McDonald's share price surged to all time highs. Who cares?

?? I'm Lovin' It (But You're Not)

McDonald's share price surged to all time highs yesterday. Who cares? Well, McDonald's earnings can tell us quite a bit about the economy...

Obviously McDonald's isn't the whole economy, so we'll look at a few other companies too...

There's been a weird dichotomy of earnings so far... Companies keep beating estimates (which isn't?that?weird when advance estimates are often guided lower?explicitly for this purpose) but still, they're reporting pretty good earnings?now?while evidence for a slowdown?ahead?keeps stacking up.

McDonald's has been a great example of consistency over the years, and they're not afraid to shout about it continuing...

What's notable about this earnings call?is?McDonald's consistency, consistency in the strength of our numbers, consistency in the powerful drivers of our business...?Let's start with the numbers. At the top line, you only need to know one number, 12.6%.

US comparable sales, 12.6%, IOM comparable sales, 12.6%, IDL comparable sales, 12.6%, and global comparable sales, you guessed it, 12.6%.?These results reflects strong consumer demand for McDonald's that we are seeing around the world despite a challenging operating environment and historically low consumer sentiment in many markets.

It's another example of watching what the public?do?rather than what they?say.

Confidence surveys capture the first part of this sentence...

"I'm really worried about the future, my confidence is low..."

But not the second...

"F**k it, let's go to McDonald's anyway"

And when people go to McDonald's, what do they do? Well, luckily for us, Ronald's always watching...

... we do see some of the pressures that give us reason to believe that our view on the macro outlook is accurate, which is, one, we are seeing a?slight decrease in units per transaction. So things like?did someone add fries to their order, how many items are they buying per order, we're seeing that go down in most of our markets around the world slightly, but it's still going down.

And then?the other thing is we continue to monitor very closely the acceptance of our pricing. I'm really proud of how our system has executed pricing in light of the double-digit inflation that we have been experiencing. But we are seeing, in some places, resistance to pricing, more resistance than we saw at the outset.

Consumer pushback against higher prices is no surprise at this point, but it's important to remember that we're going from?zero?pricing resistance to?some?resistance.

Any company with pricing power has been pushing pricing for a while now, even if that meant sacrificing sales?volumes. i.e. they're selling fewer units, but the price hikes are more than compensating for it.

We talked about this last year, focusing on PepsiCo. The TL;DR

Pepsi: "We'll keep raising prices until you stop paying them".

(PepsiCo repeated the trick this quarter -?"Average prices jumped 16% in the first quarter, while organic volume slipped 2%"?)

There's a definite slowdown story for?McDelivery too...

... I think it is fair to say that the growth of delivery whether that's a function of it just being at a large number now or if it might, in fact, be some of the consumer pressures, but?the growth of delivery has certainly slowed.

There is still growth, but it's not nearly the growth that we saw previously.?So I think as we look at it, delivery is going to remain an important part of the business, but?it's certainly not going to be the degree of growth driver that it has been historically

Quick tangent - this chimes well with the Deliveroo report (9% drop in the number of orders on its platform,?Citadel are short), and Just Eat (14% drop in orders) ??

And McDonald's still sees a recession ahead:

I would say our view remains unchanged, which is our base expectation is for a mild recession in the U.S.

In Europe, we expected it to be more challenging ... compared to the U.S., I think more challenging in Europe. So our base expectation from a macro standpoint for 2023 is unchanged.

Now, McDonald's aren't the only ones pushing price. Chipotle saw profit margins jump in the last quarter ??

Chip also mention lower delivery volumes, which is worth noting, but the bigger picture is one of higher prices ("about 10% higher in the first quarter?versus last year, but they will be only about 5% higher in the second quarter as previous price hikes roll off")

While input costs are falling...

Food, beverage and packaging costs in the first quarter were 29.2% of total revenue, a decrease of 180 basis points compared to the first quarter of 2022

Restaurant level operating margin was 25.6% compared to 20.7% in the first quarter of 2022. The improvement was primarily due to the benefit of sales leverage and, to a lesser extent, lower avocado prices and lower delivery expense due to lower delivery volumes.

