McDonald’s Misses Sales Estimates In Asia But No Reason To Panic Yet

McDonald’s Corporation (NYSE:MCD) reported comparable sales growth of 3.3% for May. This is the second month in a row that the sales growth has trailed the Street consensus. What was particularly surprising was that the company’s comparable sales growth in the APMEA region (Asia/Pacific, Middle East and Africa) was a negative 1.7%. ^[1] However, a closer look at the regional breakdown suggests that there are a few positives to take away from the results and that the world’s largest fast-food chain still offers plenty of growth potential. After gaining more than 40% in 2011, McDonald’s stock price has declined in excess of 10% in 2012, so far.

We have a $98 price estimate for McDonald’s, which is about 10% higher than the market price.

See our complete analysis for MCD stock here

U.S. and Europe Show Resilience

McDonald’s posted a 4.4% increase in comparable sales growth (also called comp sales) for its restaurants in the U.S. This is an improvement from 2.4% recorded in the same month previous year. With the U.S. contributing more than 30% to the total revenues, this certainly adds stability to overall profitability of the company. For the five months of 2012, the U.S. comp sales have grown 6.8%. ^[1]

The U.S. comp sales were boosted by the addition of McCafe Cherry Berry Chiller and Blueberry Banana Nut Oatmeal to its menu. Given McDonald’s expertise and know-how of the American markets, you expect the company to successfully keep rolling out new menu products to lure consumers.

Coming to Europe, comp sales grew 2.9% which is again better than 2.3% witnessed in the corresponding month previous year. This is certainly, by no means, a bad showing from McDonald’s given just how precarious the state of the European economy is at present. Europe is the highest revenue generating region for McDonald’s and contributes almost 40% to the total revenues. ^[1]

The Asia Story

The APMEA segment’s performance was well below expectation as comp sales declined by 1.7% in May with Japan and China, in particular, under performing. A significant proportion of restaurants in China are relatively new, and the company has said that the sales during the initial time period are usually low and will eventually pick up with time. Moreover, the true potential of the country lies in the scope for penetration (rather than comparable sales growth). With McDonald’s planning to add around 250 new restaurants in China in 2012, there is a certain amount of cannibalization expected which is negatively impacting the comp sales growth. On the other hand, we expect the dollar value of sales and profitability to be higher due to the addition of new restaurants. Despite the rather tepid comp sales figures, the company has managed a 8.5% jump in system-wide sales for the APMEA region in 2012, so far. ^[1]

China’s growth has slowed down recently and the Chinese central bank responded by cutting interest rates on June 7. Often, there is a lag between the interest rate cut and its repercussions, so it might take some time before the effect of increased liquidity reflects on the company numbers.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. McDonald’s Global Comparable Sales Rise 3.3% In May, marketwatch.com, June 8, 2012 [↩] [↩] [↩] [↩]