Why McDonald's is in trouble

Shares of America's iconic fast-food purveyor are falling into a downtrend for the first time since October.

By Anthony Mirhaydari May 30, 2013 1:42PM

 SHAUN TANDON/AFP/Getty ImagesMcDonald's (MCD) is suffering. The stock is falling out of a two-month topping pattern on heavy volume as investors bail out of the pusher of Happy Meals and Big Macs -- reversing the 45-degree uptrend shares enjoyed between November and April. And for complacent investors who forgot that mega-cap stocks like MCD can actually go down, it's all a bit shocking.

 

But what's happening with McDonald's represents the tip of the iceberg in terms of deeper economic problems I've been talking about. It's suffering weak sales growth, with same-store-sales down 0.6% globally in April on declines in Europe and Asia as consumers run down their savings. Pricing power is weak (deflationary) as the fast food industry gets more promotional -- offering one-time deals and coupons -- to boost traffic -- in the context of record beef prices (pinching profitability). 

 

And technically, MCD's slide represents an attractive short-side opportunity for aggressive traders.

 

The problem was outlined in the company's last earnings call back in April. It's just taken a month for investors to realize the troubles are real and worth selling over.

 

 

Management warned that given pressures on the expense line, maintaining profitability would require same-store sales growth of more than 3%. It's far from that. And comp sales are likely to get weaker as U.S. consumer spending -- which single handedly bolstered Q1 GDP growth -- will need to fall back to reality as recent purchases have been fueled by savings drawdowns in the midst of wage declines.

 

Sure, a strong stock market is boosting consumer confidence. But if there's no money in the bank, it doesn't matter.

 

After 1% decline in comp sales in Q1, and April's soft results, management is looking for May and June to be strong enough to lift the overall Q2 result to 2%. That's looking less and less likely. Thus, the selling pressure hitting shares today.

 

The company is also struggling with the end of its "bigger menu" tailwind that drove growth in recent years. In 2007, the company served 85 items. Now, it serves 145 according to Bloomberg's count. With franchisees complaining about kitchen complexity and longer drive-thru times, McDonald's is starting to pare back, refocusing on its core menu items but losing some of the gloss that attracted new diners.

 

The Angus burger, salads, the fruit-and-walnut platter, Chicken Selects, the McSkillet Burrito, and other items are being phased out. Less attractive alternatives are being phased in, from new quarter pounders to chicken wraps and an egg-white McMuffin.

 

UBS analyst David Palmer has a rosier outlook, and believes these new items, and the marketing surrounding them, will drive a big boost to May's sales results. Beverage and value marketing should carry the summer months, in his view.

 

For now, the share price suggests otherwise. Technically, the percentage price oscillator indicator has fallen into negative territory for the first time since October -- a clear sign a new downtrend is forming. I'm adding MCD short to my Edge Letter Sample Portfolio on the breakdown.

 

Check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​​​​​​​​​​​​​​​​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.


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11Comments
May 30, 2013 2:02PM
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Why McDonald's is in trouble?  Their food sucks and they're running a playground instead of a hamburger stand.
May 30, 2013 4:46PM
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I think I'll bet on McDonald's before Anthony !
May 30, 2013 2:23PM
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I think it would be good if we could have commonly ordered food ready to go during peak times, such as egg muffins or cheeseburgers that way we can focus time and energy into making the less commonly ordered items and feed people faster building profits. Also another idea for a good, quick menu item would be a stir fry vegetable chicken mcwrap.. Have all the veggies cooked and ready to throw on the tortilla with the grilled chicken. The new mcwraps are popular with the customers but take longer to prepare. We could offer a couple more that are quick to make to even it out maybe...

Jun 26, 2013 8:13AM
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Big Mac's image is slipping. It can improve by starting with cleanliness!  Tables, booths, and chairs; are, filthy, from my experiences.  Also, I'd rather take a beating, than use their bathrooms.  They can be awful!  Don't forget the Parking Lots - - especially, around their outdoor garbage receptacles.  Dropping the Angus Beef Burger, was a tell-tale sign.  Surrendering Quality; to increase their bottom line. 

 

Tis' a shame!  It is not your Parents - - or even, your Grand Parents,' Mickey D's.

Jun 17, 2013 10:59AM
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Almost sold my MickyD's after reading this!....Then I read this guys other columns....BTW today is just a prelude to a crash...that he can't quite put a date on!
Jun 3, 2013 7:42AM
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Normally, Anthony would be wrong.... when economic times get tough, cheaper, low-quality outlets like McDonald's are supposed to do better... BUT, if input costs continue to rise like they are, MCD and all the rest will take a huge hit!  Unless, you want to pay twice as much for your food at McDonald's?  We go there because the food is cheap... if a complete meal for one person is going to start pushing $10, I will go elsewhere for my food, or better yet, cook at home more.
May 30, 2013 3:56PM
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WE ARE BECOMING VEGETARIANS!!! NO MORE GRINDING ANIMALS! AND I'M NOT FROM GREENPEACE.

May 30, 2013 2:44PM
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"Technically, the percentage price oscillator indicator has fallen into negative territory for the first time since October [. . ..]"

 

And have you seen the alignment of Venus and Mars!

 

Oh yes, definitely things are happening.

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