McDonald's Maintains Comps Momentum - Analyst Blog

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Global comparable sales (comps) of McDonald's Corp. ( MCD ) grew 7.8% in November on the back of strong beverage as well as core menu sales. The fast-food chain operator witnessed an uptrend on both year-over-year basis and sequential basis across all regions. By comparison, overall comps rose 4.8% in November 2010 and up 5.5% in the last month.

In the United States, comps growth of 6.5% was higher than 4.9% recorded in November 2010. Growth in average unit volume comes from three primary segments: breakfast, chicken, and beverages. The comps in November 2011 were backed by the inclusion of the seasonal Peppermint Mocha to the McCafe beverage line-up. Core offerings like Chicken McNuggets, breakfast menu as well as everyday value options were the other major contributors in the month. McDonald's continues to re-invent its core offerings with variations on favorites like Chicken McNuggets and burgers.

Europesaw a growth of 6.5% as opposed to 4.9% recorded in November 2010. The growth was backed by stronger performance in the U.K., France, Russia and Germany. Locally relevant menu choices, promotional food events, sustained focus on multiple-tier menus and a restaurant reimaging program contributed to the month's performance.

The reported month's comparable sales increased 8.1% in Asia/Pacific, Middle East and Africa (APMEA) versus 2.4% in the year-ago month. Healthy performances in China and Japan were palpable. Continued focus on daypart value options, variety in menu as well as locally relevant items drove the segment.

System-wide sales increased 9.5% (same in constant currencies) in the month under review.

Estimate Revisions

Following the strong comps report, 4 analysts out of 23 covering the stock, raised their estimates for the upcoming quarter while none walked the opposite direction. In the last 7 days, the Zacks consensus estimate for the upcoming quarter increased by a penny to $1.28.

Our Take

The Oak Brook, Illinois-based company continues to strengthen its McCafe line-up, which has become its growth-engine. Beverages are also important outside the United States. While internationally, McCafe is focused on hot beverages, McDonald's has identified a number of markets to test or add Real Fruit Smoothies and Frappes over the next few years, starting with Australia.

The best part is that, McDonald's has efficiently endured the recent economic turmoil in Europe. Despite the implementation of austerity measures, no signs of slowdown have been witnessed still now. However, management will continue to scrutinize its European comps as a cautionary measure.

We expect December sales to enjoy easy comparisons as severe winter hurt sales in the U.K. and Germany as well as in the U.S. in the same month last year.

Management is expected to start 2012 with 3% pricing besides several other increases that are planned for the year in the light of this inflationary environment. The company also indicated that the faster-rising inflation of food at home compared to food away from home might provide some space for additional pricing actions in the near term.

On the flip side, increased commodity pressures can lower the fourth-quarter consolidated margin. Further, uncertainty regarding ground beef prices in 2012 also remains as this item is largely un-contracted and accounts for around 15% of total food costs.

McDonald's currently retains a Zacks #3 Rank (short-term Hold rating). We are maintaining our long-term Neutral recommendation on the stock. The company's competitors include The Cheesecake Factory Inc. ( CAKE ) and Yum! Brands Inc. ( YUM ).

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MCDONALDS CORP ( MCD ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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