The KKD management team touched upon each of the three key tenets to our bullish thesis at the C.L. King & Associates Best Ideas Conference this morning. We continue to have a favorable view of KKD’s international growth opportunity, accelerating U.S. unit growth, and the financial profile of the company. For a more in-depth analysis of these topics, we suggest you revisit our note “KKD: Room to Run.”
The presentation largely highlighted management’s growth strategy, which includes a plan to expand to 900 international stores and 400 domestic stores by FY17E. We believe KKD will be able to reach this target and will do so while driving strong financial returns, especially as the smaller format shops begin to resonate with the franchisee community. Management also acknowledged their commitment to increasing beverages as a percentage of sales mix. Loyalty initiatives are not expected to provide a lift until calendar 2015.
Although KKD reported 2Q14 results that were disappointing to some, we remain comfortable with our thesis. In fact, despite a miss on the bottom line, we thought KKD had a good quarter and one that was in-line with our expectations. The company managed to grow both revenues (+10.4%) and same-store sales (+10%) in the quarter – both impressive numbers, in our opinion.
The one point of contention we hear from some of our counterparts concern difficult same-store sales comparisons on the road ahead. As everyone already knows, this is true, but, we believe management will be able to weather these difficult comps without ceding much sales momentum.
Highlighted by the chart below, KKD generates some of the best returns on incremental invested capital in the restaurant space. This, in addition to its capital-light model and accelerating franchise unit development, should allow for high returns to continue well into the foreseeable future.
Below are links for the presentation materials and a replay of the conference call we held today with Dr. Deborah Kennedy titled "Are Energy Drinks Harmful?"
Materials: CLICK HERE
Podcast: CLICK HERE
The call was very well received and we encourage you to take the time (one hour in length including a Q&A session) to listen to Dr. Kennedy's passion about the health considerations surrounding energy drinks.
We will also be providing a summary of the call.
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As expected, the MCD management team did not share much at the GS conference. The initial comments from the presentation suggest that they believe that the economy is to blame for the difficult sales trends.
Despite a flurry of recent initiatives regarding new items and menu changes that might give support to some more optimistic forecasts, we remain comfortable with our thesis. In fact, we’ve had a rather bearish take on this news, as we believe these initiatives could add to the operational complexities of McDonald’s stores. Please see our recent note “MCD: A Pending Mighty Disaster” for more thoughts on this topic.
When questioned, management brushed aside any complexity concerns surrounding the Mighty Wings limited-time offer, citing their focus on training and hiring initiatives in anticipation of the rollout. They also appeared excited about a “clever tie-in” with the NFL that should help promote the product.
On Tuesday, MCD reported that sales were solid in Europe despite a very difficult year-over-year comparison (+3.1% in August ’12). The results benefited from continued strong performance in the UK and Russia, but France also improved. Importantly, France benefited from the Ramadan shift, while the UK benefited from the introduction of Smoothies & Frappes.
Highlighted by the chart below, McDonald’s introduction of Smoothies & Frappes in the U.S. only had limited appeal and, we can argue, masked a decline in the core sandwich business.
Client Talking Points
Japan up a beep (only one down day for the Nikkei so far in September; Up +39.6% year-to-date). China and KOSPI both punch fresh TREND highs, and the two laggards (India and Indonesia) stopped going up after Indonesian FX (Rupiah) has its worst day in three weeks. This is a good spot for a breather for anything you like long side. It's also a good spot to re-short some indices too.
I'm selling my long German Equity (EWG) position on the immediate-term TRADE overbought signal. There’s no fundamental reason to sell it. It’s just called managing the immediate-term risk of a trade-able range. The FTSE and MIB are both overbought within their bullish intermediate-term TRENDs here too.
The S&P 500 is up +3.12% for the month-to-date. Yet another one of the 2013 bear cases bites the beta dust. Meanwhile, oil corrected in a hurry down -3.5% from the highs. The VIX? It's down -18.4% since people sold fear again in August. That’s really the story of the year, fade the fear – but also have the discipline to sell some at the high end of the risk range on the recurring squeezes.
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Top Long Ideas
WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.
Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward. Near-term market mayhem should not hamper this trend, even if it means slightly higher borrowing costs for hospitals down the road.
Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks. T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.
Three for the Road
TWEET OF THE DAY
Mostly every Global Equity market we like is now immediate-term TRADE overbought; dont get piggy
QUOTE OF THE DAY
"Time is passing. Yet, for the United States of America, there will be no forgetting September the 11th. We will remember every rescuer who died in honor. We will remember every family that lives in grief. We will remember the fire and ash, the last phone calls, the funerals of the children." -President George W. Bush, November 11, 2001
STAT OF THE DAY
#RatesRising? It isn't just a USA thing; 10-year Bund is up +40 basis points month-over-month to 2.08%; Gilt is up 56 basis points month-over-month to 3.02%.
THE MACAU METRO MONITOR, SEPTEMBER 11, 2013
OKADA'S UNIVERSAL SAYS LETTER CLEARS IT OF GRAFT macaubusiness.com
Universal Entertainment received a letter dated August 23rd from the Philippine Economic Zone Authority clearing it of wrongdoing in obtaining land for its Manila casino-resort.
GOVT BUDGET SURPLUS PROJECTED TO BREAK RECORD macaubusiness.com
Macau's government budget surplus is on track to exceed 2012's MOP72.8BN by month end. At the end of August, the cumultive surplus stood at MOP68BN, over 30% higher than the YTD surplus from a year ago.
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