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Casual Dining - June Knapp Track

Malcolm Knapp reported that June same-store sales declined 7.7% with traffic down 7.2%.  For the second consecutive month, comparable guest count results were better than sales, which points to the significant discounting in the industry.  Even with companies trying to drive traffic at the expense of average check and margins, traffic trends decelerated sequentially from May on a 1-year, 2-year and 3-year basis. 

These June numbers do not reflect the same level of decline that we witnessed back in December, but the Q2 numbers overall are worse than Q1.  Same-store sales declined 6.6% on average in Q2 versus -4.2% in Q1.  We will learn more about company-specific Q2 results over the next couple of weeks and the winners will be those companies that have been able to offset these soft sales results with continued cost cutting.


MCD – JUNE SAME-STORE SALES SURVEY

McDonald’s plans to release its June same-store sales figures as part of the second-quarter earnings release, which is scheduled to be published before the market open on Thursday, July 23.

The latest proprietary McDonald’s Franchisee Survey asked respondents about their June same-store sales results. For the 35 domestic franchisees -- representing roughly 227 restaurants -- who responded, the aggregate June same-store sales figure is 2.7%.

This survey marks the 39th time that a McDonald’s Franchisee Survey has been published. In the prior 38 times, the actual U.S. same-store sales number reported by McDonald’s has been within 100 basis points of the survey results on 26 occasions, and within 200 basis points of the survey results on 33 occasions. 

The average magnitude of the difference between the survey and the actual result reported by McDonald’s is about one percentage point.

Assuming about 4% pricing, MCD continues to experience negative traffic trends.  Given the extreme discounting we are seeing from MCD, margin pressure can only follow at some point.

These numbers support out favorable position on SBUX and cautious stance on MCD.

 



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Ripples in Russia

This year we've been cautious in pointing out the risk premium associated with owning Russia, yet assertive that Russia's commodity based economy stands to benefit greatly from commodity reflation, a major theme of ours in the first half of this year. 

The Russian stock market (much like other countries that are paid in petrodollars) has followed the price of oil like a hawk year to date, with a correlation coefficient (R squared) of .94 between the RTSI and the continuous front month light sweet crude contract (see chart). This year we've frequently commented on Russia's performance as it vied for the best performing global market with the other BRIC components, until it began pulling back in concert with oil.  Starting June 1st the RTS declined 28.5% with oil down 12.0% in the same period, before catching a bid this week, up 10.6% on oil's 6.4% run.

While the price of energy commodities and metals remain the central catalyst for the Russian market, we're equally watching the country's underlying economic fundaments as we believe they'll drag down performance on an intermediate and TAIL (3 years or less) basis, especially should oil stay under our TAIL resistance level of $67.78/barrel.

This week the Russia's Economy Ministry updated its economic forecast. Whether the information is completely creditable or not is a matter of discussion in itself, however the Ministry reported that GDP may decline 8.5% this year, after contracting 9.8% Y/Y in Q1 (the most in 15 years) and that Russia may not match last year's growth until 2012.

On the ground industrial production was down 17% in May, with the IMF forecasting unemployment at 13% this year.   Wage arrears rose 10.8% and according to a study by Moscow's Higher School of Economics--and not surprisingly--Russia is seeing a rise in labor unrest with a recorded 99 labor disputes in the first five months (nearly the same level as in all of last year). 

While the data may be questionable, the country's demographics support a grim picture for future growth.  The World Bank reported that by the end of this year 17.4% of the population (24.6 Million) will live beneath the subsistence level of $185 per month, about 5% more than before the crisis. Additionally the Economy Ministry said Russia's working population will annually decrease by ~1 Million every year over the next three, and the population will continue to decline, as it has over the last 14 years; last year the population stood at 141.9 Million.

From a fiscal and monetary perspective Russia is certainly trying to weather the storm, but we'd argue that the Kremlin is not doing enough. The country issued a stimulus package of more than 2.5 Trillion Rubles ($80 Billion -a puny amount in context), and has reduced interest rates to stem the blockage in credit lending. Over the last three months Bank Rossii has cut interest rates three times, shaving off 50bps to 11% in its last cut on July 10th.  

The chart below helps to frame the USD-RUB dynamic along with the price of oil. Certainly the Central Bank has played a large role in manipulating the Ruble's value over the last year, having drained some $200 Billion (1/3 of the country's foreign-exchange reserves) from August to January to stem the Ruble's slide versus the dollar as oil came down off its summer highs. Most recently, the bank reported that international reserves slid by $8.4 Billion to $400.7 Billion last week, the largest decline in almost in six months, as the Bank attempts to strengthen the Ruble. 

All of this action begs the question: to what extent the Central bank is willing to support a strong Ruble policy (and ensure it trades below the high side of its trading band of 26 to 41 against a basket of Euros and Dollars) if oil continues to fall? On one hand, Russia has the reserves to support currency, yet the bank has no control over investors who may flee due to the volatility of a economy levered to energy prices.  

Make no mistake, the Russian stock market is focused squarely on Oil and Gas, yet our work in global macro has taught us that a country's fundamentals drive market performance in the long run. As outlined, on the TAIL there are real risks in the Russian economy and, perhaps more importantly, real political risks to investing there.

In the immediate term, we will continue to analyze all data points -large or small,  made up or not, as we look for signals on the margin that may change our stance.

Matthew Hedrick
Analyst

Ripples in Russia - russia

 


LVS: CHINA FORCING THE ISSUE

We think the Chinese government wants Lots 5 & 6 restarted by the end of 2009. Importantly, Beijing may be "persuading" Chinese lenders to help with financing.

"I'm gonna make him an offer he can't refuse" - Vito Corleone

We think the Chinese government wants Lots 5 & 6 restarted by the end of 2009. Importantly, Beijing may be "persuading" Chinese lenders to help with financing.

The way Beijing sees it, the LVS/Lots 5 & 6 situation can go in three ways:

  • LVS and a developer reach an agreement and Chinese banks provide the financing
  • LVS sells Lots 5 & 6 to a developer and SJM operates the casino
  • LVS hangs in the wind

We think Beijing has already introduced LVS to contractors and Chinese financial institutions to facilitate construction re-starting.  So far, we are hearing that LVS's offering terms are not satisfactory to at least a few contractors.  Other potential developers include Far East Development and New World Development.

Once an agreement is reached, it looks like Beijing may be willing to twist the arms of some banks to provide financing for the project as well as solve LVS's covenant problem.  Our sources tell us that LVS's financing issues are essentially "solved".

Our research continues to indicate that LVS will overcome its financing issues through refinancing, bank debt buybacks, or an IPO.  As we've stated in the past, an IPO likely will not be completed until November at the earliest meaning LVS must deliver on the other options in the meantime.


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