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    MARKET EDGES

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MCD is expected to report February 2010 sales before market open on Monday, March 8th.  On a year-over-year basis, there should not be any significant calendar impact in the U.S. as February 2009 included the same number of weekend days, and total days, as February 2010.  However, February 2009 sales trends present easy compares because of the extra day in the prior February due to 2008 being a leap year.  As a result, there are easy comparisons across the board for MCD’s segments.  This is especially true in APMEA because of the Chinese New Year calendar shift.  I expect headline numbers to appear better than the underlying trends actually are.

As is customary, I wanted to provide my view on comparable sales ranges for each of MCD’s geographic segments as indicators of what I would rate as GOOD, NEUTRAL, or BAD results based significantly on 2-year average trends.

U.S. (facing an easy +2.8% compare which was negatively impacted by 400 bps by the extra day in February 2008 due to the leap year):

It is important to note that February marks the first full month with the breakfast dollar menu as MCD began national advertising on January 11th.  Easy comparisons in February will help to make this breakfast dollar menu look successful, but I have some concerns as I outlined on 2/24. 

Weather likely had an impact on trends in February as cited by CKR this morning relative to the sequentially weaker results at Hardee’s.

While any positive result might be perceived as encouraging in light of recent results, it would not necessarily be sufficient to result in acceleration in 2-year trends.

GOOD:  Roughly +2.5% or higher would be required to result in sequential growth in 2-year trends from January to February.  While MCD is accustomed to higher 2-year trends than the 2.4% seen in January, any pickup would be seen as a positive given the softening of trends over the past number of months.  While a +3% number would be well received, it would still not yield a 2-year average trend of 3% (a level usually surpassed by MCD’s U.S. business until recently). 

NEUTRAL: +1.5% to 2.5% implies 2-year average trends that are roughly in line with what we observed in January.  From a sentiment perspective, a print in this range could be viewed favorably in light of recent declines in comparable-store sales.  In fact, it would be the best U.S. comp since September’s +3.2%.   Appropriately, the compare for February is also the easiest since September.            

BAD: Below 1.5% would signal a deceleration in 2-year average trends from January, and would be nearing a new low for MCD 2-year average trends.  Again, this bad result would still be a significant improvement from what we have seen in recent months on a 1-year basis, but 2-year average trends must be considered to get a better read on underlying trends.

Europe (facing an easy -0.2% compare, 4.0% excluding the impact from lapping the 2008 leap year):

GOOD: Better than 13% would result in a sequential acceleration in 2-year average trends from January.  Softness in Germany continues to manifest itself in MCD’s Europe top-line results.  Our Hedgeye Macro research suggests that softness in Germany is likely to persist in the near-term.  For the last three reported months, 2-year average trends have been below “normal”, and it would take a +13% result to move away from 5% to 6% and into the 6% to 7% range. 

NEUTRAL: +11% to +13% would imply 2-year average trends that are roughly even with the last 3 months.  While these numbers are impressive on a 1-year basis relative to the +4.3% result in January, it is important to remember the easy -0.2% compare from February 2009 versus the +7.1% compare the company lapped in January.

BAD: Below 11% would signal a clear decline from January’s already unimpressive 2-year average trend of 5.7%.  Again a 10% print, for example, would be the highest comparable sales number MCD has released for Europe since October 2008, but I believe that any optimism would be misguided in this case.

APMEA (facing an easy +0.7% compare, or 4.1% excluding the impact from lapping the 2008 leap year):

It is important to remember that the February number will be helped by the calendar shift of the Chinese New Year from January last year to February this year.

GOOD: Better than 13% would result in a 2-year average trend of 7% or higher, which would be in line with the 7.3% 2-year trend seen in January.  Considering that November and December’s 2-year average trends were at 6.1% and 3.4%, respectively, a February print that would maintain 2-year average trends above 7% would be a positive result for MCD APMEA.

NEUTRAL: + 11% to 13% would imply that 2-year average trends slowed somewhat from January levels but still remain in the +6% to +7% range. 

BAD: Anything below 11% would be a bad result for MCD’s APMEA segment as it would point to a significant sequential decline from January’s 2-year average trends.   This range would also point to a sign of continued weakness in China.  The recent promotional activity being undertaken by MCD in China, which we wrote about on 2/26, began on February 24th. I expect some impact from this, but March will be affected more meaningfully.