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We Scale Back, McDonald's Cleans Up

Sunday, January 25, 2009

In a financial crisis this complicated, it's nice to know that some simple economic truths endure. In a depression, people stop eating out. In a recession, they still eat out, but they don't go to upscale restaurants. They go to McDonald's.

The global burger leader is set to release its fourth-quarter earnings tomorrow, and they are expected to be delicious.

According to a poll of analysts by Thomson Reuters, the Golden Arches will report fourth-quarter profit of 83 cents a share, a whopping -- oops, Big Mac-size -- gain of 14 percent over the fourth quarter of 2007.

Revenue for 2008 is expected to come in at $23.6 billion, up from 2007 revenue of $22.8 billion, according to analysts polled by FactSheet Research.

In a down economy, Mickey D's sales figures have been up. Analysts call this the "trade-down" effect -- customers can feed their families at McDonald's for $20 instead of blowing twice that at a casual-dining restaurant, such as Applebee's or Chili's.

McDonald's same-store sales in November were up 4.5 percent in the United States, 7.8 percent in Europe and 13.2 percent across its Asia-Pacific, Middle East and Africa division. So much for McDonald's representing What the Rest of the World Hates About America.

It has been said that in a recession, it makes sense to buy or hold the stocks of companies that make things that people eat, drink, smoke or clean with.

But it's clearly not just the trade-down effect that has buoyed McDonald's stock -- a look at its competitors shows that.

As shares of McDonald's have risen 10 percent since this time last year, shares of Burger King Holdings have lost about 7 percent of their value and shares of Wendy's/Arby's Group have lost about 40 percent. The success may be partly attributable to McDonald's recent ad campaigns promising fresher, healthier ingredients than its rivals.

Also, aside from some notable misfires (Remember the McDLT, sold in that polystyrene suitcase?), McDonald's has been able to pick away at peripheral rivals while thriftily sticking to its knitting. For instance, instead of launching an expensive new chicken line, McDonald's slaps pickles on a chicken sandwich, calls it "Southern Style" and goes after Chick-Fil-A.

All of which means one thing: Tasty McProfits.

-- Frank Ahrens

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