Monday morning, fast food behemoth McDonald's (MCD) announced stronger than anticipated same-store sales growth for the month of November. Same-store sales jumped 2.4% year-over-year at a company-wide level, easily exceeding the consensus estimate of 0.4% growth. We continue to remain on the sidelines for now, though we think the company would make a compelling addition to the portfolio of our Dividend Growth Newsletter at the right price (below the low end of our fair value range).
US same-store sales increased 2.5% year-over-year, with the company citing breakfast, new items like the Cheddar Bacon Onion, and value offerings as the main drivers. Given the price point of the new sandwich and products, we believe it was the value proposition that was driving store traffic. Big Macs and Egg McMuffins offered in a 2-for-1 promotion likely drove significant amounts of value traffic, in our view. Not only did the company run such a promotion, but marketing has also been relatively heavy, so we believe awareness was higher than usual. Even though deep promotional activity could boost sales, margins could suffer as a result. And we cannot forget that while the growth was better than expected, it still fell short of the year-to-date growth rate.
European same-store sales ticked up 1.4% year-over-year during November, driven again by value offerings. The firm identified Germany as a spot of weakness, with most of the strength driven by the UK and Russia. In our view, the European business looks a bit like the US, as margins may face pressure as the company takes larger discounts in a highly-promotional atmosphere. However, we think any sentiment change with respect to consumer confidence on the continent could lead to a huge surprise.
Sales in the Asia-Pacific, Middle East and Africa (APMEA) region reversed course from their steep 2.4% decline last month to post a 0.6% same-store sales gain. With recent data out of China improving, we believe the company's strategy has yet to discover the proper marketing and awareness initiatives to compete with market leader Yum Brands (YUM). On top of an uncertain Chinese market, McDonald's continues to deal with a prolonged Japanese slump, which it said weighed on sales.
Overall, we were pleased to see the firm return to growth in November, though we remain cautious on the firm's profit outlook. With promotional activity expected to remain elevated throughout the holiday season, profits could languish during the fourth quarter (even as sales hold up).