Heat wave + smoothies = good comps…right?
McDonald’s is scheduled to report its July sales numbers before the market open on Monday. July 2010 had one less Wednesday, and one additional Saturday, than July 2009.
Consumer confidence indicators in the United States, along with other factors such as unemployment, continue to bifurcate from the “recovery” theme that has manifested in equity markets. In light of this, expectations for QSR are somewhat tempered. However, in light of the reportedly successful smoothie launch and a favorable calendar shift, I am cautiously optimistic about MCD’s top line performance in the U.S. for July.
Turning to the bottom-line, I recently wrote a note titled, “MCD – THE MCDONALDS CONUNDRUM” (7/26). MCD is faced with the difficult task of balancing the negative impact of TC-driving lower menu prices on margins (think Dollar Menu at breakfast) with the benefit of declining commodity prices fading in 2H10 and then potentially going away in 2011. It will be interesting to see whether there is any hint of imminent action on the part of McDonalds to tweak its strategy ahead of time as this conundrum becomes more obvious. However, management did state that food away from home CPI and food at home CPI would be two indicators it would monitor closely when considering taking price.
Below, I go through my take on what numbers will be received as GOOD, BAD, AND NEUTRAL, for MCD comps by region. For comparison purposes, I have adjusted for calendar and trading day impacts. To recall, management stated on its 2Q10 earnings call that momentum continued into July with global comparable sales trending in line with or better than second quarter sales (2Q10 global comp was +4.8% with the U.S. +3.7%, Europe +5.2% and APMEA +4.6%).
U.S. (facing a relatively easy 2.6% compare, including a calendar shift which impacted results by +0.6% to +0.7%, varying by area of the world):
GOOD: 5% or greater would be perceived as a good results because it would imply that the company was able to improve U.S two-year average same-store sales (by 35+ bps) on a sequential basis. While this is a fairly high print by recent standards, taking into account management’s statements on global comparable sales performing in line with or better than 2Q in July, and the U.S. smoothie launch exceeding expectations, it seems reasonable to hold an optimistic view on U.S. comps this month.
NEUTRAL: Roughly 4% to 5% implies two-year average trends that are approximately in line with those seen in June.
BAD: Below 4% would indicate that two-year trends have deteriorated significantly on a sequential basis. While June’s results showed a degree of resilience in the U.S. market, a decline in trends would be disappointing given management’s marginally positive commentary around global trends and, specifically to the U.S., the smoothies sales which were “blowing away high-end projections”, according to management on the 2Q earnings call.
Europe (facing a 7.2% compare, including a calendar shift which impacted results by +0.6% to +0.7%, varying by area of the world):
GOOD: 5.5% or better would be a good result for MCD’s Europe operations as it would imply a sequential improvement (of about 95 bps) in two-year average trends. 5.5% would also signal a return to the traditional “GOOD” territory of 6% two-year average trends for Europe. Management estimates that the World Cup negatively impacted June sales by ~1%; the strong progress made by the European teams makes it likely that the impact will carry over into July. Another important point to bear in mind for Europe is the July lapping of the VAT benefit in France. Management stated that the lower VAT on dine-in sales in France had benefited France sales by a mid-single digit number during the year ended June 30. Obviously for Europe as a whole this will be a smaller impact and management was aware of this catalyst when they announced guidance on July 23rd.
NEUTRAL: 3.5% to 5.5% would imply two-year average trends roughly in line with results seen in June, which had declined rather significantly from the prior month.
BAD: Below 3.5% would imply two-year average trends that have declined sharply from June’s results. I would point out that the street’s current estimate of 2% would fall in this range. Management did highlight some potential issues in Europe, as I outlined above, but the street’s estimate seems very conservative, particularly given the company’s comments on global trends in July.
APMEA (facing a relatively easy 2.1% compare, including a calendar shift which impacted results by +0.6% to +0.7%, varying by area of the world):
GOOD: A print of 7% or more would imply a sequential improvement in two-year average top line trends.
NEUTRAL: Comparable-store sales of 5.5% to 7% would result in two-year average trends roughly in line with trends seen in June. Like in Europe, two-year average trends in APMEA decelerated in June.
BAD: Same-store sales of 5.5% or less would imply a sequential slow down from June’s trends. It is also possible, that if the number is 4.5% or below, that two-year trends may even fall lower than December’s trough two-year average number. The street’s 4.0% estimate again falls in the “BAD” range and implies a deceleration in trends in July from the already depressed level in June.