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$MCD: #GROWTH SLOWING

Takeaway: Something is not resonating with McDonald’s customers.

This note was originally published November 08, 2013 at 09:40 in Restaurants

“Around the world, we are focused on providing the menu quality and choice, customer service and affordability that are the hallmarks of the McDonald’s experience.”


- McDonald’s October Press Release

$MCD: #GROWTH SLOWING - mcd1  

Despite management’s aforementioned focus, there is something that is not resonating with McDonald’s customers.  While MCD is a fundamentally strong company, we find it difficult to believe that it will be able to drive “initiatives that will deliver the greatest benefit” for McDonald’s customers, as promised. 

 

The charts below show sales trends across MCD’s four main regions – and they are not pretty.  October’s results prove that same-store sales continue to steadily decelerate on a two-year basis.  That said, we are comfortable in reiterating our view that McDonald’s has legitimate, inherent issues that management must address.

 

Next week, McDonald’s will host its analyst day to address the initiatives management has lined up for 2014 in order to stem the decline in global sales.  Our research tells us that the company will make an aggressive push to sell more coffee in attempt to capture incremental market share in the coffee category next year.  We expect this to be a main topic at the analyst day on November 14, 2013.

 

Our goal is to understand the potential consequences, both good and bad, of this strategy.  Delving more into this topic, we have conducted a proprietary Retail Coffee Consumer Survey, which features some of the top coffee retailers, including MCD, SBUX, DNKN, KKD, and Peet’s. 

 

We will be holding a conference call on Tuesday, November 12th at 11: 00am EST in order to present our findings and analysis.

 

 

$MCD: #GROWTH SLOWING - penn1

 

$MCD: #GROWTH SLOWING - MCD table

 

Howard Penney

Managing Director

HPenney@hedgeye.com

 

 


What's New Today in Retail (11/18)

Takeaway: GOOG opening stores for the Holidays,changes at the top for TIF, AMZN's prices tough to beat, China's e-comm market opportunity

EVENTS TO WATCH OVER THE NEXT 24 HOURS

 

URBN - Earnings Call: Monday 11/18 5:00 pm

BBY - Earnings Call: Tuesday 11/19 8:00 am

HD - Earnings Call: Tuesday 11/19 9:00 am

DKS - Earnings Call: Tuesday 11/19 10:00 am

TJX - Earnings Call: Tuesday 11/19 11:00 am

 

COMPANY NEWS

 

TIF - Tiffany financial chief resigns

(http://www.retailingtoday.com/article/tiffany-financial-chief-resigns)

 

  • "Tiffany’s chief financial officer, Patrick F. McGuiness, has resigned his position effective Nov. 27. The company’s EVP and chief operating officer, James Fernandez, will assume the position of CFO on an interim basis."
  • "Fernandez has been with Tiffany’s since 1983. The board of Tiffany’s has authorized a search for a new CFO."

 

GOOG - Google Opening Showrooms to Show Off Gadgets for Holidays

(http://www.bloomberg.com/news/2013-11-17/google-opening-showrooms-to-show-off-gadgets-for-holidays.html)

 

  • "Google Inc. is opening showrooms in six U.S. cities, promoting its latest products and stepping up retail efforts against Apple Inc. and Microsoft Corp. as the year-end holiday shopping season gets under way."
  • “Called Winter Wonderlabs, the outlets feature products such as Nexus 7 tablets, Chromebook computers and Chromecast video-streaming devices, the company said on a new website yesterday."
  • "Google is putting the showrooms at or near New York, Washington, Chicago, Los Angeles, Sacramento, California, and Paramus, New Jersey. The company is also building a barge in San Francisco Bay aimed at showing off new technologies."

 

AMZN - Report: Amazon has best price 80% of the time

(http://www.chainstoreage.com/article/report-amazon-has-best-price-80-time)

 

  • "Amazon.com has the best price on products in its assortment about 80% of the time. However, the new 'Amazon Holiday Pricing Insights' analysis from pricing technology provider 360pi shows that Amazon does have weak spots…"
  • "For example, once Home Depot decided to be price competitive on Oct. 26, they were instantly and dynamically able to beat Amazon prices on power drills. Meanwhile, tablets and televisions are the categories where a majority of retailers are either price competitive or closer to the mark than other categories, such as printers and video games, which show the least amount of price competitiveness."
  • "Top retailers such as Best Buy, Wal-Mart, and Sears and Costco are less than 5% more, or better priced, than Amazon in televisions, for example. During the Oct. 16 – Nov. 14 period, Amazon had the lowest-priced tablets 68% of the time, which means retailers are currently beating Amazon with lower tablet prices 32% of the time."

