) witnessed no upside in global comparable sales (comps) for the
month of July, 2012, as against the year-ago level of 5.1% and 4.4%
in the previous month. The fast-food restaurant operator witnessed
a relatively downward movement in all three geographical segments
namely the United States, Europe and Asia/Pacific, Middle East and
Africa (APMEA) on a yearly basis, with APMEA underperforming the
The flat performance failed to meet McDonald's expectation of
achieving positive comps but less than the 3.7% increase recorded
in the second quarter of 2012 for July.
In the United States, comps dipped 0.1% compared with 4.4%
recorded in July 2011. The comps in the reported month were hit by
the persistent economic turmoil which offset the gain from
promotional activities. Further, a tough comparison owing to the
successful launch of the Mango Pineapple smoothie also led to this
However, management noted that moderate customer demand for its
core offerings like the breakfast menu and the McCafe beverage
line-up compensated the downfall to some extent in the U.S.
Europe saw a decline of 0.6% as opposed to 5.3% growth in July
2011. Stronger performances in the UK and Russia were more than
offset by a weaker show in Germany and most of the Southern
European markets. German traffic remains extremely value sensitive
in a cutthroat competitive setting.
The reported month's comparable sales dropped 1.5% in APMEA
versus growth of 4.0% in the year-ago month. Japan continues to be
a dampener in the month as the country continues to recover after
last year's natural calamities and consumers are dining out less.
Slowdown in China also accounted for lackluster performance in
However, Australia put up a somewhat healthy performance in APMEA.
Moreover, the adverse impact from the shift in timing of Ramadan,
which fell entirely in August last year also tarnished the comps
growth in this segment.
System-wide sales fell 3.2% but grew 2.3% in constant currencies
in the month under review. Continued focus on daypart value options
along with some premium products, variety in menu, locally relevant
items and reimaging program are the strategies McDonald's is using
across all regions.
The Oak Brook, Illinois-based company's recent comps performance
is discouraging for investors. Although McDonald's is trying hard
to turnaround, its disappointing earnings report, decelerating
same-store sales momentum, a soft economy leading to compression in
margins, cost inflation, cut throat competition and currency
headwinds compel us to have a bearish outlook on the stock.
The apprehension can be validated by the cut in analysts'
estimates for the upcoming quarter. Over the last 30 days, 20 out
of 22 analysts lowered their estimates while no upward movement was
seen in that period.
Basically, the company is bogged down with difficulties like
implementation of austerity measures in Europe owing to the
sovereign debt crisis, increasing commodity costs in the U.S. and
decelerating growth in Asia.
Although McDonald's has survived the brunt of higher social charges
in Europe, presently the company has little pricing power there due
to wavering consumer confidence and shrinkage in the Europe's IEO
With the focus on value proposition along with less pricing
power, margins will likely be constricted going ahead. In addition,
high unemployment is projected to continue in the foreseeable
The company is resorting to several approaches in each market
with predominant emphasis on extra-value proposition. However,
management noted that most of these measures are short-term and
could prove detrimental to margins if exercised on a long-term
Substantial exposure to international markets also makes the
company vulnerable to currency fluctuation risks. Management
expects foreign currency to negatively impact 2012 earnings by
21-23 cents per share mainly due to a weaker Euro.
McDonald's currently retains a Zacks #3 Rank (short-term Hold
rating). We are maintaining our long-term Underperform
recommendation on the stock. The company's competitors
Yum! Brands Inc.
MCDONALDS CORP (MCD): Free Stock Analysis
YUM! BRANDS INC (YUM): Free Stock Analysis
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