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MCD SALES PREVIEW

McDonald’s is set to report December sales, along with 1Q earnings, tomorrow before the market open.

 

 

General View

 

Recently, we’ve been vocal on our view that McDonald’s earnings are likely to disappoint in 2013.  We are continuing to advise clients to be patient on the long side of MCD until expectations for next year come down. We believe that, aside from the macro environment and lapping difficult partially-weather-driven comps, self-inflicted wounds, that management has not yet owned up to, are also likely to impede earnings growth over the next twelve months.

 

 

Sales Preview

 

McDonald’s reports December sales, along with 1Q earnings, tomorrow before the market open.  Consensus is anticipating a sequential deceleration in two-year average trends for global trends.

 

Below, we go through what we would view as good, bad, or neutral comparable restaurant sales numbers for McDonald’s three regions in December.  For comparison purposes, we have adjusted for historical calendar and trading day impacts (but not weather).

 

Compared to December 2011, December 2012 had one additional Monday, one additional Sunday, one less Thursday, and one less Friday.  In 2012, Christmas fell on a Tuesday versus Sunday in 2011.   We expect a modestly positive impact on the headline numbers for December. 

 

MCD SALES PREVIEW - mcd preview

 

 

United States – facing a compare of 9.8%, including a calendar shift of roughly 0.7%, varying by area of the world:

 

GOOD: A print higher than -1% would be received as a positive result as it would imply, on a calendar-adjusted basis, an acceleration in two-year average trends versus November’s strong result.  November’s same-restaurant sales growth overstated true trends in the US, to a degree, as a sizeable calendar shift boosted the headline numbers.  A heavy focus on the Dollar Menu also aided results in November.  The question for December will be how much of an impact the McRib will have had.  Our expectation is for a print of -1.7%.

 

NEUTRAL: A result between -1% and -2% would imply calendar-adjusted two-year average trends roughly flat versus November.   Decelerating trends would arguably lend credence to our contention that self-inflicted wounds, and not only macro, have been impacting MCD sales in recent quarters.

 

BAD: Same-restaurant sales growth less than -2% would imply a sequential deceleration in two-year average trends in the United States.  We would expect the stock to react negatively to such a result.

 

MCD SALES PREVIEW - mcd us preview

 

 

Europe – facing a compare of 10.8%, including a calendar shift of roughly 0.7%, varying by area of the world:

 

GOOD: Better than -3% would be viewed as a stronger-than-expected result.  On a calendar-adjusted basis, such a result would imply a sequential acceleration in two-year average trends.  Soft economic conditions persisted in Europe during November with Germany one of the underperforming markets.  We would note the sequentially improving “Zew Germany Expectations of Economic Growth” index as being a positive sign for MCD Europe in December, but we continue to expect sluggish trends across the pond.  Our expectation is for a print of -3.3%.

 

NEUTRAL: A print between -3% and -4% would be received as neutral as it would imply calendar-adjusted two year average trends roughly flat versus November.

 

BAD: Weaker-than- -4% same-restaurant sales growth would imply, on a calendar-adjusted basis, two-year average trends in line with the weakest months of 2012: February and August.

 

MCD SALES PREVIEW - mcd europe preview

 

 

APMEA – facing a compare of 6.5%, including a calendar shift of roughly 0.7%, varying by area of the world:

 

GOOD: A print of better than 0.5% would be a positive result for MCD APMEA.  Weakness in Japan is ongoing and we are not expecting much from this division in December as the fallout continues around the KFC Chicken scandal.  While MCD is a competitor of KFC’s, we feel that some impact may follow through to other western chains.  Our expectation is for a print of 0.5%.

 

NEUTRAL: A print between -0.5% and 0.5% would be received as neutral by investors as it would imply calendar-adjusted two year average trends roughly flat versus November.

 

BAD: Same-restaurant sales growth slower than -0.5% in December would imply sequential deceleration in two-year average trends.

 

MCD SALES PREVIEW - mcd apmea preview

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 

 


Japanese Yen Gets Aso'd

Early this morning, the Bank of Japan announced it would enter into an "open ended" asset purchase program and would "firmly" target 2% inflation. As a result, the Japanese Yen spiked over 1% on the news, much to the chagrin of those who were short the currency. Japan's Finance Minister Taro Aso and Prime Minister Shinzo Abe are determined to fight deflation, calling the move ""...a bold review of monetary policy, an epoch-making document." Timing is everything in this market. Our Global Macro Theme of #QuadrillYen rings truer than ever today.

