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It seems that McDonald’s Corp.’s (MCD - Analyst Report) same-store sales (comps) are finally back on track as the world’s biggest burger chain witnessed 1.9% global comps growth in August, up from 0.7% growth recorded in the previous month. Most importantly, its Europe segment emerged out as a star performer in the month, driving overall comps.

Comps were soft in the U.S. while Asia/Pacific, Middle East and Africa (APMEA) comps continued to decline.  Overall comps growth was, however, below the year-ago level of 3.7% due to persistent global economic turmoil and peer pressure in the U.S. System-wide sales were up 2.8% and 4.7% in constant currencies in the month under review.

U.S.

In the United States, comps increased a mere 0.2% compared to 3.0% growth recorded in Aug 2012 and 1.6% growth in Jul 2013. While the Monopoly promotion had its share of success, weak consumer spending environment and cut-throat competition in the restaurant industry adversely affected sales.

McDonald's has been striving hard to scale up and adjust value messaging as well as introduce menu options, irrespective of dayparts and price tiers, to relate to faltering consumer confidence.

Europe

In Europe, comps grew 3.3%, higher than 3.1% growth in the year-ago period and a decline of 1.9% in the previous month. As expected, UK and Russia performed strongly. France too put up a good show this month thus reinvigorating European comps. However, Germany continued to remain tepid.

The rollout of blended-ice beverages in the U.K., strong premium food events in U.K. and Russia and focus on core products in France were the high points of the month.

APMEA

APMEA continued to underperform with a 0.5% decline in comparable store sales, in stark contrast to 5.7% growth recorded in the comparable period of last year. Comps were hurt by the continued weak results in Japan, Australia and China. Japan is still recovering from the aftermath of last year’s earthquake with consumers dining out less frequently. Also, the lingering impact of the avian flu outbreak in China earlier this year put Chinese comps under pressure.

However, the decline in comps was narrower than last month’s decline of 1.9%, probably due to the positive results from the shift in timing of Ramadan. Going forward, everyday affordability, locally-relevant menu and convenience will play a key role in reviving comps in APMEA. Breakfast will also be a crucial growth catalyst. The number of Asians eating breakfast at restaurants is 50% less than the U.S. average and thus holds immense potential.

Our Take

The key takeaway from the monthly result was the turnaround in European comps, indicating an improving trend in the region and purchasing power of the guests.

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.

The restaurateur is leaving no stone unturned to bounce back amid a challenging macroeconomic environment by resorting to value-proposition and menu innovation. The latest initiative includes test of mobile ordering app for its US stores.

McDonald’s, with a Zacks Rank #4 (Sell), is facing headwinds like decelerating growth in some regions of Asia and stiff competition in the U.S. markets. Also, it still has less pricing power in Europe. Hence, although the improvement in comps has just begun, 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. (BKW - Analyst Report), all with a Zacks Rank #2 (Buy).
 

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