The story that MCD is currently conveying to the investment community is one of BIGGER, BETTER and FASTER; this is a very different tale from the story just a few years ago. 


It’s nice to get away from the office, especially given the pain being felt in the financial markets.  The opportunity that MCD and YUM have in China is a far cry from the euro zone debt crisis that appears to be spiraling out of control.  Given the issues that the Financial sector faces (and maybe Energy too) three stocks that look like “safe havens” over the longer term in the restaurant space are YUM, MCD and SBUX.


I would note that the leading story in the Shanghai Daily today was “China’s Local Lending Under Scrutiny.” While China’s debt/GDP is only 50% as compared to 100% for the US and 200% for Japan, the factors most likely to derail the growth story in China are primarily outside of the country's control.  Also in today’s paper was a story that according to the chief economist at the State Administration of Foreign Exchange, China’s GDP growth could be below 9% in 2012 for the first time in 10 years.  The article stated that “the weakening global demand for Chinese exports will be a challenge”.          


Forgetting the negative MACRO environment, the MCD presentation to the investment community today in Shanghai was about as bullish a presentation as any company could give.  Importantly, the numbers they are posting support the bullish story.  Clearly, the future is bright for MCD in China and throughout the rest of APMEA.


One of the stores we visited was in a more upscale neighborhood and right next to a Starbucks.  The McDonald’s was recently upgraded to a look that has a “European edge” to it.  McDonald’s term for the store is LIM - less is more.   The remodeled store has a McCafé in it selling its coffee/pastry products that are priced at roughly half of what Starbucks is charging for equivalent food and beverage items right next door.  The sales of McCafé products currently represent about 8% of sales.  It was pointed out to me that over the next three years that MCD will have 500 McCafé stores as compared to the current 470 Starbucks in China. 


I guess it comes as no surprise that SBUX announced yesterday that over the next four years the company plans to step up its expansion plans to triple the number of units in China.  SBUX now plans to operate 1,500 stores in China by 2015.  It would have been nice to hear from the Starbucks team on this trip to China.  Maybe over the next year or two the company will be in a better position to address the investment community in a more formal fashion.       





MCD is well down the road of accelerating unit growth in China and hitting the target of having 2,000 units in the country by 2013.  As of June 30th, 2011, there were 1,349 units in China.  The unit growth strategy is based on the following principles:


  1. Accelerate the opening base - open more stores in the core markets (esp. the 5 most important cities) and helping to further make the core TV markets more efficient. 
  2. Portfolio mix - MCD will be looking to open 40% of the stores with a drive-thru and increase the number of stores in transportation hubs.  The increase in drive thru stores will help the company continue to drive same-store sales growth given the how the Chinese take to using drive-thru. 
  3. Customer experiences - modernize the store base and build more McCafe’s.      




McDonald’s average unit volumes in China have improved from $1.3 million in 2005 to $2.0 million over the last 12 months.  On an annual basis, the average store in China will serve 470,000 customers, and produce $200,000 in cash flow.  The average check right now is about $3 versus a little over $5 for the USA.


So far this year, same-store sales in China have been 10.5%, while traffic is up 8.7%.  The growth is being driven by (1) value, (2) breakfast and (3) opening more drive-thru stores.  I also learned that SSS in Shanghai have softened quarter-to-date, as they are now lapping strong sales from last year’s World Expo.


Over the next 2-3 years, MCD will be able to generate positive same-store sales as they open more drive-thru’s and they begin to gain scale on their remodel program.  A current store remodel is seeing a 6-10% lift in sales and when they include a McCafe in the remodel the sales lift approaches the low teens.





The tough lessons of the past have taught the McDonald’s management to have in place a disciplined and efficient operating structure in China.  Over the last few years, MCD has optimized its asset base that now allows the company to accelerate unit growth in the coming years.  Importantly, the significant increase in average unit volumes now puts the concept on par with KFC when developers are looking to add one concept or the other to any given site.


On the margin, as MCD takes its real estate professionals from about 120 individuals today to 300 over the next few years, it will create a little more competition for YUM. 



