McDonald’s (MCD) customers are getting squeezed and so, therefore, is McDonald’s.
For the third quarter, comparable store sales grew by just 0.7% in the United States. That’s down from 1% comparable store sales growth in the second quarter. Global comparable sales climbed by 0.9%. Wall Street had been expecting 1% growth.
McDonald’s did beat analyst earnings estimates of $1.52 a share by a penny but that wasn’t enough to offset a rather gloomy forecast for growth. In October, the company said, it expects flat comparable store sales. The shares finished down 0.64% at the close on October 21
In the United States new menu items such as pumpkin-spice lattes and Might Wings didn’t draw enough new spending to offset the company’s need to focus on value pricing as lower income customers continue to cut their spending. The problem seems to be worse, though, than at competitors. Wall Street analysts project that McDonald’s will grow revenue by just 2.4% in 2013, compared to the National Restaurant Association’s estimate of 4.9% growth for the U.S. quick-service dining sector.
Reflecting those problems, operating margin at McDonald’s company-owned restaurants fell to 18.7% in the quarter from 19.1% in the third quarter of 2012.
Unfortunately, the company’s U.S. customers aren’t the only ones feeling squeezed or the only ones cutting their spending. Read more
It looks like McDonald’s (MCD) is facing a big price/cost squeeze. The latest evidence is the chain’s test of a new Dollar Menu that would include items selling for as much as $5 and simmering discontent among franchisees who say that that company is increasing the fees that it charges them in an effort to bolster the parent company’s bottom line.
It’s hard for any company to raise prices in the current non-inflationary environment. But it’s especially hard right now for operators of fast food restaurants given the intense price competition in a very crowded marketplace. McDonald’s sales growth in recent quarters has been driven by the success of its Dollar Menu so raising prices in that segment are a big deal for the company. In addition, pushback from franchisees who say they can’t afford to refurbish their stores given higher charges from McDonald’s hits at one of McDonald’s key advantages in its market—it’s ability to refresh stores more frequently than competitors. A McDonald’s refresh at $600,000 on average, according to the company, costs substantially more than a remodel at Burger King (BKW) at $300,000 or Wendy’s (WEN) at $375,000 for the least expensive version. McDonald’s restaurants average $2.5 million in annual sales.
I don’t think those trends are fatal in the long run but they do present significant short-term headwinds for the stock. I’m looking to raise some more cash in case a volatile September and October creates some bargains—and longer term to put to work in emerging markets if I can see something that looks like a bottom. So I’m selling McDonald’s out of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ . As of the close on September 6, I have a 7.1% gain on these shares since I added them to that portfolio in My 2012. The company will pay its most recent quarterly dividend—the stock shows a current yield of 3.2%–on September 17 to shareholders of record on September 3.
The new Dollar Menu—to be called the “Dollar Menu and More”—has been under test in five U.S. markets. Read more
I can’t quite say “like clockwork” since I expected McDonald’s (MCD) to start reporting better year to year same store sales growth in April, but May is pretty close.
This morning McDonald’s reported that May same store sales were up 2.6% year over year. That comes after a drop of 0.6% in April.
For the last quarter of 2012 and the first quarter of 2013 McDonald’s has been facing very tough year to year sales comparisons that made growth seem very disappointing. In February, for example, same store sales fell by 1.5%, which seemed even worse in comparison to a 7.5% pickup in same store sales in February 2012.
March was the last month where the company faced really tough year-to-year comparisons, and April was supposed to mark a turn to easier times. But in the event slower sales in China as a result of fears of avian flu and in Europe as a result of continued recession hit April sales growth.
In May, however, the company showed a pickup of 2.4% in same store sales in the United States thanks to McDonald’s everyday value menu and new product introductions such as the Premium McWrap. In Europe comparable sales climbed 2% as positive results from the United Kingdom and Russia outweighed disappointing growth in Germany and France. Sales growth in China continued to lag as fears of avian flu kept customers out of any restaurant selling chicken and same store sales in Japan were flat.
On finally reaching the transition to easier comparisons—and on likely summer sales momentum from new products such as the Egg White Delight version of the iconic Egg McMuffin, I’m raising my December 2013 target price to $110 from a prior $106. McDonald’s is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ .
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares in McDonald’s as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
I wouldn’t make too much of today’s move to the upside in U.S. markets. It’s not unusual for the Friday of a down week to show a slight bounce.
And I certainly wouldn’t want to pin any move to the upside on better than expected earnings reports after the close in New York yesterday from Google (GOOG) and Microsoft (MSFT.) I think Google’s results continue a worrying trend of falling ad prices thanks to the growth of mobile traffic (with mobile’s lower ad prices) and Microsoft’s results are only better than expected because Wall Street had been aggressively cutting projections in the weeks before the company’s report.
Certainly today’s earnings results from market bellwethers McDonald’s (MCD) and General Electric (GE) won’t relieve market worries about revenue and earnings growth for U.S. companies. Read more
Growth fears have hit the market hard again this morning. The International Monetary Fund cut its forecast for 2013 global growth to 3.3% from 3.5%. A warning that debt at China’s local governments is out of control has reminded investors that on Monday they were worried that reports of 7.7% GDP growth in the first quarter of 2013 meant that China’s economy was slowing—or at least that it wouldn’t hit the 8% or better growth that investors were hoping for. Earnings reports from Alcoa (AA), Wells Fargo (WFC), and Coca Cola (KO) showed declining revenue in the first quarter.
But this morning, rather than giving more details on that news about growth, let me suggest what a revival of growth worries means for global markets and valuations.
First, and this may seem perverse, a rise in worries about growth will hit developing country stock markets especially hard—even though growth in those economies is still projected to outstrip growth in the EuroZone, Japan, and the United States. As we’ve seen over and over again in the last two years, when growth fears rise, the first reaction by traders and investors is to pull money out of “riskier” emerging markets in favor of “safer” developed markets. Read more