• It's Coming...

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

Every month we read the MCD press release on monthly sales trends expecting to see something more.  Typically, the opening comments from CEO Don Thompson consist of a few feel good statements that do little to convince us that the company is effectively addressing its issues.

This month, the opening statement is no different: “Around the world we are pursuing opportunities to provide our customers with their favorite food and drink, create memorable experiences, offer unparalleled convenience and become an even more trusted brand,” said McDonald’s President and Chief Executive Officer Don Thompson.  “We are intensifying our commitment to place the customer at the center of everything we do and are determined to create experiences that deliver the most meaningful impact for our customers and our business.”

Given the 1% decline in same-store sales this month in the U.S. and a seventh straight monthly decline, the company is trending to levels not seen since 2002 (see chart below).  The company also failed to drive positive traffic in this region, despite focusing the marketing calendar on its value message.  This reinforces what CEO Don Thompson said at a conference last month, inasmuch as “MCD is all about increasing top line sales and transactions, and not based on optimizing profitability.”  While the current trend isn’t nearly as bad globally, we believe the company still faces a significant uphill battle.

The stock has gained 6.2% over the last three months with the hope that the company would use its balance sheet to create shareholder value.  Management did announce a shareholder friendly move, but this is old news.  We believe the street will now turn its focus back to current business trends and the underlying issues that remain.

Industry conditions are difficult for a number of companies, but there are others that are thriving in this environment.  MCD’s core customers are in the lower-to-middle class cohort, which continues to feel the effects of limited income growth and a benign job environment.

While MCD has the marketing muscle and cash flow to muddle along for a few years, it will be constantly fighting an uphill battle against macro trends and the consumers’ shift away from traditional fast food.  In the end, we believe MCD will face a major restructuring to once again take share in the global QSR market.

MCD: Time For A Change - 111

MCD: Time For A Change - 222

MCD: Time For A Change - 333

MCD: Time For A Change - 444

Howard Penney

Managing Director

Fred Masotta

Analyst