July 28, 2012

Honesty is the Best Policy

This week saw further fallout from the strong winter 2011/2012 sales at McDonald's
USA. On Monday morning Oak Brook announced earnings for the second quarter
and revealed sales in the USA were up 3.9% for the 2nd Quarter and up 2.9% for
the month of June causing Nation's Restaurant News to report:

With same-store sales slowing sequentially from an 8.9-percent increase in the 
first quarter of 2012 to a 3.6-percent gain in the second quarter, McDonald’s 
would need to hit value harder in its domestic marketing, Thompson said.

But for the past several years sales increases in the USA of 3% or 4% have kept
investors quite happy and the share price hit historical highs.  Because of Oak
Brook's lack of candor about how much the warm winter helped sales new
expectations have been set among investors and the media.

A word search of the earnings call transcript shows the word "Value" is used
over 60 times in a one hour discussion!

To be sure there were other issues with corporate earnings but this lack of under -
standing will become an even bigger problem during the winter of 2012/2013 when 
McDonald's USA will be up against those great numbers from last winter.

And yet McDonald's management refuses to warn investors that it's going to be
a cold winter no matter the reading on the thermometer.
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Obamacare = Food Inflation?

We've previously mentioned the involvement of a former member of the McDonald's
top management team in the original drafting of the Affordable Care Act. This week
the Wall Street Journal covered the topic once more HERE

It's ironic that a former McDonald's executive and bushels of campaign contributions
from McDonald's corporate employees created something that might do major damage
to the McDonald's system over the next few years.

Speaking of that damage - during the investor conference call McDonald's CFO told
analysts he expected that health care might cost the average restaurant $10,000 to
$30,000 per year. However, the projections given to McDonald's franchisees in the 
field are three or four times those levels. Another case of telling investors what they 
want to hear.

And the CFO made another statement in reference to health care, "we have years like
last year where commodity cost increases were even greater than that. So while this 
is a significant item and it’s gaining a lot of attention as the P&L item we've managed 
through items of this magnitude in the past and I’m hopeful we can do that in future."

No, this time it's different. Premium and core menu prices are already too high at
McDonald's. It's doubtful McDonald's Operators can raise prices much further when
commodities increase, let alone raise prices again to cover health care.

But investors like to be told about food inflation in their franchised investments.
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July 23, 2012

You Can See McDonald's Future From Here

For many years I've encouraged McDonald's franchisees to pay
attention to the quarterly conference calls between McDonald's
executives and Wall Street analysts. I don't think too many
took my advice.

But, today's call is significant because of the drought, foods costs
and competitive pressures. This call contains revealing comments
from management and some really interesting questions from the
analysts.

If McDonald's Operators want a look into the next 18 months you
really should read the transcript of today's call. Or, you can listen
to the playback on the investor section of the McDonald's website.

Seeking Alpha transcript is HERE
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CNBC - MCD to Go On Offensive on Value

This is an interview with an analyst who explains very succinctly
that McDonald's can win a price war because the franchisees 
spend so much money on advertising.

The McDonald's discussion is about four minutes into this 10
minute video, but it's worth the wait.

Rachael Rothman on McDonald's
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Analysts - More Discounting at McDonald's

Some smart people quoted in this article.
Howard Penney, managing director of investment research firm Hedgeye Risk 
Management says: “McDonald's can't ever go back to the Dollar Menu.
It's permanently gone.”

Kate MacArthur reports for Crain's Chicago Business
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McDonald's CFO Foresaw Drought


McDonald’s Bought Commodities Before Rally, Cuts Cost Forecast - Bloomberg:

McDonald's Rare Profit Miss Signals Slower Growth Ahead - Forbes

McDonald's Rare Profit Miss Signals Slower Growth Ahead - Forbes:
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July 22, 2012

McDonald's of India to Lower Prices 6-15%

The last sentence in this article is profound:
"The move is line with the fast food giant's international positioning of value and affordability, with more stress on volumes than margins."

The Economic Times reports HERE
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July 20, 2012

What's the Beef?

Burger Business Reports on Beef Prices
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Chipotle Down

Friday morning most restaurant shares are under pressure because of poor earnings from Chipotle. Discussing commodities on CNBC an analyst from Raymond James quiped,

"Chicken is just corn with feathers"

News on Chipotle is HERE

July 19, 2012

It's Going to be a Hard Candy Christmas?

When announcing "disaster" areas due to the drought USDA Secretary Tom Vilsack
said: "ranchers were most seriously affected and he expects the prices of beef,
poultry and pork "may go down a bit, but over time they will rise."

In other words, restaurants may get some relief this summer but just about the time
the industry comes up against the tough comps caused by the warm weather of
winter 2011/2012 the corporate folks will be pushing for discounting and coupons to
keep same store sales from going negative.

Yikes!

Dow Jones Reports HERE
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The Food Cost Maize



This article contains some interesting facts about  where the money goes when we buy groceries.