally.  May on the other hand was not a very strong month for MCD sales.  Global comps came in at +3.1% versus expectations of +3.6%, U.S. comps were +2.4% versus consensus at +2.9%, Europe comps missed by a wide margin, coming in at 2.3% versus 3.8% expectations.  APMEA was the only division where comps beat consensus, coming in at +4.3% versus 4% expectations. 


Compared to June 2010, July 2011 had one less Tuesday and one additional Thursday.  As a result, I would not anticipate any major calendar shift.  In my recap of the May sales results, I highlighted that there were several changes in the May press release from the April sales release.  Firstly, McCafe was not mentioned as a driver of comps in May but it was in April.  Frozen Strawberry Lemonade was highlighted but, as I stated last month, this product is drawing customers due to its low price point.  I remain skeptical of MCD’s focus on “beverages over burgers.”


Consensus estimates have risen by 0.6% over the past three months, while the sell side still has a slightly bullish bias with 59.2% of analysts holding a “Buy” rating on the stock.  Interestingly, the short interest has risen steadily during the quarter, but still at very low levels. 


My model is coming up with $1.27 for 2Q11 versus the Bloomberg mean estimate of $1.28.  Naturally, my estimate is slightly lower that the street due to a more conservative revenues estimate.  The big variable this quarter will be food cost and the impact on margins.  I’m currently modeling a 100 bps increase in food costs versus 70bps in 1Q11.  Without a big June comp figure, it’s hard to get significant upside absent any “one-time” items. 


Below I go through my take on what numbers will be received by investors as GOOD, BAD, and NEUTRAL, for MCD comps by region.  For comparison purposes, I have adjusted for historical calendar and trading day impacts. 



U.S. - facing a compare of +3.7% (including a calendar shift which impacted results by +0.0% to +0.3%, varying by area of the world).  Frozen Strawberry Lemonade was launched in May, comparing with the official national rollout of Frappes in May 2010.  May 2011 results came in lighter than expected.  The June compare is slightly more difficult but I am not anticipating any large miss this month.  Expectations have risen to a level that implies that MCD is “comping the comps” in June and July - something I did not think possible in January.


GOOD: A print above 4.5% would be received as a good result, implying two-year average trends roughly 20 basis points above those seen in May.  Despite missing consensus, on a calendar-adjusted basis May results implied a sequential acceleration in two-year average trends of 75 basis points.  It will be interesting to see what drives the comp in June but, given the focus on beverages and the difficult compare in July fast approaching, I would expect the bulls to be focused on this.


NEUTRAL:  A print between 3.5% and 4.5% would be received as a neutral result by investors given that the mid-point of this range implies two-year average trends, on a calendar-adjusted basis, in line with trends in May. 


BAD: Same-restaurant sales below 3.5% would imply a sequential slowdown in two-year average trends raise significant doubt about the ability of MCD to match last year’s impressive top-line performance. 





EUROPE - facing a compare of +4.7% (including a calendar shift which impacted results by +0.0% to +0.3%, varying by area of the world).  Europe was a huge disappointment in May and, as the media has been highlighting constantly, the crisis in Europe has been gathering speed.


GOOD: A print of 6% or higher would be received as a good result for Europe as it would imply a sequential acceleration in two-year average trends after for consecutive months of declines (calendar-adjusted basis).  Consumer confidence in Germany (Icon) improved during June, was flat in France, according to INSEE National Statistics Office, and gained in Spain, according to OPINA.  A continuing debt crisis is likely hampering expenditure but, to a degree, the situation is becoming a “new normal” and without changes “on the margin”, I don’t expect any impact on MCD’s business in the Old World.  Germany disappointed in May while France, Russia and the U.K. were highlighted as bright spots.


NEUTRAL: A result between 5% and 6% would be received as a neutral result because it would imply two-year average trends only slightly above the disappointing results seen in May. 


BAD:  A result below 5% would imply two-year average trends level with, or below, the disappointing two-year average trends seen in May. 



APMEA - facing a difficult compare of +6.0% (including a calendar shift which impacted results by +0.0% to +0.3%, varying by area of the world).


GOOD: A print of 5% or higher would be received as a good result as it would imply a sequential acceleration in two-year average trends.


NEUTRAL: A result between 4% and 5% would be received as a neutral result because it would imply two-year average trends roughly level with May.  APMEA was the only region in the world where MCD comps outstripped consensus in May.


BAD: Same-restaurant sales in APMEA below 4% would be received as a bad result because it would imply a slowdown in two-year average trends.



