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McDonald's (MCD) reported lackluster November comparable sales. European comparable sales (comps) were solid, up 1.9%, but comps in the APMEA (Asia/Pacific, Middle East and Africa) and US weighed on expansion, falling 2.3% and 0.8%, respectively. Performance in the APMEA was weighed down by weakness in Japan, while US comps suffered from heightened competitive activity and relatively flat industry demand trends that were only partially offset by strength in breakfast, chicken menu choices and expanded value offerings. Systemwide sales advanced 3.1% in constant currencies during the month.

The news from McDonald's is unique in that it runs counter to a report from the National Restaurant Association, released December 2, that the Restaurant Performance Index, RPI (1), hit a four-month high in October. The business association noted that October was driven by broad-based gains in the index components, with solid improvements in same-store sales and customer traffic. The National Restaurant Association also indicated that, looking forward, "restaurant operators are relatively optimistic about sales growth in the months ahead," suggesting to us that McDonald's poor comparable sales performance in November (a month later) may reveal more of a share shift than broader weakness.

(1) "The RPI - a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry - stood at 100.9 in October, up 0.7 percent from September and the strongest level since June. In addition, the RPI stood above 100 for the eighth consecutive month, which signifies expansion in the index of key industry indicators." Source: National Restaurant Association

The "burger business" is becoming increasingly more competitive every day. Burger King (BKW) has brought back the "Big King" sandwich, which is almost a mirror image of the Big Mac, given its middle bun. Darden's (DRI) Olive Garden has rolled out an 'Italiano' burger as it can no longer do without a burger menu offering. Wendy's (WEN) new Pretzel Bacon Cheeseburger helped drive the best two-year stack for same-store sales in the third quarter since 2005. Red Robin Gourmet Burgers (RRGB) seems to have hit the sweet spot with consumers. The firm's high-quality gourmet burgers helped drive its third quarter (ended October 6) company-owned comparable restaurant revenues 5.7% higher than the same period a year ago. Red Robin experienced a 1.1% increase in traffic and a 4.6% increase in the average guest check, revealing that the underlying components of comp expansion were solid. Not only are burger options proliferating, but consumers are also opting for healthier alternatives at Panera (PNRA) and Chipotle (CMG).

Valuentum's Take

Though McDonald's monthly performance has always been quite volatile, the competitive environment hasn't been this tough in a long time. Not only is McDonald's facing a difficult US market, but the company's performance in Japan is hurting systemwide sales. Our fears for negligible same-store sales growth for the entire fourth quarter may be coming to fruition, especially if performance in Japan continues to languish and US results don't improve. McDonald's slowing pace of dividend expansion may be the most telling sign that things could be better. Still, the globally successful firm isn't going away anytime soon, and the fast-food giant remains firmly on our watch list.

Source: McDonald's Monthly Performance Remains Volatile In Tough Competitive Environment