Following a sharp, albeit somewhat expected, decline in two-year average trends in May in the U.S., MCD trends need to rebound.
McDonald’s is scheduled to report its June sales numbers, along with its 2Q10 earnings, before the market open on Friday. Relative to earnings, it is important to remember that 2Q10 is the last quarter of easy comparisons on the food and paper expense line. To recall, MCD reported its highest restaurant level margin in the U.S. in 1Q10 in nearly 16 years. The 210 bps of year-over-year margin growth was driven largely by lower food and paper costs, which management said “have allowed [them] to continue to grow margins, while holding the line on price increases. “Specifically, the company’s basket of goods decreased about 5% in both the U.S. and Europe during the first quarter, but full-year guidance assumes only a 2%-3% decrease in the U.S. and a slight decrease in Europe. Although food costs likely remained favorable in 2Q10 on a YOY basis, this benefit will go away in the second half of the year (with comparisons becoming increasingly more difficult as we trend through the year). Given the current unemployment picture and the still fragile state of the U.S. consumer, MCD may have to choose between driving traffic by keeping prices low and holding the line on margins.
June sales preview:
McDonald’s is scheduled to report its June sales numbers before the market open on Friday. On a year-over-year basis, June 2010 has one less Monday, and one additional Wednesday, than June 2009.
June’s results will likely reflect the impact of the company recalling the “Shrek Forever After 3D” collectable drinking glasses due to potential cadmium risk. For reference, MCD partly attributed the momentum in May in the U.S. to the popularity of its Shrek-themed Chicken McNugget and Happy Meal promotions. June also is the last month of the summer without any impact from the rollout of the new smoothie beverages. The impact of the McCafe smoothies, and the heat wave that gripped most of the country in early July, will be seen next month.
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 two-year average trends (adjusting for calendar shifts).
U.S. (facing a relatively easy 1.8% compare, including a calendar shift which impacted results by -2.0% to +0.2%, varying by area of the world):
GOOD: 4.5% or greater would be perceived as a good result because it would imply that the company was able to improve U.S. two-year average same-store sales (by 30 bps) on a sequential basis. Given the current unemployment picture, together with the recent drop in consumer confidence, a 30 bps sequential increase would be meaningful. While May’s U.S. result was less-than-stellar, and therefore does not pose a lofty sequential hurdle for June, a 4.5% number would be the best result this year.
NEUTRAL: Roughly 3.5% to 4.5% implies two-year average trends that are roughly in line with those seen in May.
BAD: Below 3.5% would indicate that two-year trends have deteriorated sharply on a sequential basis. May had already seen a decline from April; further decline would be decidedly negative and would imply a two-year trend below 3%, a level not seen since January.
Europe (facing a 4.7% compare, including a calendar shift which impacted results by -2.0% to +0.2%, varying by area of the world):
GOOD: 6.5% or above would be a good result for McDonald’s European operations. This print would imply a roughly level-to-slightly lower two-year average trend with May but would still be in the 6%+ area which is traditionally the “GOOD” level for Europe. The two-year trend in Europe accelerated rather significantly in May from the April level so maintaining that trend would be viewed positively. Although the heavy involvement of the European nations in the World Cup may have had somewhat of an impact on McDonald’s sales, economic issues in Europe – such as unemployment – are still weighing heavily on consumer behavior.
NEUTRAL: 5.0% to 6.5% would imply two-year average trends roughly in line with what we saw in the months preceding May’s tick up in trend.
BAD: Below 5.0% would signal that two-year trends have declined sharply from May and decidedly back into the sub-6% region.
APMEA (facing an easy +0.3% compare, including a calendar shift which impacted results by -2.0% to +0.2%, varying by area of the world):
GOOD: A print of +9% or higher would be a good result for the APMEA branch; this number would imply that two-year average trends held steady or improved in June. APMEA is lapping an easy compare of +0.3%. The slowdown in APMEA in June last year was attributed to weakness in Japan and China, with China running negative comparable store sales.
NEUTRAL: Comparable-store sales of 8% to 9% would result in two-year average trends slightly lower than those seen in May, but 8% still represents a strong comparable-sales number when compared to the past three months.
BAD: Below 8% would result in a significant sequential deterioration in two-year average trends and, therefore, would be perceived as a negative result.
Howard Penney
Managing Director
