MCD is scheduled to report its January sales results before the market open tomorrow, the 8th of January. Compared to January 2010, January 2011 had one less Friday and one additional Monday.
Below I go through my view on what sales results the Street will receive as “GOOD”, “BAD”, and “NEUTRAL” for each region. To recall, December’s results constituted a significant sequential slowdown from October in the U.S. As I detailed in my recent Black Book on MCD and the company’s prospects for 2011, specifically in the U.S., I believe that this year will see a significant slowdown in sales. While this may not spell disaster for January (there is plenty of time in 2011 for my scenario to play out), I am below the street’s estimates.
Before digging into the ranges for MCD comps, I think it important to address the key macro factors that are likely to impact results. Firstly, gas prices on a national basis were up 13.7% year-over-year in January, and up 3.3% versus December 2010. Secondly, given the importance of McDonald’s drive thru to their sales, the stormy weather that caused so much disruption may turn out to have been a factor. It is important to note, however, that Eric Levine, Hedgeye Director of Retail, wrote last week in his roundup of January’s retail same-store sales results that “the weather was barely mentioned as an excuse. Only a handful of retailers including Costco, BJ’s, JCP, and HOTT cited the impact of stormy weather on the month and actually quantified it.” There is historical precedent, however, within the restaurant space for snow storms having negatively impacted restaurant sales. The snow storms of December 1998 and January 1999 had negatively impacted the results of many QSR operators in the Midwest.
Below I go through my take on what numbers will be received by the street as GOOD, BAD, and NEUTRAL, for MCD comps by region. For comparison purposes, I have adjusted for calendar and trading day impacts. On a calendar-adjusted basis, consensus estimates are calling for two-year average trends trending roughly level with December in the U.S., down in Europe, and up in APMEA.
U.S.- Facing an easy -0.7% compare (including a calendar shift which impacted results by -0.4% to +1.0%, varying by area of the world):
GOOD: A print of roughly 4.5% or higher would be perceived as a good result, implying that the company has improved two-year average trends from December. Consensus is at 4.4% for MCD U.S. comps in January. I believe that merely meeting these expectations would be well-received by investors. I believe a print somewhere in the NEUTRAL range detailed below is most likely, but I expect a greater proportion of the slowing that I have projected for the U.S. in 2011 to take place after compares step up in difficulty from March onward. At that stage, I expect a starker divergence to emerge between my projections and those of the sell-side.
NEUTRAL: Roughly 3.5% to 4.5% implies a two-year trend approximately level with the calendar-adjusted two-year average trend in December. A print in this range may convince some investors that MCD’s top line trends are robust versus the 2.6% print in December. I would caution, however, that the compare is significantly easier in January than it was in December.
BAD: Below 3.5% would imply two-year average trends that had slowed from the calendar-adjusted two-year average trends in December which had, in turn, sharply declined from November’s results. A result this far south of expectations, obviously, would be negatively received by investors.
Europe - facing a +4.3% compare, (including a calendar shift which impacted results by -0.4% to +1.0%, varying by area of the world):
GOOD: A print of approximately 3% or higher would imply two-year average trends significantly higher than those seen in December. While two-year average trends would remain significantly below the 2010 average in the event of a +3% print, at the very least this would imply a significant bounce back from December’s disappointing result. Consensus is for a Europe comp of +3.7%.
NEUTRAL: Between roughly 2% and 3% implies a sequential increase from calendar-adjusted two-year average trends in December but would be significantly below Street expectations. Additionally, two-year average trends would be markedly lower than those seen in for the majority of 2010.
BAD: Below 2% would imply trends, at best, slightly higher than those seen in December and, of course, a one-year number far, far below Street expectations.
APMEA – facing a 4.3% compare (including a calendar shift which impacted results by -0.4% to +1.0%, varying by area of the world):
GOOD: A result of roughly 4.5% or higher would imply two-year average trends roughly in line with or better than results seen in December. Additionally, such a result would likely reassure investors that the bounce back in December from November’s result was not a head fake.
NEUTRAL: Between roughly 3.5% and 4.5% would imply two-year average trends roughly in line with, or slightly below, the strong results in December.
BAD: Below 3.5% would imply a significant slowdown from December’s result.