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$MCD: Nope, We're Not Lovin' It

Takeaway: Our bearish thesis on MCD remains in play.

Editor's note: Hedgeye analyst Howard Penney has basically been the sole bear on McDonald's this whole year. And he's been dead right. Some interesting stats: MCD is down -5.5% since Penney made his short call earlier this year on April 25th. For comparison's sake, the XLY (Consumer Discretionary) has risen almost +20% since then. The S&P 500 is up over +14%. It's hard to beat being right on the short side in a red-hot bull market.

 

$MCD: Nope, We're Not Lovin' It - mcd1

 

Here's a snippet from a report he sent out earlier this afternoon.

 

“Looking ahead to 2014, the U.S. is intent on rebuilding its underlying business momentum by strengthening key elements of customer service and leveraging the breadth of menu choices across all dayparts and value tiers.”

- McDonald’s November Press Release

 

We found the above quote to be quite interesting.  In October, McDonald’s spoke of strengthening its underlying business momentum in 2014.  In November, however, the talk has shifted to rebuilding its underlying business momentum in 2014.  As we have been calling out for the greater part of 2013, MCD has issues in its underlying core business that management must address.  The fact that management finally acknowledged it needs to rebuild its U.S. business momentum is a positive; but it is not a solution...

 

...Overall, November marked another disappointing month for MCD, as the company missed muted global same-store sales estimates.  The U.S. was once again a major source of disappointment, as the company attributed the weak comparable sales to the competitive environment and flat industry traffic trends.  To be clear, this suggests that MCD is losing market share in the U.S. and, we contend, they have been for a while.

 

Despite the temporary uptick in two-year trends, our bearish thesis remains in play.  With the street looking for 7% EPS growth in 2014, we continue to believe there is disconnect between investor’s expectations and the company’s fundamentals.  Until we see a legitimate change in company operations or strategy, we fail to see how MCD will be able to hit the street's current 2014 EPS target. 

 

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MCD: REBUILDING NOT STRENGTHENING

Takeaway: How much will it cost to rebuild?

“Looking ahead to 2014, the U.S. is intent on rebuilding its underlying business momentum by strengthening key elements of customer service and leveraging the breadth of menu choices across all dayparts and value tiers.”


- McDonald’s November Press Release

 

We found the above quote to be quite interesting.  In October, McDonald’s spoke of strengthening its underlying business momentum in 2014.  In November, however, the talk has shifted to rebuilding its underlying business momentum in 2014.  As we have been calling out for the greater part of 2013, MCD has issues in its underlying core business that management must address.  The fact that management finally acknowledged it needs to rebuild its U.S. business momentum is a positive; but it is not a solution.

 

MCD reported November global same-store sales growth of +0.5% vs. +2.4% in 2012 and missed consensus expectations by 10 bps.  The two-year trend ticked up 210 bps sequentially. 

 

The U.S. and APMEA regions showed same-store sales declines of -0.8% and -2.3%, respectively.  The U.S. missed consensus expectations by 110 bps, while APMEA missed by 160 bps.  The two-year trend in the U.S. and APMEA improved sequentially to +0.9% and -0.9%, respectively.

 

Europe was the sole bright spot in November with +1.9% same-store sales growth, beating consensus expectations by 110 bps.  Positive performance in the U.K., France and Russia was slightly offset by poor results in Germany.  The two-year trend accelerated sequentially to +1.7%.

 

Overall, November marked another disappointing month for MCD, as the company missed muted global same-store sales estimates.  The U.S. was once again a major source of disappointment, as the company attributed the weak comparable sales to the competitive environment and flat industry traffic trends.  To be clear, this suggests that MCD is losing market share in the U.S. and, we contend, they have been for a while.

 

Despite the temporary uptick in two-year trends, our bearish thesis remains in play.  With the street looking for 7% EPS growth in 2014, we continue to believe there is disconnect between investor’s expectations and the company’s fundamentals.  Until we see a legitimate change in company operations or strategy, we fail to see how MCD will be able to hit the street's current 2014 EPS target. 

 

MCD: REBUILDING NOT STRENGTHENING - twoyear avg

MCD: REBUILDING NOT STRENGTHENING - TTM

MCD: REBUILDING NOT STRENGTHENING - table

 

 

 

Howard Penney

Managing Director

 


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Don’t Bet On December Taper

Takeaway: Market signals matter a lot more than consensus "economists."

