McDonald's sees unprecedented slowdown

Normally, 1 or 2 of the company's top 10 markets might struggle. Now, for the first time, it's seeing trouble across the board.

By Jim J. Jubak Jul 24, 2012 4:28PM
That was one depressing conference call. Oh, not because the results McDonald's (MCD) announced Monday were so bad or because the company slashed guidance. McDonald's did miss Wall Street's earnings estimates by 6 cents a share, but that was the result of a strong dollar that took 7 cents a share out of earnings.

No, what was really depressing was that the results demonstrated that not even McDonald's can escape the effects of the global economic slowdown -- and that the company's assessment of the global economy was so negative. 

Post continues below.
Normally, new CEO Don Thompson said, the company might see one or two of its top 10 markets struggling. Never, he noted, has McDonald's seen an across-the-board slowdown. In addition, the company said that it is starting to see signs that the length of the current economic slowdown is changing consumer behavior.

In this very challenging environment the company continues to do what it has always done, but has also added new wrinkles.

In the what-it's-always-done category, McDonald's will refurbish -- the company calls it re-image -- 2,400 restaurants in 2012 and open 1,300 new restaurants in emerging markets.McDonald’s restaurant © AFP/Getty Images

In the new wrinkles category, McDonald's launched a "Loose Change Menu" with seven menu favorites -- a small order of fries or a 10-piece chicken McBites, for example -- selling for less than $2.50. Started in March, the idea is to offer low priced items -- items that you can buy with the change you find in your couch, according to the company's formulation (can I get one of those sofas?) -- that will get customers into the store and then hope that they'll upgrade to items such as a Cheeseburger combo or a value family dinner box. (The company reports that the menu is working.)

The problem, though, is that the tough economy is cutting into the company's operating margins. Labor and commodity costs are up -- but McDonald's doesn’t feel able to pass through all those higher costs to consumers. And the margins on the "Loose Change" and "Value" menus aren't as high as those on items such as a Mighty Angus burger.

Margins at company operated stores fell to 18.2% globally from 19% in the second quarter of 2011. For the company as a whole, operating margins fell slightly to 31.2% from the 31.7% of the second quarter of 2011.

And McDonald's doesn’t look likely to make up for those falling margins on volume. Revenue climbed less than 1% in the quarter and same store sales grew by just 3.7%.

At current prices the shares pay a 3.15% dividend, making McDonald’s a relatively low risk/high
yield place to park your money at a time when the 10-year U.S. Treasury is yielding just 1.42%.

And although McDonald's isn't going to be able to escape the bad times in the global economy, the company is picking up share against competitors and is sufficiently profitable to franchisees so that they're willing to invest in refreshing their stores and to follow the company’s lead on unified positioning such as the McDonald’s Value Menu.

It does indeed look like McDonald's may miss its target of 6% to 7% growth (on a constant currency basis) in operating income in 2012 thanks to the global economic slowdown, but McDonald's is very reasonably priced, at 16.7 times earnings, for a company that went into this slowdown as the leader of the quick-serve segment and looks like it will come out of this downturn -- whenever that happens -- with an even bigger lead on the competition. Competitor Yum Brands (YUM) sells at a trailing 12-month price to earnings ratio of 20.9.

McDonald's is a member of my Jubak's Picks portfolio, where I have a target price of $109 by May 2013. As of July 23, I'm leaving my target price at that level.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of McDonald's as of the end of March. 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. 
Tags: MCDYUM
21Comments
Aug 1, 2012 4:23PM
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I have not trusted your judgement since you convinced me Asia Pulp and Paper was on the list of 50 best corporations in the world. I bought, and they went bankrupt
Jul 25, 2012 6:22PM
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Overall, McDonalds is not a bad gig. They have done well in working healthier fast food into their menu and if I really have no time to eat a proper meal, I will go to McDonalds because I can get a good meal with little cash I carry around. Some are obviously better than others, some McDonalds are just plain bad, most are decent though. I do wish they would reduce the amount of grease they serve, that seems universal. Their Fruit Salad is still the best fast food item I have had.
Jul 25, 2012 6:22PM
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Overall, McDonalds is not a bad gig. They have done well in working healthier fast food into their menu and if I really have no time to eat a proper meal, I will go to McDonalds because I can get a good meal with little cash I carry around. Some are obviously better than others, some McDonalds are just plain bad, most are decent though. I do wish they would reduce the amount of grease they serve, that seems universal. Their Fruit Salad is still the best fast food item I have had.
Jul 25, 2012 9:57AM
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wasn't it just yesturday, McDonnalds specifically,  recommended as a 'buy' stock from you?

