Largely overlooked amid coverage of the Apple (NasdaqGS: AAPL) iPhone launch was the release of August same-store sales figures from McDonald’s Corp. (NYSE: MCD).
On the whole, the numbers looked positive: globally, the chain’s same-store sales increased 1.9% during the month. That was down from last year’s 3.7% gain but ahead of July’s 0.7% increase. The latest figure was also well ahead of the 0.3% rise the Street was expecting.
In the U.S., same-store sales gained 0.2%, helped by the company’s Monopoly promotion. The Asia/Pacific, Middle East and Africa region saw a 0.5% decline due to weakness in Japan, China and Australia.
The real surprise came in Europe, where same-store sales jumped 3.3% on strength in the U.K., Russia and France. Of particular note was an improvement in France, where McDonald’s has struggled. However, the company did report negative same-store sales in Germany, home to the largest number of the company’s outlets in Europe.
McDonald’s Would Welcome a Steadier Europe
Of course, one month does not a trend make, but the chain’s latest results from Europe do align with other indicators that the continent’s consumers may be starting to open their wallets again after years of economic weakness and austerity. As we reported on Tuesday, Goodyear Tire & Rubber Co. (NYSE: GT), posted slightly improved sales volumes on the continent in its latest quarter.
Stephen Odell, head of Ford’s (NYSE: F) European division, also recently sounded a guardedly positive note on the continent’s economic situation: “We are at bottom,” he said in a September 10 Bloomberg article. “There are no major signs of uptick, but it does feel like we’re running along the bottom.”
Moreover, in August, eurozone consumer confidence rose to a two-year high, continuing a nine-month trend of increases. “The level of consumer confidence is only slightly below its long-run average and is pointing to positive growth in consumer spending,” said Greg Fuzesi, economist at J.P. Morgan Chase (NYSE: JPM), in an August 23 Wall Street Journal article.
Any signs of steadiness on the continent are welcome news for McDonald’s. Europe is the company’s largest market, accounting for 39% of its 2012 sales, followed by the U.S. (32%), the Asia Pacific Middle East region (23%) and other countries and corporate (6%).
McDonald’s Has Had a Rough Year …
The news comes amid what has been a difficult 2013 for the fast-food giant. In the second quarter, it posted revenue of $7.1 billion, up 2.4% from a year earlier. Earnings per share gained 4.5%, to $1.38 from $1.32. However, those results missed the consensus forecast of $1.40 a share in profits on $7.08 billion in earnings.
The company pointed to the slow global economy as the main reason for the miss. In response, McDonald’ssaid it will open slightly fewer new stores this year. It also lowered capital spending by about $100 million, to around $3.1 billion.
“Based on recent sales trends, our results for the remainder of the year are expected to remain challenged,” said CEO Don Thomson in the earnings release.
“Recently, it’s been a very difficult industrywide environment—it’s not just McDonald’s,” Standard & Poor’s Chuck Pinson-Rose said in a July 22 Los Angeles Times article. “There’s been a deceleration from last year. The consumer is having a hard time.”
At the same time, the company is facing rising competition from chains like Wendy’s (NYSE: WEN) andBurger King (NYSE: BKW), which have both been overhauling their menus. Wendy’s is also undergoing itsfirst rebrand in nearly 30 years, with an updated logo and renovated restaurants. The chain has had particular success with its pretzel bacon cheeseburger, which it rolled out in July.
… But It Remains a Fast Food Force
The above-noted factors are likely to keep weighing on the stock in the near term, but the company does still have a number of advantages that will help it compete in the long run. Here are three:
Brand strength: The ubiquitous golden arches are synonymous with fast food and recognized worldwide. McDonald’s sat in seventh spot on Interbrand’s annual list of the world’s strongest brands in 2012. The next closest fast food chain was KFC—owned by Yum! Brands (NYSE: YUM)—way back in 64th spot. The only other competitor on the list was coffee chain Starbucks (NYSE: SBUX), at No. 88.
History of menu innovation: The company has had a number of successful product launches over the years, notably its premium coffee, which it rolled out in 2006 to compete with chains like Starbucks. In 2009, it expanded into espresso-based drinks and blended-fruit beverages, such as smoothies. According to one estimate, coffee accounted for around 4% of McDonald’s revenue in 2012, double the percentage of five years earlier.
In addition, the company has launched new items to respond to the trend toward healthier eating, such as wraps and premium salads, and it continues to tailor its menu to local tastes in emerging markets.
Back at home, it’s now in the process of rolling out Mighty Wings nationally in the U.S. after successfully testing them in Atlanta and Chicago. It has also added steak as an option on all of its breakfast sandwiches.
“While [U.S.] results were somewhat sluggish, we believe that the roll-out of new products (Mighty Wings rolling out now) will likely drive improved comps over the next several months,” wrote Sterne Agee analyst Lynne Collier in a note quoted in a September 10 Barron’s article. The firm is maintaining its buy rating and $107 price target on McDonald’s shares in the wake of the August sales figures. The stock currently trades around $97.50.
Dividends, buybacks and low volatility: McDonald’s pays dividends at an annual rate of $3.08 a share, for a 3.18% yield, well ahead of Wendy’s (2.42%), Burger King (1.18%) and Yum (1.86%).
The company also regularly repurchases its stock. In 2012, it bought back 28.1 million shares for a total of $2.6 billion. The shares are also relatively stable, with a beta rating of just 0.35, meaning they are roughly a third as volatile as the overall market.