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DNKN - ANOTHER K-CUP PLAY?

If you would like a copy of our forthcoming DNKN Black Book, please contact sales@hedgeye.com.

 

It’s a great time for the Private Equity sponsors to be bringing DNKN public.  Restaurant industry performance, particularly the coffee category, has been leading the consumer space and valuations are extremely rich. 

 

We will be publishing a DNKN Black Book on Monday.  Needless to say, we think there is a bubble in the coffee market which PE sponsors are taking advantage of.

 

If you would like a copy of the Black Book, please contact sales@hedgeye.com 

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


MCD: DOWN MARGINS DON’T MATTER WITH COMPS LIKE THAT

MCD is looking as good as the weather is hot today following extremely strong earnings that came in far above the street, and our, expectations.  The crux of our negative thesis on MCD at the outset of 2011 was based around the difficulty I foresaw for MCD to “comp the comps” versus the company’s resounding success in driving same-restaurant sales in the U.S. during summer 2010.  Following the release of April sales results, we “cried uncle” as the facts changed and sales continued to accelerate. 

 

Having seen the June results, it is clear that MCD is “comping” the comps this summer and management was eager to point out that July global same-restaurant sales are expected to be between 4-5%.  Below we offer ten takeaways and a quick recap of the sales trends by region and the markets/factors driving each.

 

 

Our ten takeaways from the quarter are as follows:

  1. MCD US is the most important division for the company from an operating income perspective and the acceleration of same-restaurant sales in June and, as guided to, in July versus extremely difficult compares from 2010 means that MCD is successfully driving traffic through its beverage initiative.  Total McCafé beverage sales grew 29% y/y in the second quarter. 
  2. On a global basis, higher commodity and, to a lesser extent, labor and occupancy costs are being offset by positive same-restaurant sales.  In China, margins are being negatively impacted by the acceleration of new restaurant openings.  New restaurants typically open with lower margins and then accelerate over time.
  3. MCD is taking share from other QSR companies.  TAST’s report of their Burger King restaurants seeing same-restaurant sales decline -5.2% in 2Q is testament to that.  Companies that fail to keep up with MCD reimaging and product initiatives are likely to continue to lose market share.  The reimaging program in the US will be implemented at 600 restaurants in the US by year-end (200 done as of 1H11).
  4. The hot weather is driving people in the US to buy beverages.  This is a positive for SBUX, SONC and other brands positioned to take advantage.  Beverages are driving traffic and are margin-accretive.
  5. The full-year outlook for the company’s U.S. grocery basket is unchanged at 4%-4.5%.  As food at home CPI continues to outstrip food away from home CPI, which gives the company some confidence in taking pricing in the current environment.
  6. Our pre-earnings assertion that top-line is all that matters this quarter seems to be correct.  Companies have made their operations far more efficient than before the recession and, despite margins declining at company-operated stores in the US from 22.2% in 2Q10 to 20.7% in 2Q11, the health of the top line is what investors are focused on.
  7. China still only represents 3% of global MCD profit.  MCD is growing rapidly in China, but the overall pie is growing also.  This is not something YUM is seeing – YUM’s US business has already shrunk to 25% of the company’s total operating profit, previously a 2015 target. 
  8. China 2Q comps were up 14.4%, the brand clearly has relevance and there seems to be enough room for MCD and YUM, which also produced double-digit comps in China during 2Q.  For MCD, breakfast is approaching 8% of sales in China.
  9. The company is growing aggressively in APMEA, and China in particular with 175-200 openings in China projected for the year.
  10. Momentum is strong heading through 3Q with July global comps expected to come in at 4-5%.

 

U.S.

Drivers: Frozen Strawberry Lemonade, classic core offerings including Chicken McNuggets and the Big Mac, and breakfast supported by the new Fruit & Maple Oatmeal.

 

MCD: DOWN MARGINS DON’T MATTER WITH COMPS LIKE THAT - mcd us jun

 

 

Europe

Strong markets: France, UK, Russia.

Drivers: Ongoing restaurant modernization efforts, focus on premium menu offerings.

 

MCD: DOWN MARGINS DON’T MATTER WITH COMPS LIKE THAT - mcd eu jun

 

 

APMEA

Strong markets: China and most other markets. 

Drivers: Affordability, drive-thru, delivery and extended hours.  Breakfast is offering a lot of growth in China and, despite the sluggish economic growth, Australia.