 

KER - Kering Taps Eyewear Executive Roberto Vedovotto

(http://www.wwd.com/fashion-news/fashion-scoops/eyes-on-eyewear-7280621?module=hp-topstories)

 

  • "Kering is putting a new focus on its eyewear businesses — and has tapped Roberto Vedovotto, formerly chief executive officer at Safilo Group SpA, who is to start work at Kering effective today, WWD has learned."
  • "Kering president and ceo François-Henri Pinault has tasked Vedovotto with reviewing the French group’s eyewear strategy across all brands in order to optimize and further develop the business. His remit is to coordinate Kering’s efforts across its luxury and sport-lifestyle brands, which include Balenciaga, Stella McCartney, Boucheron, Puma and Volcom."

 

INDUSTRY NEWS

 

China Tops E-commerce Opportunity Study

(http://www.wwd.com/retail-news/trends-analysis/china-tops-e-commerce-opportunity-study-7280500?module=hp-topstories)

 

  • "When it comes to market opportunity for e-commerce, China occupies the number-one position, followed by Japan, the U.S., the U.K. and South Korea, according to a new global e-commerce study by A.T. Kearney…"
  • "The Global Retail E-Commerce Index ranks the top countries in online retail, based on a 0 to 100 point scale. A.T. Kearney looked at 186 countries to determine the ranking of the top 30 countries. The index evaluates countries according to online market size, technology adoption and consumer behavior, infrastructure and growth potential."
  • "Over the past five years, online retail has grown at a 17 percent compound annual growth rate, with growth particularly strong in Latin America (27 percent) and Asia-Pacific (25 percent), according to the study. Interestingly, India didn’t make the top 30 because of its low Internet penetration and significant infrastructure constraints."
  • "China’s $64 billion online retail market will explode over the next five years to $271 billion, due to infrastructure improvements, increased Internet access for rural regions, rising wealth and customers’ growing predisposition to spend. China has the world’s largest population (1.36 billion), the most Internet users (517 million) and the most online shoppers (220 million), according to the study."

 

Apparel Beats Overall Import Growth in September

(https://www.sourcingjournalonline.com/apparel-beats-overall-import-growth-september/)

 

  • "Total apparel imports (on a CIF basis) were $8.5 billion for the month, a 2.9% increase over September of last year and a drop from August’s $9.1 billion. Apparel imports grew faster than total goods and services imports, which increased 2.4%, due largely to increases in industrial supplies and automotive vehicles and parts."

 

What's New Today in Retail (11/18) - chart2 11 18

What's New Today in Retail (11/18) - chart3 11 18

 

Finally, Bangladesh Govt Sets New Minimum Wage

(https://www.sourcingjournalonline.com/finally-bangladesh-govt-sets-new-minimum-wage/)

 

  • " Bangladesh’s government has finally agreed upon a new salary structure, effective December 1. Labor Minister Rajiuddin Ahmed Raju announced that the new minimum wage will be set at 5,300 taka ($68), a...77 percent increase."

 

What's Selling: Children's

(http://www.wwd.com/footwear-news/retail/whats-selling-childrens-7279736?module=hp-fn)

 

ITTLE’S SHOES, Pittsburgh

  • Nina Kids Cassina
  • Merrell Jungle Moc
  • Stride Rite lighted shoes

Top trend: “People were really shopping for dual-purpose shoes at back-to-school time — shoes the kids can wear outside on the playground and with their uniforms,” said Justin Sigal, president of Little’s. “Now that the weather is getting colder, Ugg Australia, Kamik and Sorel boots are picking up.”

HARRY’S SHOES FOR KIDS, New York

  • Naturino any style
  • Stride Rite any style
  • New Balance 990

Top trend: “Bright pops of color and rainbow colors are really hot for kids,” said Ivan Castro, store buyer and manager. “The colorful soles and combination of colors on the uppers are big for not just adults but kids, too.” 

SESAME STEP, Miami

  • Sperry Top-Sider Bahama and Cupsole
  • Nina Kids Marnee
  • Sam Edelman Fiona

Top trend: “Ballerinas are still big for us and so are the Sperrys,” said owner Eddie Quintana. “We’ve still had hot weather down here, so those categories are huge for us and controlling a lot of our business.”

HANSEL & GRETEL, Wilmington, Del.

  • Jumping Jacks Anaa
  • Livie & Luca
  • Lelli Kelly Mary Jane styles 

Top trend: “We do a lot of dress shoes at our location,” said owner Carol Harvey. “People like the Livie & Luca [label] because it has really well-made dress shoes for kids, and Lelli Kelly because of the soft soles.”

