McDonald's suffers as customers get squeezed

The fast-food giant offers up a rather gloomy forecast for growth as diners cut their spending.

By Jim J. Jubak Oct 22, 2013 1:59PM
A McDonald's employee prepares an order at a McDonald's restaurant on April 19, 2011 in San Francisco, Calif. (© Justin Sullivan/Getty Images)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 Oct. 21.

In the United States, new menu items such as pumpkin spice lattes and Mighty 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. In Europe comparable store sales climbed 0.2% In the Asia/Pacific, Middle East and Africa region comparable store sales fell 1.4% in the quarter and operating income dropped 12%, mostly thanks to unfavorable exchange rates. (In constant currencies operating income fell just 4%.) 

The company didn’t offer investors any immediate cheer. In the fourth quarter, McDonald’s expects comparable store sales growth to be in line with results in recent quarters and margins would fall, the company said, at something like recent rates of decline. Commodity costs, up 2.5% in the third quarter in the United States, won’t help: For the full year, commodity costs will climb 1.5% to 2%, the company said. Currency effects will take five to six cents out of 2013 earnings per share. 

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. When in 2010 he started the mutual fund he manages, Jubak Global Equity Fund (JUBAX), he liquidated all his individual stock holdings and put the money into the fund. The fund may or may not own positions in any stock mentioned. The fund did not own shares of McDonald’s as of the end of June. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here
2Comments
Oct 22, 2013 4:03PM
avatar
What do they expect?  A lot of people just don't have much "disposable income" anymore.  Sometimes you just gotta cut back on non-essential things and going out to eat is one of them.  Cheaper (and healthier) to just cook your own meals.
Oct 22, 2013 2:12PM
avatar

How does one gauge poverty in America?  By watching the stock prices of junk food chain stores.. 

Now, numbers of those who can barely afford to spend their money at those cheap places seem to hitting the threshold, not that consumers can switch to healthier outlet, as supported by record number of American receiving welfare food stamps payment, not to mention record poverty rate among American citizens.  Another sign that Bernanke's "print all we can" drug seems to running out of its efficacy. What's next? Did Jews stuffed enough money for next downfall, diluting everyone else's life savings?

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