McDonald’s Corporation (MCD) posted weak comparable sales (comps) for the month of Feb 2014. Comps declined 0.3% in the month compared to an increase of 1.2% in January. The decline was due to weak comps in the U.S. and Asia/Pacific, Middle East and Africa (APMEA) regions, partially offset by comps growth in Europe. The decline was however less worse than the year-ago shortfall of 1.5%.
U.S.
Comps in the domestic market declined 1.4% due to inclement weather that stopped customers from venturing outside and cutthroat competition. Consumer preference toward healthy food is denting sales at fast-food restaurants like McDonald’s. Moreover, weak consumer spending also remains an overhang.
However, comps were better than the year ago as well as previous quarter decline of 3.3%, reflecting the company’s efforts to enhance customer service with its new menu launches and value offerings.
The company is focusing on customization, which includes rolling-out new prep tables at its more than 14,000 U.S. locations that will have many more toppings and sauces than the old tables. Meanwhile, the company also intends to bring in build-your-own-burger concept to its outlets, though not very soon.
Moreover, McDonald's has a strong breakfast lineup. Currently, the company is trying to boost breakfast revenues by introducing variations of items already on its menu instead of making new offerings. The introduction of too many items last year complicated kitchen operations and delayed orders. Overall, these initiatives would help in curbing the negative impacts of challenging industry conditions.
Other restaurateurs like Starbucks Corp. (SBUX), Burger King Worldwide, Inc. (BKW) and Yum! Brands, Inc. (YUM) are also focusing on improving and advertising their breakfast menu.
Europe
Comps increased 0.6%, better than the year-ago decline of 0.5%. However, growth was much lower than 2.0% in the previous quarter. Comps in Europe benefited from strong performances in U.K. and France, which were largely offset by the ongoing weakness in Germany. Varied menu options and extended hours at outlets boosted sales.
Asia/Pacific, Middle East and Africa (APMEA)
After posting comps growth of 5.4% in Jan 2014, comps at APMEA fell 2.6% in February. Also, the decline was worse than the year-ago decline of 1.6%, primarily due to weak performance in Japan. Also, the decline reflects a shift in the timing of the Chinese New Year as well as a weak performance in Australia.
Our Take
McDonald's February comps compared unfavorably with the prior month. In fact, APMEA, which posted solid results last month, turned out to be the weak link this time. It seems that the company’s efforts like introduction of healthy and fresh menu items and focus on customization are yet to reap benefits.
Meanwhile, weak comps will pressurize margins of this Zacks Rank #3 (Hold) company in the first quarter of 2014. Moreover, food costs remain a matter of concern. According to the U.S. Department of Agriculture, food prices will rise 3.5% in 2014 due to the ongoing drought in California.
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