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McDonald's January Comps Tumble

Zacks Equity Research

After a relatively decent performance in the fourth quarter of 2012, same-store sales (comps) at McDonald’s Corp. (MCD) dipped in Jan 2013, as expected by management. Apart from the persistent global economic turmoil and peer pressure, a tough year-over-year comparison resulted in the comps decline.

McDonald’s witnessed a downward movement in all its geographical segments apart from the U.S. on a yearly basis, especially in Asia.  

Comps at McDonald’s dipped 1.9% in Jan 2013 as against 6.7% growth in the year-ago quarter. System-wide sales inched up 0.3% and 0.7% in constant currencies in the month under review.

In the U.S., comps advanced 0.9% compared with 7.8% growth recorded in Jan 2012. Sustained focus on value as well as premium menu, breakfast offerings and the inclusion of the new Grilled Onion Cheddar burger to the Dollar Menu pushed up the comps.

In Europe, comps slumped 2.1% compared with an increase of 4.0% in the year-ago period. Strong performances in U.K., and Russia were overshadowed by a much weaker show in Germany, France and some other markets.

Comparable sales plunged 9.5% in Asia-Pacific, Middle East and Africa (:APMEA) as against 7.3% 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 with consumers dining out less frequently.

China made things worse for the company during the month. The shift in timing of the Chinese New Year from the prior-year quarter and the negative perception of the consumers about the quality of food offered by U.S restaurateurs dragged down January comps.

Notably, in Dec 2012, another U.S.-based eatery Yum! Brands Inc. (YUM) faced an allegation regarding the quality of chicken supplied to its KFC unit. Although food safety regulators in Shanghai cleared Yum!, McDonald’s apprehends the incident shattered consumer confidence about the quality of food offered by U.S. restaurateurs. In fact, decent performance from Australia could not contain the downward drift of the APMEA comps.

February Guidance

Going forward, management expects comps to suffer by approximately 3 percentage points in February since there was one extra operating day in the year-ago period due to the leap year. However, Chinese New Year should act as a tailwind in February this year.

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.

The company’s future menu innovations that are expected to hit the market in 2013 include Fish McBites, new beef and chicken products, a revamped breakfast menu as well as beverages.

One of the company’s recent products, “Mighty Wings”, currently on a test run, can see a national rollout in the near future. This is expected to provide the company with a shot in the arm.

However, McDonald’s is still vulnerable to a fragile macro economy. 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. McDonald’s currently retains a Zacks Rank #3 (Hold).

Some restaurateurs that are worth a look at the current level include The Cheesecake Factory Inc. (CAKE) and Burger King Worldwide Inc. (BKW) with a Zacks Rank #2 (Buy).

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