Fast-food behemoth McDonald's (NYSE:MCD) can't seem to get its act together, at least as far as the domestic market is concerned. The company continues to struggle in the United States. This is especially confusing because the environment seems to be ripe for McDonald's to thrive. Economic growth remains modest, meaning you'd naturally assume consumers would restrain spending on their dining options.
Nevertheless, McDonald's keeps posting poor sales results in the United States, while competitors such as Chipotle Mexican Grill (NYSE:CMG) are eating its lunch - metaphorically speaking of course. It appears that despite the fairly sluggish economic recovery, consumers are willing to spend more in exchange for better-sourced, fresher ingredients.
Before you panic over McDonald's tepid performance in its own backyard, it should be stressed that McDonald's might not actually need to produce strong growth here. Its international operations already account for a large (and growing) percentage of its business, and that's where most of its growth will be going forward. Before long, McDonald's might be an American company in name only.
A tale of two companies
McDonald's is performing steadily on the surface. Earnings per share rose 5% last year, then fell 2% in the first quarter in constant currencies. There's nothing earth shattering about the company's earnings on a companywide basis. But breaking down its reports by regional markets reveals how differently McDonald's is performing in the U.S. and across the globe.
McDonald's U.S. comparable-store sales, which measure sales at locations open at least one year, fell 1.7% in the first quarter. This more than offset solid performance across the globe. In Europe, same-store sales rose 1.4%, and comparable sales increased 0.8% in the company's APMEA (Asia Pacific, Middle East, and Africa) segment.
Chipotle, on the other hand, is thriving right now, which means it's plain to see the shift in consumer preferences. Chipotle's comparable-restaurant sales jumped 13% in the first quarter. Management attributes such strong growth to higher traffic as well as an increase in the average check size. Plainly stated, not only are more people coming through Chipotle's doors in the U.S., but each customer is spending more per visit as well.
The opposite is happening to McDonald's. Unfortunately, things didn't get much better in May. Last month, its global comparable sales grew 0.9%, but again there was a striking disparity among its different geographic regions. The U.S. declined a full percentage point, while comparable sales increased 0.4% in Europe and 2.5% in APMEA.
With such unimpressive results, it might be difficult to see the light at the end of McDonald's tunnel. It's not growing in the U.S., but to a certain extent it doesn't have to. If it can simply stabilize its performance in the U.S., the potential offered up by emerging markets should be enough to keep it on track for growth.
McDonald's is doing great abroad
There's no doubt McDonald's is doing poorly here in the United States. At the same time, however, it's performing well across the world. Profitability stands to improve further going forward, not just by a continued expansion and the opening of new restaurants but also by increased refranchising activity.
By year-end 2016, McDonald's plans to refranchise up to 1,500 restaurants, primarily in the APMEA and European markets. This represents a 50% increase in refranchising activity and will help boost profits because franchising places most of the renovation and maintenance costs on the franchisee.
This is in addition to the considerable investments McDonald's will make to open new restaurants. This year, the company plans to spend as much as $3 billion in capital expenditures strictly to open new locations across the globe. McDonald's will open as many as 1,600 restaurants, which will be mostly concentrated in faster-growing markets.
The key takeaway for investors is don't panic over McDonald's sluggish performance in the United States. If its strategic investments pay off, there should be more than enough growth from emerging markets to lift the entire company.