Three weeks after the discovery of mad cow disease in the U.S., shares of restaurant companies are trading close to prescare levels as chains continue to report solid sales trends. On Thursday, McDonald's ( MCD) said it had a 12.2% increase in same-store sales in December, topping expectations. The stock finished just under its closing price prior to the mad cow news, having risen above it last week. McDonald's said it expects to earn 10 cents a share in the fourth quarter, in line with Wall Street estimates, after a charge of 25 cents a share for restructuring initiatives. Almost a month after the USDA said it discovered bovine spongiform encephalopathy, or BSE, in a cow in Washington, the restaurant industry appears to be unharmed by the development. According to a recent Gallup poll, 80% of Americans haven't changed their consumption habits since the news. Wendy's last week said that U.S. same-store sales were up 9% in December from a year ago, adding results were strong in the final week of the month, after mad cow was revealed. Further, steakhouse chain Rare Hospitality ( RARE) raised its fourth-quarter guidance, citing better-than-expected results in December. The company said it had "no material change" in sales because of the mad cow discovery. Mad cow disease, or BSE, is a deadly brain disease found in cattle, which devastated the U.K. beef industry during periods of the 1990s and has cropped up in other parts of Europe. Canada last year also reported its first case. BSE has been connected to a human form of the disease, known as variant CJD, which has killed more than 100 people, primarily in the United Kingdom, in recent years. Against that backdrop, a day after the USDA announcement on Dec. 23, restaurant stocks plunged with McDonald's and Wendy's losing as much as 5%. But even then, few believed the selloff would be prolonged. "We'd be buyers of restaurant stocks on the weakness as we don't expect to see lasting earnings impacts, unless several more cases of mad cow were discovered," said Larry Miller, an analyst at Prudential, in a note.
At the time, Miller and others said there could be a silver lining in the mad cow scare -- lower beef costs for restaurants. But on Jan. 5, Outback Steakhouse ( OSI) said it still expects costs to be up as much as 10% in 2004. "We hoped Outback, who had not contracted its beef needs before the mad cow discovery, might benefit from the precipitous drop in beef prices. It didn't," said Miller, in a research note last week. Even though cattle futures are still down 16%, analysts see little gain in that for restaurants. "We still believe most restaurant operators are factoring in higher commodities for 2004," said Andrew Barish, an analyst at Banc of America Securities, in a research note. Meanwhile, restaurants may face higher beef prices abroad as bans of U.S. imports remain intact. Wholesale Australian beef in Japan has reportedly surged more than 40% since the mad cow outbreak. "It is too early to say whether or not it will have an impact," said Lisa Howard, spokeswoman for McDonald's. The fast-food giant uses beef from Australia and New Zealand for its Japanese operations.