MCD - Changing the rules in the middle of the game

I have long been a critic of MCD’s coffee strategy because it never made sense to me. The original strategy called for MCD to spend $100,000 per store, to incorporate separate “McCafes” in each restaurant that would serve a new line of espresso-based products and assorted baked goods. At the time, the project was the largest corporate initiative ever undertaken by MCD. Late in 2008, I documented that the company was clearly behind plan in converting restaurants to McCafes in order to nationally promote the product by mid-2009.

Guess what, the original strategy has changed! Even though the original plan never worked, MCD continues to maintain that it is not slowing down the roll out – they can’t! The 2009-2010 business plan calls for the “beverage strategy” roll out! It is how management plans to drive incremental transaction counts, and without beverage sales, trends are going to slow for MCD. As an aside, it’s interesting to see that MCD is starting to test the “high-end” Angus burger in more markets. I guess if McCafe is not working, they need to go to plan B…

More than 7,000 of the 14,000 U.S. McDonald's restaurants have been retrofitted to include the separate “McCafes” that offer espresso based coffees, with the balance expected to be complete by mid-2009. Going forward, however, the espresso machines are being integrated into the front counter rather than moving ahead with the “McCafe” strategy! Are you kidding me! This is the strategy that was going to hurt Starbucks. Not even!

Lastly, I know management needs to tow the corporate line, but they almost sound delusional when it comes to the coffee strategy. A McDonald’s executive is quoted as saying; "That's the great part about McDonald's is that we are actually offering affordable luxuries, so for us we know our customers are looking for those affordable luxuries." Over the past year, McDonald’s US average check growth has been fueled solely by price increases as mix was negative in each of the last four quarters with the Dollar menu growing in popularity. This just magnifies the point that the same McDonald’s customers that are coming to eat off the Dollar menu are not going to pay $3.50-$3.75 for a cup of coffee.

On Monday, MCD will release February same-store sales. Consensus estimates for MCD are; Global +0.4%, United States (0.6%), Europe (0.4%) and APMEA +3.8%. The reported February numbers will be negatively impacted by about 4% as last year’s numbers included one extra day due to the leap year. The January results, on the other hand, were helped by about 2% from a calendar shift. That being said, neither month alone provides a good indication of the underlying trends. The February numbers need to be taken in context with January to get a better feel for what trends look like in 1Q09. Taking the two months together (and adjusting both for calendar shifts), the underlying 1Q same-store sales trends look like; Global +4.8%, United States +3.4%, Europe +4.4% and APMEA +8.0%. If the consensus numbers are close to being right, this would represent a slowdown across each region from 4Q08 when Global +7.2%, United States +5%, Europe +7.6% and APMEA +10%.

The headline on Monday will not look good, the overall trends are slowing and coffee is not working. This is not the MICKEY DEES the street is in love with.

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more

REPLAY: Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more

Premium insight

[UNLOCKED] Today's Daily Trading Ranges

“If I could only have one thing of the many things we have it would be my daily ranges." Hedgeye CEO Keith McCullough said recently.

read more

We'll Say It Again: Leave Your Politics Out of Your Portfolio

If your politics dictates your portfolio positioning, the Democrats and #NeverTrump crowd out there have had a hell of a week.

read more

Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more