McDonald’s (MCD, Financial) reported better-than-expected second-quarter results, only to see its stocks slide down since the call.
After seeing its U.S. same-store sales rise steadily in the last four quarters, McDonald’s U.S. same-store sales grew by 1.8%, much below the analysts' estimate of 3.4% growth. With a major portion of its revenue coming from the home market, the sales growth slowdown took the wind out of McDonald’s sails. You could say it took the patty out of the McBurger, exerting enormous downside pressure on the stock.
The problem with being U.S.-heavy
Though a highly franchised system, McDonald's has more than 40% of its restaurants located in the U.S., bringing in more than 32% of its overall sales in 2015. What happens in its home market is extremely crucial for the company’s top line as well as bottom line. After going through a huge phase of downward trend, McDonald's revamped its menu and offered all-day breakfasts, slowly getting the customers flowing back into its stores. Same-store sales in the U.S. steadily inched upward in the last four quarters before dropping down to 1.8% during the second quarter while global same-store sales remained healthy at 3.1%.
After going through a horrible phase of (non)growth during the 2013-2014 period, McDonald’s returned to the growth path in 2015, which saw U.S. comparable store sales grow steadily right through fiscal year 2015.
The market is possibly worried about the company now returning to a period of negative comps growth and is expressing that fear through a stock dip.
An industrywide occurrence
But fortunately for McDonald’s it is not a company-specific event, as overall traffic to restaurant chains seems to have been slowed down.
Starbucks’ (SBUX, Financial) same-store sales in the U.S. came in at 4% for the second quarter after growing in the 5%-plus range for a long time while Domino's Pizza (DPZ, Financial) also reported lower growth during the current quarter compared to what it did last year.
Traffic to restaurants in the U.S. seems to have taken a hit across the board; with most of the bigger franchises facing a slowdown in numbers compared to last year, this might bring in another unwanted cousin into the picture – margin pressure.
As restaurants fight for more footfall, pricing could become a key issue, and they may have to offer discounts to lure traffic. What’s worse, the odds of any price increase go out the window, which means comps may take a further hit because one of the components of comps growth is price increase.
Major restaurant chains are likely to be under pressure over the next two quarters both at the top line as well as the bottom line, and McDonald’s is likely to be representative of that pressure.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
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