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McDonald’s shares have recovered well since the November lows and are outperforming the S&P 500 year-to-date but management has plenty of work to do to ensure EPS growth in 2013.


McDonald’s same-restaurants sales in November were sequentially stronger than October’s, albeit aided by the calendar shift, but December will offer a more meaningful indication of the health of the company’s business heading into 2013. 


Latent Issues Remain


We’ve had concerns about the operational complexities that have manifested themselves over the past 5-6 years.  Like Yum! Brands, McDonald’s has difficult top-line comparisons, from a same-restaurant sales perspective, over the next three months.  Even if our concerns over the operational side of the business are unfounded, we believe that staying on the sidelines for the next three months is worth considering. 


Consensus is expecting sales to recover in 2Q13 but, if our contention about over-complexity in the operational setup is even half-accurate, consensus could be early on the turn.   Street expectations of 5% revenue growth and 9% EPS growth are overly optimistic, in our view, with food inflation running in the low-to-mid single digits.  This, along with ongoing pressure in Europe, represents a risk to earnings growth expectations.

  • We believe that 5% revenue growth could prove to be aggressive by 150-200 bps, in our view
  • The margin recovery story, that the street buys into, seems less and less likely to materialize

MCD'S ISSUES MAY CONTINUE IN 2013 - mcd revenue growth


MCD'S ISSUES MAY CONTINUE IN 2013 - mcd operating margin yy bps chg


Move to Value Has Failed Before


In 2003/2004, McDonald’s made an aggressive move to value that failed to gain traction with consumers and we struggle to understand how value will put sales trends on the right track in 2013.  The company needs to take price or shift mix in order to mitigate margin erosion due to beef price inflation. 



Operational Issues


Increasing complexity in the back of the house can present challenges to restaurant companies.  Management has disagreed with our view that this is happening at McDonald’s but we think three areas need to be addressed to help sales and margins recover:

  1. Menu Optimization:  A typical McDonald’s in the United States  carries out more than 1,000 transactions per day with many items carrying 10-30 transactions, daily.  At a point, the complexity in the menu hampers efficiency to the degree that some of the less popular items need to be taken off the menu.
  2. Espresso-Based Beverages:  The biggest loser on the menu is the line of espresso-based McCafé drinks.  Given that the Chief Executive Office was the primary champion, internally, of placing these items on the menu, we see little chance that management will change course.  More and more advertising dollars need to be pulled away from the McCafé line as, over time, pressure will build on management to invest less and less in an under-performing business
  3. Removing the Angus Burger:  The Angus Burger has failed to meet expectations.  With promotions, restaurants tend to sell roughly 70 per day in US markets.  Without promotions, that number falls to less than 40.  While the $4 price tag helps average check, that the company had to go to the McRib for December implies that Angus burgers are failing to meet expectations.  Removing the Angus could prove to be an operational improvement given the additional features of the Angus versus other burger offerings (extra patty, extra bun)


What is the Company Focusing On?


The company’s global priorities are:

  1. Optimizing the menu
  2. Modernizing the customer experience
  3. Broadening accessibility to our Brand

The menu has not, as of now, been optimized to the degree that it needs to be.  The pricing structure was changed but that strategy has not been positive.  The modernizing of the customer experience is a given, in 2013, and remains an ongoing process.  Broadening accessibility to the brand seems to be an exhausted approach for McDonald’s; increasing accessibility at this point could involve lower returns.


The McRib has always, since 1983, been a three-to-four week promotion, which began this year in November.  While many markets began selling McRib in November, the advertising started in mid-December and it appears that a number of markets are still selling it in January.


Other than the aggressive global value message, details are few and far between on 2013.  The company plans to “relaunch” the Big Mac this year, with the commissioning of a 10-ad special campaign, reintroducing the Big Mac to America.   



Howard Penney

Managing Director


Rory Green

Senior Analyst








JOBLESS CLAIMS: Modest Improvements

The US economy continues to pump out positive data points with the latest coming from the labor market. Year-over-year NSA claims improved to -9.8%, a sizable improvement than the -6.0% and -5.9% readings over the last two weeks. Remember that a smaller number (i.e. more negative) is better in this instance. With labor conditions accelerating since December, the overall improvement is a welcome addition to our theme of #GrowthStabilizing.


JOBLESS CLAIMS: Modest Improvements  - 1



It’s worth noting that seasonally-adjusted claims "rose" 4k to 371k after last week's print was revised from 372k to 367k. Overall, the seasonally-adjusted series continues to bounce along the 365-375k range it has occupied post Hurricane Sandy renormalization.


