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Comps at MCD Slump Again in Feb

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Same-store sales (comps) at McDonald's Corp. (MCD - Free Report) continued to decline even in the second month of the year as the company witnessed a downward movement in all its geographical segments in Feb 2013.

Apart from the persistent global economic turmoil and peer pressure, a tough year-over-year comparison resulted in the comps decline in February. Comps at McDonald’s dipped 1.5% in Feb 2013 as against 7.5% growth in the year-ago quarter and a decline of 1.9% in Jan 2013.

However, the decline in comps was less than anticipated. Management expected comps to suffer by approximately 3 percentage points in February. Excluding the negative calendar shift of 3.2 percentage points, as the year-ago period had an extra operating day due to the leap year, global comparable sales were up 1.7%

System-wide sales inched up 1.1% in constant currencies and fell 0.9% on a reported basis in the month under review.

In the U.S., comps fell the most by 3.3% compared to 11.1% growth recorded in Feb. 2012 mainly due to negative calendar shift.

Excluding this impact, comps in the U.S. were flat against robust prior-year performance. The new Grilled Onion Cheddar burger, the Hot 'n Spicy McChicken, McDonald's value lineup and the limited-time Fish McBites were the month’s highlights.

In Europe, comps fell 0.5% compared with an increase of 4.0% in the year-ago period. Excluding the adverse calendar shift due to the leap year, comps grew 2.7%. Strong performance in U.K., and Russia was the high point in debt-ridden Europe. Focus on unique premium menu as well as value proposition and the expansion of Europe's breakfast and restaurant operating hours drove the segment’s performance.

Comparable sales decreased 1.6% in Asia-Pacific, Middle East and Africa (APMEA) as against 2.4% growth in the year-ago month. Excluding the tough comparison arising out of leap year 2012, comps were up 1.5%. The sluggish performance in Japan was offset by a much better performance in China and Australia.

The shift of the Chinese New Year in February this year boosted sales in the month. We believe the negative perception of the consumers about the quality of chicken offered by U.S restaurateurs like McDonald’s and Yum! Brands Inc. (YUM - Free Report) did not seem to affect sales at McDonald’s this time.

Notably, in Dec 2012, Yum! Brands faced an allegation regarding the quality of chicken supplied to its KFC unit. Although food safety regulators in Shanghai cleared Yum!, McDonald’s apprehended that the incident shattered consumer confidence about the quality of food offered by U.S. restaurateurs.  

Our Take

Although McDonald’s has faltered in the recent past, we still believe that the company has strong value. The company is consistently striving to bounce back amid a challenging macroeconomic environment by resorting to value-proposition and menu innovation.

However, McDonald’s is still vulnerable to a fragile macro economy. The Oak Brook, Ill.-based chain is facing extreme challenges on its home turf. Some of its new menu offerings like Fish McBites, which the company relied heavily on, could not stir up comps.

The company has little pricing power in Europe due to wavering consumer confidence. With increased focus on value proposition along with less pricing power and increasing investments toward media, margins might suffer, going ahead. On a positive note, Asia-Pacific appears to be better placed. McDonald’s currently retains a Zacks Rank #3 (Hold).

Some restaurateurs that are worth a look at the current level include Chuy's Holdings Inc. (CHUY - Free Report) and Burger King Worldwide Inc. with a Zacks Rank #2 (Buy).

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