McDonald's July Comps Decline 2.5% In July

McDonald's Corporation (NYSE:MCD) 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.

U.S.

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 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 service.

Competition has intensified for McDonald’s with food chains like Burger King Worldwide Inc (NYSE:BKW) offering discounts and Chipotle Mexican Grill Inc (NYSE:CMG) 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.

Europe

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 (NYSE:YUM).

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.

Our Take

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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