Jul 25, 2012 2:45AM
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Too many corporate salaries.............
The products will get to the consumer without them..........
Time to cut the dead weight  and make the remainder work for a living........
Jul 25, 2012 2:28AM
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I always get a kick out of people who say Mac's sucks; yet, their parking lots are full and and there's

15 cars in their DT lane....alot of people think different.

Jul 25, 2012 12:29AM
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"The private sector is doing fine."

June 8, 2012

Barak Hussein Obama

Press Conference

 

Jul 24, 2012 11:48PM
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fast food is belong to past generation that like to eat fast food today people attitude is to feed them self with healthy food from fear of getting fat or to get sickly of fast food mc Donald and others fast food industry will shrink slowly and give way to healthy food business industry. unfortunate there is no healthy foods exist in the market is all with hormone chemicals mix with the food and this even worse for human consumption next generation will eat lettuce and tomatoes only and the industries will adjust it self to there need
Jul 24, 2012 10:54PM
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almost $4.00 for a big mac or 1/4 !! What a joke...those are pretty little burgers....you should not have to spend $8.00 to get full at McDonalds....not that long ago those were $1.99...
Jul 24, 2012 10:03PM
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Mcdonalds hire school kids that dont know responsibility so they'll get a tax break,here wher i live its all high school kids workin in mcdonalds
Jul 24, 2012 9:51PM
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Ramen noodles costs less.

On the rare occasion when we used to be able to afford fast food, it would cost us (two people) more than $10 dollars total for some freakymeat and fries....you have to realize, you can still buy a small steak at the food store for less than that.

Oh, the dollar is stronger so you missed your silly WS estimates?....b!teme!

Jul 24, 2012 9:21PM
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Who cares about McDonalds the food is CxxP its making people fat and they made billions what are they upset about.
Jul 24, 2012 9:02PM
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If I am in a good mood and feel like getting pissed off, I go to a McDonalds drive through......

 

I have NEVER dealt with such stupidity!  From "forgetting" to give you sauce with your nuggets, to no fork with your salad, the employees working at McDonalds are the WORST I have ever seen!  And its not just my local place, I travel A LOT and every single time I stop, there is a discrepancy!

 

Want to bring in more customers?  GET COMPETENT HELP!!!!!!  Quit "revamping" your stores and start revamping your staff!

Jul 24, 2012 8:20PM
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do they think people are stupid ... we cant tell the difference between a bagle thay has been toasted, grilled or nuked or leftover ... boo! Mcedees's
Jul 24, 2012 7:54PM
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Michelle OBAMA is killing fast food places like McDonald's. Michelle has enjoyed the White House life though, her thighs are getting so damn fat it's not funny. Hey Michelle...lay off the trans fat!!!
Jul 24, 2012 7:48PM
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yea ... they should put the microwave away ... the food has turned to slop ... bs draught ......wyandotte mi 48192
Jul 24, 2012 5:33PM
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Agreed mwlee300.

Also, no one in my circle of friends even thinks about MCD. If they want fast food, it's always In-N-Out. People really are starting to wake up, and know now to appreciate good food and excellent customer service. MCD has run its course. That is all.
Jul 24, 2012 5:17PM
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It would help McDonald's if they were to hire and properly train people who want to work.  At the McDonald's near me, I noticed that 7 out of 10 orders come back because something was made wrong.  Alot of times, it is because the customer will get something in addition for free.  The rest of us just want our order to be right.  I requested a Hot Spicy Chicken sandwich with no mayonnaise.  It took seven tries for them to get that one right.  It came fully dressed the first time.  The second time it came with mayonnaise no lettuce.  The third time, it came with everything except the chicken.  The fourth time, it came with a piece of chicken that was over 30 minutes old, it was dry.  The fifth time, it was fully dressed again.  I forget what was wrong the sixth time, but on the seventh try, it came with chicken and bread, so I just asked for a lettuce cup.  The point is that their employees basically do not pay attention to what they are doing.

Jul 24, 2012 5:07PM
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Or maybe people are waking up and eating food that is better for them, hmmm?
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