McDonald's: A Billion Sold, but What about 2009?

McDonald's (MCD) has been one of our two "Pooring of America" themes (the other rhymes with Ballmart) [Do the Bottom 80% of Americans Stand a Chance?] and November same store sales continued to impress both domestically and across the globe.

These results are a bit weaker than October however [Nov 10: McDonalds Strong, Circuit City Out] when global sales were up 8.2% and domestic 5.3%. Europe is also down from 9.8% last month to 7.8% same store sales this month. If one is a very dire bear, you could theorize that as Americans (and Europeans?) become more cash poor they will simply opt for the grocery and start eating at home more to save even more money.

It will be interesting to watch the trend the next 3-5 months. It is too hard to extrapolate much from 1 data point, but if next month we see further deterioration in same store sales it will be interesting (and again, it is all relative as "weaker" same store sales at MCD are much better than anything in the industry) [Sept 19 2007 - Tough Times Ahead for Restaurants?].

I watch this company more for economic reasons than for company-specific reasons. The stronger dollar has actually hurt them (which we warned would happen to all US multinationals this summer), but at some point (when risk is embraced again in capital market) I expect the dollar to begin its move down. In fact, we saw some weakness, which is one of our tells for being "bullish" (since the dollar broke out upward, the US markets have basically imploded)

I continue to expect 2009 to be a good year for MCD as the economy worsens. However what will be interesting from a stock market perspective is will investors eventually abandon these two names as they "front run" an economic recovery (that will remain an elusive dream all year)? Remember, reality means nothing - only thesis.

Ironically a stronger US economy "thesis" could cause investors to abandon these stocks as they believe US consumers are ready to go back to their normal shopping habits. It will be an interesting tell in the year ahead simply in terms of perception; of course, on our thesis for the economy, next year will be wonderful for cheap eats. I also believe the investment professionals of America understate the damage the real estate/stock market has done to personal balance sheets, and that there is no "going back" to 2005-2006 spending levels for a long time, even if the economy "recovers". But I'm in a tiny minority camp on that one.

• Consumers hungry for cheap meals boosted worldwide sales at McDonald's Corp.'s established locations by 7.7 percent in November, more proof of how the fast-food leader is thriving in a downturn that has eaten into sales at its competitors. U.S. same-store sales -- or sales at locations open at least a year -- rose 4.5 percent, the company said Monday.
• The Oak Brook, Ill.-based chain said the increase came from strong sales of breakfast items, chicken sandwiches and the chain's value menu options. It comes even as U.S. consumers increasingly opt for eating at home to conserve cash.
• Morris noted that McDonald's positioned itself well even before the economy took a turn for the worse by adding healthier options to its menu and enhancing the quality of its food. Those changes have helped the chain expand its sales ahead of the rest of the industry for months. Those changes have helped make the chain more palatable to consumers looking for good food at lower prices.
• Total sales worldwide for the month ending Nov. 30 rose 1.9 percent. The increase would have been higher but a stronger dollar ate into gains. McDonald's, like other U.S. companies that operate overseas, translates its revenue into dollars, so a stronger dollar in comparison to other currencies can hurt revenue. Excluding currency effects, worldwide sales climbed nearly 10 percent. "Foreign currency is starting to be a drag on the company and that could continue for the next few quarters," Owens said.
• Same-store sales were also strong overseas, rising 7.8 percent in Europe and 13.2 percent in the Asia/Pacific, Middle East and Africa division. Overseas sales gains came from the chain's open early and close late -- if at all -- mantra and its breakfast menu.

[Nov 5: Keeping an Eye on....]

[Oct 10: What are Walmart and McDonalds's Telling Us?]

Disclosure: No position

Comments

[John Gordon:]

Trader has written a nice article, but not being an restaurant analyst, he misses a few points about McDonalds: He principally needs to think about unit growth.

McDonalds profits comes from franchising, company store operations and real estate transactions in that order.

McDonalds has been outperforming the restaurant sector and is practically the only company in the chain restaurant universe that has positive comp sales in both the US and Internationally. Its is because it has a great menu and great marketing support.

Should commercial real estate tank worldwide (as it is about to here in the US) that will be a drag on earnings.

But at the same time, a stronger dollar will help moderate commodity cost inflation, which will improve company operated unit level margins in the US.

And: the most important factor: the availability of credit for franchisees to continue expanding. The (AUV) sales to investment level for McDonalds is about 1:1. Buildings are not cheap. If no $ less franchisee expansion. Thats a big deal.


John Gordon
Restaurant Analyst
Pacific Management Consulting Group

2008 Dec 09 09:59 PM

[keithpiccir...:]

The "Golden arches" have that classic moat to protect their best of breed status. I never owned it other than in a fund, but feel a bit better with this stock than one of the tobacco or vice stocks. It is disappointing that they do have the kids brainwashed though . When their clown mascot is more recognizable than any political leader to a 5 year old what does that translate to?
Future sales stability and brand loyalty.
In 2002-3 when they were building too much and stores were dirty and lines too long, they regrouped. I think their Paul Newman's coffee has bitten into Starbucks share of the morning crowd which must have hurt already plunging sales numbers via the sub prime crisis and resultant job losses in the key states of Nevada, Ca. and Fla.
I grind my own beans every morning.
It took eons for Starbucks to figure out people don't want to wait too long while the patron in front of them glosses over the jazzed up treats behind the glass.
As always, good post.

2008 Dec 09 10:17 PM