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Muted May Comps at McDonald's

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McDonald’s Corp. (MCD - Free Report) witnessed a 3.3% upside in global comparable sales (comps) for the month of May that nudged up from the year-ago level of 3.1% but remained flat sequentially.

The fast-food restaurant operator witnessed a relatively upward movement in two geographical segments namely the United States and the U.K. on a yearly basis. While the United States and the Europe performed managed to surpass year-ago performance, the Asia/Pacific, Middle East and Africa (APMEA) region was the main laggard in the month, recording a decline in comps.

In the United States, comps grew 4.4%, quite higher than 2.4% recorded in May 2011. The comps in May 2012 were buoyed by strong customer demand for the newly launched Blueberry Banana Nut Oatmeal. Core offerings like breakfast menu, the McCafe beverage line-up, especially the Cherry Berry Chiller along with everyday value-menu were the other major contributors in the month.

Europe saw a growth of 2.9% as opposed to 2.3% in May 2011. The growth was backed by stronger performance in the U.K., France and Russia offset somewhat by a weaker show in Germany. The efficient mix of premium as well as value-menu and a restaurant reimaging program were responsible for the month’s performance.

The reported month’s comparable sales dropped 1.7% in APMEA versus a growth of 4.3% in the year-ago month. A somewhat healthy performance was palpable primarily in Australia. However, Japan continues to be a dampener in the month. Slowdown in China also accounted for lackluster performance in APMEA. Continued focus on daypart value options, variety in menu as well as locally relevant items are the strategies McDonald’s is using in APMEA.

System-wide sales increased 1.2% (5.6% in constant currencies) in the month under review.

Our Take

The Oak Brook, Illinois-based company’s recent comps performance were not on par with investors’ hope. Management noted earlier that Japan's results were not smooth as the country continues to recover after last year’s natural calamities and consumers are less dining out.

According to management, the company is caught up with difficulties like implementation of austerity measures in Europe, increasing commodity costs in the US and decelerating growth in Asia. McDonald’s has so far efficiently endured the recent economic turmoil in Europe. However, management believes the implementation of austerity measures will now put pressure on its top and bottom lines. With the focus on value proposition along with less pricing power, margins will likely be hassled, going ahead. In addition, high levels of unemployment are projected to continue in the foreseeable future.  

The apprehension can be validated by the cut in analysts’ estimate for the upcoming quarter as well as fiscal year’s earnings. Over the last 7 days, 5 out of 23 analysts deducted their estimates while 6 out of 25 analysts cut the same for fiscal 2012. No upward movement in estimates was seen in that period.

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 - Free Report) and Yum! Brands Inc. (YUM - Free Report) .

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