Conclusion: I expect 3Q EPS and guidance to be helped by the weak dollar but a sales rebound is necessary in Europe and APMEA to restore confidence after a poor August showing. The US likely remained strong in September, up 5-6%, but I would expect trends to slow on a two-year average basis going forward as the incremental smoothie sales should fall off in the colder months. As it stands today, 2011 is going to be a challenge for MCD, particularly as reported comparisons get increasingly more difficult come March.
Having covered MCD for nearly 17 years, I was struck by the retirement of MCD’s head of investor relations Mary-Kay Shaw. Before Mary-Kay took the helm, Mary Healy sat in the hot seat during some very difficult times at the company, and she retired when the stock was in the mid-20’s; just before the company took off on this incredible run. Mary Healy had an unfortunate sense of timing! Perhaps the departure of Mary-Kay Shaw is a negative omen for MCD given the run the stock has been on and how difficult a year 2011 is shaping up to be. The way I see it, Mary-Kay Shaw may prove to have a better sense of timing.
McDonald’s is scheduled to report its September sales numbers, along with its 3Q10 earnings results, before the market open on Thursday, October 21st. September 2010 had one less Tuesday, and one additional Thursday, than September 2009.
Below I go through my take on what numbers will be received by the street as GOOD, BAD, and NEUTRAL, for MCD comps by region. For comparison purposes, I have adjusted for calendar and trading day impacts. To recall, August same-store sales numbers showed maintenance of trends in the United States and softness in Europe and APMEA.
U.S. (facing a 3.2% compare, including a calendar shift which impacted results by -0.2% to +0.2%, varying by area of the world):
GOOD: 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 ~15 bps on a sequential basis, when adjusting for calendar shifts, off of an already improved August trend. This would be a strong number when compared to the results thus far in 2010, with only July coming with a higher number: +5.7% (albeit aided by a positive calendar impact of 0.4% to 1.3%, varying by area of the world).
NEUTRAL: Roughly 4% to 5% implies two-year average trends that are approximately in line with those seen in August. I would be disappointed to see a number in the low end of this range, however.
BAD: Below 4% implies that two-year average trends deteriorated on a sequential basis from August. Given that the U.S. was the only market to maintain sequential two-year trends in August, it would be a bad sign for MCD if the U.S. market were to slow from here.
Europe (facing a difficult 6.9% compare, including a calendar shift which impacted results by -0.2% to +0.2%, varying by area of the world):
GOOD: A print of 2.5% or higher would be viewed positively because it would imply a sequential gain of ~100 bps in two-year average trends in Europe. While this would be the lowest print of the year outside of August, it is worth bearing in mind that August’s 2.2% print was on the back of a 3.5% print in August 2009; September 2009 saw a jump in same-store sales to +6.9% in Europe. A GOOD result in Europe would suggest that last month was a blip rather than a beginning of a more protracted malaise. A significant acceleration in two-year trends from August’s soft result would likely be required to convince the street.
NEUTRAL: A result of 1.5% to 2.5% implies sequential trends held relatively level in Europe during September. While even the low end of this range would imply a marginal increase in sequential two-year average trends, last month’s print of 2.2% was the lowest of the year.
BAD: Less than 1.5% would be the worst headline number since February 2009. While a sequential slowdown in two-year average trends will be avoided unless comps slip below +0.45%, such a significant decline from August’s print would be disconcerting. However, maintaining two-year average trends from August is not that encouraging either as it implies that the softness was not the result of a one-month issue.
APMEA (facing a 5.3% compare, including a calendar shift which impacted results by -0.2% to +0.2%, varying by area of the world):
GOOD: 4.5% or higher would imply a sequential increase of ~40 bps versus August. Following August’s disappointing print, and declining two-year average trends, this would be a positive for investors. While 4.5% is typically a low print for APMEA, September 2009 presents the most difficult comparison since May. The May 2010 result was +3.8%, which translated into a 50 bps gain in two-year average trends.
NEUTRAL: 3.5% to 4.5% would result in two-year average trends being maintained from their August levels.
BAD: Below 3.5% would imply a significant slowdown from the lackluster print in August and could raise investor concerns about MCD’s APMEA business.