Will the company be able to maintain momentum in the U.S. from February’s strong results?

McDonald’s is expected to report before the market opens tomorrow and, along with its earnings for the first quarter, management will be disclosing details on its March sales trends.  On a year-over-year basis, there should not be any significant calendar impact other than March 2009 having on extra Sunday compared to March 2010.  In Europe, however, results in March 2009 were adversely affected by the shift in Easter-related holidays from March 2008 to April 2009. 

As usual, I would like 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 a 5.6% compare, including a calendar shift which impacted results by -1.0% to -1.8%, varying by area of the world):

GOOD:  Any result greater than 1.0% would be received as a good result because it would imply that the company was able to maintain its momentum from February when you account for the impact from the 2008 leap year.  For reference, a 1.0% print would result in a slight acceleration in 2-year average trends from last month to about 3.8% when you account for last year’s calendar shift.  MCD’s 2-year average trends typically far-exceeded 3% but during the past six months, trends have been disappointing.

NEUTRAL:  Roughly flat to 1.0% implies 2-year average trends are about even with February, but still remain above prior month trends.

BAD:  A negative result would imply that February’s stronger result was only a 1-month aberration.  A -1% result would point to

two-year average trends that again fell below 3%.

Europe (facing an easy 2.9% compare due to Easter holiday shift, which impacted March ’09 by 2% and a calendar shift which impacted results by -1.0% to -1.8%, varying by area of the world):

GOOD:  Above 6% would signal a return to 6.0%-plus 2-year average trends when you account for both of last year’s calendar impacts, after coming in a little lighter for the last few months. 

NEUTRAL:  +3.5% to +6% would signal that 2-year trends are about even with both February levels and the prior few months.  While this level is neutral with respect to sequential trends, it would indicate continued softness in the Europe business compared to the most part of 2009 when 2-year average trends were consistently in the 6.0% to 8.0% range.

BAD:  Below +3.5% would indicate that trends have sequentially deteriorated further from February levels. 

APMEA (facing a 5.4% compare, including a calendar shift which impacted results by -1.0% to -1.8%, varying by area of the world):

It is important to remember that MCD began its significant promotional activity related to accepting coupons issued by other QSR competitors at its China stores (as we wrote about on 2/26/10) on February 24th.  This promotion was expected to run through March 23rd so it will be interesting to see the impact on March numbers.

GOOD: Better than 7% would signal that 2-year average trends have remained strong for three consecutive months after December’s disappointing 2-year average number.  

NEUTRAL:  Roughly 5% to 7% would indicate that 2 year-trend slowed slightly from the prior two months.  Some deceleration may be expected following February when the company’s results were helped by the celebration of Chinese New Year.

BAD: Below 5% would imply 2-year average trends that have slowed significantly from the prior two months.  Below 1% would point to trends even with the weak results we saw in December.

Howard Penney

Managing Director