MCD – Slowing Global Sales Trends

MCD reported February same-store sales that came in better than street expectations in every geographic region except APMEA. That is where the bulk of the good news ended.

On a sequential basis from 4Q08, average underlying comparable sales trends for 1Q09 (adjusted for both the January and February calendar shifts) have slowed in every region except the U.S. Globally, same-store sales in January and February have slowed to 5.3% from 7.2% in 4Q08. This slowdown was driven by a 3.0% and 3.8% sequential decline in Europe and APMEA, respectively, while the U.S. has held in at about 5%.

Going forward, the March numbers will continue to be impacted by timing/calendar shifts, which will hurt results in each region by approximately 1.0% to 1.8%. Additionally, the timing of Easter, which falls in April this year versus March last year, will hurt Europe comparable sales by about 2% and should help U.S. numbers by less than 0.5%. For reference, MCD is lapping its easiest monthly and quarterly U.S. same-store sales comparison from 2008 in March and 1Q so MCD’s U.S. numbers should continue to look good in the near-term. I continue to believe, however, that the company’s McCafe strategy will not provide the incremental sales necessary in the U.S. to maintain this level of sales strength throughout 2009.

U.S. margins have been negative for the past 8 quarters and I expect this trend will continue as the company drives increased foot traffic with its dollar menu at the expense of average check (mix was negative each quarter in 2008) and margins. As stated in today’s sales release, commodity costs are expected to continue to pressure margin comparisons in the first quarter, which could further increase the declines in the U.S.

MCD reported that Europe’s February results were hurt by weakness in Germany, which is a trend that is continuing from the fourth quarter. For reference, Europe was MCD’s largest geographic region on a sales basis in 2008, representing 42% of total company sales, and France, Germany and the U.K. accounted for 55% of Europe’s revenues. That being said, the sequential slowdown in reported quarter-to-date same-store sales in Europe is of significance. During MCD’s 4Q earnings call, management stated that about 40% of Europe’s comparable sales number has been driven by traffic, which implies that average check makes up the remaining 60%. We knew going into 1Q09, that average check in Europe could come under pressure as management stated that it would not implement the same level of pricing in 1H09 that it typically would “because you’ve got to consider how the consumer is feeling and during these times the consumer is looking for deals and we want to make sure that we’re out there.” Specifically, management stated that the “German consumer is very sensitive to pricing.”

MCD attributed APMEA’s underperformance to weakness in China, which the company said was impacted by the timing shift of the celebration of the Chinese New Year (fell in January this year versus February last year). Although I am sure the timing shift did impact the YOY comparability, I would expect that underlying trends in China, which slowed during the fourth quarter, have remained weak. We learned in early February that MCD, like its competitors in China, cut its prices by more than 30% in response to the economic slowdown. I don’t think the company would have cuts its prices so drastically if demand was holding up.

Management also stated in its press release today that “unprecedented volatility in foreign currency exchange rates and commodity costs will continue to pressure revenue and margin comparisons in the first quarter.” The company stated that if foreign currency rates remain at current levels, that currency translation will negatively impact EPS results by $0.07-$0.09. The company had previously said that it expected the 1Q09 currency impact to be similar to that of 4Q08 when it hurt EPS by $0.07. The negative currency impact on total company systemwide sales has grown sequentially from 4Q08 through February. At the same time, however, systemwide sales growth on a constant currency basis has slowed rather significantly in February to 3.2% from 9.1% in January. This caused reported systemwides sales growth to turn negative in February.

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