Howard Penney

Managing Director


Rory Green



Darden Restaurants provided preliminary 1QFY12 EPS from continuing operations of $0.78 versus consensus of $0.87.  The company also reported that 1QFY12 combined same-restaurant sales for Red Lobster, Olive Garden, and LongHorn Steakhouse are expected to increase 2.8%.  This preannouncement is negative for the group but it is important to point out that some of the drivers are specific to Darden.


Preliminary 1Q U.S. same-restaurant sales results at Red Lobster, LongHorn Steakhouse and Olive Garden are 10.7%, 4.8%, and -2.9%, respectively.  On a combined basis, the same-restaurant sales performance for 1Q was not terrible, but there are two important caveats to keep in mind.  Olive Garden appears to have structural problems that will take some time to address and Red Lobster’s strong comp is impressive at first glance but comes almost entirely from promotion-driven traffic.  An increase in price in August brought a steep decline in traffic.


Red Lobster posted strong comp for the quarter but, with seafood inflation as high as it is, the question most investors will be posing is “are they making money?”  The chart below shows the acceleration in two-year trends the preliminary 1QFY12 number implies and the table, below the chart, shows the monthly numbers for traffic, pricing, and menu-mix at Red Lobster.


DRI 1Q EARNINGS ON A DIET - red lobster pod 1


DRI 1Q EARNINGS ON A DIET - RL pod 1 detail



Olive Garden is clearly suffering from structural problems and we believe that roughly half of the unit base needs to be remodeled.  As discussed on the most recent earnings call, management plans to remodel 430 non-Tuscan Farmhouse restaurants in the Olive Garden system with completion by the end of fiscal 2014.  On July 1st, management said that 60 restaurants had been remodeled for the purposes of a test and 75 are due to be remodeled this fiscal year.  The schedule described by management would suggest that any issues being posed by restaurants in need of remodels are here to stay for some time!





LongHorn Steakhouse has been a strong concept for Darden over the past several quarters but this preliminary number suggests that the chain’s performance has come closer to the Street’s expectations.  Same-restaurant sales were certainly strong, but a second consecutive decline – albeit marginal – in two-year average trends is not what investors were looking for.  Intra-quarter, LongHorn comps slowed from 6.5% in June to 4.0% and 3.5% in July and August, respectively.


DRI 1Q EARNINGS ON A DIET - longhorn pod1



Darden has long been considered the safe haven of the casual dining space and this label has been earned by a competent management team that runs an impressive organization.  Over the last few months, however, the difficult macro environment has been taking its toll on the casual dining industry.  Gas prices, specifically called out by DRI CEO Clarence Otis this year, and – more recently – plummeting consumer confidence amid a confluence of headwinds have worried management and investors alike. 


Today’s preannouncement of 1QFY11 EPS and same-restaurant sales will disappoint investors and likely cause many on the sell-side to realign their expectations with the change in tone from management. 


DRI 1Q EARNINGS ON A DIET - darden historical sentiment



Howard Penney

Managing Director


Rory Green




It may be too early to say definitively but Wynn Macau has been losing share recently in both Mass and VIP.



Let’s face it: the Cotai Strip is gathering momentum.  Well, it’s not like most of Macau is not doing extremely well.  However, Cotai is gaining share – and was gaining share even before Galaxy Macau (GM) opened on May 15th of this year.  The following chart depicts Cotai’s share surge beginning in February 2011 for VIP and April 2011 for Mass.




Obviously, Wynn Macau is not situated on Cotai and the company will not have a presence on Cotai until at least 2015.  We don’t want to make too big a deal of a few months of share shift but it is curious to see Wynn lose share for more than an isolated month here and there.  Wynn has lost share in both Mass and VIP the last two months from June as can be seen in the following chart.




GM seems to be having an effect, albeit delayed.  We know GM has been very aggressive on the junket commission front, in terms of levels and commission advancement.  City of Dreams was already aggressive.  The two recent losers in this segment offer the least attractive commission structures:  Wynn and Sands China.  Sands China’s junket issues have been well documented – at least by us.  Could it be that Wynn’s cherished junket business is showing some chinks?  They have been by the far the most productive and profitable despite offering the junkets less.  Maybe a slight increase in the amount of commissions advanced could stem the tide.


