Sales for McDonald's Corporation (NYSE:MCD) climbed more than expected in May, showing an increase of 2.4%, 0.3% above expectations. The gains can be attributed to menu innovations targeted at health-conscious customers, such as the Egg White Delight and a new line of wraps. The gains were not limited to the U.S., as Europe, the Middle East, and Africa showed sales increases of 2.0% collectively and Asia’s sales ticked up 0.9%.
So far this year, McDonald's Corporation (NYSE:MCD) has been unable to keep up with the S&P 500 due to poor first-quarter results, lagging 3% behind the index’s 16% clip.
Can McDonald’s show strong growth?
According to the McDonald’s 10-Q for the first quarter of FY13, future sales growth is predicated on restaurant unit expansion and comparable-store sales. Given this, the company projects about a 2.5% increase in sales throughout the rest of 2013. This increase would be largely due to the net 1,135 restaurants added in FY12.
McDonald’s is looking to expand further in China, where it opened 256 restaurants in FY12. Currently, more than 1,700 franchises are operating in China; McDonald's Corporation (NYSE:MCD) expects to push that number above 2,000 in FY13. Worldwide, it expects net additions of 1,200 to 1,300 restaurants. This is not a significant change from FY12, and the FY14 projections from unit expansion should reflect this.
For McDonald’s, a 1% increase in sales corresponds to roughly a $0.04 increase in diluted earnings per share. This translates to a $0.10 increase over FY13 and a $0.20 increase over the next two years assuming projections hold and the currency is constant.
McDonald’s success going forward
The success of McDonald’s is dependent upon several key elements
1. Its ability to introduce new menu offerings and the success thereof
2. The impact of marketing initiatives (direct marketing and social responsibility initiatives) on sales
3. Its ability to respond effectively to negative press and success of imaging
Recently, McDonald’s has been remarkably successful at introducing new menu offerings that appeal to a broad range of consumers. This continued innovation is essential to maintaining sales in the face of competition in the marketplace.
Also essential to sales is marketing—McDonald's Corporation (NYSE:MCD) needs to maintain product differentiation and continually draw in new consumers. Its re-imaging and social responsibility initiatives are integral to the perception of the company in society at large. If the company is perceived as socially responsible and succeeds in re-imaging itself as somehow more accountable than the average fast-food chain, it will be able to fend off attacks on the brand more easily.
McDonald’s is subject to competition from Burger King Worldwide Inc (NYSE:BKW) and The Wendy's Co (NASDAQ:WEN), and must differentiate its fast-food experience. How are Burger King and Wendy’s doing by comparison, and how will they perform in the future as compared to McDonald's Corporation (NYSE:MCD)?
Burger King Worldwide Inc (NYSE:BKW) showed a sales decrease of 1.4%. Furthermore, its EBITDA increased by just 4.5% from the first quarter of FY12. However, its diluted EPS increased by 49%, and the company authorized a $200 million share-repurchase program. For comparison, The Wendy's Co (NASDAQ:WEN) EBITDA increased by 21% in the same period.