Heat wave + smoothies = good comps…right?


McDonald’s is scheduled to report its July sales numbers before the market open on Monday.  July 2010 had one less Wednesday, and one additional Saturday, than July 2009. 


Consumer confidence indicators in the United States, along with other factors such as unemployment, continue to bifurcate from the “recovery” theme that has manifested in equity markets.  In light of this, expectations for QSR are somewhat tempered.  However, in light of the reportedly successful smoothie launch and a favorable calendar shift, I am cautiously optimistic about MCD’s top line performance in the U.S. for July.


Turning to the bottom-line, I recently wrote a note titled, “MCD – THE MCDONALDS CONUNDRUM” (7/26).  MCD is faced with the difficult task of balancing the negative impact of TC-driving lower menu prices on margins (think Dollar Menu at breakfast) with the benefit of declining commodity prices fading in 2H10 and then potentially going away in 2011.  It will be interesting to see whether there is any hint of imminent action on the part of McDonalds to tweak its strategy ahead of time as this conundrum becomes more obvious.  However, management did state that food away from home CPI and food at home CPI would be two indicators it would monitor closely when considering taking price.


Below, I go through my take on what numbers will be received as GOOD, BAD, AND NEUTRAL, for MCD comps by region.  For comparison purposes, I have adjusted for calendar and trading day impacts.  To recall, management stated on its 2Q10 earnings call that momentum continued into July with global comparable sales trending in line with or better than second quarter sales (2Q10 global comp was +4.8% with the U.S. +3.7%, Europe +5.2% and APMEA +4.6%).



U.S. (facing a relatively easy 2.6% compare, including a calendar shift which impacted results by +0.6% to +0.7%, varying by area of the world):


GOOD:  5% or greater would be perceived as a good results because it would imply that the company was able to improve U.S two-year average same-store sales (by 35+ bps) on a sequential basis.  While this is a fairly high print by recent standards, taking into account management’s statements on global comparable sales performing in line with or better than 2Q in July, and the U.S. smoothie launch exceeding expectations, it seems reasonable to hold an optimistic view on U.S. comps this month.


NEUTRAL:  Roughly 4% to 5% implies two-year average trends that are approximately in line with those seen in June.


BAD:  Below 4% would indicate that two-year trends have deteriorated significantly on a sequential basis.  While June’s results showed a degree of resilience in the U.S. market, a decline in trends would be disappointing given management’s marginally positive commentary around global trends and, specifically to the U.S., the smoothies sales which were “blowing away high-end projections”, according to management on the 2Q earnings call.



Europe (facing a 7.2% compare, including a calendar shift which impacted results by +0.6% to +0.7%, varying by area of the world):


GOOD:  5.5% or better would be a good result for MCD’s Europe operations as it would imply a sequential improvement (of about 95 bps) in two-year average trends.  5.5% would also signal a return to the traditional “GOOD” territory of 6% two-year average trends for Europe.  Management estimates that the World Cup negatively impacted June sales by ~1%; the strong progress made by the European teams makes it likely that the impact will carry over into July.  Another important point to bear in mind for Europe is the July lapping of the VAT benefit in France.  Management stated that the lower VAT on dine-in sales in France had benefited France sales by a mid-single digit number during the year ended June 30.  Obviously for Europe as a whole this will be a smaller impact and management was aware of this catalyst when they announced guidance on July 23rd.


NEUTRAL:  3.5% to 5.5% would imply two-year average trends roughly in line with results seen in June, which had declined rather significantly from the prior month.


BAD:  Below 3.5% would imply two-year average trends that have declined sharply from June’s results.  I would point out that the street’s current estimate of 2% would fall in this range.  Management did highlight some potential issues in Europe, as I outlined above, but the street’s estimate seems very conservative, particularly given the company’s comments on global trends in July.



APMEA (facing a relatively easy 2.1% compare, including a calendar shift which impacted results by +0.6% to +0.7%, varying by area of the world):


GOOD:  A print of 7% or more would imply a sequential improvement in two-year average top line trends. 


NEUTRAL:  Comparable-store sales of 5.5% to 7% would result in two-year average trends roughly in line with trends seen in June.  Like in Europe, two-year average trends in APMEA decelerated in June.


BAD:  Same-store sales of 5.5% or less would imply a sequential slow down from June’s trends.  It is also possible, that if the number is 4.5% or below, that two-year trends may even fall lower than December’s trough two-year average number.  The street’s 4.0% estimate again falls in the “BAD” range and implies a deceleration in trends in July from the already depressed level in June.



MCD JULY SALES PREVIEW - mcd july preview


Howard Penney

Managing Director





Bull/Bear Macro-Tug

There’s a real good Bull/Bear macro-tug of war going on out there all of a sudden. There is a core constituency of bulls who want to believe that the current pattern of US economic growth is going to sustain itself and then there are the bears who remain negative on both the US Dollar and the SP500 for the intermediate term TREND.


