MCD - MCD's Top-Line Momentum Continues...Will Margins Follow?

McDonald's global same-store sales were up 7.7% in May, reflecting strong results in each of its segments, primarily Europe and APMEA, up 9.6% and 9.7%, respectively. A calendar shift, which added an extra weekend to this year's May results relative to last year, benefited this 7.7% number by about 2% (this shift will reverse in June, negatively impacting results by the same magnitude). All in, this is still a great number.
  • U.S. - MCD's U.S. same-store sales were up 4.3%, which represents an uptick from recent trends (-0.8% in March and +2% in April). The 2-year trend increased to 5.9% in May from up 2.8% in April. Pricing in the U.S. has been running up about 3%-3.5% so the 4.3% number implies about a 1% increase in transaction counts, which is an improvement off of March and April's implied negative traffic results.
  • What is driving those transactions? The company stated on its 1Q08 conference call that although it is seeing more activity on the Dollar Menu that it remains consistent in the 13%-14% of sales range. Since then, an Ad Age article quoted Gregg Watson, VP of marketing at McDonald's USA , saying that Dollar-menu sales in the U.S. are now roughly 15% of sales, on the high end of the 13%-15% range that's been typical during the past 5 years... This increased range signals that these Dollar Menu transactions are becoming a bigger part of MCD's U.S. sales mix. NPD data points to a similar trend within the entire QSR segment, as the percent of transactions made on deal have grown from 21.5% in 3Q07 to nearly 23% in 1Q08.
  • MCD's higher U.S. same-store sales are translating into an increase in less profitable transactions. That being said, MCD's U.S. company restaurant margins have declined in the last 5 quarters with 1Q08 falling 20 bps on top of a 30 bp decline in 1Q07. Margins declines in light of sales growth typically highlights a real problem and this seems to be the trend at MCD's U.S. business, particularly if 2Q08 marks the first time these dollar-menu transaction move outside of the company's historical 13%-14% of sales range.