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business newsMcDonald's Continues to Sizzle
By
Justin Sharon
Aug 09, 2010 4:30 pm
Shares have massively outperformed the DJIA all year, and it stands at an all-time high after announcing a 7% increase in global same-store sales for July.
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Friday afternoon, prime time for burying bad headlines, provided two examples highlighting how important a Top Banana is to any organization. (Coincidentally -- and conveniently -- forgotten in the Hewlett fuss was an announcement by Berkshire Hathaway (BRK-A), led by the soon-to-be-80-year-old Warren Buffett, that its second-quarter net profit plunged 40.3%.) The trend continues today with news that the company "nobody doesn’t like" is officially leaderless also. Brenda Barnes, CEO of Sara Lee (SLE), is to leave her post permanently after having been on medical leave since mid May. Its stock, which reached a one-year peak only last week, has held up reasonably well since the announcement but remains at the mercy of deeper structural forces. These include currency volatility (almost all of its operating profit is derived outside the US) and higher commodity costs. A five-year restructuring effort aimed at cost savings has met with only mixed success and the maturity of many core brands leaves little room for growth. As such, it’s hard to see any compelling reason for purchase at present.
Another iconic consumer staple is more successfully moving into middle age. McDonald’s (MCD) shares, which have massively outperformed the Dow Jones Industrial Average all year, stand at an all-time high after announcing a 7% increase in global same-store sales for July. This comfortably beat Street soothsayers forecasting 4.8%. While the performance of its international operations was undeniably impressive, what caught my eye was a 5.7% comp sales gain even in its saturated US base, home to over 32,000 outlets. Blistering temperatures in many parts of America had customers traipsing through its Golden Arches searching for salvation in form of a McCafe Real Fruit Smoothie. A near-term correction may be inevitable but will be seen by many as an ideal entry point. The company’s Dollar Menu has enormous financial (if not nutritional) appeal in this economy, and a history of dividend hikes offers impressive total return potential.
Target (TGT) shares are up over 2% as I write, benefiting from a Barron’s bounce after the publication gave its current cover over to a glowing exposé on the discount retailer. The PFresh grocery roll out, a concept coming to 20% of its stores, is garnering favorable early reviews. And having just opened a 174,000 square foot outpost in New York City, it may soon be hip enough to attract even jaded Manhattanite hipsters into its stores. However, fully 60% of Target’s offerings are discretionary in nature, and its expansion brings looming competition from the king of category killers, Walmart (WMT). Food for thought.
No positions in stocks mentioned.
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