MCD reported February global same-restaurant sales growth of -1.5% versus consensus of -1.6% (not adjusting for the calendar shift).  While calendar shifts are material for monthly headline numbers, the trend in McDonald’s comparable sales growth is unmistakably negative.  In five of the last eight months, McDonald’s has reported flat or down same-restaurants sales growth.  This is the longest sustained slowdown in sales trends since the company’s historic “plan-to-win” turnaround. 

This begs the question: can McDonald’s maintain its long term system-wide sales and operating income growth targets of 3-5% and 6-7%, respectively?


We remain skeptical that this slowdown is macro-driven; it seems evident that there are company-specific issues that are yet to be addressed by management.   Below, we update our thoughts on the various geographies.





There is nothing in the currents sales trends or in management communicated turnaround strategies that would cause us to reverse our negative stance on MCD.  We still believe MCD will see flat-to-low single digit EPS growth in 2013.  The emphasis on value has boosted MCD SRS growth in recent months, but history has shown that this strategy is not effective over the long term.  In fact, it externalities of this approach can impede sustainable earnings growth over time as operational complexity increases. 


The macro environment is challenging for a number of companies but the changes in McDonald’s long-term trends suggest that there are company-specific issues at play.  The current guidance for food inflation suggests that 2013 will not be as big an issue for MCD as in 2012, but the risk of upward revisions remains high.  Operating margins around the world are likely to continue to be pressured by sales deleveraging and incremental development costs.   


Our macro team retains its bullish view on the USD which would be a headwind for MCD Earnings, given its FX exposure.





February comparable sales growth for the domestic market was -3.3%, or flat excluding the segment’s calendar shift, versus consensus of -3.6%.  Sales were better than expected despite choppiness in consumer spending trends.   February represented the most difficult comparison for MCD in the U.S.



  • Fish McBites were introduced
  • Heavy focus on the Dollar Menu continued
  • Several lower-performing items were dropped from the menu, including the Fruit  & Walnut Salad and Chicken Selects.  We expect McDonald’s to drop the Angus Burger in the near future
  • Monthly SRS have held up on the back of incremental value message promotion, but this is not a sustainable trend
  • Extended hours are not driving incremental sales
  • The $6-7 casual dining lunch price point of $6-7 is competitive with MCD core menu items at lunch



MCD Europe

Europe comparable sales growth came in at -0.5%, or +2.7% excluding the calendar shift, versus -0.4% consensus. 



  • Russia and the UK continue to generate positive same-restaurant sales on the back of extended day parts and it appears that the horsemeat scandal may not have significantly impacted UK trends
  • German and France continue to experience declining sales and traffic trends, despite continuing messaging around value platforms
  • Margins in Europe are under pressure and will likely Margins in Europe are under pressure and will likely continue to contract in FY13 as sales growth remains under pressure in the region
  • The boost from reimaging is likely to diminish over time as almost all of the interiors and half of exteriors in the region have been completed





Asia/Pacific, Middle East and Africa (APMEA) February comparable sales growth decreased -1.6%, or +1.5% including the segment’s calendar shift, versus consensus of  -1.5%.



  • Australia continues to deliver positive SRS growth, while China benefited from the timing of Chinese New Year
  • Japan trends remain soft with February SRS trends of -12.1%
  • Average check at MCD Japan improved but traffic continued to decelerate, declining -10.9% year-over-year, versus the -8.1% decline in January.
  • Given the seemingly secular deceleration in Japan and the difficult environment in China, APMEA is also likely seeing continued margin pressure
  • What ideas, beyond value, are being put forward to improve the APMEA business?
  • Almost 2/3 of markets offer extended hours of some form and over half are open 24 hours.  This spigot is slowly closing from an incremental sales growth perspective.



Howard Penney

Managing Director


Rory Green

Senior Analyst




Ike's Bluff (Book Review)

Takeaway: A great rewind of uniquely American-style Presidential leadership - buy the book.