Howard Penney

Managing Director


Rory Green



European Portfolio Update: Shorting Italy (EWI); EUR-USD (FXE); Spain (EWP)

Positions in Europe:  Short Italy (EWI); EUR-USD (FXE); Spain (EWP); UK (EWU)

Keith’s taking the opportunity to re-short strength in European equities [Italy (EWI) and Spain (EWP)] and the EUR-USD (FXE) in the Hedgeye Virtual Portfolio this AM as the positions run ahead of themselves on optimism about “positive” bailout talks on Greece today at the EU Summit in Brussels.


As we’ve said in multiple research pieces recently (for more, see our portal at Hedgeye.com), we see a long road ahead in Europe’s sovereign debt soap opera as European officials choose to issue short term solutions (band-aids) to much longer term fiscal imbalances.


Should anything come of today’s talks regarding new concessions for Greece’s outsized debt—and at this point everyone is running on pure speculation—we believe the news will at best provide only a short term boost to capital market performance, particularly for the peripherally countries. Bottom line, we’re shorting today’s bounce (Italy’s MIB is trading up +4% intraday and Spain’s IBEX is up +3%) and the EUR-USD cross broke out above our TREND Line of $1.43 (+1.2%).


European Portfolio Update: Shorting Italy (EWI); EUR-USD (FXE); Spain (EWP) - 1. A


European Portfolio Update: Shorting Italy (EWI); EUR-USD (FXE); Spain (EWP) - 1. B


One chart in particular that is worrying us is the coming debt maturities for Italy and Spain over the next 2-3 months.


European Portfolio Update: Shorting Italy (EWI); EUR-USD (FXE); Spain (EWP) - 1. H


Our intermediate term TREND levels on European equity indices are not just breaking across the PIIGS, but  also teetering around breakdown in Germany (DAX TREND = 7198) and broken in the UK (FTSE TREND = 5925), driven and confirmed by slower high frequency data (Services and Manufacturing PMI figures all slowed in July for Germany, France and Eurozone ave.) and pressing threats of contagion (especially as Italy and Spain push to the forefront) that even fiscally sober countries like Germany and Sweden are not immune to. 


Matthew Hedrick



A legitimate beat and raise



"Despite concerns about a slowdown in U.S. economic growth, during the first half of 2011 we've seen gradual improvements in consumer trends, though there continues to be month-to-month revenue volatility in several of the markets where we operate. With second quarter results exceeding guidance and expectations for continued positive operating momentum throughout 2011, we are raising our full year 2011 revenue and adjusted EBITDA guidance to $2.7 billion and $723.5 million, respectively."


- Peter M. Carlino, Chairman and CEO of PENN



  • "With the recent opening of the sports bar and lounge at Charles Town, we have completed the property's expansion to complement our table game product offerings and have transformed this facility into one of the largest full amenity casinos in North America. In addition, Hollywood Casino Perryville had a successful opening last fall and we benefited from a month of operations from M Resort. Hollywood Casino Perryville generated $5.7 million in quarterly adjusted EBITDA and M Resort contributed $2.1 million of property adjusted EBITDA (excluding transaction costs) in the month of June. Overall, thirteen of our fifteen gaming facilities generated year-over-year adjusted EBITDA improvements and fourteen increased their adjusted EBITDA margins."
  • "In June, Penn National entered into an agreement to divest its joint venture interest in the Maryland Jockey Club as we believe its tracks will be well served under a sole ownership structure. Given that Penn National previously wrote down the value of this investment due to a goodwill impairment charge at the Maryland Jockey Club, we expect to record a gain from the sale in the third quarter. Going forward in Maryland, our focus will be on resuming live and simulcast racing at the now dormant Rosecroft Raceway in Prince George's County, which we acquired earlier this year, with the hope of eventually offering expanded gaming there, and building on the initial success of Hollywood Casino Perryville."
  • "M Resort recorded second quarter property revenue of $43.1 million and adjusted EBITDA of $5.6 million before the impact of transaction costs. This compares favorably to the prior year revenue and adjusted EBITDA of $41.9 million and $4.5 million, respectively. We are confident that our operating discipline, rationalized approach to marketing and active player database can continue to improve the property's financial performance over time."
  • "Hollywood Casino at Kansas Speedway and Hollywood Casino Toledo are expected to open in the first quarter of 2012 and first half of 2012, respectively, provided the required regulatory framework and approvals are in place"
  • "During the second quarter, we entered into a contingent agreement with The City of Columbus that called for annexation of the site of Hollywood Casino Columbus into the City of Columbus in exchange for water and sewer service and other considerations. The agreement was conditioned, among other things, on the sale of real estate previously purchased by the Company in downtown Columbus for $11 million and an acceptable settlement agreement with certain affiliates of the Columbus Dispatch. While neither of these conditions were satisfied by the July 19, 2011 deadline set forth in the settlement agreement, we believe that we have now reached an agreement in principle among all parties relative to the satisfaction of these conditions. We expect to complete the documentation of these matters shortly. In the meantime, construction has continued on our planned $400 million Hollywood Casino Columbus project, which we expect to open in the fourth quarter of next year."
  • Guidance:
    • Net Revenue: 3Q:$706.3MM; FY: $2,727MM
    • Adjusted EBITDA: 3Q:$197.4MM; FY: $723.5MM
    • EPS: 3Q:$0.53; FY: $2.16
    • Adjusted EBITDA includes a $20MM gain on anticipated closing of Maryland Jockey Club sale on Aug 1 
    • Extension of Casino Rama management contract
    • $10.6MM of pre-opening expenses with $2.4MM incurred in 3Q
    • D&A: 3Q:$53.4MM; FY: $213.3MM
    • Debt extinguishment charges of $18.6MM ($13MM non-cash) in 3Q
    • Stock comp: 3Q:$6.3MM; FY: $24.9MM
    • Tax rate: 38.2%
    • Share count: 107.4MM


