The fast food industry is doing well, especially because of the growing market for breakfast items. People are busy and do not want to waste their time eating. Thus, they want easy and healthy options that can be consumed on the way to work. Therefore, fast-food companies, which are providing newer and healthier options, are doing well.
Although McDonald’s (MCD, Financial) is one of the leading players in the breakfast industry, its results are suffering from quite some time. It missed the analysts’ estimates in the last five quarters. Let us take a look at what the Street is expecting this time.
The estimates
Analysts are expecting the top line to fall to $7.2 billion as compared to $7.32 billion in the last year’s quarter. Even the bottom line is expected to drop to $1.38 per share as against $1.52 per share in the prior year. Also, the same store sales are expected to fall by 2.8% this quarter. Given the fact that it has been missing on analysts’ expectations from quite some time, these results look obvious.
One of the key reasons for such a dull estimate was the food issue in July. A meat supplier in China was discovered using expired meat and mixing it with fresh. This has resulted in loss of reputation for McDonald’s as customers are withholding their purchases. The company has already announced that its bottom line will be affected by 15 to 20 cents this quarter as sales in August and September fell drastically.
Last quarter performance
The fast food chain’s performance was not up to the mark in the previous quarter also. In the second quarter, the retailer’s revenue dropped 1.4% to $7.18 billion over last year. The top line was slightly below analysts’ expectations and was affected by lower customer traffic in regions such as the U.S. and Europe. Demand in the U.S. has been a matter of concern mainly because of service issues and stiff competition from other players such as Yum! Brands (YUM, Financial). However, even Yum! Brands’ latest quarter was below Street’s expectations. Its revenue fell 3.2% to $3.35 billion as sales in China suffered due to food safety scandal.
In Europe, demand has been weak for McDonald’s due to safety issues. Safety regulators in Russia find the company’s safety measures inappropriate and not up to the mark. Thus, it has led to store closures and lower confidence of its residents in McDonald’s food.
Even the bottom line had declined to $1.40 per share, missing expectations by $0.04 per share. Therefore, McDonald’s is unable to attract customers as well as to manage costs efficiently. Despite a wide variety of new breakfast items added to the menu, the retailer is unable to meet the estimate.
Other concerns
McDonald’s share price is also been unattractive. Its stock price has fallen 6% since the start of the year and more than 9% in the last 6 months.
Moreover, McDonald’s faces stiff competition from companies such as Chipotle Mexican Grill (CMG, Financial). Chipotle’s last quarter was a blockbuster one, wherein it significantly beat the estimates. Its top line was up 28.6% to $1.05 billion over the previous year. Its bottom line too jumped to $3.50 per share, way ahead of the estimate of $3.09 per share. Despite price hikes, customers were attracted to its products, thereby boosting its results.
The definite conclusion
McDonald’s is indeed suffering a lot as demand in the key markets, such as the U.S., China and Europe, is weakening. Further, the recent food scandal in China has played an important role to scare away customers. With increased competition from other players and weakening expectations for the future, this company seems to post a lackluster quarter. Investors should stay away till there are signs of a turnaround.
