Despite weakness in the U.S., McDonald’s Corporation (MCD) posted better-than-expected comparable sales (comps) for the month of Jan 2014. At its fourth quarter earnings call, the company guided flat year over year comps for the month of January. However, comps increased 1.2% in the month. The increase was much better than a decline of 1.9% in the year-ago period. The improved comps reflect solid performance in the international markets (Europe and Asia/Pacific, Middle East and Africa (APMEA)), partially offset by a poor performance in the U.S.
U.S.
Comps in the domestic market proved to be a weak link for the company. Comps fell 3.3% in January compared to an increase of 1.9% in the year-ago period. The dismal performance was attributed to inclement weather conditions that stopped customers from venturing outside. Moreover, U.S. customers continued to spend cautiously. As per Edward Jones & Co., consumers paid credit card bills for their Christmas spending, and therefore were not willing to dine out.
In order to regain momentum and attract diners, McDonald’s pinned its hopes on the revamped Dollar Menu comprising burgers that were priced more than a dollar. It was designed to boost the company’s profits without pushing away customers who were accustomed with paying a dollar for different items. However, it is yet to find favor with diners.
Moreover, the company introduced healthy and fresh menu items, like chicken wraps and breakfast sandwiches made with egg whites. However, these initiatives are yet to reap benefits. As per a regulatory filing, the company’s customer traffic at established locations declined 1.6% in the U.S. in 2013.
Like McDonald's other restaurant chains like Burger King Worldwide Inc. (BKW) and The Wendy's Company (WEN) are also busy introducing new items and achieving operational excellence in order to improve traffic trends.
Europe
Despite the challenging macroeconomic conditions, the region reported comps growth of 2.0%, much better than a decline of 2.1% in the year-ago month. The improved results reflect strong performance in the U.K. and France. Particularly, new drink offerings in the U.K and less-expensive snacks in France led to the positive performance in Europe. However, these results were partially offset by a weak performance in Germany.
Asia/Pacific, Middle East and Africa (APMEA)
After posting a decline of 9.5% in the year-ago month, comps in the region were up 5.4% in January.
The significant improvement reflects solid results in China due to a shift in timing of the Chinese New Year. It also seems that consumer sensitivity related to the prior year supply chain issue in the chicken industry is almost over. Solid results in other markets like Japan and Australia also contributed to overall comps.
Our Take
It seems that the company is trying to offset weakness in the domestic market with growth in overseas markets. A perfect example of this is the opening of its first restaurant in the largely untapped market of Vietnam. According to data from market research firm Euromonitor International, Vietnam's fast-food industry is small but growing rapidly.
However, one cannot ignore the weakness in the U.S. economy, which is affecting consumer confidence. McDonald’s presently has a Zacks Rank #4 (Sell). Fiesta Restaurant Group, Inc. (FRGI) is a better-ranked stock in the same sector with a Zacks Rank #1 (Strong Buy).
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