  • Regional trends: Generally, they are seeing a stable environment with slight growth in some markets. The promotional environment remains rational.  The only strength is in the VIP segment (>$400 of gaming per day).  


  • PA has seen some migration towards electronic table games which helps margins. They don't have a lot of competitive pressure given their location. When and if revenues start to improve they will see margin improvements.
  • Took over M Resorts on June 1st. The local gaming market in the locals Las Vegas market continues to be challenged. Continue to see strength in group and convention. Marketing roll-out in 3Q.  2Q isn't as seasonally strong as 1Q.
  • Toledo: 1MM population base - compares to 1.2MM at Penn National (PA) with similar income demographics. Penn National is a good proxy for margins when you adjust for respective tax rates
  • View on bill to expand gaming in IL. Governor is struggling with passing the expansion bill given the VLT passage. There is ongoing dialogue - they think will not be resolved until the fall. They don't think that the VLTs will have any impact on the existing casinos since there are already illegal machines out there.
    • Governor can veto the package once it's delivered to him
    • He can try to structure a new deal with the legislature when they return in the fall
    • The opening of the 10th license in IL will also provide some additional tax relief
    • Do not think that the bill in its current form will get passed
  • Expect that OH VLTs will get passed in September but it will take at least 18 months to open the new facilities
  • Lawrenceburg market continues to show slight declines. The riverboats have impacted SE Indiana.  They are looking at ways to continue to rationalize costs. Don't expect Cinncinatti to open until 2013.
  • Charles Town will lose some business when Arundel opens - especially the convenience business. All they can do is make their property more competitive as they have done with the recent improvement. Their customers will still be allowed to smoke while MD facilities are smoke free.  Also the high tax rate in MD allows them to offer a more complete entertainment experience. The don't expect much impact on Perryville from Arundel until if and when the Baltimore facility opens
  • In the process of putting in a one card solution at Kansas Speedway to take advantage of cross marketing. They will also take advantage of cross marketing in Ohio.
  • They are interested in opportunities in Asia when and if they arise
  • Discussions in MA will begin after Labor day
  • In Florida, the expansion bill failed
  • They are done making investments in Lawrenceburg. They are in discussions with the city about partnering to build a 150 room hotel. They have the ability to open smoking on their floors which Cincinnati will not when they open in 2013.
  • If they are able to move the racetracks - there's a $150MM capital investment requirement plus $50MM license fees. It's unknown if there will be a premium for relocation
  • There haven't been any internal modifications to the way they look Ohio investments but they did reach an agreement for additional payments
  • Cash:$322MM  Debt: bank debt: $1.518, capital leases: $5, bonds: $325+250 = $2.1BN at June 30th
  • Capex: $59MM (14.6MM maintenance; $15.2MM on Kansas; $37.9MM of project capex)
  • Capitalized interest was $1.27MM in 2Q; $1.750 in 3Q and 6.2MM for the 2011
  • Depreciation at M should be roughly $1.75MM per quarter. Originally they thought it would be a lot higher.
  • They are not interested in the AC market
  • Wouldn't want to go over 5x on a gross leverage level
  • M Resorts - 4 growth drivers: Locals market, S. California market, Penn regional database, and group and convention business.  Their database is already contributing 3-4% of occupancy. They do think that there are facets of the business that can improve without the locals business improvement. They are also looking at optimizing marketing.