 

MCD: DOWN MARGINS DON’T MATTER WITH COMPS LIKE THAT - MCD APMEA Jun

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


Risk Ranger: SP500 Levels, Refreshed

POSITION: no position SPY

 

People can get upset about it; tired of it; frustrated with it – but the market doesn’t care about our feelings. This market is going to continue to confuse buy-and-hold inasmuch as it does short-and-hold. You’ve got to manage your beta risk around the range.

 

Across durations, here are the lines that matter: 

  1. TAIL resistance = intact at 1377
  2. TREND support = intact at 1319
  3. TRADE zone = 1 at of 11AM EST 

Not too bullish. Not too bearish. Just about right.

 

This should suck the perma-bulls in at the high-end of the ranges inasmuch as it inspires the perma-bears to press their shorts on the lows.

 

I have 17 LONGS and 13 SHORTS in the Hedgeye Portfolio and see plenty to do on both sides.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Risk Ranger: SP500 Levels, Refreshed - 1


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THE HBM: MCD, RT, BJRI, TAST, COSI, BEEF PRICES

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

 

THE HEDGEYE BREAKFAST MENU

 

MACRO

 

Beef Prices

 

The drought in Texas that we highlighted in our WEEKLY COMMODITY MONITOR on Wednesday is contributing to an increase in beef prices.  As previously highlighted, despite the short-term increase in supply, ultimately the smaller herd size supports prices.  As of July 1, the nation’s inventory of all types of cattle and calves fell to 99.69 million head, down 1.4% from the same date in 2010, according to a Dow Jones Newswires survey of analysts.  That would be the smallest herd for that date since the U.S. Department of Agriculture began compiling a July 1 figure in 1973.  This will likely keep beef prices elevated well into 2012.

 

Jim Robb, the director of the Livestock Marketing Information Center, was quoted by Bloomberg as saying “we are slaughtering animals that are potential productive-breeding animals…They are going into feedlots and beef-production systems. We’re not holding heifers for future breeding herd growth.”  The poor pasture conditions are making it less feasible for farmers to maintain larger herd sizes.

 

 

Subsectors

 

The rally in the consumer space recently has been led by categories that were previously lagging.  Within our universe, and related spaces, food processing has picked up performance-wise and full service restaurants have underperformed. 

 

THE HBM: MCD, RT, BJRI, TAST, COSI, BEEF PRICES - subsector fbr

 

 

QUICK SERVICE

  • MCD reported 2Q earnings this morning.  EPS came in at $1.35 versus $1.28.  Comps for the quarter were: Global +5.6%, US +4.5%, Europe +5.9%, APMEA +5.2%.  In June, comps were: Global +7.7% versus StreetAccount consensus +3.8%, US +6.9% versus consensus +3.3%, Europe +9.1% versus consensus +4.1% and APMEA +4.8% versus +3.3%.  The stock is trading up to all-time highs this morning.  July, according to management, is expected to bring global comparable sales of 4-5%.
  • TAST reported that its Burger King division’s same-restaurant sales for 2Q declined -5.2%.
  • SBUX, MCD, and now Chick-fil-A Inc. will be following the restaurant industry grain Monday when it debuts new steel-cut oatmeal on its breakfast menu.
  • COSI is cooked - reports Q2 system-wide comps (0.2)% vs. Q1 increase of +1.7% Company-owned +0.5% - Franchise-operated (1.3%)

 

 

CASUAL DINING

  • RT reported a horrible 4QFY11; comps came in at -0.1% versus +0.1% consensus.  EPSS came in at $0.25 ex-items versus consensus at $0.31.
  • RT was cut to Underperform from Neutral at BofA.
  • BJRI reported strong 2Q results with EPS coming in at $0.28 versus $0.27.  Comps came in at +6.9% versus consensus +5.3%.  Trading at such a high multiple, the stock is priced for perfection.

 

THE HBM: MCD, RT, BJRI, TAST, COSI, BEEF PRICES - stocks 722

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 


THE M3: MGM COTAI; JUNKET MOVEMENT; JUNE VISITATION; TAIPA FERRY TERMINAL; S'PORE Q2 HOME PRICES

The Macau Metro Monitor, July 22, 2011

 

 

MGM COMPLETES DESIGN PLAN FOR COTAI Macau Daily Times, Macau Business

President of MGM Grand Paradise Grant Bowie said MGM has finished the blueprint for its Cotai project and that it will include non-gaming elements used to complement with the Macau government's standards for an integrated resort hotel.  The applications are still being approved and Bowie said MGM will respect the government's decision.

