McDonald's Corp. (MCD) has posted global comparable sales growth of 5.1% in July on the back of strong beverage sales as well as core 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 Europe. Comparable sales growth stepped down from 7.0% in July 2010.
In the United States, comparable sales growth dipped to 4.4% from 5.7% in July 2010. The recently introduced Mango Pineapple Smoothie along with the popularity of Frozen Strawberry Lemonade and McCafe shakes boosted the beverage line-up. The chain also continues to feature $1 soft drinks and sweet tea in the majority of its stores, which will drive its future revenue. Continued demand for core offerings, including Chicken McNuggets and McDonald's market-leading breakfast, were the other major contributors in the month.
Europe maintained a growth momentum of 5.3% year over year. Quarterly growth was backed by stronger performance in the U.K., Russia and Germany. Unique premium menu offerings, including premium beef and chicken options, sustained focus on multiple-tier menus, new products across all price tiers, and a restaurant reimaging program contributed to the month’s performance.
Driven by healthy performances in China and many other markets, the reported month’s comparable sales grew 4.0% in Asia/Pacific, Middle East and Africa (APMEA). Continued focus on daypart value options, variety in menu as well as locally relevant items drove the segment. However, on a yearly basis, same store sales declined 6.1 percentage points. Slower recovery in the earthquake-ridden Japan and GDP decline in Australia remained headwinds in this region.
System-wide sales increased 14.0%, or 7.1% in constant currencies, in the month under review.
Our Take
We are impressed with the company’s business in Europe, which remained unperturbed despite the implementation of some austerity measures. 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 covers 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 throughout 2011. Beverages are also important outside the United States.
On the flip side, the competitive environment is heating up. One of the major peers of McDonald’s, Yum! Brands Inc. (YUM) is all set to beef up its portfolio in Russia and India, the two prime markets of McDonald’s. Although the scale of Yum! lags far behind McDonald’s in those markets at the current level.
Additionally, the company will face stiff competition from The Wendy's Company (WEN) in the breakfast menu segment. Wendy’s targets to have about 1,000 restaurants serving its new breakfast by the end of this year. High rate of unemployment, mounting commodity inflation and increased gasoline prices also remain other areas for concern.
McDonald’s currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
MCDONALDS CORP (MCD): Free Stock Analysis Report
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