McDonald’s Same-Store Sales Rebound But Tough Times To Stay

McDonald’s Corporation‘s (NYSE:MCD) same-store sales growth rebounded to 2.4% in November after they turned negative for the first time in nine years last month. McDonald’s shares have had a roller coaster year with the stock price going as high as $102 in January before retreating to $84 last month, primarily because of concerns about its deteriorating same-store sales. Comparable sales or same-store sales growth is an important measure to gauge a restaurant’s performance since it only includes the restaurants open for more than a year and excludes the effect of currency fluctuation. ^[1]

The regional break-up of the comparable sales is as follows: U.S.: 2.5%, Europe: 1.4%, APEMA (Asia/Pacific, Middle East and Africa): 0.6%

Value Meals to Drive Sales

The management of McDonald’s had acknowledged that their decision to focus on the Extra Value meals (such as the 20 chicken McNuggets for $4.99) did not yield the desired results. Instead now, McDonald’s is putting emphasis on value meals such as the Dollar menu in the U.S. Starting from late 2012 or early 2013, two new menu items, Snack Size Fish McBites and the Grilled Onion Cheddar Burger, will debut on the Dollar Menu. Moreover, McDouble is already being offered for $1 since September and restaurants across the country will also continue to offer soft drinks and premium roast coffee for $1. ^[2]

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Besides the Dollar Menu, introducing new menu items has always been a part of McDonald’s strategy to attract greater customer footfalls. The fast food chain has already added the Cheddar Bacon Onion sandwich to its menu. It will now launch McMuffin made of egg whites in January next year as well as reintroduce the mackerel sandwich and the McRib shortly. McDonald’s will also debut three new varieties of Quarter Pounders soon. ((McDonald’s Releasing Three New Quarter Pounders, November 27, 2012, complex.com))

Not So Fast

In spite of all this, the times ahead are likely to be tough for the company as the results will be announced on top of an already high base. A warm winter resulted in higher than expected sales for McDonald’s at the end of 2011 (and the start of 2012), so the growth figures the next couple of quarters face tough comparisons. The extra emphasis on value meals could also squeeze the margins of its company-operated restaurants.

We have a $93.60 price estimate for McDonald’s, which is about 5% higher than the current market price.

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1. McDonald’s ‘Dollar Menu’ sparks November sales rebound, December 11, 2012, chicagotribune.com [↩]
2. McDonald’s to roll out new $1 items to spur traffic, November 27, 2012, nrn.com [↩]