McDonald's (MCD) April Comps Outpace, But U.S. Deficit vs. Peers Growing - RBC Capital

McDonald's (NYSE: MCD) is trading higher Friday along with the broader market following its April sales report, which saw the company report a 0.6 percent drop in comps, narrower than the 1.8 percent drop expected by the Street consensus.

Analyst David Palmer commented, Sales in APMEA continue to be hurt by Japanese SSS declines (-21.5% SSS decline in Feb.), but were offset by strong growth in Australia across all dayparts and price tiers. SSS trends in China remain negative but continue to improve, with positive trends expected by mid-year. Positive SSS growth in Europe was largely the result of ongoing strength in the UK and Germany, with macro issues continuing to weigh on results in France and Russia. Strength in the Other Countries & Corporate segment, which primarily includes Canada and Latin America, also added to global SSS growth.

On U.S. comps, Palmer said, In the US, the chain's SSS deficit to chain sandwich fast food peers widened to -780bps – its largest deficit in recent history. While advertising was largely on premium items (e.g. Artisan Chicken Sandwich), our guess is that share losses are the result of direct competition on value. The company is planning an aggressive relaunch of its value offering this summer and we believe share losses should moderate through the year (RBCe US SSS – 2Q15: -1%, 2H15: 1%). We wonder what McDonald’s value strategy will be—especially in the key summer selling season. While we believe the recent transition to a more regional approach to value may make sense, some national competitors (e.g. Burger King, Taco Bell) are winning with nationally-advertised value tiers. In our view, value is a key pillar of McDonald’s brand, and the US division struggles have coincided with a shifting away from the Dollar Menu over the last 2+ years.

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