McDonald’s Corporation’s (MCD) comps declined 3.7% for the month of August, worse than a decline of 2.5% in July. Comps had increased 1.9% in the year-ago quarter. In fact, these were reportedly the worst comps posted by the company since 2003.
None of the regions could post positive comps. However, the majority of the decline came from the Asia/Pacific, Middle East and Africa (APMEA) region due to supplier issues in China. In fact, given the intensity of the China issue, the company expects its third quarter earnings per share to decline year over year by 15 to 20 cents. Share price of the company hit a new 52-week low in response.
Regional Update
Asia/Pacific, Middle East and Africa (APMEA)
Comps in the APMEA region declined 14.5%, worse than July comps decline of 7.3% and the year-ago comps decline of 0.5%. The results reflect the impact of recent food safety issues in China, which has adversely affected comps in China, Japan and certain other markets.
It was found that Shanghai Husi Food Co – a supplier of McDonald’s — was reusing meat that had fallen on the factory floor as well as mixing fresh and expired meat. This led to food safety concerns among McDonald’s customers, thereby negatively impacting comps. However, the company indicated that it is undertaking recovery strategies to regain customer confidence.
We note that Shanghai Husi Food Co was also a supplier for Yum! Brands, Inc. (YUM). Its China division comps are expected to fall 13% in the third quarter. (Read: Yum! Brands' Q3 China Comps to Fall 13% on Supply Issue).
Europe
Comps in Europe declined 0.7% that compared unfavorably with the year-ago increase of 3.3% and positive July comps of 0.5%. The dismal comps reflect weak performance in Russia where the company is facing pressure from consumer safety regulators who have reportedly kept more than 100 of McDonald’s restaurants under inspection. Also, they have reportedly shuttered a dozen of its units citing multiple violations of sanitary rules. (Read More: 100 McDonald's Units under Russia's Scrutiny; 12 Shuttered).
However, these negatives were partially offset by positive performance in the UK, owing to the company’s premium beef and chicken offerings, along with the ongoing expansion of breakfast and blended ice beverages.
McDonalds expects weak consumer sentiment to negatively impact sales and profitability in this market as well in the third quarter.
U.S.
Comps in the U.S. declined 2.8% against growth of 0.2% last year. However, the numbers were favorable compared with a decline of 3.2% in the month of July. Sluggish comps reflect difficult economic conditions and stiff competition. The region has not been able to post positive comps since Oct 2013 mainly due to heightened competition and a few unwise decisions that have slowed down service.
Competition has intensified for McDonald’s with food chains like Burger King Worldwide Inc. (BKW) offering discounts and Chipotle Mexican Grill, Inc. (CMG) providing healthier options compared to the processed food offered by McDonald’s. Moreover, the introduction of too many items in 2013 continued to impact service as well as orders. Given the current scenario, the company expects soft revenues and hence poor margins in the third quarter in U.S.
Our Take
The numbers indicate that the company is having a difficult time in all its operating regions. Nevertheless, it has reportedly taken a number of initiatives such as offering a value menu, shifting focus to more coffee-oriented beverages, and testing mobile ordering app to keep the guests engaged. However, we need to wait and see when these initiatives yield results and convert into positive numbers for this Zacks Rank #5 (Strong Sell) company.
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