MCD – Currency Benefit Abating

MCD posted solid July comparable sales today. U.S. same-store sales grew 6.7% on top of a 4.3% increase last year. The question remains, however, how much of this top-line lift will be reflected in U.S. margins, which have declined for six consecutive quarters, as a result of the negative mix impact from customers trading down to the Dollar Menu and other lower priced menu offerings (average check at breakfast is lower than the rest of the day).

  • Currency Risk

    MCD’s July comparable sales were up 7.6% in Europe versus a 7.7% increase last year. MCD’s Europe division has posted consistently strong same-store sales results, which has translated to high operating income margins. Europe’s operating income growth, however, has been boosted by a growing foreign currency benefit for the last eight quarters. In 2Q, this currency impact helped by 16% in line with 1Q. As Keith McCullough highlighted earlier today, the U.S. Dollar Index is up 5% since July 14, which indicates the benefit MCD has seen from this currency cushion will begin to slow in the coming quarters. MCD’s Europe business has posted impressive operating growth in the double-digit range even excluding currency, but the incremental currency flow through has helped to offset U.S. margin weakness as it relates to the company’s consolidated operating income.


Personal consumption expenditures have been a rocket ship over the past 20 years. Gaming revenue growth has been even more impressive. Gambling spend accelerated from 0.3% of PCE in 1990 to a peak of 0.94% in December, 2006. The trend broke soon after that all the way down to 0.79% in June of 2008. As a point of reference, if gambling reverts to the mean since 1990 of 0.6%, revenues would fall by $20bn annually or 25% of the current level. This trend could be a double whammy in a consumer slowdown.

Gambling % of PCE rolling over

I Bought The US Market This Morning... No Joke

My Compliance Officer thought it was a typo, but I did in fact BUY the S&P 500 (SPY) this morning. This US Dollar strength is going to beget the long side of the US market "Trade", at least to the target level that I issued yesterday of 1299.

Keep a "Trade" a trade however. Commodities down, inflation down, will be the squeeze "Trade" that the Street cannot ignore.

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Chart Of The Day: US Dollar In the End Zone!

I flashed this chart earlier in the week when the US$ was at the "goal line". It's not anymore. It's in the end zone. And it's bullish - big time.

My critical resistance level was 75.08, and the US Dollar Index is trading comfortably above that now at 75.77, up a whopping +5% since July 14th (when the S&P 500 hit an intraday low of 1201).

Dollar up, Euro down, Commodities down, inflation abates... I like it, for a "Trade".
  • US$ Breaking Out
(chart courtesy of

What’s Bearish for Wheat Prices is Bullish for PNRA

Wheat prices were down 7% in the month of July and are now down over 35% from the peak levels seen in March. And, we could see further pressure on wheat prices according to the International Grains Council (IGC), which recently raised its 2008/09 production forecasts by 4 million tons to a record 662 million tons. This production number represents a nearly 9% increase off of 2007 levels and is higher than the current world consumption projection, which stands at 639 million tons. The IGC attributes this increased forecast to improved prospects in the EU, the CIS, the U.S. and Australia.

Franchisee Bankruptcy Risk Emerges

Consistent with our bankruptcy theme and my comments from the bankruptcy conference call that the biggest risk to the QSR companies is franchisees going bankrupt, Midland Food Services, LLC, one of the largest Pizza Hut franchisees in the U.S. filed for Chapter 11 bankruptcy earlier this week. YUM is particularly exposed to this franchisee risk due to the massive amount of stores the company has sold over the last five years (YUM has a target to reduce its company ownership mix to below 10% by 2010 from about 20% currently and nearly 30% in 2002). Franchisees have used significant leverage to buy stores, which already puts them at greater risk. Making matters worse, YUM’s U.S. company-owned store base has recently experienced significant margin declines. KFC has been particularly weak recently, and chicken prices will only be moving higher.

Another phrase that will join the list of commonly used phrases by the restaurant industry is “the health of the franchise system.”

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