McDonald’s (MCD) is on the Hedgeye Restaurants Best Ideas list as a LONG.
The franchisees voted YES on the proposal last week to launch All Day Breakfast nationwide at all 14,318 U.S. locations. The vote confirmed on Tuesday, September 1st by the franchisee leadership council. This is a very important and monumental move by CEO Steve Easterbrook, and will define his legacy as the CEO that changed McDonald's and the rest of the industry for many years to come.
With this move we are also moving JACK and WEN from the bench to the Best Idea SHORT list. In 2016, if MCD (with all day breakfast and an improved value message) can drive same-store sales up by 5%, the system will generate $1.9bn in incremental system-wide sales. Needless to say, a healthy McDonald’s will make life difficult for a number of others in the QSR space.
As noted in our survey we released on July 27th it is evident that All Day Breakfast (ADB) will be a game changer for MCD. Breakfast is the single most requested item by McDonald’s customers, and listening to the customer is a tried and true way to succeed.
Menu changes are coming as part of this initiative. MCD will have to remove some items from the previous menu to make way for ADB. They have already announced the removal of certain sandwiches and snack wraps and the simplification of the drive thru menu, but expect more to come on a region by region basis. The company has said that they will be offering at minimum the Egg McMuffin, Bacon, Egg & Cheese Biscuit, Sausage Burrito, Hotcakes, Hash Browns and Fruit ‘N Yogurt Parfait.
As part of this move, operators will need to purchase separate grills and toasters. The grills will sit on rolling carts which will carry utensils used just for eggs to ensure the raw eggs do not contact any other food. The required investment will range from $500 to $5,000 per restaurant, depending on what equipment franchisees already have. We would not be surprised to hear that corporate is helping to support the franchisees making this investment.
All Day Breakfast has the potential to be the “silver bullet” MCD will need to drive same-stores sales higher in 2016 and beyond. This will undoubtedly drive incremental traffic, probably even from people that don’t normally go to McDonald’s. The momentum that they gain from this must be harnessed to turnaround customer perception. This is their time to shine and we are confident the system is ready to show off its bountiful improvements to bring back their lost customers and continue to serve their loyal ones. ADB is coming sooner than we had thought, and we look forward to the November 10th analyst day in which we will assuredly be getting an early read on All Day Breakfast performance.
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"[This] appears to be the most ominous setup in my macro model since 2008…As I look at what I call the downside of the “probable range” in Global Equity markets this morning, for the first time in my career I don’t think I want to be right. That’s a tough thing for me to write because the goal of the game is to be right. We’ve spent the last 7-8 years trying to evolve the Global Macro risk management process to the point where many aren’t unprepared for this. Unfortunately, many are.”
- Hedgeye CEO Keith McCullough in the Early Look on 8/28/15
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In this special excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough and Senior Macro Analyst Darius Dale respond to a subscriber's question on whether the U.S. is inching closer to recession.
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Takeaway: CoreLogic again shows dramatic acceleration in HPI in July. Our enthusiasm is tempered only slightly by the trend toward downward revisions.
Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.
Today's Focus: July CoreLogic Home Price Report
CoreLogic HPI: Home prices rose +1.7% month-over-month in July with year-over-year growth accelerating +130 bps sequentially to +6.9% - marking a 5th month of acceleration off the Feb ’15 RoC trough. Prices lag demand trends by ~12 months and rising TTM demand along with the prevailing tight supply environment argue for further acceleration in HPI over the nearer-term.
Revisions: Magnitude, Not Direction: Downward revisions to prior month estimates have been serial in the CoreLogic HPI series over the last ~12+ months. The August release continued that trend as the rate of change in HPI was revised lower by -30bps and -90bps in May and June, respectively (see 1st chart below).
In short, the recurrent trend in CoreLogic estimates has been this:
Initial estimates show a remarkable sequential acceleration in HPI ---> Subsequent downward revisions reflect only a modest acceleration ---> the direction of the 2nd derivative trend remains intact upon final revision but the magnitude of RoC improvement is significantly more muted than original estimates.
Given the prevailing trend, it’s likely the July figures see another downward revision while leaving the larger trend towards accelerating price growth in tact. The larger trend towards acceleration is the key takeaway as rising price growth supports higher ASP’s, builder margin expansion, and positive equity performance across the housing complex.
Further, it’s likely the trend across all three primary price series (CoreLogic, FHFA, Case-Shiller) becomes more congruent as the price trend matures. Specifically, we’d expect the Case-Shiller series - which is the most lagging and currently reflecting flat price growth – to play catch-up to the CoreLogic data on a lag and as the trend becomes more firmly entrenched. Historically, as can be seen in the 2nd chart below, the catch-up and overshoot dynamic has been typical of the Case-Shiller data over the last two decades.
CoreLogic HPI incorporates more than 30 years worth of repeat sales transactions, representing more than 55 million observations sourced from CoreLogic's property information database. The CoreLogic HPI provides a multi-tier market evaluation based on price, time between sales, property type, loan type (conforming vs. nonconforming), and distressed sales. The CoreLogic HPI is a repeat-sales index that tracks increases and decreases in sales prices for the same homes over time, which provides a more accurate constant-quality view of pricing trends than basing analysis on all home sales. The CoreLogic HPI covers 6,208 ZIP codes (58 percent of total U.S. population), 572 Core Based Statistical Areas (85 percent of total U.S. population) and 1,027 counties (82 percent of total U.S. population) located in all 50 states and the District of Columbia."
Joshua Steiner, CFA
Christian B. Drake
Takeaway: Both sides of the trade need to be careful into the next catalyst. P could rip on fool’s gold, but will likely lose out in the end.
See notes below for supporting detail on our Web IV analysis. Let us know if you have any questions, or would like to discuss in more detail.
P: Notes from WebIV Closing Arguments
07/22/15 01:26 PM EDT
P: Losing the Critical Debate?
04/08/15 08:53 AM EDT
P: Worst-Case Scenario? (Web IV)
03/23/15 09:30 AM EDT
P: Webcaster IV = Powder Keg
01/13/15 02:49 PM EST
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