McDonald's Shares: Still a Value Meal?
Tough times have been easy on
( (MCD)) and its shareholders.
So far, McDonald's has found ways to benefit from the global slowdown, as penny-pinching consumers around the world chose the chain and its "value menu" over more expensive fare. But as the recession grinds on, the fast-food giant is seeing its sales growth slow, particularly in the U.S. McDonald's U.S. same-restaurant sales rose 2.8% in May, but that's significantly down from a 6.1% rise in April and a 4.3% rise a year ago.
The numbers disappointed analysts and investors, and McDonald's shares fell almost 2%, to $58.72, on June 8.
Overseas sales were strong, particularly in Europe, but a stronger U.S. dollar ate up all those gains. Total worldwide sales fell 0.4% in May, though sales would have risen 7% if currency values hadn't changed.
value meals and southern style chickenA weak economy has been a relatively good environment for inexpensive quick-service , especially compared to full-service competitors. "The challenging global economy [is] causing some consumers to trade from higher-ticket occasions to lower-priced alternatives," analyst David Tarantino noted on June 8.
McDonald's has found ways to outpace fast-food rivals, too. In the last year, McDonald's stock is up 3%, even as the broader market, represented by the S&P 500-stock index, is down 31%. Shares of rival ( (BKC)) dropped 40% in the last 12 months, while ( (YUM)), owner of KFC, Pizza Hut, Taco Bell, and others, saw its stock fall almost 6%.
The secrets of McDonald's success have been much discussed. Reasons cited include its popular "value menu" and new product offerings. A year ago, McDonald's sales were benefiting from a new Southern Style Chicken sandwich, while last month its McCafe espresso-style coffees boosted sales, the company says.
Despite the May sales disappointment, Citigroup ( (C)) analyst Gregory R. Badishkanian believes McDonald's retains its advantages. "It seems [McDonald's is] taking share from less promotional concepts like [Burger King], while maintaining share vs. more aggressive competitors like ," Badishkanian wrote on June 8.
McDonald's "continues to show strong global operating momentum despite difficult macroeconomic headwinds," Baird's Tarantino wrote.
less competition overseasEurope is a particular bright spot. European same-restaurant sales rose 7.6% in May from a year ago, and sales are up 17% from two years ago. In Europe, "its strength and longevity in the face of a worse macroenvironment still confounds us," Morgan Stanley ( (MS)) analyst John Glass admits. McDonald's has remodeled restaurants, extended hours, and improved its products, he says.
What's accounts for the difference between performance in Europe and the U.S.? One difference, Glass writes, may be greater competition in the U.S. compared with Europe. The U.S. simply has far more inexpensive restaurant chains competing for consumer dollars, with many following McDonald's strategy of providing a wide range of prices and introducing new products.
Those worried about whether McDonald's can sustain its success also note that not all parts of the globe are feeling the recession equally—at least not yet. "We are concerned that weakness in the U.S. economy has begun to spill over into overseas economies, and ultimately this could have a negative impact on McDonald's international business," Citi's Badishkanian said.
Despite the worries about slowing sales, McDonald's continues to find ways to attract more customer dollars—and yen, pounds, and euros—at a time when many consumers are earning less. The question is how long McDonald's can continue to do this amid fierce competition in the U.S. and a possible worsening of economies abroad.