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McDonald's: Its own Arch enemy?
Analysts question whether the fast-food king can still rev up sales as comparisons get tougher.
May 10, 2004: 1:19 PM EDT
By Parija Bhatnagar, CNN/Money staff writer

NEW YORK (CNN/Money) - McDonald's salads and hamburgers may be juicing up sales right now, but some analysts caution the fast-food king may soon be forced to prove it can keep up the good times as comparisons get tougher.

"The second half of 2004 is extremely critical. April sales were very strong, but I don't think anyone expects a 10 percent sales increase in September, October and November, " said John Glass, analyst with CIBC World Markets.

McDonald's Corp., the world's largest restaurant company, said Monday that its global same-store sales -- or sales at its restaurants open more than a year -- rose 10.5 percent in April. The company credited the successful launch of its entree-sized salads in Europe and other initiatives such as extended hours at some U.S. stores.

It was the 12th consecutive positive sale increases for McDonald's, reflecting the company's turnaround that was jumpstarted in January 2003 by former chief executive Jim Cantalupo, whopassed away last month of an apparent heart attack.

McDonald's Corporation

Additionally, Oak Brook, Ill.-based McDonald's (MCD: Research, Estimates) said same-store sales in the U.S., its largest market, rose a strong 13.5 percent. Sales growth in Europe, which had lagged overall growth in the domestic market, also improved 5 percent for the month versus a decline of 2.5 percent in April 2003.

McDonald's said the results were helped by the introduction of new "Salad Plus" menu of meal-sized salads in about 14 countries by the end of May. A similar menu in the United States launched last year helped revitalize U.S. sales.

McDonald's operates more than 30,000 hamburger restaurants worldwide.

Rough to repeat

Dean Haskell, analyst with JMP Securities, says that while the 16-month turnaround is clearly evident, his concern is that McDonald's comparable sales gains may have been boosted by one-time items that he thinks are not repeatable.

"McDonald's has closed stores, it has moved operations to more efficient stores, it has implemented late-night shifts at some locations and also raised average amount per check largely due to new products like the salads," said Haskell.

"If the average check earlier was $3.50 per customer, it could be up to $4.50 now with the salads." Haskell said. "Depending on the menu mix going forward, I think it could be difficult to push that amount any higher."

And as the sales comparisons become increasingly difficult, industry watchers will see if McDonald's can improve upon a past performance helped by such 2003 initiatives as the premium salads and the all-white meat Chicken McNuggets.

"McDonald's will have to prove that it is not a one-trick pony in terms of its sales trends," said CIBC's Glass. "Europe is getting better. This is a market that's almost as strong as the U.S. and accounts for as much as 40 percent of profits. But psychologically for investors, the U.S. market has to continue to do well in order for the stock to hold up."

"Where McDonald's goes from here is a good question," said Haskell. "Burger King recently introduced the new Angus beef burger which is perceived to be of higher quality. I think McDonald's has to do something with the hamburger now."

Off their highs

Shares of McDonald's have sagged somewhat, down 10 percent from their 52 week high of $29.98 hit in March. While the short-interest activity on the stock is not significant -- at 2.8 percent of the total number of shares traded -- it has edged up steadily to its highest level in a year.

Short sellers typically borrow stock and sell it, hoping to buy it back and profit if the stock declines.

Haskell, who has a "market perform" on the stock, said that in addition to same-store sales trends, Wall Street is also monitoring the company's management succession issues.

McDonald's new CEO Charlie Bell, who replaced Cantalupo after his untimely demise, suffered a health-related incident of his own and underwent colorectal surgery last week.

However, Bell said in a statement that "he is recovering nicely."

"I feel good and I look forward to a complete recovery," Bell said. "While I recognize that last year's strong comparable sales will create more challenging monthly comparisons as we move throughout the year, I remain confident in our plans and the opportunities that exist to add even more customers to our restaurants in the future."

McDonald's officials could not immediately be reached for further comment about the company's plans.  Top of page

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