A not-so-Big Mac in a downturn

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NEW YORK (CNNMoney.com) -- Don't assume that McDonald's is recession proof simply because it's a cheap place to eat.

McDonald's (MCD, Fortune 500) stock fell 7% in midday trading Monday after the No. 1 fast-food chain said slowing consumer spending was partly responsible for flat December same-store sales, a measure of sales at its U.S. restaurants open at least a year.

December's performance caps three months of decelerating U.S. same-store sales, which are a key gauge of retail performance.

For January, the company expects same-store sales to grow a mediocre 1.5%.

Investors clearly ignored the fact that the company posted better-than-expected fourth-quarter profit and revenue.

Retailing expert Burt Flickinger of consulting firm Strategic Resource Group chided retail analysts who recently pegged McDonald's as a recession-proof company based on the rationale that more consumers would migrate to cheaper fast-food menus from casual dining restaurants.

"All they would've had to do is go back and look at the historical trends," Flickinger said. "In the late 1980's and 90's when we had higher food and fuel price inflation, McDonald's [business] was hit in a meaningful way."

He said eating trends at the time indicated that consumers switched from McDonald's to buying ground beef and [burger] buns at the supermarket and cooking at home. Consumers also switched from meats such as beef, pork and poultry to eating more pasta.

"There really is no safe harbor in retail right now," Flickinger warned, adding that McDonald's U.S. sales slowdown should be a bleaker sign that American consumers may be in even worse shape.

"McDonald's will still get customers but they'll be buying more of the dollar- menu items instead of the number meals (sandwich, fries and drink), and many will bring their own bottles of water," Flickinger said.

During a conference call with analysts to discuss its fourth-quarter results, CEO Jim Skinner addressed McDonald's past performance during a recession.

"In 1991, we were a completely different company," Skinner said. "Our sales did drop off, but the U.S. back then accounted for 58% of our revenue. Now its 35%."

Skinner also said McDonald's would be making a [menu] "slight shift" to more value-priced offerings in 2008. The company's value meal items currently account for up to 14% of total revenue.

However, other executives dismissed any speculation that McDonald's was gearing up for an all-out burger price war.

Gary Bradshaw, portfolio manager with Hodges Capital Management, agreed with Flickinger's assessment that softness in McDonald's comparable sales indicated Americans were "feeling the headwinds from housing problems and gas and energy costs."

"But McDonald's itself will tell you that it is not recession-proof, but recession-resistant," Bradshaw said.

While some consumers will trade down to its menu instead of eating at a casual dining chain, Bradshaw said even McDonald's customers will now look to downgrade their options from a premium meal to a value-priced meal.

Morningstar analyst John Owens said the trading down on McDonald's menu probably also hurt same-store sales growth last month.

"Even though fast food is becoming a consumer staple, it's not entirely immune from a recession," Owens said, citing slowing sales at Hardee's and Carl's Jr. - both owned by CKE Restaurants (CKE) - as two other examples of a fast-food pullback.

Still, Bradshaw who owns 200,000 shares of McDonald's in his fund, hasn't lost his appetite for the fast-food chain.

"McDonald's can weather the storm if it keep executing its plan to win," he said.

That means the chain should focus more on their value meal offerings, and advertise value price products and convenience more heavily in the U.S.

"Currently 35% of McDonald's U.S. locations are open 24 hours," Bradshaw said.

Bradshaw also doesn't believe that consumer spending will fall off a cliff. "I expect consumers will dig us out of a hole," he said. "Yes, consumers are pinched but they will continue to spend."

Bradshaw said McDonald's international business, now more than 50% of sales, will help to offset weakness at home.

Also, Skinner told analysts that the $150 billion fiscal stimulus plan, which aims to put back rebates of as much as $600 into consumers pockets, could boost its business.

"Any opportunity to have cash in the hand is a good thing for consumers and certainly for McDonald's," he said.

--Bradshaw personally owns shares of McDonald's but other analysts quoted in the story do not personally own shares of McDonald's and their firms do not have an investment banking relationship with the company.