Burger giant McDonald’s Corporation’s (MCD) comps for the month of January fell 1.8%, in line with the company’s expectation of posting negative comps. This marked the eighth consecutive monthly comps decline for the company. Comps decline at Asia/Pacific, Middle East and Africa (APMEA) overshadowed a modest recovery in the U.S. and Europe.
It compared unfavourably with analysts’ expectation of a decline of 1.2% and the year-ago comps growth of 1.2%. As a result, the share price of the company fell approximately 1.4%.
Asia/Pacific, Middle East and Africa (APMEA)
The region continued to remain a weak link for the company. Comps in the region declined 12.6%, comparing unfavourably with comps growth of 5.4% in the year-ago quarter. Performance in Asia was hurt by consumer issues in Japan as a human tooth and vinyl were reportedly found in its food. This came at a time when the company is trying to regain consumer confidence in China after it encountered a food safety issue in Jul 2014. This involved one of McDonald’s suppliers who was allegedly found using expired meat.
Amid these difficulties, the Big Mac seller had to contend with offering small sized portions of fries to Japanese customers as labor disputes in the U.S. hampered potato exports to Japan.
U.S
Comps in the domestic market were up 0.4% as strong breakfast sales were largely offset by aggressive competition. Competition has intensified for McDonald’s with food chains like Chipotle Mexican Grill, Inc. (CMG) providing healthier options and fresh ingredients compared to the processed food offered by McDonald’s.
Nevertheless, comps compared favorably with the year-ago decline of 3.3% and were better than analysts’ expectation of an increase of 0.3%. This marked the second consecutive monthly gain. The relatively better comps reflect the company’s efforts to win back customers. The improving economy also had a positive role to play.
Europe
Comps in Europe moved up 0.5%, comparing unfavorably with year-ago comps growth of 2%. However, it was better than analysts’ expectation of a decline of 0.5% aided by positive performance in the U.K. and Germany. However, a weak performance in Russia where authorities temporarily shut down restaurants on alleged sanitary violations negatively impacted comps. Currency headwinds added to its woes.
On its fourth quarter earnings call on Jan 23, the company stated that while the restaurants in Russia are back in operation, the market is in recession and the economic outlook still weak.
What’s Next?
The company during the fourth-quarter earnings release warned that it does not expect a material rebound in trends in some key markets. In fact, it expects comps to remain under pressure in the first half of 2015.
However, one cannot ignore the efforts taken by the company to reinvigorate sales. The company intends to lower its capital expenditure by limiting store openings in markets that are experiencing significant near-term challenges, including China, Russia, Germany and the U.S. Instead, it intends to focus on sales and profits in its key operating regions. The launch of the “Create Your Taste” program, efforts to reduce waiting times for customers by simplifying menu portions and decreasing the number of Extra Value Meals, and a digital strategy to make ordering easy for customers are the main focus areas of the company.
Also, the company is set to appoint Steve Easterbrook as its new CEO. The move is expected to be a positive for the struggling company. It remains to be seen as to when these initiatives will turn around the fortunes of this Zacks Rank #4 (Sell) company and restore it to its erstwhile position.
Some better-ranked stocks in the restaurant industry include Ignite Restaurant Group, Inc. (IRG) and Kona Grill Inc. (KONA), both of which sport a Zacks Rank #1 (Buy).
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