These decreases were partially offset by higher inflation across several food costs?and to a lesser extent, wage inflation.

Which ties in with this...

Another chink in the armour of the strong labour market narrative.

Now, there's a lot of chatter lately about?excuseflation, which the excellent Sam Rines has been covering for at least a year.

Plenty of commentators have jumped aboard the blame train and berated corporates for raising prices. While this is an entirely?valid?observation, please contain your moral outrage until the end of this note.

First up, it's not all one way traffic...

I think the one thing, David, that is different now is?labor rates are much, much, much higher. And our menu pricing hasn't really stayed caught up all the way with the labor over the last few years.

And in fact, the biggest move that we made in the second quarter of 2021, we basically raised wages by 15% and only raised price by 4%. So we basically offset the dollar value of that. We didn't try to protect the margins and certainly didn't try to protect the labor line at all. So I think there's been a bit of a dislocation there...

Even though margins are clearly back above the?pre-pandemic?trend, there's still room for improvement ??

Overall, there's little doubt that corporate profits have been?exceptional?but that seems like old news now...

This chart shows the trends more clearly, a slowdown of?everything?is expected this year before growth recovers in 2024... ??

Surely it's going to be hard to?price gouge?in this environment? And is price gouging even the right term for what we've been seeing? Not for me...

I mean, one man's?price-gouging?is just another man's?price optimisation strategy to find the true breaking point of customer demand elasticity...

Too?economisty?I know...

In financial markets we call(ed) it?price discovery?- the corporate & financial world is basically a massive, continuous experiment to see the price people will pay for stocks (or products and services) in real time.

In any case, aren't we all supposed to?'make hay while the sun shines'?

If you got a pay rise from your firm over the past couple of years, or moved jobs to get one, are you also GUILTY of the heinous crime of price-gouging?

Of course not! Everything's cyclical. Massive monetary and fiscal expansion wasn't sustainable, so everyone grabs their share while they can.

The monetary punchbowl left the party long ago, and the fiscal effect is gradually being drained too, potentially with spending cuts ahead...? ??

Which is why we're feeling pretty paranoid about the next 12 months, the air of complacency, and?transitory green shoots of illusion?that keep sprouting ??

Nearly forgot, the?Dallas Fed manufacturing survey comments?are always refreshingly honest - themes that will be familiar to regular readers ??

?? Why Don't People Understand Things?

The world of markets is a fascinating and frustrating place. And not necessarily in that order. It's also humbling, especially when you first start paying attention...

One big frustration is people just not understanding things. It's not THE frustration. We can't expect other people to understand everything. Nobody (including us) has infinite knowledge.?

It's more the realisation that people shouldn't be so f**king confident when they've got no insight or experience of the things they're commenting on.

The Prosecution Presents Exhibit A - The Shouty Critic

You don't have to watch the clip. You've probably seen it all before (with different pantomime characters). This isn't a complaint about the 'stars of the show' here either.

It's about the state of politics, and the level of 'debate'. Just two people shouting/talking past each other again.

Did anyone come out of this better informed? Or is it more likely that viewers will each feel like their team won (and that's all that matters)...?

The comment on JRM's?'interests in the fossil fuel industry via Odey' just?screams,?'I don't understand how any of this works.'

Which is fine. Everyday people don't need to understand all of this.

But maybe that's a better starting point if you're going to speculate over someone's interests and motives...?

If you're trying to understand what they do and why?

Staggeringly, JRM (and anyone else) can have vested interests in the fossil fuel industry by just, you know, buying shares in energy companies. No conspiracy is required.

Again, it's hard to take much issue with people not understanding things, there are only so many hours in the day...

Unless it's?wilful?ignorance. Which, it seems is becoming more common (and absolutely fair game).

See, there's a world of information at our fingertips, but if all you're looking to?prove?is that?bad person is bad,?you're not trying to become informed.

You're trying to prove yourself right.?Intellectual masturbation. And it's entered a raging bull (ball?) market, which unfortunately means...

