) comps declined 2.5% for the month of July, comparing unfavorably
with year-ago comps growth of 0.7%.
As per Bloomberg, analysts had expected a decline of 1.1%. Sluggish
comps reflect underperformance in the Asia/Pacific, Middle East and
Africa (APMEA) region, mainly due to supply related issues in China
and weakness in the domestic market. Given the current scenario,
the company expects its second half comps that were expected to
remain flat with first half levels to be under pressure.
Comps in the U.S. declined 3.2% as against comps growth of 1.6% in
the year-ago period. Sluggish comps reflect difficult economic
conditions, marked by a sluggish job environment and stiff
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 service.
Competition has intensified for McDonald's with food chains like
Burger King Worldwide Inc. (
) offering discounts and Chipotle Mexican Grill, Inc. (
) providing healthier options compared to the processed food
provided by McDonald's. Meanwhile, foolish decisions like
introducing too many items in 2013 continued to impact service as
well as orders.
McDonald's nevertheless 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 yield results and
convert into positive numbers for the region.
Comps in Europe grew 0.5% that compared favorably with the year-ago
decline of 1.9%. Better performance in UK and France on the back of
an improved beverage and breakfast business made up for the weak
performance in Germany and Russia.
Asia/Pacific, Middle East and Africa (APMEA)
Asia/Pacific, Middle East and Africa comps experienced a decline of
7.3% compared to a decline of 1.9% in the year-ago quarter. The
results reflect the impact of recent food safety issues in
China. On Jul 20, 2014, a local Chinese television media
uncovered that workers at Shanghai Husi Food Co - a unit of
U.S.-based OSI Group LLC - were reusing meat that had fallen on the
factory floor as well as mixing fresh and expired meat. Shanghai
Husi Food Co was a supplier for McDonald's in the Shanghai
region. We note that Shanghai Husi Food Co was also a
supplier for Yum! Brands, Inc. (
Food-Safety Concerns Threaten Yum! & McDonald's
This led to distrust among McDonald's customers, thereby negatively
impacting July comparable sales by more than 700 basis points. In
fact, the company had to temporarily stop the sale of beef, pork
and chicken items at its restaurants in China.
However, the company indicated that it is undertaking recovery
strategies to regain customer confidence and will soon resume
selling beef and chicken burgers in Beijing and Guangzhou.
Moreover, it also stated that it is increasing orders from other
existing suppliers in China while exploring new ones.
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. We believe that the latest China setback could also
adversely affect McDonald's international sales especially at a
time when its comparable sales in the U.S. are suffering due to
declining consumer spending in a sluggishly recovering economy.
McDonald's presently has a Zacks Rank #4 (Sell).
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