A Challenge Ahead for This World's Biggest Franchise Chain

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McDonald’s (NYSE: MCD), the world’s biggest quick service restaurant, did not have a smooth year in 2012. The share price dropped from $100 in January to only around $84 in November, and gradually climbed to $93.70 currently. Along with the share price drop, in October McDonald’s experienced the first decline in comparable store sales growth in the past 10 years. It is also expected to have negative comparable store sales growth in January 2013. Should we be bearish on McDonald’s outlook

A Move That Helps Growing Comparable Store Sales Growth

In October 2012, McDonald’s experienced a 1.8% drop in comparable store sales, with the US down 2.2% and Europe down 2.2%. The decline in the US comparable store sales was due to increased competition and low consumer demand. The company said that it would remain concentrated on balancing the everyday value menu with affordable premium menu options. However, the comparable store sales came back positive in both November and December. In November, the global comparable store sales increased 2.4%, with 2.5% in the US and 1.4% in Europe. In the US, the comparable store sales growth was due to the popularity of the McDonald’s breakfast, everyday value offerings, and options for premium menus. Indeed, the increase in November sales was due to the refocus on its famous “Dollar Menu.” In December, many people had been expecting a 1.8% drop in the US comparable store sales. Surprisingly, McDonald’s posted a 0.9% gain instead.

In the full year 2012, McDonald’s enjoyed a 3.3% rise in its global comparable store sales growth, with the US up 3.3% and Europe up 4%. McDonald’s generated nearly $27.6 billion in revenue, 2% higher than 2011 revenue of $27 billion. Net income came in at $5.46 billion, small growth compared to the $5.5 billion in net income last year. In the fourth quarter, McDonald’s successfully fixed the US business to help the operating performance in November and December. It delayed the annual McRib limited offering to December, shifted the business focus to the “Dollar Menu,” and persuaded restaurants to stay open on Christmas Day.

Tough Competition Ahead

The refocus on the “Dollar Menu” seems to be working. Nevertheless, McDonald’s will have to face increasing competition in the quick service restaurant market, as well as increasing ingredient costs. The issue with the “Dollar Menu” was that it encouraged people to spend less, not to buy more.  Yum! Brands’ (NYSE: YUM) Mexican fast food chain Taco Bell has been quite creative with a “$1 Craving Menu,” with five different cravings. Christ Brandt, the vice president of marketing for Taco Bell, said that diners felt that they were “forced to eat off the value menu/.” The Wendy’s Company (NASDAQ: WEN) has recently replaced its 99-cent value menu with “Right Price Right Size” with the item cost in the range of $0.99 to $1.99. Wendy’s also passed on the increased ingredient costs to consumers, by both increasing the price of several items and reducing the quantity of food offered. Burger King Worldwide (NYSE: BKW) has reportedly attracted consumers away from McDonald’s with its more family friendly foods. It has kept consumers feeling fresh with a stream of new food items, including popcorn chicken, an Italian basil chicken wrap, and a raspberry smoothie. According to Datassential, a food researcher, Burger King had around 20 new test items in the third quarter last year, whereas McDonald’s offered only 9 items.

Along with the decent fourth quarter and annual earnings result, McDonald’s has risen to more than $93.70 per share, bringing the total market capitalization to $94.1 billion. The market is valuing McDonald’s at 9.34x EV/EBITDA. Burger King is the most expensive, with more than 14x EV multiples. Wendy’s is the cheapest, with around 9x EV/EBITDA, whereas the market values YUM! at 11.3x EV multiples.

Foolish Bottom Line

McDonald’s warned investors about the comparable store sales drop in January. It might continue to experience a decline in comparable store sales growth until it is more creative with the new food offering to gain back its customers from other competitors.



hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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