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McDonald’s Corp. (MCD - Analyst Report) witnessed a 7.5% upside in global comparable sales (comps) for the month of February. The fast-food chain operator witnessed an uptrend in comps both on a year-over-year basis as well as sequential basis. February sales results reflect the benefit of about three percentage points from an extra day of operation due to leap year. By comparison, overall comps rose 3.9% in February 2011 and 6.7% in the last month. Barring the United States, the fast-food restaurant operator witnessed a relatively downward movement across the U.K. and APMEA on a yearly basis.
Geographically, the United States was the major contributor to the month’s growth followed by the Europe and the Asia/Pacific, Middle East and Africa (APMEA) region.
In the United States, comps grew 11.1% which was much higher than 2.7% recorded in February 2011. The comps in February 2011 were backed by strong customer demand for Chicken McBites. Core offerings like Filet-O-Fish, breakfast menu, McCafe beverage line-up as well as everyday value options were the other major contributors in the month.
Europe saw a growth of 4.0% as opposed to 5.1% in February 2011. The growth was backed by stronger performance in the U.K. and Russia. Locally relevant menu choices, promotional food events, sustained focus on fourth-tier menus and a restaurant reimaging program were responsible for the month’s performance. However, inclement winter in certain markets adversely impacted the segment's overall February results.
The reported month’s comparable sales inched up 2.4% in Asia/Pacific, Middle East and Africa (APMEA) versus 4.0% in the year-ago month. Healthy performance was palpable only in Australia. However, China was the dampener due to the shift in timing of the Chinese New Year. Weakness in Japan was also a spoiler. Continued focus on daypart value options, variety in menu as well as locally relevant items drove the segment.
System-wide sales increased 9.4% (9.7% in constant currencies) in the month under review.
The Oak Brook, Illinois-based company continues to strengthen its McCafe line-up, which has become its growth engine. Beverages are also important outside the United States. While internationally, McCafe is focused on hot beverages, McDonald’s has identified a number of markets to test or add Real Fruit Smoothies and Frappes over the next few years, starting with Australia.
McDonald’s has efficiently endured the recent economic turmoil in Europe. Despite the implementation of austerity measures, no signs of drastic slowdown have been witnessed so far.
The company is also hopeful on the faster-rising inflation of food at home compared to food away from home might provide some space for additional pricing actions in the near term. Remodeling remains another bright spot on McDonald’s 2012 agenda.
We expect comps in March to benefit from a favorable calendar this year as it includes one extra weekend compared to March 2011 and restaurant companies seasonally drive higher sales during the weekends.
On the flip side, increased commodity pressures as well as wages in the US, ongoing economic uncertainty in Europe and its lingering impact throughout the globe can lower the first-quarter’s operating margin. VAT increases in some countries in Europe like France, Portugal, and Hungary remains a cause of concern as these areas boasts a number of McDonald’s outlets in Europe. In addition, high levels of unemployment are projected to continue for the foreseeable future.
Further, according to management, the most significant inflationary pressure will be felt in the first half of the year, especially in first-quarter 2012.
McDonald’s currently retains a Zacks #3 Rank (short-term Hold rating). We are maintaining our long-term Neutral recommendation on the stock. The company’s competitors include The Cheesecake Factory Inc. (CAKE - Analyst Report) and Yum! Brands Inc. (YUM - Analyst Report).