There was plenty of economic data this morning for both bulls and bears to tug on:



  1. In the chart below we show a modest sequential acceleration in the ISM Non-Manufacturing Index (54.3 in July vs. 53.8 in June)
  2. MBA mortgage applications were up +1.5% week-over-week (barely budging demand levels not seen since 1997)
  3. ADP’s employment report came in at 42k (better than expected) 


  1. ABC/Washington Post weekly consumer confidence dropped for the 5th consecutive week to -50 versus -48 last week.
  2. II’s Bullish/Bearish Survey widened to +6 points in the Bulls favor (Bears dropped to 33% and this is a contrarian indicator).
  3. The SP500 remains below the Bear Market Macro line of resistance (1144). 

Coming up next are US Retail same store sales reports (tonight and tomorrow), weekly jobless claims (tomorrow), and Friday’s unemployment report for the month of July. My immediate term TRADE lines of support and resistance for the SP500 are now 1116 and 1131, respectively.


Keith R. McCullough
Chief Executive Officer


Bull/Bear Macro-Tug - 1


ASCA's revenues were in-line but higher promotional expenses across numerous properties led to an EBITDA miss. However, it's all about expectations and clearly, they were low going into this print.


"As we look into the third quarter, we are optimistic regarding the performance of the properties in our more stable markets, including Kansas City, Council Bluffs and Vicksburg. We anticipate Black Hawk will continue to produce year-over-year growth ...We also expect some opportunities for growth in Missouri, as both of our properties have been permitted to operate 24 hours daily (except for one hour each Wednesday morning) since July 1, 2010. Prior to the change in operating hours, our Missouri properties were required to be closed for three hours per day on non-holiday weekdays."

- Gordon Kanofsky, Ameristar's Chief Executive Officer.



  • "East Chicago property's financial results were adversely affected by a nearby bridge closure to a degree much greater than originally anticipated"
    • "The Company has significantly reduced forecasted financial results for the property based on the actual operating results since the bridge closure. As a result, in the second quarter of 2010 the Company recorded a non-cash impairment charge of $56.0 million ($33.2 million on an after-tax basis) that completely eliminates the remaining net book value of goodwill associated with the acquisition of the East Chicago property and reduces the carrying value of the property's gaming license to $12.6 million."
  • "Ameristar Black Hawk once again posted substantial year-over-year improvement in all financial metrics thanks to the September 2009 opening of its luxury hotel and the July 2009 regulatory reform in Colorado"
  • "Our St. Charles property was negatively impacted by new competition that entered the St. Louis gaming market in early March 2010, although to a lesser degree than we had anticipated prior to its opening"
  • "Assuming no significant changes in LIBOR, we expect to save approximately $6.5 million in interest expense per quarter from the July 19, 2010 expiration of our interest rate swap agreements."
  • 3Q2010 Guidance:
    • Depreciation: $27 to $28 million
    • Interest expense, net of capitalized interest:$27.5 to $28.5 million, (non-cash interest expense: $2.8 million)
    • Tax rate: 42.5% to 43.5%.
    • Capital spending: $15 to $20 million
    • Capitalized interest: $0.1 to $0.2 million
    • Debt reduction: $25 million
    • Non-cash stock-based compensation: $3.4 to $3.9 million


  • A little more than half the declines they are seeing are attributed to the economic environment and new competition in St. Louis
  • Things in St. Louis are stabilizing from a market share standpoint
  • At East Chicago, the marketing efforts have been unsuccessful. Think that the impact will be $25MM unless the bridge opens. Working on some improvements to the hotel. The reduced forecast to this property led them to take a $56MM impairment charge.
  • 80% of the market growth in Blackhawk was attributed to their property
  • CIP is immaterial - mostly just payment negotiations on prior projects
  • Anticipate $45-50MM available under the R/C by December
  • Anticipate that the additional hours of operations in Missouri should give them a bump up in performance


  • East Chicago - only improvement will be from more efficient operations now that they know what to expect from it
  • Until they see general economic improvement in the economy, they think holding on to cash is the best idea for them
  • Think that the old President license will go to Cape Girardo
  • Kansas City - why the bigger than usual gap between reported state numbers and reported numbers?
    • Promotional spending - which turned out to be a bad decision- they pulled back going forward
  • Are they going to put some new swaps on?
    • No
  • Any changes to consumer behavior - traffic stable but spend per visitor down?
    • Not really
  • Impact of 24 hour rule in Missouri over the last month
    • Too early to say....or shall I say that it's not that material otherwise they would mention it
  • Peak margins at Blackhawk? Looks like expenses came down a bit
    • Think that they have some more revenue opportunity there as they continue to penetrate Denver
    • Will try to get incremental margin improvements
    • Seasonality is impacted by weather - (July - September) is their best quarter
  • Doesn't think that they will see material increases in market share in Blackhawk
  • They aren't giving up all marketing efforts in East Chicago 
  • Hotel in Kansas City - 100 rooms - in design now. 15 months of outflows of cash related to it
  • Need about $70MM of cash to operate their properties
  • How have competitors reacted to their promotional spending?
    • At Blackhawk, it is really about giving away hotel rooms

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%


As we look at today’s set up for the S&P 500, the range is 11 points or 0.3% (1,117) downside and 0.7% (1,128) upside.














