) global same-store sales fell 1.5% in February. The results
initially might paint a worrisome picture, but a closer look
reveals that the situation might not be as bad as it seems.
Firstly, last year February had an extra day since it was a leap
year. Excluding the effect of the extra day, McDonald's same-store
sales were up 1.7%. Secondly, a warmer winter in the U.S. last year
resulted in better than expected sales. McDonald's sales in the
first three months of 2012 were unusually high so these results
come on top of a high base. For example, same-store sales were up a
whopping 11.1% in February last year. The reported same-store
sales figures should improve once the winter passes. Sales in the
U.S., from where the company derives about 40% of its profits were
down 3.3% but flat when adjusted for the extra day.
Comparable sales, or same-store sales growth, is an important
measure to gauge a restaurant's performance since it only includes
the restaurants open for more than a year and excludes the effect
of currency fluctuation.
See full analysis for McDonald's Corporation
Margins Getting Squeezed
Beginning in the fourth quarter of 2012, the company has upped
its focus on lower priced value meals (such as the Dollar menu) to
address faltering sales. Recent additions to the Dollar menu
include the Grilled Onion Cheddar burger and the Hot 'n Spicy
Although the results of the last couple of months signal a
turnaround, McDonald's excessive reliance on value meals to
resuscitate flagging sales is the reason behind our conservative
valuation for the stock. Operating margins for the company-reported
restaurants were already down 90 basis points to 17.8% in the
fourth quarter of 2012. Value meals generally have lower margins
and are offered by the company to attract more customers with the
hope that they will spend more on other expensive (and more
New menu introductions will be critical for McDonald's to recoup
some of its lost margins. The company has added Fish McBites to its
menu this year and plans to debut new beef sandwiches and
chicken entrees soon.
We have a
$92.80 price estimate for McDonald's
, which is about 5% lower than the current market price.
a Company's Products Impact its Stock Price at Trefis