Today we shorted Gold via the SPDR Gold Trust ETF (GLD) at $162.40 a share at 10:34 AM EDT in our Real-Time Alerts. Our macro thesis hasn't changed; we're still bearish on gold and will short when it's green like we did today.
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.
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.
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:
What is the Company Focusing On?
The company’s global priorities are:
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.
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.
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.
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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.
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.
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.
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.
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