The drop off in Mass hasn’t been as severe and its sustainability remains to be seen.  However, the drop off is possibly even more perplexing.  GM opened on May 15th and Wynn’s Mass share barely moved in May or June before dropping in July and August.  Wynn certainly doesn’t dominate Mass like it does VIP so it has less to lose.  However, given the profitability of Mass in general and Wynn specifically, this is a trend that the company needs to reverse.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

SP500 Levels Refreshed: The Ides of September

The Ides of March, or March 15th, was a particularly brutal day in the Roman Empire as it was the day that Julius Ceasar was stabbed to death in the Roman Senate by a group of conspirators led by Marcus Junius Brutus.  In comparison, the recent debates in the U.S. Congress actually sound downright peaceful.


After a brutal move in August, the SP500 is off to another dismal start in September and is currently down nearly -1.6% on the day to 1,159. For the month-to-date, the SP500 is down -5.2%, which we have coined the Ides of September.  As fund managers marked up their portfolios at the end of August, this early September sell-off was a risk that we flagged in an Early Look note on September 1st, when we wrote:


“LAST 6 DAYS OF THE MONTH (in the SP500):

APRIL = +2.0%

MAT = +2.1%

JUNE = +2.6%

JULY = -3.8%

AUG = +4.9%



MAY = -1.3%

JUNE = -4.9%

JULY = +1.8%

AUG = -13.4%

SEP = ?


Now, if you want to roll the Bernanke Bones on this, maybe this time will be different. After all, that’s what the Keynesians and Fiat Fools have been telling us all along. But if it’s not, the US stock market could have a big problem in September. That +4.9% month-end markup into August end was the most aggressive yet and, as you can see, the higher they mark’em up, the harder they fall.”


Since our note above, a mere five days ago, equities have fallen hard early into September.  That said, as outlined in the chart below, while the SP500 is in a Bearish Formation, the SP500 continues to hold the TRADE support line at 1,137.  For now, we aren’t looking at this as a buying opportunity or a selling opportunity, but rather as an opportunity to cover shorts. 


In fact, we covered two short positions in the Virtual Portfolio today, which were as follows: 

  1. British Equities (etf: EWU)
  2. Capital One Financial (ticker: COF)

With volatility, as represented by the VIX, continuing to be in a Bullish Formation, and up almost 10% on the day, nimbly trading the ranges should continue to lead to alpha generating profits versus wishing for an extended move either up or down.  To that point, as Julius Ceasar famously said:


“Men are nearly always willing to believe what they wish.”


Trade the range.


Daryl G. Jones
Director of Research


SP500 Levels Refreshed: The Ides of September - SPX

European Risk Monitor: Italy and Spain in the Balance

Positions in Europe: Covered UK (EWU) today in the Virtual Portfolio

Some things change, some stay the same 

Today the SNB announced that it will put a floor under the EUR-CHF at 1.20 and “will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.” The news sent the heavily overvalued currency down -8% versus the EUR day-over-day, after SNB intervention attempts throughout August were largely unsuccessful.  We’ve had a bullish bias on the CHF vs EUR and USD for most of the year, yet the tone of the SNB this time around is much firmer—we’d be sellers here.


On the theme of announcements, the head of Slovakia’s junior government, Richard Sulik, said he’d push back the date to vote on the EFSF to December versus the expected late September/early October timeframe.  While we’re squarely focused on Germany’s EFSF vote on September 29 due to its leadership in the region—and ability to get the other “ducks” in orders—we’re nevertheless seeing signs that the final votes across countries on the terms of the EFSF will likely be pushed into the October period, versus original calls for mid to late September. As we’ve said before—this indecision will breed more downside risk to European capital markets.


One concurrent issue of note remains Finland’s demands that Greece post collateral on the amount Finland is to contribute to the EFSF. The news here wavers between Finland’s desire for cash (liquid) collateral from Greece for the money it will post to the facility to even talk of Greek bank stocks as collateral, which of course throws up a huge flag given the difference between where securities are marked to market or model.  The broader implication remains that what is decided between Greece and Finland will impact similar collateral demands of the other Eurozone countries.