Summary Thoughts


  1. Inspirational book on judgment and accountability in decision making
  2. Sharp contrast to the broken #PoliticalClass concepts of leadership in America today
  3. His greatest victories were the wars he did not fight” –Evan Thomas #indeed


Content Highlights


  1. “Eisenhower was the first President to use TV as a bully pulpit, but he was not particularly good at it” (pg 16) #authenticity
  2. “The people, judging from Eisenshower’s high poll ratings, believed that he had sound judgment” (pg 16)
  3. “too many cups of coffee, smoked too many cigarettes, slept badly, and worried far too much.” (pg 18) #accountability
  4. “He knew that he had a gift: the power to make people – indeed, whole peoples – trust him” (pg 28) #trust
  5. “His firstborn child… “Icky”, died of scarlet fever in 1921… and he never really recovered from the loss” (pg 30) like #Jefferson
  6. “Eisenhower had grown up poor in Abilene, Kansas” (pg 33) #perspective
  7. “President Eisenhower’s day usually proceeded with the precision of a military band.” (pg 43) very #process/routine oriented
  8. “Let’s not make our mistakes in a hurry” was one of his standard sayings.” (pg 45) very #patient, risk manager of a man
  9. “Never get in a pissing match with the skunk” (pg 57) to his brother Milton about #McCarthy
  10. “What we found was the result of seven years of yapping was exactly zero. We have no plan.” (pg 59) Ike on #Stalin’s death
  11. “Miss America contestants were asked to state their opinion of Karl Marx” (pg 69) #1950 zeitgeist in America during Korean War 
  12. “More significant was the death of Stalin, the leader most responsible for the conflict” (pg 81) good chapter contextualizing Korea
  13. “The war is over and I hope my son is coming home soon” (pg 81) wars different vs recent US Presidents; #personal responsibility
  14. “Learning To Love The Bomb” (pg 101) Chapter 7, illustrates how politicians in America marketed/sold #fear
  15. “we live by emotion, prejudice, and pride” (pg 105) Ike in an excellent leadership note to #Churchill
  16. “Eisenhower, himself a heavy editor, fiddled with his speeches until the last possible moment” (pg 111) #accountability
  17. “You’ve got to stick your butt out more, Mr President” (pg 115) loved #golf, this was advice from Sam Snead at Augusta
  18. “Eisenhower was astonished at the foolishness of the French” (pg 120) annoyed w/ France at Dien Bien Phu #Vietnam
  19. “You have a row of dominos set up, and you knock the first one over” (pg 127) why he kept USA out of Vietnam #1954
  20. “Eisenhower was an expert in finding reasons for not doing things” (pg 130) –Andy Goodpaster, his Staff Secretary
  21. “Scientists and industrialists must be given the greatest possible freedom to carry out their research” (pg 146) #evolve
  22. “Don’t Worry, I’ll Confuse Them” (Chapter 10) fascinating #strategy chapter on how he’s play the Chinese
  23. “Chiang might have dragged out the crisis had the Red Chinese not backed down. But they did.” (pg 164)
  24.  “Eisenhower had read Clausewitz’s On War – three times” (page 203) #study
  25. “This fellow’s licked and what’s more he knows it” (pg 209) Ike on Adlai Stevenson’s challenge for the Presidency #1956
  26. “icy with anger, warm with satisfaction, sharp with concern” (pg 215) when Ike learned of the #U2 intelligence on Russia
  27. “A crisis in leadership” (pg 255) that’s what Time Magazine said about Ike in #1957, #embarrassing editorial times
  28. “The President must be in some kind of partial retirement” –Walter Lippmann (pg 255) #1957, not knowing what Ike knew
  29. “You can understand that there are many things that I don’t care to allude to publicly” –Eisenhower (pg 260)
  30. “Patience and privacy were virtues of leadership, vices of politics… he was the lonely keeper of the nation’s secrets” (pg 260)
  31. “Psychologically, he could handle the pressure. But physically, he could not” (pg 260) I get it
  32. “The Roman Empire controlled the world… Now the communists have established a foothold in outer space” –#LBJ! (pg 276)
  33. “Ike, who regarded LBJ as a phony” (pg 277) Life Magazine put Lyndon Johnson on the cover, Russian space #FearMongering
  34. “Alsop did what newsmen do: he found other sources. One was Johnson, who cultivated Alsop” (pg 310) gotta love #NYTimes
  35. “Eisenhower was, in effect, his own secretary of defense” (pg 314) #experienced practitioner, not political parrot
  36. “honesty of purpose, calmness, and inexhaustible patience” (pg 331) Ike, on himself, and virtues of #leadership
  37. “Khruschev was surprised and overjoyed to be invited to America by Eisenhower” (pg 335), keep your #enemies close
  38.  “He found her and crawled in beside her” (pg 352) Eisenhower’s best friend, his wife #Mamie
  39. “I’m Just Fed Up!” Chapter 25, classic – U2 crisis blows up with Russia/Khruschev; Eisenhower diffuses the risk, again
  40. “Ike was more comfortable as a soldier, yet his greatest victories were the wars he did not fight” (pg 404) #conclusion


A great rewind of uniquely American-style Presidential leadership - buy the book.



