MCD will announce sales numbers for April on Monday, May 9th, before the market open. On the 1Q11 conference call, management indicated April comps were healthy, running at or above the +4.2% rate seen in 1Q11. Therefore, how the different regions of the world performed will be the focus on Monday.
There was a slight calendar shift between the number of weekdays and weekend days in April 2011 versus April 2010. April 2011 had one additional Saturday, and one less Thursday, than April 2010. Easter 2010 and Easter 2011 both fell in April. I would expect a slight, positive calendar shift in April 2011’s result due to the extra Saturday.
For the U.S., March comparable restaurant sales came in above my expectations, and those of the Street, at 3%. I have b I have been bearish on the stock since December and released a Black Book to that effect in January. While March was certainly a blow to my thesis, it by no means has led me to capitulate in my view that 2011 is proving to be a difficult year for the U.S. business overall. I believe that comps will slow during the year due to a declining core business. In addition, a complicated menu borne of management’s aim to offset the decline in the core menu with new menu items, it proving a hindrance for operators seeking to operate efficiently at this time with commodity costs so elevated.
Below I go through my take on what numbers will be received by investors 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 a +3.15% compare (including a calendar shift which impacted results by +0.4% to +0.9%, varying by area of the world):
GOOD: A print above 4% would be received as a good result, implying two-year average trends that were roughly level with those in March. The comparable restaurant sales growth in March, on a calendar-adjusted basis, implied a sequential acceleration in two-year trends of roughly 200 basis points. While I remain bearish on the prospects of MCD “comping the comps” through the summer months when the compares significantly step up in difficulty, I think that April will likely be a stable month for MCD given the easier compare versus March and the strong performance management spoke to during the earnings call. The Bloomberg Consumer Comfort Index trended positive overall during April, albeit peaking mid month and declining thereafter. The decline has continued in May but it is likely, in my view, that April will be a solid month for MCD.
NEUTRAL: A print between 3% and 4% would imply two-year average trends slightly below those seen in March. However, I think it is unlikely that the two-year trend remains quite as robust as it did in the final month of 1Q. While the mid-point of this range is below consensus, it would still be a healthy result for MCD and imply a two-year trend far in excess of the level seen during the malaise of December/January/February.
BAD: A print below 3% would not be received well by the Street as it would imply a sequential deceleration in two-year average trends. In addition, it would likely dampen investor sentiment given that concerns are arising around the pricing strategy that will be required to overcome inflation. If the core business is not robust, it could be perceived that a price increase will adversely impact traffic, which of course is the lifeblood of MCD’s comps.
Europe:- Facing a difficult +5.30% compare (including a calendar shift which impacted results by +0.4% to +0.9%, varying by area of the world):
GOOD: A comparable restaurant sales number of 6% or higher would be received well by the Street as it would represent a sequential acceleration in two-year trends. While this acceleration would be meager, I believe that with the austerity measures being implemented in Europe, MCD maintaining the ~5%+ two-year average trends that have been the norm in 2011 would be a positive. In spite of the austerity measures and cloud uncertainty that remains over Europe’s political/fiscal future, MCD has been performing well in Europe this year and the recent Euro strength may also support confidence somewhat.
NEUTRAL: Between 5% and 6% would imply two-year average trends slightly below those seen in March. While a deceleration is never what investors are hoping for, I think a slight slowdown (~20 basis points) in this case would not raise too many concerns and two-year trends would remain above 5% and well above the trends seen in November and December in Europe.
BAD: Below 5% would imply a significant sequential slowdown in two-year average trends.
APMEA:- Facing a difficult +10.1% compare (including a calendar shift which impacted results by +0.4% to +0.9%, varying by area of the world):
GOOD: Above 2.5% would imply a sequential acceleration in two-year average trends. Inflation has been a concern for consumers in many Asian countries, and countries around the globe for that matter, and I believe an improvement in two-year trends would be received positively.
NEUTRAL: Between 1.5% and 2.5% would imply two-year average trends slightly higher than those seen in March but still well below the average two-year comp over the last 6, 12, or 24 months.
BAD: Below 1.5% would imply two-year average trends roughly in line with, or below, those seen in March which would raise concerns that last month’s poor result could be the start of a longer trend.
Howard Penney
Managing Director
