MCD is scheduled to report its February sales results before the market open tomorrow, the 8th of March. There was no difference in the number of weekdays and weekend days in February 2011 versus February 2011.
Below I go through my view on what sales results the Street will receive as “GOOD”, “BAD”, and “NEUTRAL” for each region. To recall, January’s U.S. result was a mere 10 basis points above my expectation and represented a slowdown for the company’s domestic business. I expect this slowdown to continue in February. There is plenty of time for my thesis on MCD in 2011 to play out, so I will not be discouraged by an upside surprise in February. I am below the Street’s estimate and would note that a miss in February may spur the sell-side to rethink expectations ahead of 1Q results. As gas prices creep higher, putting pressure on casual dining chains, MCD may actually benefit slightly but certainly not enough to dissuade me from my bearish thesis on 2011. After all, as I noted in last month’s sales preview, drive-thru sales are important for MCD’s sales, so any share gained from casual dining may be offset, likely depending on just how high gas prices climb.
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.
U.S. – Facing an easy +0.6% compare (there was no calendar shift in February 2010):
GOOD: A print of roughly 3% or higher would be perceived as a good result, implying that the company has improved two-year average trends from January. I believe that any improvement in two-year average trends would be met positively by investors. I believe a result in the NEUTRAL range – closer to the lower end of roughly 2% - is most likely. To reiterate, I expect a greater proportion of the slowing in top line trends that I have projected for the U.S. business in 2011 to take place after compares step up in difficulty from March onward. At that stage, I expect a more obvious divergence to emerge between my projections and those of the sell-side. Of course, weak results tomorrow may precipitate a correction in Street expectations ahead of 1Q results but, given the darling status currently enjoyed by MCD on Wall Street, I anticipate some stickiness in current consensus.
NEUTRAL: Roughly 2% to 3% implies two-year average trends that are approximately in line with the calendar-adjusted two-year average trend in January. I would add that, in reality, a result towards the lower end of this range will not be received well and that is where I expect the U.S. comp to come in.
BAD: Below 2% would imply a significant deceleration in two-year average trends on a calendar-adjusted basis. Headline comps for the U.S. were low for December and January with similarly easy compares. A further deceleration in two-year average trends would likely call into question the direction of the U.S. business for 2011.
Europe – Facing a compare of +5.4% (there was no calendar shift in February 2010):
GOOD: A print of approximately 6% would imply two-year average trends significantly higher than those see in December and marginally better than the strong two-year average trends in January. An improvement, or even maintenance, of trends from January would be well-received given that the compare in February is significantly more difficult than that of January.
NEUTRAL: Between roughly 5% and 6% would imply a two-year average trend slightly below January’s trend. While a deceleration is usually received negatively, a slowdown is almost expected following a sharp gain in two-year average trends in January.
BAD: Below 5% would imply trends significantly below January’s and, while I believe some allowance will be made for a deceleration given the improved levels of two-year average trends on an absolute scale, the perception of January’s Europe result as being anomalous will likely drag sentiment.
APMEA – Facing a difficult 10.5% compare (there was no calendar shift in February 2010):
GOOD: Any positive same-store sales result from APMEA would be well-received by investors. Given the difficulty of the compare from February 2010, +10.5%, a same store-sales print of roughly 0.0% would imply two-year average trends approximately in line with January’s result. Additionally, a third consecutive month of strong two-year average trends flowing November’s disappointing number would bolster confidence in the APMEA business.
NEUTRAL: Between -1% and 0% would imply two-year average trends roughly in line with January.
BAD: Below -1% would obviously look bad from a headline perspective but, also, on a two-year average basis, this would imply a significant deceleration in two-year average trends from January.
Howard Penney
Managing Director
