You might be wondering how a stock as staid as McDonald's (MCD) may have run an astounding nine points in one otherwise totally miserable session. You may be thinking that the comparable store sales were good, but not insanely good - 2.9% domestically. Plus, the considerable number of bears in the name immediately pointed out the increase was from the price of the meals not the traffic, as if traffic, all of a sudden, is all that matters to the comp store component.
But I would come back and say that the stock rallied so hard, not because of the actual number, but because of the expectations, which were for a total collapse from previous quarters, based on a failed promotion.
It rallied because the whispers were that the $1, $2, $3 Dollar Menu was failing, something I heard a half-dozen times going into the quarter. It was the first gaffe of the Steve Easterbrook era, went the tale, a sign that Steve's run of the place had, at last, run out.
The stock took off, though, because it was, in fact, the opposite: "The $1, $2, $3 Dollar Menu is a platform that anchors our value strategy in the U.S.," Easterbrook said at the beginning of his triumphant call. "With the introduction of this menu at the start of this menu at the start of this year, we're offering customers a choice and a variety for a simplified menu at multiple price points. It's performing in line with expectations as customer awareness continues to grow." He called it a "key factor in higher average check for the quarter."
As earnings season goes this is an astonishing turnabout. No, Easterbrook did not say that the 1-2-3 was blowing away the numbers. Nevertheless there was so much negativity about this initiative that the words "in-line" ignited a short squeeze.
That, plus the fact that his big-time competitors didn't beat his numbers. Remember that Starbucks (SBUX) only had a 2% comp while Dunkin' Brands (DNKN) actually lost .5%. In other words, as "bad" as 1, 2, 3 was supposed to be, the others were a lot worse.
Yep, the shorts couldn't resist betting against McDonald's given that they heard that 1, 2, 3 was a bust and they didn't think they could get hurt all that badly by shorting a huge dollar, big cap stock.
Given how thin the market is, they were clearly wrong.
I, myself, am mystified how the shorts could be so wrong about such a big cap company that plays with a total open hand. If 1, 2, 3 were a bust, Easterbrook would have no trouble cutting and running intra-quarter. He simply isn't a guy who will keep repeating mistakes. He tries and tries and tries and if there is traction he keeps it. Which is why I never believed the short case for a moment and stuck by him.
I imagine that the research houses that made this negative call will not eat it or fall on their swords. They just move on and pick someone else to slam
But this isn't isolated. The last 50 points tacked on by Domino's was directly related to some highfalutin research outfit that figured out, through some form of payment monitoring, the pizza company was having a slowdown in deliveries. It simply wasn't true and the short sellers had no recourse but to cover when the real numbers came out because like the 1,2,3 short call, this one gave you nothing else to hang your hat on.
Domino's (DPZ) was plagued with this nonsense for years, quite shocking given that Pat Doyle, the retiring CEO, had racked up the single best performing record of any CEO from the time he took over in 2010. I remember when I first asked him about the rumors that a particular quarter would be weak and he was incredulous about how anyone could know the truth other than very senior management. He was aware that individual operators were routinely being asked to provide numbers to these brokerage services, but he doubted that you could build any mosaic from those receipts.
He's right; they were not dispositive.
Here's my takeaway: when you hear from some "research" firm that claims to have the inside skinny on how numbers are working ahead of the quarter, as was the case both with McDonald's and Domino's, be more skeptical. This isn't Apple (AAPL) where there are a gazillion sources and parts and outlets that matter. This one wasn't gameable, no more than Domino's was, which is why the stock soared far more than you would have otherwise thought possible.
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