In the category of “some stay the same”, today Italy’s largest trade union is protesting Italy’s €45.5B austerity package in another act of foot-power. This week the Italian senate begins debate on the package, which has been chopped up from the original. The new version removes the Solidarity tax, which placed an additional 5% tax on annual incomes above €90K, and the original proposal to cut €9B in funding to regional and local governments was trimmed by €2B.


Look for indecision with the ECB to arise as the package is trimmed; remember, the ECB’s resumed its SMP bond purchasing program (including buying the secondary issuance of Italian and Spanish bonds) on Italian insurance that it would pass its austerity package to shave its budget, and presumably on the terms of the original package. This development is likely the driving force in Italian yields rising over the past week (more below under Risk Rising).



Risk Rising

Below are charts of 10YR government bond yields and 5YR sovereign cds spreads. Our focus continues to be on Italy and Spain, two countries that present exponentially more sovereign debt risk than their peripheral peers.


Italy’s 10YR yield is up 33bps week-over-week to 5.46%, and Spain’s 10YR rose 14bps to 5.19%. 6% continues to be a critical breakout line. While the ECB has been able to arrest yields in Italy and Spain since it began its bond purchasing program in early August, confidence wanes as Europe fumbles with the terms of the EFSF.  5YR CDS spreads show a similar risk profile: Italy moved up 74bps w/w to 443bps and Spain jumped 52bps to 421bps. Both are well above the 300 line, a critical breakout line.


European Risk Monitor: Italy and Spain in the Balance - 1. me. yields


European Risk Monitor: Italy and Spain in the Balance - 1. me. cds


European Financials CDS Monitor – As opposed to the sovereign direction of Italian and Spanish swaps, bank swaps tightened in Europe last week.  37 of the 39 swaps were tighter and 2 widened.   The average tightening was 10%, or 47 bps, and the median tightening was 7%. 


European Risk Monitor: Italy and Spain in the Balance - 1. me banks



Getting in front of the Calendar

(9/7) The German Constitutional Court is expected to deliver a major decision on the constitutionality of Berlin’s participation in the bailouts of Greece, Ireland, and Portugal. We expect the court to rule in favor of the legality of the State’s right to bailout European neighbors. In any case, this will be an important sentiment gauge for the EFSF.


(9/8) ECB Interest Rate Announcement – We don’t expect any movement off of 1.50%. The ECB purchased €13.3B worth of debt last week (vs. €6.7B in week prior), bringing its total purchases since August 8th to €56.25 Billion.  Additionally the ECB will be releasing new staff projections for inflation and growth — expect downward revisions!


(9/8) BOE Interest Rate Announcement – We don’t expect any movement off 0.50% but could see a hike to its asset purchasing program, which could weaken the GBP. As sticky stagflation continues to plague the country, our outlook remains bearish over the intermediate term TREND. With the UK immediate-term TRADE oversold today, we booked a gain and covered our position in EWU.


(Mid-September) Troika’s (EU, ECB, IMF) mission to inspect the country’s measures to shave its debt and deficit was suspended until mid-September to allow Greek authorities to complete “technical” work. Greece said it expects to receive its €8B tranche of bailout money in September, however expect the Germans to require a positive report from the mission before the bailout tranche is paid.


(9/18) State Elections in Berlin. Is Merkel’s party on the chopping block again?


(9/29) Germany votes on EFSF. On Sunday Merkel’s CDU party lost state elections in Mecklenburg-Vorpommern, her home-state, to the Social Democrats (SPD).  The loss raises questions on Merkel’s support for the EFSF. Remember, confidence in Merkel has waned and her party has lost 5 regional elections this year.  Doubts have circled on Merkel’s ability to maintain a majority in her coalition, and if so, if she’ll be able to garner enough votes to pass the EFSF. The news agency Dapd reported today that more than 19 lawmakers refused to support expanding the powers of the EFSF (Merkel has a 19 vote majority). 


Matthew Hedrick

Senior Analyst


The detail was better than the headline



August gross gaming revenues (GGR) increased 57% YoY to $3.1BN.  With the detail in hand, we can confirm that this was a terrific month.  High margin Mass business increased 41% for the 3rd straight month.  Even though VIP hold was higher than last year, VIP volume was the bigger driver, up 58% YoY.  It would be hard to poke holes in this month. 