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PENN beat us for Q2 and we were well above the Street. Outstanding quarter with revenues and EBITDA exceeding expectations.  PENN beat Q2 consensus by almost $10MM in EBITDA and us by $6MM.



Guidance for the second half of the year was also raised.  If we excluded the $20 million gain and pre-opening expense from guidance, it appears that PENN raised EBITDA guidance about $17 million from prior.  New 2011 EBITDA guidance was $723.5 million or $715.1 million after the above non-operating adjustments.  Consensus was $694.9 million or $704.3 million after adjusting for the Q2 beat.  Thus, PENN provided 2H guidance $10.8 million above the Street ($715.1-704.3), of which $2m falls in Q3.


Here are the property results:




Initial Claims Rise 10k WoW (13k After Revisions)

Initial unemployment claims came in at 418k last week, up from 408k the prior week (revised from 405k).  1.75k of the claims were attributable to the Minnesota government shutdown.  This is down from the prior week, when 11.5k of the claims arose from Minnesota government employees.  On a rolling basis, initial jobless claims fell 3k week over week to 421k.


We've stated many times that our analysis shows rolling claims must reach a level of 375-400k on a sustained basis for any improvement in the unemployment rate to occur. We've also noted the relationship between Quantitative Easing and jobless claims, pointing out the fact that when QE is in effect it tends to lower claims and vice versa. Given that QE ended 3 weeks ago, we're not surprised to see rolling claims bounce along sideways. This is also an interesting takeaway for the broader market and the XLF as we also show below the relationship between those two benchmarks and jobless claims. 


While there are many systemic risks facing the market right now from Europe to the Debt Ceiling to the Housing market, we come back to jobless claims time and again as the ultimate best read on what matters most for lenders. If jobless claims aren't improving this is a major overhang for the space, and when you add in weak home prices it paints an especially challenging picture for the group.












2-10 Spread Close to Flat WoW

The 2-10 spread, which we track as to gauge NIM pressure, was 1 bps wider WoW at 255 bps.  The spread is currently running 4 bps tighter than 2Q.  






Joshua Steiner, CFA


Allison Kaptur





Notable news items and price action from the restaurant space as well as our fundamental view on select names.




Two interesting data points pertaining to the restaurant industry have emerged over the past twenty-four hours.


Consumers in the U.S. are increasingly using credit cards to pay for basic necessities as income gains fail to keep pace with rising food and fuel prices; dollar volume of purchases charged grew 10.7% year-over-year in June.

  • The volume of gasoline purchases placed on credit cards jumped 39% year-over-year (compared with a 21 percent increase in June 2010).
  • Food shopping increased 5% year-over-year (compared to falling 7% last year).

Yesterday, the Restaurant finance monitor highlighted a survey from American Express business insights.  A recent report from American Express Business Insights has revealed that overall dining spend increased 1.6 % in the first quarter of the year. QSR sales grew 5.2%; Fine dining sales expanded 4.2% and Casual Dining flat.  Yet another example of the high/low society and the lack of a recovery in the 50-55 cohort, the biggest user of casual dining. 


THE HBM: MCD, KONA, DIN, CAKE - 1q sss growth by sector



Initial jobless claims were, once again, above 400k – coming in at 418k. The four-week rolling number declined by 3k week-over-week to 421k.


THE HBM: MCD, KONA, DIN, CAKE - initial jobless claims 721



Our subsector table shows that full service restaurants underperformed yesterday.  Food processing companies have started to perform less badly.


THE HBM: MCD, KONA, DIN, CAKE - subsector fbr




  • MCD lost a skirmish in a lawsuit over its Happy Meal advertising practices, as a U.S. district judge ruled the case could not be litigated in federal court.
  • MCD has unveiled sponsorship plans for the 2012 London Olympics. Dara Torres has been announced as global ambassador of a new global initiative focused on “balanced eating and fun play”.



  • KONA has outperformed the market by 71% over the past month.  Yesterday volumes across the board were down day-over-day but KONA was up again on accelerating volume.
  • DIN announced today that it has signed a multi-restaurant franchise agreement with AMECO Foods for the development of ten new Applebee’s restaurants in Egypt.
  • CAKE served up earnings largely in line with expectations, although slightly below consensus on comps.  The stock is trading down pre-market.

THE HBM: MCD, KONA, DIN, CAKE - stocks 721



Howard Penney

Managing Director


Rory Green


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.51%
  • SHORT SIGNALS 78.32%