MCD JULY SALES PREVIEW

On its last earnings call, the McDonald’s management team did not strike a positive tone, saying that “persistent unfavorable economic conditions are weighing on consumer sentiment and spending”.

 

We wrote on April 24th that we saw “plenty to be concerned about” regarding the outlook for McDonald’s top-line trends.  Many of those concerns are persisting; weak economic conditions in Europe and the U.S. are front and center while our thesis on McDonald’s value proposition in the US weakening has not changed.  The company is now pricing – at roughly 3% – in line with Food Away from Home CPI whereas last year that difference was roughly -50 basis points.  Even with price of that level on the menu, we are unconvinced that traffic trends will be sufficient to bring the overall July comp in line with consensus for the U.S. division.

 

 

Macro Growth Slowing Matters

 

We called this out on July 20th in our 2Q preview note but it is worth posting again.  We won’t be using the charts below to make month-to-month calls, but in terms of the trends that we can expect to see in McDonald’s U.S. and APMEA businesses over the next few months, it is worth referring to these charts. 

 

MCD JULY SALES PREVIEW - industrial production vs MCD comps

 

 

Sales Preview

 

Below we go through what we would view as good, bad, or neutral comparable restaurant sales numbers for McDonald’s three regions.  For comparison purposes, we have adjusted for historical calendar and trading day impacts (but not weather).

 

Compared to July 2011, July 2012 had one less Saturday, one less Friday, one additional Monday and one additional Tuesday.   Ramadan starting early – impacting 10 days of July versus 0 last year – will also contribute to the shift that management has guided to as -1.8%. 

 

U.S.  – facing a compare of 4.4%, including a calendar shift of between -0.4% and +0.7%, varying by area of the world.

 

GOOD: A print above 2.5% would be considered a good result, as it would imply a sequential acceleration in calendar adjusted, two-year average trends.  It is important to note that this would imply negative traffic but, as management noted on the 2Q12 earnings conference call, a trading day shift and the year-over-year change in the timing of Ramadan will result in the headline number understating actual business trends.  We are anticipating a print of 2% for MCD U.S. comparable restaurant sales in July.

 

NEUTRAL: Same-restaurant sales growth of between 1.5% and 2.5% would be considered neutral by investors as it would imply calendar-adjusted two year average trends roughly level with June.  While June’s trends were at (historically) trough levels, we believe that the market is expecting the underlying business in July to have fared similarly to June. 

 

BAD: A print below 1.5% would imply a sequential deceleration in calendar-adjusted two-year average trends and could spur some analysts to further lower their FY12 EPS expectations.

 

MCD JULY SALES PREVIEW - mcd us preview

 

 

Europe – facing a compare of 5.3%, including a calendar shift of between -0.4% and +0.7%, varying by area of the world.

 

GOOD: A same-restaurant sales number in excess of 2.5% would be considered a strong result because it would imply, on a calendar-adjusted basis, two-year average trends roughly in line with those seen in June and above the weaker trends seen in May. 

 

NEUTRAL: 1.5-2.5% would be a neutral result for Europe as it would imply trends roughly in line with the year-to-date average.  While this is not a positive, given the commentary management provided on the earnings call on July 23rd, it seems likely July was another difficult month for MCD in Europe.

 

BAD: A print below 1.5% would imply a significant sequential deceleration in calendar-adjusted, two year average trends. 

 

MCD JULY SALES PREVIEW - mcd europe preview

 

 

APMEA – facing a compare of 4.0%, including a calendar shift of between -0.4% and +0.7%, varying by area of the world:

 

GOOD: Same-restaurants sales growth of 2.0% or more would be received as a good result as it would imply a sequential acceleration in calendar-adjusted two-year average trends.  On July 23rd, management cited weakness in Japan and consumer caution in China, particularly in tier-one cities where McDonald’s stores are most heavily concentrated. 

 

NEUTRAL:  A print between 1.0% and 2.0% would be considered neutral for investors as it would imply calendar-adjusted two year average trends roughly flat with June. 

 

BAD: Below 1.0% would imply a sequential deceleration in calendar-adjusted two-year average trends from June to July.  While expectations are low, at 1.56% according to Consensus Metrix, we believe that further deceleration would be a red flag for investors.

 

MCD JULY SALES PREVIEW - mcd apmea preview

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


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