MCD: MAY SALES PREVIEW

MCD will announce sales numbers for May on Wednesday, June 8th, before the market open.  April was a strong month for MCD, with comps comps coming in at 6% on a global basis and +4%, +6.5%, and +6.5% in the U.S, Europe and Asia, respectively.  For the U.S., this print constituted acceleration in two-year trends of approximately 30 basis points (all coming from increased pricing). 

 

Despite the April U.S. number far outstripping consensus, we are looking for a slowdown in two-year average trends of approximately 70-80 basis points, slightly worse that consensus at 65 basis points.  There was a slight calendar shift between the number of weekdays and weekend days in May 2011 versus May 2010.  May 2011 had one additional Tuesday, and one less Saturday, than May 2010.  I would expect a slight, negative calendar impact on May comps as a result.

 

Overnight, McDonald’s Japan (35% of the comp base) announced that May same-store sales we 0.9%, which was a significant slowdown from the 3.6% level in April.  I would also note that the BBC is reporting this morning that Australian butchers are reporting a drop in beef sales of 10-15% after ABC broadcast an investigation into animal cruelty in Indonesian abattoirs.  The program featured graphic footage of animals being slashed and whipped.

 

 

For the U.S., which remains the most important division for MCD, I remain cautious on the company’s ability to “comp the comps” as we head into the key selling season for beverages and lap the national roll-out of beverages last year. 

 

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 historical calendar and trading day impacts. 

 

 

U.S. – facing a compare of +3.4% (including a calendar shift which impacted results by +0.4% to +0.9%, varying by area of the world).  To keep the beverage sales momentum going, Frozen Strawberry Lemonade was launched in May as compared to the official National rollout of Frappes was in May 2010.  I’m looking for the USA to come in at +3%, between the “neutral” and “bad” ranges outlined below.

 

GOOD: A print above 4% would be perceived as a good result, implying two-year average trends roughly 20 basis points below those seen in April.  Depending on the magnitude of any negative impact that may result from the aforementioned calendar shift in May, the calendar-adjusted two-year average trend from a 4% one-year print could even accelerate from April’s level.

 

NEUTRAL: A print between 3% and 4% would be received as neutral by investors, given that expectations are for a softer month than in April.  However, I would weight this range to the higher end; the lower quartile of this range would likely raise some questions after the April sales results went a long way toward reassuring investors of the viability of MCD on the long side.

 

BAD: A print below 3% would imply a significant sequential deceleration in monthly two-year average trends.  As the economic data has shaken investor confidence of late, it will be interesting to see how MCD fares following the release of April sales.  Historically, MCD has been a value destination for consumers and I have no doubt it will remain so, but the effect could be diluted by the compelling value being offered at other concepts within quick service and casual dining.

 

MCD: MAY SALES PREVIEW - mcd sales chart

 

 

Europe – facing a compare of +5.7% (including a calendar shift which impacted results by +0.4% to +0.9%, varying by area of the world).  It was reported that the Eurozone April Retail sales rose +1.1% y/y vs consensus 0.0% and prior (1.7%); Eurozone April Retail sales +0.9% m/m vs consensus 0.4% and prior revised to (0.9%) from (1.0%).

 

GOOD:  A print of 4% or higher in Europe would be received as a good result as it would imply two-year trends that had slightly retreated from the levels seen in April, which were very robust compared to recent months. The skyward trajectory of the Icon Germany Consumer Confidence Indicator Index was arrested at the end of 2010 and has declined through April.  In addition, Germany Manufacturing PMI plummeted in April causing, along with several other factors, Hedgeye’s macro team to lose some confidence in its long position via the EWG ETF in the Hedgeye Virtual Portfolio.

 

NEUTRAL:  Between 3.5% and 4% would be received as a neutral result by investors.  While the result would imply a slow-down in two-year average trends, the two year trend would remain strong, continuing the departure from the softer two-year trends from the end of 2010 and maintaining the strong performance in Europe year-to-date.  Some degree of a slowdown, I think, is expected given the ongoing political and economic turmoil in the Eurozone.

 

BAD:  Below 3.5% would not be received well by investors as it would imply a significant sequential decline in two-year average trends.   The Europe number will likely be watched closely given the political events there of late and, it is also important to note, the E Coli situation on the continent is likely to impact consumer behavior to a degree.  Should a meaningful slowdown have taken place in May, investors may lose a degree of faith in MCD’s prospects in June with the E Coli scare taking hold.

 

 

APMEA - facing a compare of +5.7% (including a calendar shift which impacted results by +0.4% to +0.9%, varying by area of the world):

 

GOOD:  Above 5% will be received as a strong print despite the fact that it would imply a slowdown in two-year average trends of almost 100 basis points.  Nevertheless, the trend would be strong and it would also constitute a second consecutive month of strong growth after the disappointment of March.

 

NEUTRAL: Between 4% and 5% would be received as a neutral number.

 

BAD:  Less than 4% would imply a sharp fall off in two-year average trends and would be received poorly by investors.

 

 

Howard Penney

Managing Director


Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more