McDonald’s Corp. (MCD) posted global comparable sales growth of 3.1% in May, on the heels of strong beverage sales as well as new menu offerings and promotional activities. However, the fast-food chain operator witnessed a relatively downward movement on a year-over-year basis across all regions but Asia/Pacific, Middle East and Africa (APMEA). Comparable sales growth stepped down from 4.8% in May 2010 and 6.0% from April 2011.
In the United States, comparable sales growth dipped to 2.4% from 3.4% in May 2010. The national launch of Frozen Strawberry Lemonade, the popularity of Fruit & Maple Oatmeal, McCafe shakes and the continued demand for McDonald’s signature beverage as well as core offerings were key contributors in the month.
Europe registered a sluggish growth momentum of 2.3%, down 340 basis points (bps) year over year. Sequentially, the growth fell 420 bps. The moderate growth in the month stemmed from stronger performance in France, Russia and the U.K., offset somewhat by weak spending in Germany.
Unique premium menu offerings, including McWraps and 1955 Burger, sustained focus on multiple-tier menus, limited-time food events like U.K.’s Great Tastes of America campaign, new products across all price tiers, and a restaurant reimaging program contributed to the month’s performance.
On the other hand, driven by healthy performances in China and many other markets, the reported month’s comparable sales grew 50 bps 4.3% in APMEA. Continued focus on core value menu offerings, variety in menus as well as locally relevant items drove the segment.
System-wide sales increased 12.0%, or 4.7% in constant currencies, in the month under review.
Our Take
Although comparable sales were soft in May, we do not see this as a major worry. Going forward, McDonald’s U.S. plans to brew more McCafe options to become a beverage destination, and leverage core products like Chicken McNuggets and the burger line-up.
The company has pointed out that coffee represented only 2% of sales two years ago and over 6% of sales now, that too with room for additional growth. Management plans to continue promoting the McCafe line-up with expectations for continued benefits from Frappes and Smoothies in 2011. Beverages are also important outside the United States. In China, the company had more than 145 McCafes and more than 1,350 in Europe.
On the flip side, the competitive environment is heating up. Japan, one of the prime markets for McDonald’s, will also experience the re-entry of Wendy’s/Arby’s Group Inc. (WEN). In order to tap the beverage market, many players like Jamba Inc. (JMBA) are enhancing their beverage line. High rate of unemployment and increased gasoline prices also remain other causes for concern.
McDonald’s currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. We are also maintaining our long-term Neutral recommendation on the stock.
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