We estimate that direct play was 6.1% in July vs. 7.5% last year.  Adjusted for direct play volumes, market hold was 2.93% vs. 2.78% last year.  If we normalize hold levels, August growth would have been up 51% YoY.  September will have a tougher hold comparison and therefore, YoY growth rates should moderate somewhat. 


MGM was the largest market gainer in August – helped by an easy July comparison where the company experienced the largest share loss.  Galaxy continued to ramp while Wynn lost the most share.  VIP growth – or the lack thereof – continued to plague LVS with VIP revenue growing only 5% YoY compared to market growth of 64%.  Due to LVS’s continued struggle to attract more junkets, their share hit an all-time low of just 14.2%.


Just looking at Mass, MPEL had the strongest YoY growth (excluding Galaxy of course).  Importantly, MPEL gained share in the Mass business which puts them on track to best our EBITDA estimate for Q3 - already 20% above the Street.  Wynn and LVS also had good quarters on the Mass front.  However, both Wynn and LVS saw slot revenues that were flattish and down YoY, respectively, perhaps indicating saturation in that business. 



Y-o-Y Table Revenue Observations


Total table revenues grew 58% YoY this month, on top of 40% growth las­t August.  August Mass revs rose 41%; VIP revs grew 64%; and Junket RC rose 58%. 


For the 6th straight month, LVS table revenues grew the slowest – at 12%.  Over the 13 months, LVS’s table revenues have grown at roughly 1/3 of the market’s pace.

  • Sands was up 37% YoY, driven by a 54% rise in VIP and 13% increase in Mass
    • Junket RC was up 27%
    • Sands held high in August.  Adjusted for 12% direct play (in-line with 2Q11), hold was about 3.47%, compared with 2.85% hold in August 2010 assuming 14% direct play (in-line with 3Q10). 
  • Venetian was the only property we track to be down YoY in August – with table revenue down 5% YoY.  Mass rose 31%, but VIP revenues plunged 25% impacted by low hold and below average Junket RC growth
    • Junket VIP RC grew 19%
    • Hold in August was 2.3%, based on 21% direct play vs. 3.4% in August 2010 assuming 23% direct play levels.
  • Four Seasons was up 42% YoY, driven by 42% growth in Mass and VIP revenues. 
    • Junket VIP RC grew 14% YoY – the slowest grower in the market
    • Results would have been better if not for low hold, however, last Augusts’ hold’s was even worse.  Assuming 41% direct play (in-line with 2Q11), we estimate hold was 2.1% compared to 1.6% in August 2010 assuming the same direct play percentage.

Wynn table revenues were up 48%

  • Mass was up 53% and VIP increased 47%
  • Junket RC increased 38%
  • Assuming 8% of total VIP play was direct (in-line with 2Q11), we estimate that hold was 3.1% compared to 2.8% last year (assuming 13% direct play – in-line with 3Q10)

MPEL table revenues grew 39%, driven by Mass growth of 72% and VIP growth of 32%

  • Altira revenues rose 44% with Mass up 58% while VIP grew 43%, benefiting from high hold and easy comparisons
    • VIP RC increased 15%
    • We estimate that hold was 3.1% vs. 2.5% last year
  • CoD table revenue was up 36%, driven by 75% growth in Mass and 26% growth in VIP
    • Junket VIP RC grew 33%
    • Assuming a 13% direct play level, hold was 3.0% in August compared to 3.1% last year

SJM revs grew 48%

  • Mass was up 23% and VIP was up 61%
  • Junket RC was up 50%

Galaxy table revenue skyrocketed 146%. Mass soared 240% and VIP rose by 136%.

  • StarWorld table revenues grew 42%
    • Mass grew 40% and VIP grew 42%
    • Junket RC grew 40.5%
    • Hold was high at 3.1% but flat YoY
  • Galaxy Macau's total table revenues were $278MM, 18% higher than July and 74% higher than June’s first full month of operations
    • Mass table revenues fell slightly MoM to $43MM from $45MM in July
    • VIP table revenue of $235MM, increased 23% MoM with RC volume of $7.9BN. Assuming 4% direct play, hold was 3%.

