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McDonald’s sales results were announced this morning and while trends were maintained in the United States, they flattered to deceive.  Europe and APMEA showed softness.

In my preview note posted early yesterday, I outlined some GOOD, BAD, and NEUTRAL ranges for MCD same-store sales in August.  It is worth noting that a calendar shift from August 2009 to August 2010 (one less Saturday and one additional Tuesday) adversely affected results by approximately -0.6% to -1.2%, varying by area of the world.

In the U.S., August sales increased 4.6%.  In my preview, I wrote that any print between 4 and 5% would be a NEUTRAL result because two-year average trends would be roughly in line with those in July.  The print of +4.6% implied a sequential slowdown in reported two-year average trends, however, on a calendar-adjusted basis, top-line performance actually accelerated sequentially in August by ~58 bps.  Looking forward to September, a result of approximately +4.5% in the U.S. would be required to maintain two-year trends when adjusting for calendar shifts.  September 2009 included no meaningful calendar shift and I would expect the same in 2010 (although this may vary by area of the world).

Europe is undoubtedly the fly in the ointment for August results; same-store sales came in at +2.2% versus consensus +5.2% and my NEUTRAL range of +5.5% to +6.5%.  This is certainly a concern for investors given the renewed attention on Europe’s sovereign debt and financial sector woes.  On a calendar adjusted basis, two-year average trends sequentially decelerated by ~185 bps.  Tellingly, the reported same-store sales number for MCD was the worst since February 2009.  Looking forward to September, a result of roughly +0.5% in the U.S. will be required to maintain two-year trends, on a calendar-adjusted basis, since August was so weak. 

APMEA’s same-store result came in at +7.8%.  This was slightly below my NEUTRAL range of 8 to 10% and above the Street at +7.4%.  Two-year average trends in August decelerated, on a reported basis, to +3.7% which is considerably below the +6.1% two-year average trend in July and just above the disappointing +3.2% two-year average trend in June.  Looking forward to September, a result of roughly +3.7% in APMEA will be required to maintain two-year trends next month when accounting for calendar shifts.

All in all, MCD’s results in August were disappointing.  Despite +4.6% being a decent number in this retail environment, it is important to note the composition of the results – particularly in the U.S. – being levered to smoothie sales which are likely to slow as we move into fall and colder weather.  Comparisons in September step up sequentially from August in all three geographical areas; it will be interesting to see whether the company can bounce back in September.

Howard Penney

Managing Director