Keith R. McCullough
Chief Executive Officer

Destroy The Currency, Boost The Market

Japan and Venezuela have enjoyed massive gains in their respective stock markets over the last year. Venezuela's IBVC Index is up over 30% year-to-date while Japan's Nikkei 225 is up almost 20%. Comparatively, the S&P 500 is up a little over 9.0%. These two countries have seen their the value of the Japanese Yen and Venezuelan Bolívar drop considerably since last year. Debauched currency = rising stock market. 


Destroy The Currency, Boost The Market - image001

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.47%
  • SHORT SIGNALS 78.68%

Stock Report: Darden Restaurants (DRI)

Stock Report: Darden Restaurants (DRI) - HE II DRI 3 30 13


We have been writing for several quarters of our belief that Darden’s multi-brand portfolio is inefficient and, far from achieving the economies of scale that management touts, has led to subpar cash return on investment.  


Following our call to short the stock in July of 2012, we saw a depreciation in the stock price and a general consensus emerge among the investment community that fully bakes in our negative views of the company’s fundamentals.  


At this point, we believe that the potential for improvement at Darden is too great, and the mismanagement so egregious, that it is difficult to imagine either activism in the shareholder base or management offering a mea culpa and following a more prudent strategy with respect to capital allocation.  In either scenario, the stock should appreciate and $1 billion in EBITDA makes the dividend yield safe and, we believe, supports the stock in the mid-to-high $40’s valuation range. 


INTERMEDIATE TERM (the next 3 months or more)

Over the intermediate-term, we believe that sequentially improving restaurant trends within the casual dining industry should provide support to Darden’s same-restaurant sales results.  Darden’s blended “Big Three” (Olive Garden, Red Lobster, LongHorn) sales will almost certainly continue to lag the industry, but until management, willingly or otherwise, attacks the middle of the P&L, we believe a true turnaround will take some time.


LONG-TERM (the next 3 years or less)

The long-term is where there is real upside in Darden.  This kind of opportunity does not arise in this space on a regular basis.  Darden’s operating margins are in line with Brinker’s while its restaurant-level operating margins are 400-500 bps wider; we see this as indicative of a corpulent cost structure at Darden.  


By our estimation, $293 million could and should be cut from SG&A, adding roughly $1.40 per share in EPS or $20 of share price upside.  Combining this with the difference between our sum-of-the-parts valuation ($67) and the share price, we see roughly $33 of upside in the stock. 


Stock Report: Darden Restaurants (DRI) - HE II DRI chart 3 30 13

Tired? SP500 Levels, Refreshed

Takeaway: In other words, the all-time highs remain in play, but so does some very short-term mean reversion (to 1532). We want to be flexible here.



I sold the open this morning (sold 2 LONGS, added 2 SHORTS) because the bottom up signals in each security told me too. The SPY didn’t register a sell signal (it usually doesn’t until after stocks do). The market has been up for 9 of the last 10 weeks; certain stocks are getting exhausted.


Exhaustion can last (think the 1995 US stock market), particularly if the research fundamentals support it (they do). So don’t expect me to get too cute here. This remains a market we want to be risk managing with a bullish bias, until something (signal or research) changes.


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE overbought = 1565
  2. Immediate-term TRADE support = 1532
  3. Intermediate-term TREND support = 1477


In other words, the all-time highs remain in play, but so does some very short-term mean reversion (to 1532). So we want to be flexible here. Keep moving and don’t get plugged buying on overbought signals.




Keith R. McCullough
Chief Executive Officer


Tired? SP500 Levels, Refreshed - SPX


March is off to a bang with average daily table revenues (ADTR) up 34% YoY for the first 10 days.  The numbers are skewed higher a little because the period contains 2 weekends of data.  We are upping our full month forecast from 10-15% growth to +12-17%.  Our initial growth projection was based on historical sequential seasonal patterns and an easy hold comp over last year.




The word around town is that hold percentage is likely running higher than normal.  We had received reports last week that traffic on the Mass floors was a little light.  ADTR is likely to moderate the rest of the month.


SJM outperformed to start the month mostly at the expense of Wynn.  The other operators are tracking fairly close to recent trend. 



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