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    MARKET EDGES

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Topline trend will be difficult to sustain.

McDonald’s is expected to report its May sales numbers before the market open on Tuesday.  On a year-over-year basis, May 2010 has one less Friday, and one additional Monday, than May 2009.  

Today McDonald’s announced that it is recalling the “Shrek Forever After 3D” collectable drinking glasses due to potential cadmium risk; the impact will be felt in the June 2010 sales data. 

Getting past top line trends and looking at cost trends in 2Q10, the focus will be on commodity prices.  On the margin, the biggest benefit the company has seen from lower commodity prices is behind them.  In 1Q10, MCD’s basket of goods in the U.S. decreased 5% (this compares to the 6.7% increase in first quarter 2009). For the full year 2010, the outlook in is for costs to be down 2-3%.

Below, I am providing 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 largely on 2-year average trends.

U.S. (facing a 2.8% compare, including a calendar shift which impacted results by -0.4% to 1.4%, varying by area of the world):

GOOD:  Any result greater than approximately 5.5% would be perceived as a good result because it would imply that the company was able maintain U.S. 2-year average same-store sales only slightly below those of March and April but considerably above the lower levels of the preceding months.  While usually I look for 2-year average trends to be maintained or surpassed for a “GOOD” result that would demand a print of 7% for May.  In light of the current unemployment picture, and given that a 7%+ print has not been attained since February ’08, I am looking for levels clearly above the 2%-3% region that MCD’s U.S. same-store sales languished in – on a 2-year average basis – from August ’09 through February ’10. Last month’s number resulted in a 2-year average trend of 5%, which equaled that of March, the best 2-year number since February 2009.  In order for May’s number to imply a 2-year average trend that sustains the divergence from August-February’s slump, a 5.5% print will be needed. 

NEUTRAL:  Roughly 4.5% to 5.5% implies 2-year average trends that are not reverting to the pre-March slump, but are still below those seen in March/April.

BAD:  Any comparable store sales number below 4.5% would imply a significant sequential slowing from the 2-year average numbers of March and April and would also indicate business trends declining towards the level seen during the difficult months at the end of 2009 and beginning of 2010. This would be a meaningful disappointment and would likely be received negatively by investors.

Europe (facing a 7.6% compare, including a calendar shift which impacted results by -0.4% to 1.4%, varying by area of the world):

GOOD:  Above +6% would signal a 2-year average trend equal to that seen in April; this would solidify the significant sequential jump in 2-year average sales numbers seen from March to April.  For Europe I am maintaining the usual standard because 6% comparable store sales results have occurred as recently as March 2010.

NEUTRAL: +5% to +6% would signal that 2-year trends are slightly below April levels but still above the +6%.  

BAD:  Below +5% would indicate that trends have sequentially deteriorated from April levels. 

 

APMEA (facing a 6.4% compare, including a calendar shift which impacted results by -0.4% to 1.4%, varying by area of the world):

GOOD: Better than 5.0% would signal that 2-year average trends have improved sequentially from last month’s rebound from the dip seen in March (adjusting for the calendar impact).  This would instill further confidence that March was an anomaly and that the strong performance seen at the start of the year is sustainable.

NEUTRAL:  Roughly 3% to 5% would indicate that 2 year-trends were level on a sequential basis from April.

BAD: Below 3% would imply 2-year average trends that have slowed further from the level seen in April.  Below 1% would point to trends in line with the trough 2-year average trends indicated in December.

Howard Penney

Managing Director