McDonald’s sales improved on a sequential basis, partly due to calendar shifts, in the month of August. The US number was in line with our estimate while APMEA and Europe exceeded and missed our estimates, respectively. We do not read much into this one-month sequential improvement in the headline numbers. From here, compares ramp up dramatically through February. The downside in this stock is limited, in our view, but patience will be required for meaningful upside to come about; we are staying on the sidelines until catalysts emerge.
“Every mile is two in winter.”
Trend Still Corroborating Hedgeye Macro’s “Growth Slowing” Thesis
McDonald’s released August comparable restaurant sales growth numbers this morning. Versus consensus, Global, US, and Europe narrowly missed while APMEA posted a beat. We discuss these geographies in greater depth below. Given the significant calendar shifts that seem to have resulted in some distortion of the July and August headline numbers, we believe that looking at the average of the numbers for those months is useful when thinking about the underlying trend of the business. In all geographies, taking the average of July and August, and considering the resulting numbers versus prior trends, implies a continuation of slowing growth. Looking at the headline numbers on a month-by-month basis suggests a sequential recovery which, we believe, will not show up in the numbers from here on.
August was a “last chance saloon”, of sorts, for McDonald’s to post a strong sales headline. As we have written over the last few days, the coming dividend announcement offers management the opportunity to send a positive message regarding the state of the business but, looking at the compares MCD must lap from here suggests that it could be a long, harsh winter from a sales headline perspective.
The US print came in at 3%, in line with our expectations and 10 bps below the Street, as breakfast contributed the results. Any mention of beverages was conspicuous by its absence, despite the continuing advertising focus. The outlook for MCD’s US business suggests that headline numbers may be depressed for the next six months as compares ramp up and traffic is flat (price running at roughly 3%). McDonald’s will likely struggle to avoid posting some negative monthly comparable sales numbers for the US over the next six months. As we wrote on 4/23/12, “The evidence suggests that beverages are increasingly becoming a less important part of the vocabulary from McDonald’s’ management team. With that in mind, foremost in our thoughts is what the company’s strategy will be to maintain top-line momentum over the next few months.”
Europe comparable restaurant sales grew 3.1% in August, missing Hedgeye and Consensus expectations by 50 and 20 bps, respectively, as positive results in the U.K., France, and Russia were offset by Germany and certain markets in Southern Europe. The Olympics had, as we wrote in our preview, a positive impact on sales but, going forward, the macroeconomic environment remains a concern.
APMEA comparable restaurant sales grew 5.7% as strong results in Australia and China, along with the positive impact from the Ramadan shift, were offset by ongoing weakness in Japan. That APMEA was such an outlier to the downside in July, and to the upside in August, is likely due in no small part to the impact of the Ramadan calendar shift. The macroeconomic data in major APMEA markets continues to suggest difficult conditions for MCD and, taking the average of July and August comps, we believe that the Growth Slowing theme, articulate by the Hedgeye Macro team earlier this year, continues to manifest itself in McDonald’s sales trends in APMEA and elsewhere. We are not believers in any recovery narrative in MCD’s APMEA business from here. As the chart below indicates, compares step up meaningfully from here through January 2013.