The 10-Year Treasury yield is down a couple beeps to 2.84% today (and making a lower-high versus the year-to-date high in September, when Bernanke went no-taper).

Don’t Bet On December Taper - benfed

 

If I handicap what the bond market thinks, versus consensus “economists” (Bloomberg survey just doubled from 17% on December-taper to 34%), it’s still no-taper. Incidentally, there’s a -133,201 net short position in CFTC futures/options on the 10-year.

 

Don’t Bet On December Taper - dra1

As far as the US Dollar is concerned, it’s down four straight weeks as Fed Overlords continue devaluing America’s currency. The Euro continues to breakout versus USD. So on the margin, the currency market thinks no December-taper too, despite there currently being a bigger net long position in USD than EUR.

 

This is a brief excerpt from Hedgeye research this morning. For more information on how you can become a subscriber click here.


CASUAL DINING CONDITIONS MARGINALLY IMPROVING

Takeaway: Casual dining trends, although weak, are improving on the margin.

We have been bearish on the casual dining sector since early June and this morning Black Box gave us a look at November sales trends, which are, on the margin, positive for the industry.  Same-restaurant sales trends, although positive, were down sequentially from October while traffic trends, although negative, were up sequentially from October.  Before we delve further into the details of the release, we thought it would be useful to point out which casual dining companies have seen same-restaurant sales estimates adjusted since November 2nd.


The following companies have seen 4Q13 same-restaurant sales estimates revised upward since November 2nd: BBRG, BLMN, BOBE, BWLD, CBRL, CEC, IRG, RRGB


The following companies have seen 4Q13 same-restaurant sales hold steady since November 2nd: CAKE, CHUY, DFRG, DIN, EAT, KONA, TXRH


The following companies have seen 4Q13 same-restaurant sales estimates revised down since November 2nd: BJRI, DRI, RUTH


Moving back to the release, Black Box reported that November 2013 same-restaurant sales increased +0.8%, a 20 bps sequential decline from October.  Comparable traffic trends were down -0.9%, a 50 bps sequential improvement from October.  These same-restaurant sales and traffic estimates come against results of +1.0% and -1.4%, respectively, in October.

 

Same-restaurant sales and traffic estimates on a 3-month basis improved +30bps and +30bps, respectively, on a sequential basis.  In aggregate, same-restaurant sales and traffic trends have been improving on a 3-month basis since August 2013.

 

CASUAL DINING CONDITIONS MARGINALLY IMPROVING - SALES

 

CASUAL DINING CONDITIONS MARGINALLY IMPROVING - traffic

 

 

In addition, consumer willingness to spend in November signals a recovery from a dismal September and October. 

 

CASUAL DINING CONDITIONS MARGINALLY IMPROVING - willingness

 

 

Although same-restaurant sales were down sequentially and traffic is still negative on a year-over-year basis, the 50 bps sequential improvement in traffic and the overall slope of the lines are encouraging signs for the casual dining industry.  If this trend persists, we expect to see a steady recovery from the doldrums of 2013.

 

Currently, consensus metrix estimates for the 25 casual dining chains we track in the space are for 4Q13 same-restaurant sales growth of +1.2% (excluding DRI brands) versus +0.4% in 3Q13.  This would imply a 23 bps sequential deceleration in same-restaurant sales on a trailing twelve month basis over the prior quarter.

 

CASUAL DINING CONDITIONS MARGINALLY IMPROVING - SSS final chart

 

 

 

Howard Penney

Managing Director

 


BNNY: Removing Annie's From Investing Ideas

Takeaway: We are removing BNNY from Hedgeye's high-conviction stock idea list.

As we head into 2013 year-end, we are taking Annie’s (BNNY) off our Investment Ideas List.

 

Hedgeye analyst Matt Hedrick says that, "we believe with the stock market at all-time highs, expectations for this growth stock to outperform the market are too lofty. We’d like to be buyers of this organic foods growth company closer to the $35-40 range on a pullback."

 

Our long-term bullish thesis on Annie's remains intact.

 

BNNY: Removing Annie's From Investing Ideas - anni


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