MCD – MORE VICTIMS IN EUROPE

Last month MCD reported that February system wide sales were -4.6%, down from +2.6% in January. MCD reported that February same-store sales in Europe declined 0.2% YOY (up 4% excluding the calendar shift due to leap year). Adjusting both the reported January and February numbers for calendar shifts, this 4% number in February represented a slowdown from January’s 5.1% growth. On a sequential basis from 4Q08, average underlying comparable sales trends for 1Q09 have declined 3.0% in Europe. And, the news from Europe is not getting any better. Today it was reported that German business confidence fell to the lowest level in more than 26 years in March. Additionally, the slump in demand has forced German companies to scale back production and cut jobs, pushing the economy into its worst recession since World War II.

The Research Edge MACRO team believes that the Eurozone looks nothing short of a disaster, as the economic crisis sweeping Central and Eastern Europe continues to claim more victims. The political issues facing many countries in Europe are spreading into the labor market, impacting the economies of Europe.

I don’t think MCD is immune!

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."

The slowing in Europe’s February sales was 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 and looks to slow further in March.