 

Japanese Yen Gets Aso'd - DAYEN


Hedge Funds Chase Corn

Corn prices have inched upward after the recent World Agricultural Supply and Demand Estimates (WASDE) and Quarterly Stocks report showing an increase in demand and a lower harvest. Hedge funds have piled into long corn positions as they chase the uptick in price. Net positioning (net long positions/net short positions) remains bullish at 166%, well off the ’12 highs that we saw back in December (525%). We have no position in corn right now but remain bearish on the commodity.

 

Hedge Funds Chase Corn - corn1


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HOUSING: Inventory Falls Lower

Existing home inventories fell further in December by 170,000 units, another positive data point for the housing market that falls in-line with our second Q1 2013 Global Macro Theme of #HousingsHammer. Don’t let the 1% month-over-month decline in existing home sales we saw print this morning get to you; the housing recovery is still underway and in full effect. It's worth noting that this morning's decline in inventory can act as a catalyst for driving home prices higher in the coming year.

 

HOUSING: Inventory Falls Lower - inventory 2 normal


FNP: Kate in the Spotlight

Takeaway: Kate Spade was unofficially endorsed by the Obama fashionistas at Monday’s Presidential Inauguration.

The Kate Spade brand got a little kicker yesterday in the nation’s capital as Sasha Obama wore a Kate Spade dress and overcoat to President Obama’s second inauguration. While this isn’t exactly a stock moving event, we think it’s a brand validator given that the First Lady is arguably the most trend-setting First Lady since Jackie O fifty years ago. We’ve seen that thus far with brands like J Crew, and the addition of Kate Spade into the mix can’t hurt by any means. Again, this does little to alter our value for FNP today as it is minor in the grand scheme of things, but the underlying strength and value of Kate Spade is core to any investment thesis, and this is a nugget of evidence that it still holds true.

 

 

FNP: Kate in the Spotlight                 - FNP KatePI

 

 


HOUSING: EXISTING HOME INVENTORIES FALL FURTHER - A GOOD THING

Takeaway: Don't be confused by the knee-jerk reaction to today's existing home sales number. The inventory number was better, and that's what matters.

Focus on the Inventory Reading

While the media is focused on the headline sales print for December existing home sales declining 1% MoM and coming in below expectations, we're focused on the inventory number, which is down 23% vs. last December and carries with it very strong future pricing implications. 

 

As those who follow our pricing models know, a change of 1 million units in inventory affects future (11 months) HPI prices by 12.1%. As such, this morning's sequential decline in inventory of 0.17 million units equates to an additional 200 bps of upward pricing pressure in the coming year.

 

Similarly, on a month's supply basis, every one month of supply equates to a 4.1% delta over the coming year, so this morning's decline of 0.4 months works out to 164 bps of incremental (i.e. vs. last month's expectation) upward pricing pressure over the coming year. 

 

These are independent models so the fact that they arrive at similar, albeit slightly different, conclusions is important.

 

We're not concerned about the shortfall in the existing home sales number. More recent MBA volume statistics and the most recent pending home sales reports are better, more recent, indicators that show demand remains robust and growing. As a reminder, our thesis revolves around price reflexively driving demand, and that demand, in turn, driving price further.

 

HOUSING: EXISTING HOME INVENTORIES FALL FURTHER - A GOOD THING - inventory 2

HOUSING: EXISTING HOME INVENTORIES FALL FURTHER - A GOOD THING - inventory

HOUSING: EXISTING HOME INVENTORIES FALL FURTHER - A GOOD THING - inventory 3

HOUSING: EXISTING HOME INVENTORIES FALL FURTHER - A GOOD THING - inventory 4

HOUSING: EXISTING HOME INVENTORIES FALL FURTHER - A GOOD THING - sales

HOUSING: EXISTING HOME INVENTORIES FALL FURTHER - A GOOD THING - sales long term

HOUSING: EXISTING HOME INVENTORIES FALL FURTHER - A GOOD THING - median price

 

Joshua Steiner, CFA


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