McDonald's Returns to Growth Mode

By  DEC 12, 2012 11:46 AM

The world's leading fast-food chain reported an unexpected same-store sales gain Monday. Can it sustain its growth after a couple rough quarters?


America’s leading large-cap stocks continue to attract investor interest. Over the past year, the S&P 100 (INDEXSP:SP100) has risen 13.6%, just edging out the broader S&P 500 (INDEXSP:.INX), with a 13.0% rise.

One S&P 100 component that has badly lagged the overall average, however, is McDonald’s Corp. (NYSE:MCD). The stock is down around 8.8% in the past 12 months. That’s largely because the company has posted disappointing earnings reports over the past two quarters.
Its leadership has also changed: Current CEO Don Thompson, the former president and chief operating officer of McDonald’s, took over the top job after Jim Skinner, who has held the position since 2004, retired last summer. The company also appointed its global restaurant officer, Jeff Stratton, as president of McDonald’s USA, effective December 1. According to CNNMoney, “strategic missteps” at the US division were behind the switch, including a focus on higher-priced items, which hurt customer traffic.
November Surprise Gives McDonald’s a Boost
However, on Monday the company took the Street by surprise when it reported that its same-store sales rose 2.4% in November. That was well ahead of the consensus estimates of roughly flat sales. McDonald’s stock rose just over 1% on the news. The gain comes after McDonald’s reported a same-store sales decline of 1.8% in October.
The improvement was largely driven by a 2.5% gain in the US, where the company’s breakfast offerings remained popular. McDonald’s also saw stronger sales of its everyday value meals, McCafe beverages and premium items. Its limited-time Cheddar Bacon Onion sandwiches were also a hit.
European same-store sales rose 1.4% due to strength in the UK and Russia. Recent renovations to the company’s restaurants also helped attract customers.
The weakest area was the Asia Pacific, Middle East and Africa region, which rose just 0.6%, largely due to weak results from Japan. McDonald’s did continue to benefit from its locally based menus and value-priced meals, however.
McDonald’s International Expansion Brings Both Risk and Reward
Despite the strong month, McDonald’s is still dealing with a weak global economy. It’s also facing rising competition, particularly in overseas markets. In China, for example, it’s trailing Yum Brands (NYSE:YUM), which controls the KFC, Pizza Hut, and Taco Bell brands; Yum, which has won a following in emerging markets by tuning its stores’ menus to local tastes, was the first fast-food chain to enter the country, in 1987. McDonald’s currently has about 1,400 restaurants in China, compared to more than 4,000 for Yum.
Both companies have seen slower sales due to the weaker Chinese economy, but the country’s growth looks to be picking up again. China’s GDP could grow at an 8% rate next year, up from a projected 7.5% in 2012.
McDonald’s is now aiming to spur its overseas growth by expanding in India. This is another market with strong potential. According to research firm RNCOS, the fast-food industry is expected to post a combined annual growth rate of 34% in India from 2011 to 2014.
However, McDonald’s faces strong competition there, too. Right now, the largest US fast-food chain in India is Domino’s Pizza (NYSE:DPZ), with 500 outlets. Yum follows close behind with 495, while McDonald’s trails with 271—though it aims to double that total by 2014. Evolving International Menu Should Help McDonald’s
Still, the company has lots of advantages that should help it make gains overseas. For one, it controls arguably the most popular brand in the world, so it should have less trouble winning over customers in these foreign countries.
In addition, as I reported in September, it’s taking a page out of Yum’s playbook and doing a better job of adapting its menu to local tastes. For example, it now plans to open two vegetarian-only restaurants in India, both of which will be located near important Hindu sites: in Armritsar, near the Golden Temple, and near the Vaishno Devi cave shrine in Jammu & Kashmir.
The cow is a sacred animal in India, which is something that has frustrated the company’s expansion in the country and forced it to rely on a half-vegetarian menu, with chicken as the main meat.
Low Volatility, Attractive Dividend
Back in the US, the company hopes to replicate the success of the Cheddar Bacon Onion sandwich with the return of its McRib sandwich in late December. This product, which has a significant following, occupied a permanent place on the company’s menu until 2005; since 2010, McDonald’s has been bringing it back on a seasonal basis. It hopes the McRib will help it match up against strong results from a year ago, which were partly due to the exceptionally warm winter.
The stock is also less than half as volatile as the overall market. Its beta rating, a key measure of volatility, stands at 0.39. (A stock with a rating of 1 is as volatile as the market; greater than 1 is more volatile.)
In addition, McDonald’s leads many other fast-food chains when it comes to rewarding its investors. In September, it raised its quarterly dividend by 10%, to $0.77. It has now raised its payout every year since 1976. The stock’s current annual yield of 3.4% also puts it ahead of Yum (2.0%) and Domino’s (3.0%). It’s roughly tied with The Wendy’s Company (NASDAQ:WEN).
McDonald’s is also a frequent buyer of its own stock. In 2011, it repurchased 41.9 million of its shares at an average price of $80.56, for a total cost of $3.4 billion.
This article by Chad Fraser was originally published on Investing Daily.
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