China Drives McDonald's May Comps, U.S. Weak - Analyst Blog

McDonald's Corporation's MCD comps grew 0.9% for the month of May, which compared unfavorably with the year-ago comps growth of 2.6% as well as April comps of 1.2%. Sluggish comps reflect weakness in the domestic market that was partially offset by an improved performance in the Asia/Pacific, Middle East and Africa (APMEA) region, mainly in China.

U.S.

Comps in the U.S. declined 1.0% as against comps growth of 2.4% in the year-ago period and flat comps in April. Sluggish comps reflect difficult economic conditions, marked by a sluggish job environment and stiff competition.

The region has not been able to post positive comps since Oct 2013 mainly due to heightened competition, a few wrong decisions that have slowed service and protests by minimum-wage workers.

Competition intensified for McDonald's with food chains like Burger King Worldwide Inc. BKW offering discounts and Yum! Brands, Inc. YUM introducing new breakfast items under its Taco Bell division.

Wrong decisions like introduction of too many items in 2013 led to a slow down in service and inaccurate orders. However, currently the company is working with its franchisees to deal with these problems. Meanwhile, the protests by minimum-wage workers are denting the reputation of these food chains.

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 company is also making marketing and promotional offerings. However, these initiatives are yet to reap benefits and convert into positive numbers for the region.

Europe

Comps in Europe grew 0.4% worse than the year-ago period comps growth of 2.0%. However, it was marginally up from April comps growth of 0.3%. Better performance in UK and France on the back of the improved beverage and breakfast business made up for the weak performance in Germany.

Asia/Pacific, Middle East and Africa (APMEA)

Asia/Pacific, Middle East and Africa comps grew 2.5%, better than the year-ago comps growth of only 0.9%. However, it was below April comps growth of 2.9%. The results reflect strong results in China mainly (due to easy year-over-year comparisons) and positive performance in many other markets. This was however partially offset by the ongoing weakness in Japan.

Our Take

Though the fast-food chain is trying to strengthen its position by offering value propositions and an innovative menu, it has become extremely vulnerable to macroeconomic headwinds like intense competition, weak economic conditions, and lower consumer confidence in the U.S. and sluggish economic recovery in Europe. It seems that the company is trying to offset the weakness in the domestic market with growth in overseas markets. McDonald's presently has a Zacks Rank #3 (Hold).

Buffalo Wild Wings Inc. BWLD is a better-ranked stock in the same industry sporting a Zacks Rank #1 (Strong Buy).
 

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