McDonald's Back to Winning Ways

After relatively weak performances in the recent past and a monthly decline in October, same-store sales (comps) at McDonald’s Corp. (MCD - Analyst Report) bounced back in November 2012.

McDonald’s recorded growth of 2.4% in global comparable sales (comps) in November 2012 as against a 1.8% decline in the previous month. System-wide sales inched up 3.2% and 4.8% in constant currencies in the month under review.

However, the Oak Brook, Illinois-based company witnessed a downward movement in all its geographical segments on a yearly basis. The fast-food restaurant chain had posted a substantial increase of 7.4% in overall comps in the year-ago month. Apart from the persistent global economic turmoil and peer pressure, tough comparison led to the year-over-year decline in comps.

In the United States, comps advanced 2.5% compared with 6.5% growth recorded in November 2011. Sustained focus on value menu, breakfast offerings, strong beverage line-up and the limited time offer for Cheddar Bacon Onion sandwiches pushed up the comps.

In Europe, comps grew 1.4% compared with an increase of 6.5% in the year-ago period. Strong performances in UK, Russia and some other markets were partially offset by a rather tepid show in Germany.

Comparable sales nudged up 0.6% in Asia-Pacific, Middle East and Africa (APMEA) as against a sizeable growth of 8.1% growth in the year-ago month. Japan continues to be a dampener as the country is still recovering from the aftermath of last year’s earthquake and consumers are dining out less frequently. However, decent performances from Australia and some other markets have partially balanced this weak performance.

The company is presently heavily dependent on value options, variety in menu, locally relevant items as well as reimaging programs to drive sales ahead.

Our Take

Although the company is consistently striving to drive profits amid a challenging macroeconomic environment by resorting to value-proposition and gaining traction in coffee markets, it continues to face tough competition from peers like Yum! Brands Inc. (YUM - Analyst Report), The Wendy’s Co. (WEN - Analyst Report) and Starbucks Corp. (SBUX - Analyst Report).

Further, the prospect of value proposition amid curtailed pricing power and increased investments toward media can only restrain profits. The company could not increase price this year as it did last year. This has led to tougher comparisons.

At the end, we still believe that the company is heading the right way. However, it needs to launch a few major offerings at prices that are economically sensitive. McDonald’s currently retains a Zacks #4 Rank (short-term Sell rating). We maintain our long-term Neutral recommendation on the stock.