So now McDonald’s (MCD) comes to the hard part.
On Friday October 21, McDonald’s reported third quarter earnings of $1.62 a share, 14 cents a share better than Wall Street projections. Revenue dropped 2.9% year over year, but at $6.42 billion still beat the Wall Street consensus estimate of $6.28 billion. Global same store sales climbed 3.5%, versus estimates of 1.5% growth and 4% growth in the third quarter of 2015. The big, pleasant surprise was a 1.3% gain in same store sales in the United States. Analysts had forecast a 1.3% gain in U.S. same store sales but recent whisper numbers on the street had pointed to expectations for a miss in this market by McDonald’s.
All that came against very low expectations.
Now comes the really hard stuff since McDonald’s is facing tough comparisons in the next two quarters against results from a year earlier. All-day-breakfast, including a recent expansion of the all-day breakfast menu, has been a big part of the company’s return to sales growth. But the company introduced the all-day-breakfast menu during the fourth quarter of 2015 and the first quarter of 2016 so for the next two quarters McDonald’s earnings and revenue won’t be compared to the slow growth period before all-day breakfast but to the fast growth after that menu introduction.
There are indications that franchisees, at least are nervous, about the growth picture going forward. Internal emails obtained by Bloomberg show franchisees wondering when the company is going to reverse not just the slide in revenue growth but a decline in store traffic that now stretches back four years.  The email, summarizing a September meeting between company executives and franchise leaders, reads “Growing guest counts is our main challenge. Over the past 12 months, we have been pretty flat.” The thrust of that email has been confirmed by a survey from Nomura Securities analyst Mark Kalinowski of 30 McDonald’s franchisees who operated 271 of McDonald’s 14,000 restaurants. The respondents warned that the excitement of all-day breakfast was wearing off and predicted flat to negative same store sales growth for the rest of 2016. On average the franchisees in the survey expected same-store U.S. sales growth to drop by 0.8% in the fourth quarter. “No way we can beat last year,” one franchisee wrote. In the first quarter of 2016, after the all-day breakfast menu had fully clicked, U.S. sale store sales climbed 5.4%.
U.S. same store traffic for McDonald’s fell 3% in 2015 after dropping 4.1% in 2014.
On the strength of the menu changes–plus the new Pick 2 promotion and improved ingredients in the Egg McMuffin and chicken nuggets–McDonald’s shares climbed 26% in 2015. They are down 4.6% in 2016 through the close on October 25. The shares yield 3.1%. The next ex-dividend date is November 29.
