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.
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).
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.
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.
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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.
In addition, consumer willingness to spend in November signals a recovery from a dismal September and October.
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.
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.
Takeaway: Taxable bond outflows have now occurred in 22 of the past 26 weeks with tax-free or municipal outflows in 26 consecutive weeks
This note was originally published December 05, 2013 at 08:00 in Financials by Hedgeye Financials analyst Jonathan Casteleyn. For more information on how you can subscribe to Hedgeye research click here.
Investment Company Institute Mutual Fund Data and ETF Money Flow:
Total equity mutual fund flow for the week ending November 27th was $1.5 billion, a below average weekly inflow for 2013 but none-the-less a slightly positive indication for stocks. Within the total equity inflow result, domestic equity mutual funds lost $1.3 billion, the first outflow in 6 weeks with International equity funds posting a $2.9 billion inflow. Total equity mutual fund trends in 2013 however now tally a $3.2 billion weekly average inflow, a complete reversal from 2012's $3.0 billion weekly outflow
Fixed income mutual funds continued persistent outflows during the most recent 5 day period with another $4.7 billion withdrawn from bond funds. This week's draw down worsened sequentially from the $3.2 billion outflow the week prior which has now forced the 2013 weekly average for all fixed income funds to an $1.1 billion outflow which compares to the strong weekly inflow of $5.8 billion throughout 2012
ETFs experienced mixed trends in the most recent 5 day period, with equity products seeing very strong inflows and fixed income ETFs seeing slight outflows week-to-week. Passive equity products gained $11.4 billion for the 5 day period ending November 27th, the 5th best week in all of 2013. Bond ETFs experienced a $251 million outflow, a deceleration from the $363 million subscription in the 5 days prior. ETF products also reflect the 2013 asset allocation shift, with the weekly averages for equity products up year-over-year versus bond ETFs which are seeing weaker year-over-year results
For the week ending November 27th, the Investment Company Institute reported slight equity inflows into mutual funds with over $1.5 billion flowing into total stock funds. The breakout between domestic and world stock funds separated to a $1.3 billion outflow into domestic stock funds and a $2.9 billion inflow into international or world stock funds. These results for the most recent 5 day period within stock funds were bifurcated, with the outflow in domestic stock funds below the weekly average of a $597 million inflow and with world stock fund production slightly above the $2.6 billion weekly inflow average. The aggregate inflow for all stock funds this year now sits at a $3.2 billion inflow, an average which has been getting progressively bigger each week and a complete reversal from the $3.0 billion outflow averaged per week in 2012.
On the fixed income side, bond funds continued their weak trends for the 5 day period ended November 27th with outflows staying persistent within the asset class. The aggregate of taxable and tax-free bond funds booked a $4.7 billion outflow, a sequential deterioration from the $3.2 billion lost in the 5 day period prior. Both categories of fixed income contributed to outflows with taxable bonds having redemptions of $3.6 billion, which joined the $1.0 billion outflow in tax-free or municipal bonds. Taxable bonds have now had outflows in 22 of the past 26 weeks and municipal bonds having had 26 consecutive weeks of outflow. While the sharp outflows that marked most of the summer and the start of the third quarter have moderated, the appetite for bonds has hardly rebounded. The 2013 weekly average for fixed income fund flows is now a $1.1 billion weekly outflow, a sharp reversal from the $5.8 billion weekly inflow averaged last year.
Hybrid mutual funds, products which combine both equity and fixed income allocations, continue to be the most stable category within the ICI survey with another $870 million inflow in the most recent 5 day period. Hybrid funds have had inflow in 24 of the past 26 weeks with the 2013 weekly average inflow now at $1.6 billion, a strong advance versus the 2012 weekly average inflow of $911 million.
Exchange traded funds had mixed trends within the same 5 day period ending November 27th with equity ETFs posting a very strong $11.4 billion inflow, a sequential improvement from the $4.0 billion subscription the week prior and the 5th best week all year for stock ETFs. The 2013 weekly average for stock ETFs is now a $3.3 billion weekly inflow, nearly a 50% improvement from last year's $2.2 billion weekly average inflow.
Bond ETFs experienced a slight outflow for the 5 day period ending November 27th with a $251 million redemption, a sequential deceleration from the week prior which netted a $363 million inflow for passive bond products. Taking in consideration this most recent data, 2013 averages for bond ETFs are flagging with just a $265 million average weekly inflow for bond ETFs, much lower than the $1.0 billion average weekly inflow for 2012.
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
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