Back to top

Analyst Blog

Despite the persistent global economic turmoil and peer pressure, McDonald’s Corp.’s (MCD - Analyst Report) same-store sales (comps) increased slightly in July backed mainly by improved performance in the U.S. Among the three geographical segments – U.S., Europe and Asia/Pacific, Middle East and Africa (APMEA) – only the U.S segment scored positive numbers in July. The recent upside came as a pleasant surprise, given management’s expectation of flat global comps in July announced at the second quarter conference call.

Global comps nudged up 0.7% in Jul 2013 as against flat comps in the year-ago month. System-wide sales were up 1.6% and 3.3% in constant currencies in the month under review.

U.S.

In the United States, comps advanced 1.6% compared to a 0.1% decline recorded in Jul 2012. Sustained focus on value menu, solid breakfast offerings, and a variety of chicken options bolstered comps growth. The rollout of the late night daypart offering also had its share of success.
The premium chicken McWraps, the Big Mac and Chicken McNuggets delighted consumers. Strategic expansion of its four pillars – chicken, beef, breakfast and beverages helped the Oak Brook, Ill.-based company drive sales.

Europe

In Europe, comps declined 1.9% higher than a dip of 0.6% in the year-ago period. A rather tepid show in Germany, France and southern Europe outweighed stronger performances in UK and Russia.
Although McDonald’s has managed to survive the brunt of higher social charges for a length of time, presently the company has little pricing power in Europe. This is due to a slowdown in consumer discretionary spending, which has constricted the informal-eating-out (IEO) industry in Europe. McDonald's has been striving hard to scale up and adjust value messaging and daypart options to relate to low consumer confidence.

APMEA

APMEA also underperformed with a 1.9% decline in comparable store sales. Reduction in comps was steeper than last year’s decline of 1.5% hurt by the shift in timing of Ramadan. Japan, Australia and China continued to remain weak. Japan comps were flat in the month as the country is still recovering from the aftermath of last year’s earthquake with consumers dining out less frequently.

Our Take

Although the world’s biggest burger chain has been faltering for quite some time now due to a fragile macro economy, changing eating habits and cutthroat competition, we still believe that the company has strong value. It is consistently striving to bounce back amid a challenging macroeconomic environment by resorting to value-proposition and menu innovation.

Currently carrying a Zacks Rank #4 (Sell), McDonald’s is slowly but steadily moving in a positive direction, at least in the domestic arena. The company is facing headwinds like implementation of austerity measures in Europe and decelerating growth in some regions of Asia. Hence, as far as foreign shores are concerned, things are yet to look up for this iconic brand.

Other players in the restaurant industry, which look attractive at current levels, include The Wendy’s Co. (WEN - Analyst Report), Domino’s Pizza Inc. (DPZ - Analyst Report) and Burger King Worldwide Inc. , all carrying a Zacks Rank #2 (Buy).
 

Please login to Zacks.com or register to post a comment.