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McDonald’s: Better to Avoid Now

May 16, 2014 | About:
TaniaC

TaniaC

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McDonald's (MCD) has given meager returns to investors for the last two years. It continued to face a tough economic environment and intense competition in the U.S., which resulted in declining comparable sales in the country. The company's CEO has taken the right steps to revamp the business so that it can reduce its serving time. However, these initiatives can't turn the company around that quickly.

Financial Performance

On April 22, McDonald's reported earnings for the first quarter. The company reported $6.7 billion in revenue. Net income also fell 5% to $1.2 billion, which resulted in earnings per share of $1.21, 4% below the year-ago quarter's earnings. McDonald's earnings also missed the consensus estimate of $1.24 per share.

Same-store sales in the U.S. fell by 1.7%. This is the sixth consecutive quarter in which McDonald's has missed Wall Street's comps forecast. In Europe, comps increased by 1.4% while in the Asia Pacific, Middle East, and Africa, or APMEA, region comparable sales grew by 0.8%.

The company's stock has provided a capital return of just 6% for the last two years. As the company keeps posting weak comparable sales in the U.S., investors are losing faith in the restaurant. McDonald's is trading at a low forward price-to-earnings ratio of 16, which testifies to this fact. According to the sell side, McDonald's has a one-year target price of $105, which reflects an upside potential of just 5%.

Probable Reasons

According to McDonald's, one of the primary reasons for the drop in earnings was bad winter weather in the U.S. Tough competition in the country also continued to hamper its sales.

Over the last few months, McDonald's has been criticized for making its menu more complicated, which resulted in a longer serving time. This in turn discouraged a lot of customers, who eventually went to other restaurants. McDonald's CEO Don Thompson said that the restaurant would add more preparation tables at U.S. locations to accommodate more ingredients.

Unfortunately the company's efforts to get its business back on track haven't worked so far, as McDonald's is still suffering from a slow serving time and this metric is key to fast-food chains' success these days. Adding more preparation tables to support ingredients for diversified menus should pay off but the progress hasn't been that quick.

McDonald’s is hardly the first place that comes to mind when thinking of a low-calorie-low-cholesterol menu. The McDonald’s name, which once was an asset in the baby-boomer market, has turned into a liability.

Stabilizing Measures to Be Adopted by the Company

McDonald's plans to focus on stabilizing performance in the "key priority markets" of the U.S., Germany, Australia and Japan. How does the company plan to stabilize those markets? President and CEO Don Thompson outlined a four-point plan during the first-quarter conference call:

  • Improve planning process to better balance customer desires with the company's financial needs.
  • Strengthen marketing initiatives.
  • Restructure menu pricing for value and consistency.
  • Rebalance menu offerings to focus more on core, proven products such as the Big Mac and Egg McMuffin.

The former two points are obvious strategies that any company uses to improve its performance in any market. But the latter two show the origin of McDonald's current stagnation: Regular customers still like the core products, but new products aren't bringing in fresh customers. It's a problem that has spread across the fast-food industry as more chains have focused on limited-time-only menu promotions.

To End

Anyone following McDonald’s closely cannot help but be concerned about the continued slow-down in the company’s business, as evidenced by the most recent earnings and sales reports. While McDonald’s performance in the last quarter could be skewed by bad weather, the company’s problem is much more serious than one that can be solved by better weather or free cups of coffee — as the company has been doing lately. McDonald’s problem is growing competition and saturation in its domestic and overseas markets.

McDonald's is still a successful global presence, but the company's growth has stalled. It is better for the investors to stay away from the company. McDonald’s is facing some important challenges for its long-term growth, including its continuing inability to attract the growing ranks of younger health-conscious consumers.


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