McDonald's (MCD) reported same-store sales growth results for August that were slightly worse than expected, but still marked a step in the right direction. Same-store sales grew 3.7% year-over-year, just shy of consensus estimates. For an extensive view on the valuation and calculation of McDonald's intrinsic worth, please click here.
We were pleased by the performance of U.S. sales, which grew 3% during August after falling 0.1% in July. Management cited strong performance from breakfast and value items, which could translate into some near-term margin pressure. However, we think the firm's highly-promotional items carry high enough margins at reduced costs that it won't materially impact the bottom line.
Same-store sales in Europe grew 3.1% year-over-year driven by positive results from the U.K., France and Russia. McDonald's Olympic sponsorship helped drive sales growth and visibility, and we think the firm will continue to fare well even if macroeconomic conditions deteriorate further. Asia Pacific/Middle East and Africa same-store sales grew 5.7% driven by strength in China and Australia but challenged by weakness in Japan. We're encouraged to see strength in China, as growth seems to be slowing. We think this could mean McDonald's is stealing market share from the YUM! Brands' (YUM) cohort (KFC, Pizza Hut, Taco Bell).
We continue to like McDonald's competitive position and its growth potential over the long haul. Near-term profitability could be challenged by promotional activity and higher input costs, but the company still has a long runway in China. Additionally, we think the firm can withstand macroeconomic headwinds in Europe due to its compelling value offerings. Still, shares are fairly valued and do not offer a sufficient margin of safety for us to consider in the portfolio of our Best Ideas Newsletter (please see links on the left sidebar for more information).