McDonald’s Corp. (MCD - Analyst Report) witnessed global comparable sales (comps) growth of 3.7% in August 2012, as against the year-ago level of 3.5% and a flat performance in the previous month. The fast-food restaurant operator witnessed a relatively upward movement in all geographical segments except the United States on a yearly basis.
The improved performance was led by easy comparison as well as focus on value options along with some premium products and reimaging program. System-wide sales nudged up 1.2% but grew 6.2% in constant currencies in the month under review.
In the United States, comps growth of 3.0% was less than 3.9% recorded in August 2011. Continued focus on value menu helped drive segmental revenue. However, comps in the reported month were hit by the persistent economic turmoil.
Europe witnessed a growth of 3.1% compared with 2.7% in August 2011. Stronger performances in UK, France and Russia were partially offset by a weaker show in Germany and most of the Southern European markets. UK benefited from the London Olympics. However, German traffic still remains extremely value sensitive in a cutthroat competitive setting.
The reported month’s comparable sales surged 5.7% in APMEA versus a decline of 0.3% in the year-ago month. China and Australia put up a somewhat healthy performance in APMEA. Continued focus on daypart value options, variety in menu as well as locally relevant items tried to drive the segment. Moreover, the favorable impact from the shift in timing of Ramadan in July led to an easy comparison. Ramadan was entirely in August last year.
However, Japan continues to be a dampener as the country is struggling to recover from the after-effects of last year’s natural calamities restricting consumers to dine out.
After a discouraging comps performance for quite some time, Oak Brook, Illinois-based McDonald’s seems to inch forward towards improved results. Although emphasis on extra-value proposition and easy comparison benefited its monthly performance to a great extent, we remain impressed with the company’s consistent efforts to emerge out of its tough time. Its recent announcement of posting calorie content on restaurant and drive-through menus to attract a more health-conscious traffic is one such effort.
However, we prefer to remain on the sidelines until we find some evidence of continued same store sales momentum. Besides, we believe that it will be difficult to maintain the impetus as the company will lap much stronger year-ago comps in late 2012.
Management had also noted that some of its measures are short-term and could prove detrimental to margins if exercised on a long-term basis. With the focus on value proposition along with less pricing power and increasing investments towards media, margins will likely suffer, going ahead.
Presently, the company has little pricing power in Europe due to the wavering consumer confidence and shrinkage in the Europe's IEO industry. In Europe, the company will overlap lower pricing in the latter half of the year with year-ago level price increases.
In the U.S. too, the inflationary environment constricts the company’s ability to exercise pricing action due to an increasing food-away-from-home inflation index.
Hence, the implementation of austerity measures in Europe owing to the sovereign debt crisis, commodity cost inflation in the U.S., decelerating growth in Asia and currency headwinds compel us to have a bearish outlook on the stock, at the current level.
McDonald’s currently retains a Zacks #3 Rank (short-term Hold rating). We are maintaining our long-term Underperform recommendation on the stock. The company’s competitors include The Cheesecake Factory Inc. (CAKE - Analyst Report) and Yum! Brands Inc. (YUM - Analyst Report).
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »