(MCD) McDonald’s Reports Weak August Comps

McDonald’s Corp. (MCD) has posted global comparable sales (comps) growth of 3.5% in August on the back of strong beverage sales as well as core menu products. However, the fast-food chain operator witnessed a relatively downward movement on a year-over-year basis across all regions but Europe. The Asia/Pacific, Middle East and Africa (APMEA) region was a dampener. Comps were down from 4.9% in August 2010 and 5.1% in July 2011.

In the United States, comps growth of 3.9% was less than 4.6% recorded in August 2010. The growth in August 2011 was buoyed by the sale of McCafe beverages. Continued demand for core offerings and McDonald’s market-leading breakfast including the new Premium Chicken sandwiches and Fruit & Maple Oatmeal were the other major contributors in the month.

Europe saw a growth of 2.7% from 2.2% recorded in August 2010. The uptick was backed by stronger performance in the U.K. and Russia partially offset by weak results in Germany. Unique premium menu offerings, including premium beef and chicken options, sustained focus on multiple-tier menus, and a restaurant reimaging program contributed to the month’s performance.

Hit by persistent tension in Japan, the reported month’s comparable sales declined 0.3% in APMEA versus a handsome growth of 7.8% realized in the year-ago month. The weakness in earthquake-ridden Japan obscured healthy performances in China, Australia and many other markets. However, continued focus on daypart value options, variety in menu as well as locally relevant items tried to drive the segment.

System-wide sales increased 11.3%, or 5.4% in constant currencies, in the month under review.

Our Take

Although Japan, which accounts for around 40% of APMEA’s sales, weighed on the monthly APMEA results, we consider the threat as short term. Excluding Japan, the countries in that region did well. We believe Japan will begin to post modest results once the concerns related to the March tsunami ease off.

The Oak Brook, Illinois-based company also continues to brew up the McCafe line-up with expectations for further benefits from Frappes and Smoothies throughout 2011. Beverages are also important outside the United States.

On the flip side, management expects a higher tax rate hovering in the range of 33–34% for the upcoming third quarter that will likely dent its quarterly earnings to some extent. Further, given increased commodity pressures, the company expects third-quarter consolidated margin to remain stressed with comparisons easing out in the fourth quarter.

McDonald’s currently retains a Zacks #2 Rank (short-term Buy rating). We are maintaining our long-term Neutral recommendation on the stock. The company’s competitors include The Cheesecake Factory Inc. (CAKE) and Yum! Brands Inc. (YUM).

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