 

VIP OPERATOR MOVES TO GRAND LISBOA Macau Business

Junket operator Golden Way has moved to Grand Lisboa from Sands Macau.  The company’s marketing manager, Kenneth Cheng, said the new location, in the city centre, was more convenient.  In Grand Lisboa, the junket operator will run 21 VIP gaming tables, more than double of what it ran in Sands Macao.

VISITOR ARRIVALS FOR JUNE 2011 DSEC

Visitor arrivals totaled 2,181,476 in June 2011, up by 14.5% YoY.  Visitors from Mainland China increased by 21.7% YoY to 1,198,754 in June 2011, and the majority came from Guangdong Province, Fujian Province and Zhejiang Province.  Mainland visitors traveling to Macau under the Individual Visit Scheme totaled 465,218, up by 23.2%.

 

THE M3: MGM COTAI; JUNKET MOVEMENT; JUNE VISITATION; TAIPA FERRY TERMINAL; S'PORE Q2 HOME PRICES - macauV

 

TAIPA TEMPORARY FERRY TERMINAL IN NEED TO EXPAND Macau Daily News

The Office for the Development of Infrastructure says the Taipa Temporary Ferry Terminal is in need for expansion in order to turn Macau into a world‐class tourism and leisure center and cater to the continuing increase of tourist arrivals.  The terminal was designed to handle a maximum of 6MM visitors on an annual basis, and visitation had been over 4MM from Jan-May 2011.  The terminal is expected to cover 200,000 square meters, which is four times bigger than the current space.

 

S'PORE PRIVATE HOME PRICES UP 2% IN Q2 Channel News Asia

According to statistics from the Urban Redevelopment Authority (URA), private home prices in Singapore rose 2% QoQ.

 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - July 22, 2011

 

Funny things happen to markets when they go bullish TRADE and TREND in our model. That's been the SP500's signal since recovering TREND line support of 1319 this week.  We have been waiting to re-short the SPY - and why we waited to re-short the Financials (XLF) yesterday.  As we look at today’s set up for the S&P 500, the range is 32 points or -1.85% downside to 1319 and 0.54% upside to 1351.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 722

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: +1855 (+1518)  
  • VOLUME: NYSE 969.18 (+21.72%)
  • VIX:  17.56 -8.01% YTD PERFORMANCE: -1.07%
  • SPX PUT/CALL RATIO: 1.16 from 1.98 (-41.13%)

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 21.75
  • 3-MONTH T-BILL YIELD: 0.05% +0.03%
  • 10-Year: 3.03 from 2.96  
  • YIELD CURVE: 2.63 from 2.56

MACRO DATA POINTS:

  • 10 a.m.: State unemployment data released
  • 1 p.m.: Baker Hughes rig count

WHAT TO WATCH:

  • President Obama and House Speaker Boehner press for a broad agreement to boost the debt limit while cutting spending by trillions of dollars and overhauling the tax code
  • NFL owners approve 10-yr labor pact, await player vote
  • Borders Group can start liquidating stores starting today

COMMODITY/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Gold Falls a Second Day in London as Europe Debt Concern Eases
  • Copper May Rise on Reduced European Debt Concern, Mine Strike
  • Silver May Jump to $100, Citigroup Says: Technical Analysis
  • Sugar Heads for Fourth Weekly Gain on Tight Supply; Coffee Rises
  • Corn Trims Weekly Loss on Concern Dryness May Hurt U.S. Yields
  • Copper May Fall on Indications of Ample Supplies, Survey Shows
  • Beef Prices Seen Rising to Record as U.S. Cattle Herd Shrinks
  • China, Russia Cleared to Explore Pacific Seabed for Minerals
  • Posco Profit Rises on Steel Demand Recovery, Higher Prices
  • Mineral-Rich, People-Poor Mongolia Prepares for Flood of Money
  • European Commodity Day Ahead: Miners Strike at Escondida Mine
  • Raw Sugar May Fall Next Week on Climbing Supplies, Survey Says
  • Gold May Gain on U.S., European Debt Concerns, Survey Shows

CURRENCIES

  • EUR/USD - the intermediate-term TREND line of resistance for the Euro ($1.43) being tested and tried aggressively; if it fails here (and it should because the Europeans aren't going to have three hour bailout lunches every day next week - watch out below!

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • EUROPEAN SQUEEZE - there's no other way to describe what just happened in everything Italian, Spanish, or Greek; critically however, the TREND Lines for the IBEX, MIB, and ATG Indices are 10405, 20889, and 1346 - all remain decidedly bearish

 

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

  • ASIA: excellent session for Asian stocks to end the week with HK, KOSPI, and Sensex breaking out above critical lines of resistance.

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

 

Howard Penney

Managing Director


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