Intellectual Curiosity Enters Bear Market

... the natural desire to learn new things, understand the inner workings, and take a deep dive into subjects that others may find tiresome or burdening.

The media that former generations used to rely on for unbiased information is long extinct for this purpose. 24 hour news cycles made sure of that.

Instead we get infinite variations of this ??

You're a Liar, You're to Blame, You're Greedy &?The Politics of Envy

Playing the blame and outrage game solves nothing. Even worse, it?absolutely?murders?any chance of?understanding more about how the world actually works.

We've all seen variations of these headlines over the past 12 months ??

"It’s time to take on the profiteers who are holding the public to ransom"

YEAH! Making money is a sin. How dare these companies charge us more for things that are essential to our everyday lives - it should just be free - what do I even pay my taxes for?

OK, an actual quote...

Natural resources like oil and gas, wind, sun, and hydropower belong to all of us if they belong to anyone—but right now a handful of shareholders are profiting while ordinary households suffer.

On some level, you can see the point.?BUT?if the natural resources?belong to all of us, why don't we simply club together, invest in developing machinery, pay for the engineers & geologists to do a bit of research, sort the government licensing to extract these resources, plus invest some transport & storage facilities for our well-earned bounty?

If I pitched you this as a startup idea, would you invest?

There's NO risk of bankruptcy whatsoever, I promise...???

So, we generally don't understand how things work, and we completely take this stuff for granted now.

When the UK energy market was privatised in the '80s, it wasn't with a profit motive. The market simply hadn't worked properly for a long time...

Three day work weeks and regular blackouts (electricity rationing) were a part of life in the 70's.

Imagine only being able to get your food home delivered on three out of seven days, and on some of those days Netflix wouldn't even work!! Euuurgh dystopian or what?!

Now we have time to worry ourselves about what we call these natural resources instead...

I wanted to share a recent example (that was the inspiration behind this note). The following was written by an energy/power trader at RISQ... ??

The Danish news outlets (lead by?Finans, but closely followed by?DR - Danmarks Radio?and?EnergiWatch)?seems to just blindly bash the way the energy markets work. This, without even knowing how the market as a whole is put together.

They didn't even care to ask - they printed the narrative "these guys make money, these guys are bad".

Such a common media theme it's almost beyond parody. Zero interest in facts or impartiality...

The fact of the matter is, that if you play by the book, you ONLY make money, if you help the market. If power is needed, the price will go up. If you bought power, you can sell this off to help the market. Vice versa the other way around.

If there is a need of power, and you owe power to the market, you have to fill that hole, with power that is more costly to you, and you would lose money. It's as simple as that.

Sounds remarkably like a typical business. Be useful to make money, but there are risks...

Now, the individual consumers reference the spot price. Which is obtained by solving an optimization problem, that includes many variables. But?most importantly, it includes the need/surplus of power in the surrounding countries. The surge in prices last year, was a product of French Nuclear plants being out for service, droughts in Norway, Italy, Austria etc. causing a shift in available production capacity.

Soooo, the most BASIC laws of supply and demand and not profiteering? Astonishing.?

It was NOT a product of some trading house doing mad speculation.

That would simply be impossible. This is a game, that is closely tied to physics. Power cant be stored (for long), and hence the price will closely follow this balance.

However much the media wants to, they can't change that.

That 8 people have been accused of abusing the market, 47 CHP (Combined Heat & Power) plants have been accused of forming a cartel, and that a few employees are looking at getting (by all standards) a large payout, does not constitute anything being wrong with the market.

If we buy that narrative, what are we going to do with the politicians who mis-use the law?

If you need help with adding context, I'm open for a call. But?this one-sided bashing has to end.

On this, we totally agree. As Oscar Wilde said,?the cynic knows the price of everything and the value of nothing.

And if you don't understand the value of markets, you're probably not paying attention ??

We're posting sh*t daily to TikTok.

Look, we're tired of giving TikTok actual information.

It just doesn't get picked up.

Instead, we want to go with Memefotainment.

Follow me here...

I guarantee you won't be able to like them if they were posted on LinkedIn because your BoSs MiGhT sEe.

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Ciao 'til next Friday x