MGM table revenue soared 125%, boosted by healthy RC volumes, high hold and easy comps.

  • Mass revenue growth was 15%, while VIP ballooned 166%
  • Junket RC grew 96%
  • Assuming a direct play level of 8%, we estimate that hold was 3.4% this month vs. 2.5% in August 2010 assuming direct play of 9% 


Sequential Market Share (property specific details are for table share while company-wide statistics are calculated on total GGR, including slots)


LVS share in July fell 30bps sequentially to 14.2% - an all-time low for LVS. This compares to 6 month trailing market share of 16.1% and 2010 average share of 19.5%

  • Sands' share increased 1% to 5%,
    • The increase in share was primarily attributed to a 120bps increase in VIP rev share
  • Venetian’s share dropped 20bps to 7.0% share, an all-time low since opening
    • VIP share fell 70bps to 4.5%, also setting a record low for the property
    • On the bright side, Mass share increased 90bps to 15% - above the 14% average for the trailing 6 months
    • Junket RC remained flat at 4.6%
  • FS share fell 1% to 1.7%
    • VIP share dropped 1.4% to 1.6%
    • Mass share increased 40bps to 2.2%
    • Junket RC increased to 1.4% - up 40 bps sequentially

WYNN lost the most share in August with a 2% drop to just 13.2%. Augusts’ share was below its 6 month trailing average share of 15% and 2010 average share of 15%.

  • Mass market share was held flat at 9.9%
  • VIP market share plummeted 2.8% to 13.9%
  • Junket RC share fell 1.8% to 12.9%, below its 6 month trailing average of 15.3% and 2010 average of 15.2%

MPEL market share fell 1.1% to 14.5%, below their average 6 month trailing share of 15% and 2010 share of 14.6%.

  • Altira share fell 1% to 5.1%, compared to a 5.6% average share in 2010
  • CoD’s share ticked down 10 bps sequentially to 9.2%
    • Mass market share declined 10bps to 10% - still second only to Venetian and slightly ahead of Wynn’s share
    • VIP share fell 10 bps to 9.0%

SJM share fell 60bps to 27.2% in August- the lowest share since August 2009 and below its 6-month trailing average of 30.6% and 2010 average of 31.3%.

  • Mass market share remained flat at 36.1%
  • VIP share fell 1% to 25.3%
  • Junket RC share fell 40bps to 29.8%

Galaxy continued its momentum from Galaxy Macau, gaining 1.3% share to 20.1%, its highest share since August 2007. August share compares with an average share of 10.9% in 2010 and a 6 month trailing average of 12.8%.

  • Galaxy Macau garnered 9.4% market share, up from 8.1% in July
    • Mass market share fell 70bps to 6.3%, offset by a VIP share gain of 180bps to 10.3% and RC share gained 240bps to 10.8%.
  • This marked the 4th straight month of post-GM opening that Starworld continued to gain share - increasing 30bps to a market share to 9.7%, 60 bps above its TTM pre-Galaxy Macau level.
    • Mass market share ticked down 10bps to 2.8% while VIP share rose 170bps to 11.4%

Even in the face of the GM ramp, MGM was the largest share gainer in August – granted this follows a month where MGM lost the most share. MGM’s share increased 2.8% to 10.9%. August share compares with an average share of 8.8% in 2010 and a 6 month trailing average of 10.6%.

  • Mass share declined 60bps to 6.5% but was more than offset by a 4% increase in VIP share to 12.1%
  • Junket RC increased 40bps to 10.4%, materially above the property’s 2010 average of 8.4% but below its 6 month trailing average of 10.7%


Slot Revenue


Slot revenue growth decelerated to 22% YoY in August to $116MM, down 4% sequentially

  • Galaxy slot revenues grew 601% YoY, reaching $15MM due to GM
  • MGM had the second best growth at 35% YoY, but decreasing $1MM sequentially to $15MM
  • SJM’s slot revenues grew 20% YoY to $14MM
  • MPEL’s slot revenue grew 16% YoY to $21MM
  • Wynn’s slot revenue only grew 1% YoY to $21MM
  • LVS slot revenues actually fell 3% YoY to $30MM








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