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As expected, the MCD management team did not share much at the GS conference.  The initial comments from the presentation suggest that they believe that the economy is to blame for the difficult sales trends. 

Despite a flurry of recent initiatives regarding new items and menu changes that might give support to some more optimistic forecasts, we remain comfortable with our thesis.  In fact, we’ve had a rather bearish take on this news, as we believe these initiatives could add to the operational complexities of McDonald’s stores.  Please see our recent note “MCD: A Pending Mighty Disaster” for more thoughts on this topic.

When questioned, management brushed aside any complexity concerns surrounding the Mighty Wings limited-time offer, citing their focus on training and hiring initiatives in anticipation of the rollout.  They also appeared excited about a “clever tie-in” with the NFL that should help promote the product.

On Tuesday, MCD reported that sales were solid in Europe despite a very difficult year-over-year comparison (+3.1% in August ’12).  The results benefited from continued strong performance in the UK and Russia, but France also improved. Importantly, France benefited from the Ramadan shift, while the UK benefited from the introduction of Smoothies & Frappes. 

Highlighted by the chart below, McDonald’s introduction of Smoothies & Frappes in the U.S. only had limited appeal and, we can argue, masked a decline in the core sandwich business.

MCD: LONG-TERM PICTURE TELLS A STORY - MCD chart

Howard Penney

Managing Director