McDonald's October Comps Down, Markets Expected Worse - Analyst Blog

McDonald's Corporation's (MCD) comps declined 0.5% for the month of October, as expected, comparing unfavorably against the year-ago comps increase of 0.5%. None of the regions could post positive comps in the month. The majority of the decline however came from the Asia/Pacific, Middle East and Africa (APMEA) region due to supplier issues in China.

However, the comps decline was lower than analysts' expectations of a decline of 2.2%, per the Consensus Metrix. This can be attributed to the company's efforts to mitigate the impact of the current headwinds and strong comparable sales in McDonald's Other Countries & Corporate segment, which includes Canada and Latin America.

Regional Update

Asia/Pacific, Middle East and Africa (APMEA)

Comps in the APMEA region declined 4.2%, worse than the year-ago comps decline of 2.8%. The results reflect the impact of recent food safety issues in China, which have adversely affected comps in China, Japan and certain other markets. In July, 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.

In fact, owing to the same reason, the company posted weak results in the third quarter, the results of which were announced on Oct 21. We note that Shanghai Husi Food Co. was also a supplier for Yum! Brands, Inc. (YUM) and Papa John's International Inc. (PZZA) and the incident affected sales of these companies too.

However, the comps decline was lower than analysts' expectation of a decline of 6.1%, per Reuters, possibly due to strong performance in Australia. Meanwhile, the company indicated that it is undertaking recovery strategies to regain customer confidence. Also, the company is pursuing long-term opportunities with menu innovation and convenience options that are expected to drive traffic.

Europe

Comps in Europe declined 0.7%, comparing unfavorably with the year-ago increase of 0.8%. The dismal comps reflect weakening of the euro and poor performance in Russia where the company is facing pressure from consumer safety regulators leading to temporary disclosure of restaurants.

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.

U.S.

Comps in the U.S. declined 1% against growth of 0.2% last year. The 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 Chipotle Mexican Grill, Inc. (CMG) providing healthier options and fresh ingredients 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.

Nevertheless, the numbers were favorable compared to analysts' expectation of a decline of 1.9%, which reflects the company's efforts to convert its negative comps into positive.

McDonald's is trying to boost revenues by introducing variations of items already on its menu instead of making new offerings. The company is also making marketing and promotional offerings and working toward a new organizational structure. However, these initiatives are yet to yield results and convert into positive numbers for the region. McDonald's presently has a Zacks Rank #4 (Sell).