The Macau Metro Monitor, August 4th, 2010


CEO Murren said on Bloomberg that MGM plans to build multiple properties in Macau and more properties in Asia over time. "We are starting to assert ourselves in Macau," added Murren.  Aggressive new terms have been negotiated with junket consolidators and the company has just raised US$950m for refinancing of existing debt and added liquidity.



SJM CEO Shu Fai So said they had already expressed their interest in the Cotai development project to the local government.  SJM has not received any official notification from the government with regards to the land grant application but So believes a announcement will come shortly.  So also said that if China does not tighten its macroeconomics policy any further this year, GGR will grow at least 30% YoY.


As expected, WMS made the quarter and provided revenue guidance slightly below the Street but in-line with us. The only surprise to us was higher R&D guidance which may not be a bad thing.



The quarter was largely in line with our expectations, not the highest quality we’ve seen, but not bad given the environment.  Top line guidance for FY2011 was also healthy with our $834 million estimate toward the lower end of the guidance range of $830-850 million.  The only material surprise is management’s R&D push in FY2011 which will cost them an additional $0.10 to $0.12 in diluted EPS.  Implied guidance for FY2011 appears to be around $2 in EPS.


The news of the R&D acceleration initially brought about a high level of consternation on our part.  Is this catch up/maintenance R&D spend?  However, taking management at its word, we don’t believe that to be the case but we will do some serious digging.  CEO Brian Gamache indicated that they had showed customers some forward looking products that were in test and the response was positive enough that management decided to pull the development forward.  This is the definition of investing in the business and is the right long-term move if it is incremental and not maintenance.


While we don’t think investors get as excited about share repurchases – a bear market and credit crisis will do that –, in this case, they should.  Free cash flow is accelerating and the company announced a $300m share repurchase.  WMS is in a positive net cash position so share repurchases will be more accretive than if they had to borrow. 


WMS generated $51 million in operating cash flow, a number that will grow substantially next year due to net income growth and a stable customer financing environment.  After ratcheting up the use of its balance sheet to finance customer slot purchases in FY2010, WMS indicated that the company does not expect to be any more aggressive in this area.  A relatively constant accounts receivable balance will boost working capital and cash flow generation in FY2011 relative to FY2010.  Higher investment spend will eat into the operating cash increase somewhat but this is due primarily to Italy.  For now, the only comment we will make is that $40m seems like a high number for the 2.0-2.5k machines we were projecting.  Could management be expecting a larger market for them in Italy?  We will find out.



Quarter details

Product sales of $135MM were $4MM above our estimate with weaker new unit sales revenue offset by stronger used gaming machine sales.  Gross profit margins were 20 bps above our estimate.

  • New unit sales of 7,076 were in-line with our estimate (with NA shipments weaker than expected offset by stronger international shipments) and pricing was 3% lower
  • For the first time ever, WMS had the highest ship share in a quarter, overtaking IGT
  • Replacement sales were materially weaker than we expected; however, strength in new and expansion unit sales somewhat offset this.
    • WMS shipped units to Sugarhouse this quarter, receiving mid-high 20’s ship share
    • Our best guess is WMS’s share of the North American market was 27% this quarter
  • We believe that the increase in used gaming machines sold is reflective of the cost sensitive environment as more and more casinos are purchasing used games for some portion of their “new floors”
  • WMS should recognize shipments to PENN's Cecil County facility and Cosmo next quarter.  WMS got around the 90 day acceptance clause in Maryland by selling through a distributor.

Gaming operations revenues of $78MM were $2MM below our estimate and gross margins of $63.5MM were $3MM below our estimate.

  • WMS’s install base was 150 units less than we expected due to a higher than estimated removal of standalone games, partly offset by higher WAP & LAP placements.  We assumed that the standalone base was approaching a more stable level.
  • Average revenue per day was below our estimate as were margins – partly because we didn’t take into account last year’s favorable jackpot expense
  • Other gaming operations revenues were $2.4MM higher than our estimate

Other stuff:

  • R&D, SG&A and D&A were $2.7MM below our estimate

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