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McDonald's October Comps Disappoint

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McDonald’s Corp. (MCD - Free Report) recorded a decline of 1.8% in global comparable sales (comps) in October 2012, as against year-ago growth of 5.5% and 3.7% in the previous month. McDonald’s witnessed a downward movement in all its geographical segments on a yearly basis.  

System-wide sales slipped 0.8% but nudged up 0.6% in constant currencies in the month. This was the fast-food restaurant chain’s first decline in sales since March 2003.

Apart from the persistent global economic turmoil and peer pressure, tough comparisons arising from the calendar shift led to the comps decline.

In the United States, comps declined 2.2% compared with 5.2% growth recorded in October 2011. This was in the wake of a slowdown in discretionary spending along with heightened competition. Sustained focus on value menu, Monopoly promotion and the recent launch of the Cheddar Bacon Onion premium sandwiches were unable to contain the downward drift.   

The rate of decline in Europe was the same as in the U.S., which was in stark contrast to the 4.8% growth recorded in October 2011. A strong performance in UK was undone by a much weaker show in many markets.

Comparable sales dropped further in Asia/Pacific, Middle East and Africa (APMEA), recording a decline of 2.4% as against 6.1% growth in the year-ago month. Japan continues to be a dampener; the country is still recovering from the aftermath of last year’s earthquake as consumers are eating out less frequently. To make things worse, China and Australia have also delivered unhealthy performances.   

As things stand now, the company is heavily dependent on value options, variety in menu, locally relevant items as well as reimaging programs to drive sales ahead.  

Our Take

Oak Brook, Illinois-based McDonald’s has performed rather weakly in the recent past, and now the decline in October comps has added to its woes. The implementation of austerity measures in Europe owing to the sovereign debt crisis, commodity cost inflation in the U.S. and decelerating growth in Asia compel us to have a bearish outlook on the stock at the current level.

Although the company is consistently striving to drive profits in these difficult times by resorting to value-proposition and gaining traction in coffee markets, it continues to face tough competition from peers like Yum! Brands Inc. (YUM - Free Report) and The Wendy’s Co. (WEN - Free Report) in all aspects of its business. Most of the restaurants began to innovate menu regularly, offer at low prices and last but not least, revamp restaurant’s interiors.

Further, excessive reliance on the value-menu to retain customers amid an anemic economy could prove detrimental to margins if exercised for a longer period. The prospect of value proposition in the backdrop of curtailed pricing power and increased investments towards media can only restrain profits. The company has had to overlap price increases enforced last year in the latter part of 2012, adding to tougher comparisons.  

The effects of the super-storm Sandy on McDonalds’ November sales have yet to be assessed. If comps grow at all in November, year-over-year comparison will still be tough given its much stronger year-ago performance.

In the end, we still believe that the company has strong value. McDonald’s currently retains a Zacks #3 Rank (short-term Hold rating). We are also maintaining our long-term Neutral recommendation on the stock.

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