JOBLESS CLAIMS: Modest Improvements  - 2


As we wrote about in  “LV STRIP: AN UGLY PRINT COMING” (1/8/2013), the November Las Vegas Strip print of a 12.8% decline in gaming revenues was indeed “ugly”.  Adjusting for normal slot and table hold, Strip gaming revenues were down 7%.  Baccarat volume declined for the 1st time since May 2012 on a not so difficult comp of +16% last year.  That doesn’t sound like a recovery to us.


Gaming details:

  • Slot handle rose 4% and is flat on a rolling 3-month average
  • Slot win fell 10% as hold was 7.3% (compared with 8.4% in November 2011).  On a trailing twelve month average, slot hold was 7.6%.
  • Table volume excluding baccarat rose 5% YoY and +2% on a rolling 3-month average.  Table hold excluding baccarat was 10.0%, compared with 12% on a trailing twelve month average.
  • Baccarat volume fell 16% (compared with 16% growth in November 2011); this is the 1st decline since May 2012.
    • Baccarat win fell 25% on hold of 12.2% vs 13.6% in November 2011.  On a trailing twelve month average, baccarat hold was 12.0%.

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SBUX: Full Speed Ahead

Currently, Starbucks (SBUX) has a few tailwinds going for it that could push the stock higher. We believe that SBUX will post another strong year for FY13 thanks to revenue drivers firing on all cylinders. According to the Street consensus, revenues are expected to grow 12.7% in FY13 versus FY12, which we think is possibly conservative given momentum in several other areas of SBUX’s business. Combined with growth in China, the expanded availability of the Evolution Fresh brand, and stronger market share in the single serve and core retail space, Starbucks looks attractive as a long right now. We think top- and bottom-line estimates will rise over the next three months.



SBUX: Full Speed Ahead - SBUXquant



From a quantitative setup, the stock is in bullish formation, with immediate-term TRADE and intermediate-term TREND support at $53.39 and $51.37, respectively. We remain long SBUX in our Real-Time Alerts.



SBUX: Full Speed Ahead - SBUXgrowth

URBN: We Liked It Lower, And We Like It Higher

Takeaway: $URBN looks expensive, but we can’t point to a catalyst to get either the multiple to contract or for earnings to slow.

URBN’s positive release this morning did not come as a great surprise to us. The company has strong momentum in both its business and its turnaround, and we think that those both have legs. The timing – ie less than a week before ICR – is a no-brainer as well.


It’s impossible to argue that this stock is still cheap, but the reality is that we think it is a 20% EPS grower over the next 2-years, and consensus estimates are at least 5% too low (we think that’s probably conservative). Our model assumes a sales and margin recovery, but still not even within a stone’s throw of prior peaks.  


Bears have often told us that there’s no way that URBN will hit prior peaks. But we never thought we needed that to support a bull call. We are assuming mid-single digit comp rates, and have EBIT margins topping out shy of 16% -- well pelow 18%-19% peaks.


Is the stock expensive? Yes. But looking into next year, we consider it the first real year of the company’s recovery, as we have the benefit of the new human capital put in place in 2012 as well as the new fulfillment centers to facilitate better DTC growth. Our model has earnings growing 24% in the upcoming year, which is very difficult to find in retail/consumer. That plus upside from the consensus numbers still leaves us liking URBN here.


Do we like it more on a pullback? Yes.  But remember that the consensus is still rather bearish on it, as evidenced by our Hedgeye Sentiment Monitor (which triangulates Buy Side, Sell Side, and Inside sentiment).  It looked expensive at $26, then at $30, then at $35 and now at $42. We can’t point to a catalyst to get either the multiple to contract or for earnings to slow. 


URBN: We Liked It Lower, And We Like It Higher - 1 10 2013 11 21 14 AM


Takeaway: Full steam ahead on the labor front.

This week's take on the labor market is shorter than usual owing to me being on the road.


The Signal

Labor conditions improved demonstrably this past week, in spite of what the printed number suggests. As the first chart shows, the rolling YoY NSA claims series improved to -9.8%, which is sharply better than the -6.0% and -5.9% readings over the prior two weeks. Remember that a smaller number (i.e. more negative) is better in this instance. This puts the rolling NSA series right back on track with it's longer-term average, meaning that labor conditions are continuing to improve, and at an accelerating rate versus what we saw in December.


The Noise

Seasonally-adjusted claims "rose" 4k to 371k after last week's print was revised from 372k to 367k. Overall, the seasonally-adjusted series continues to bounce along the 365-375k range it has occupied post Hurricane Sandy renormalization.








Joshua Steiner, CFA

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