McDonald's (NYSE: MCD) reported yet another stellar month of same-store sales, underlining a recurring theme: It's hard to slow Mickey D's down, even in tough economic times. However, there's a little more "cha-ching" rattling around in its same-store sales data because of menu price increases.
April comps increased an impressive 6% overall at McDonald's. Broken out by region, McDonald's U.S. sales increased 4%, while Europe and the Asia/Pacific, Middle East, and Africa regions both surged by 6.5%. Total systemwide sales increased by 12.7% in April.
McDonald's attributed the stronger-than-expected month to success of its beverage line-up, its breakfast offerings, and tried-and-true menu items such as the Big Mac and Quarter Pounder With Cheese. However, the sales increase also incorporated higher price tags associated with some McDonaldland meals.
The price increase is no surprise; McDonald's plan to up prices has been in the news this year. Meanwhile, all restaurants currently contend with higher commodity prices, and many consumer-facing companies must establish a tricky balance of what costs they can pass on to customers before consumers won't pay up (or defect to cheaper options).
The current climate of commodity inflation is a major and increasing risk for restaurants. It's similarly grim for grocery stocks, too. And let's not forget the ramifications for companies such as Dean Foods (NYSE: DF), Sara Lee (NYSE: SLE), and Kellogg (NYSE: K); many companies have found this environment increasingly difficult to navigate, and some are unable to completely pass on higher commodities costs.
Still, people need to eat, and McDonald's provides deep value (and convenience, too). As far as restaurant stocks go, it's a resilient choice for defensive portfolios. Meanwhile, some of McDonald's initiatives (like McCafe beverages, which compete with Starbucks (Nasdaq: SBUX)) attract pretty broad demographics. On the other hand, I'd steer clear of more middle-of-the-road restaurant stocks such as Ruby Tuesday (NYSE: RT), which recently missed quarterly earnings expectations.
I'd also beware of many of McDonald's direct competitors. Just today, burger rival Wendy's/Arby's (NYSE: WEN) reported that it's managed to narrow its quarterly loss, but it's also planning price increases to deal with commodity inflation. Wendy's/Arby's is a far weaker company; its quarterly revenue rose a mere 1.2%. I question whether Wendy's/Arby's is in a position of strength to raise prices without alienating its customers.
McDonald's management has proven many times over recent years that it can weather all kinds of economic conditions. As far as restaurant stocks go, it's still an appetizing choice to have on the menu. Let us know what you think of McDonald's in the comments box below, or add it to your watchlist to track its progress in this difficult climate.
