McDonald’s Improved Same Store Sales In August Offer Hope For Upside

by Trefis Team
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McDonald's
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McDonald’s Corporation (NYSE:MCD), the world’s largest fast food chain, reported same-store sales growth of 3.7% for August helped by strong performances in China, the U.K., Russia and France. The company’s same-store sales growth turned red in July, which was its worst performance in 9 years, so August’s figures are definitely a big improvement. [1]

McDonald’s comparable sales growth in the first eight months of the year was 4.4%, certainly not as bad as most people think who tend to focus more on the recent performances which have generally trailed market expectations. Same store sales are an important indicator of a restaurant chain’s financial health as it only includes the restaurants operational for 13 months or more. Sales of new restaurants might be unusually high or low.

The region wise breakdown for comparable sales is as follows:

U.S.           3.0%

Europe     3.1%

APEMA    5.7%

The U.S. has been the strongest performing region for McDonald’s in 2012 in spite of its near ubiquitous presence in the country. The company has been able to maintain steady growth in the U.S. through a combination of new product offerings and restaurant refurbishments. Also, McDonald’s is generating incremental sales by transitioning a greater proportion of its restaurants to 24/7 formats.

See full analysis for McDonald’s Corporation

APEMA Rebounds

The biggest positive for the company was definitely APEMA’s (Asia/Pacific, Middle East and Africa) growth of 5.7%. Contrary to expectations, same store sales growth in developing markets have been flat-to-negative in recent months. This is one of the main reasons why McDonald’s stock took a beating.

Further, McDonald’s plans to spend $1.5 billion on opening 1,300 new restaurants in 2012, of which 250 will be in China alone. Hence, the fact that the existing restaurants are doing well in spite of new restaurant openings (which could potentially cannibalize the sales of existing ones) is a big plus for the company. Year-to-date, comparable sales are up 2.8% for APEMA.

Europe Continues to Do Moderately Well

Another thing to look forward to is the fast food chain’s performance in Russia. McDonald’s reported that Russia is one of the countries that has fared well in August. The company’s understanding of the Russian markets will be crucial as it now heads to Siberia, the region in West Russia. Till now, all of its restaurants were in the eastern part of the country.

A word of caution though. Same-store sales growth in Europe has hovered around the 3% mark in the last few months, out of which the U.K. has performed well, but Germany and other countries in Southern Europe haven’t. McDonald’s had a huge sponsorship campaign earlier and during the Olympic games, which might have boosted its sales. As the games are over now, growth could slow down in the U.K. in the coming months. Note that Europe is the biggest revenue contributor to McDonald’s with almost 40% of the top-line coming from the region.

Revenue and profitability are likely to be negatively affected in 2012 due to a strong Dollar. In August, for example, total sales were up 1.2% only, even though they rose 6.2% on a constant currency basis.

We have a $96 price estimate for McDonald’s, which is about 5% higher than the current market price.

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Notes:
  1. MCD Investor Relations []
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