 


LV: LESS BELLS AND FLAGS

Nevada taxi trips fell again in October

 

  • The number of Nevada taxi trips declined 3.3% in October 2013 despite the easiest comp of the year
  • Visitation to Las Vegas, which has a 0.86 correlation to NV taxi trips, could be weak in October
  • Taxi trips also has a 0.60 correlation with non-baccarat table volume
  • While MGM has the sell side focused on the strength of Q1 RevPAR, Q4 is looking increasingly soft. We remain concerned surrounding the health of the underlying Strip gaming metrics, particularly slot volumes.

LV: LESS BELLS AND FLAGS - NV3


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European Banking Monitor: The Setup Remains Favorable

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

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European Financial CDS - European banks posted a rare week of widening, but only nominally so. The average change was +2 bps. Spanish and Italian banks showed the largest increases, though those increases were still relatively modest at 10-11 bps. Improvements came from Greek and Belgian banks, where swaps continued to tighten.

 

European Banking Monitor: The Setup Remains Favorable - z.banks

 

Sovereign CDS – Portuguese sovereign swaps widened 14 bps last week, but it was the exception. Elsewhere, swaps either tightened or went unchanged. The largest improvements came from the US and Japan, tightening 6 and 4 bps, respectively. 

 

European Banking Monitor: The Setup Remains Favorable - z. sov1

 

European Banking Monitor: The Setup Remains Favorable - z. sov2

 

European Banking Monitor: The Setup Remains Favorable - z. sov3

 

Euribor-OIS Spread – The Euribor-OIS spread was unchanged at 11 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

European Banking Monitor: The Setup Remains Favorable - z. euribor png

 

Matthew Hedrick

Associate


UNLOCKED CONTENT: WEIRD BUBBLES

Takeaway: The relationship between interest rates and 0%-rates-forever-bubbles isn’t weird at all. It makes perfect sense.

UNLOCKED CONTENT: WEIRD BUBBLES - bbub

To review what we have been calling the Bernanke Bubbles for the last year:

  1. Gold
  2. Bonds
  3. MLPs

UNLOCKED CONTENT: WEIRD BUBBLES - Chart of the Day

 

MLPs are master limited partnerships. If you don’t know what those are, don’t worry about it. We’ll boil it down for you – they are the sub-asset class of equities that look most like a bond that slow-growth Yield Chasinginvestors have found tax refuge in.

 

All 3 of these bubbles have 3 things in common:

  1. They had almost bullet proof storytelling narratives that lasted on the order of 1-3 decades
  2. Their asset prices confirmed the storytelling (making higher-highs) until they all topped in 2011-2012
  3. They’re now all making a series of lower-highs as interest rates make a series of higher-lows

Now, as you all know, all-time is a long time. So this concept of US 10yr Treasury Bond Yields making an all-time low when US Growth expectations were bottoming in November 2012 can make for some exciting causal relationships.

 

The relationship between interest rates and 0%-rates-forever-bubbles isn’t weird at all. It makes perfect sense. That’s why the upside down of repressed growth expectations (US Growth Stocks) have bubbled up to bring the US stock market to all-time highs:

 

From a US stock market “Style Factor” perspective, check out the score:

  1. LOW YIELD (i.e. GROWTH) stocks = +40.4% YTD
  2. Top 25% EPS GROWERS (by SP500 quartile) = +37.2% YTD
  3. HIGH BETA stocks = +35.8% YTD

As my boy Jesse Pinkman would say, that growth stuff is “awesome!”

 

At the same time, the slow-growth-end-of-the-world-fear trade score for 2013 YTD is:

  1. US Equity Volatility Fear Index (VIX) = crashing -32.4% YTD
  2. Gold = crashing -23.6% YTD
  3. UST 10yr Bonds Yields = +54% YTD

In other words, there was this Weird Bubble in fear-mongering that consensus got sucked into last year that popped as everyone trying to call the top in a said “US stock market bubble” ended up being a bubble themselves.

 

US stock market bears hate that. Another way to measure their “hate” is how well short-interest has performed in 2013. As a “Style Factor,” High Short Interest stocks in the SP500 are currently +31.8% YTD, outperforming the SP500 by +570 basis points.

 

And that’s why I’ve been so quick to cover “growth” shorts throughout October. Holding the bag on a bubble of fear isn’t exactly how I roll. Neither is holding onto the long side of bubbles (like Gold and Bonds) that are still very much in crash mode.

 

UNLOCKED CONTENT: WEIRD BUBBLES - fedfarts

 

(Editor's note: This is a complimentary excerpt from today's "Morning Newsletter" written by Hedgeye CEO Keith McCullough. To learn how you can start your market day ahead of the pack and subscribe click here.) 


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