Monday, November 10, 2008

McDonalds (MCD) Strong; Circuit City (CC) Out

Both our "Pooring of America" stalwarts are giving out updates this week - Walmart (WMT) with an earnings report Thursday and McDonalds (MCD) reported October same store sales today. They were stellar, despite a stronger dollar hurting on the currency conversion side. U.S. Sales are accelerating... again much like how Target shoppers are becoming Walmart shoppers (not by choice) [Dec 26 2007: Target Shoppers Turning into Walmart Shoppers] so are many mid chain restaurant eaters being forced downstream. What is also interesting to me is the strength in Europe - in this global recession McDonald's is also an alternative to pricier fare overseas. I expect both chains to continue to excel through 2009.
  • Consumers worldwide who are watching their spending bought more burgers and chicken breakfast biscuits at McDonald's in October, leading to a big rise in sales at established locations for the fast-food leader. Many sit-down chains have reported steep declines in same-store sales during October as consumers grew more anxious about the possibility of a prolonged recession.
  • McDonald's Corp (NYSE:MCD - News) on Monday said global sales at its fast-food restaurants open at least 13 months rose 8.2 percent in October, topping analysts' targets and sending its shares up more than 2 percent. Same-store sales, a key gauge of retail health, rose 5.3 percent in the United States, 9.8 percent in Europe and 11.5 percent in the Asia/Pacific, Middle East and Africa (APMEA) division.
  • RBC Capital Markets analyst Larry Miller said the October results "were above expectations in every division" and that the report's one "negative," which was not unexpected, was that the impact of foreign exchange has started to turn against the company in its overseas markets.
  • Strong results in the United Kingdom, France and Russia as well as promotions and value items boosted results in Europe, while localized menu items, value items and extended hours helped in APMEA, the restaurant chain said.
  • Goldman Sachs analyst Steven Kron said in a note to investors that business momentum at the chain is "overpowering" any shift in the strength of the dollar. Overall, Kron said the results "temper lingering concerns that a global economic slowdown will impact the company's results."
  • Morningstar analyst John Owens said the results show McDonald's is likely benefiting from diners who might ordinarily go to pricier sit-down restaurants but are gravitating to fast food to save money -- a phenomenon called "trading down." (actually it's called "Pooring of America" but "trading down" will suffice - he is about a year and a quarter late on his analysis but good call anyhow)
And in the least surprising bankruptcy filing of the past decade, out goes Circuit City (CC) - they of infamous moves such as firing most of their experienced staff to bring in lower paid newbies. Bright ideas like that are just one of many signature move of management at this fine firm.
  • Circuit City Stores Inc. filed for bankruptcy protection on Monday heading into the busy holiday season as analysts question whether the nation's second-biggest electronics retailer will be able to survive.
  • The company said it decided to file for bankruptcy protection because it was facing pressure from vendors who threatened to withhold products during the holiday period. The company also said it cut 700 more jobs at its headquarters, after announcing a week ago that it would close 20 percent of its stores and lay off thousands of workers.
  • The company laid off about 3,400 retail employees last year and replaced them with lower-paid workers, a move analysts said could backfire, hurting morale and driving away customers. (very similar move to what Mr Bob Nardelli did at Home Depot which helped to drive customers to Lowes - for that Mr Nardelli was "fired" and got a $200 Million bonus to leave - that's our "heads we win, tails we win" culture of executive compensation)
  • Stifel Nicolaus & Co. analyst David Schick said in a note to investors that since Circuit City is a well-known brand it could re-emerge from bankruptcy, saying "We believe the marketplace has a slot for a higher-end chain with a commissioned sales force." But Stephen Lubben, the Daniel J. Moore professor of law at Seton Hall Law School, said the company's surivial depends on "whether these folks here like Sony and Hewlett-Packard are going to be willing to work with Circuit City going forward or whether they think they're a lost cause and cut them off permanently."
More important is the theme here we've been presenting - America is overbuilt with retail and restaurants; the number was built for a consumer spending over his/her head. Circuit City is joining the first wave of bankruptcies along with Mervyn's [Jul 21: Add Mervyn's to our Growing Litany of Retailers Headed to the Great Sunset], Steve n Barry's [Jul 10: Another Retailer (Canary in Coal Mine Down], Linens 'n Things [Apr 11: This Day in Bankruptcies - Another Airline and our First Major Retailer] - along with some smaller ones I don't even bother mentioning here. Unfortunately we've "transformed" our economy to be based on consumerism and "shopping" so the vicious circle we are embarking on will be much worse due to the fact that as stores close, many people lose jobs and when they lose jobs they cannot shop which leads to... well you get the picture. Again, you are only hearing about the large chains here and in the news. Many many many "small businesses" (job drivers) in America are one off mom and pop retail outlets or restaurants - you won't see those in the newspaper - but just drive around your strip malls and start watching the closures over the coming year. (mall based REITs continue to be among my favorites way to play this from the short side) The "Great Retrenchment" of consumerism is just starting... 2009 will be a much larger wave - it's time to 'right size' the number of retail outlets in America to a realistic spending level for the next half decade. If Americans ever return to the old days of 4-6% savings rates, the effects on retail will be devastating.

But coming full circle - this all should be a bonanza for Walmart and McDonalds. However, showing how tough this market is, even these guys no longer have good charts and cannot make sustained moves upward.... so when the biggest beneficiaries cannot sustain a bid the market is simply not worth playing with.

No position

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