McDonald’s (MCD) is as blue chip as a restaurant can be, but the company has been treading water this year and seems to be unable to make any serious movement. The latest sign of that struggle comes from its latest quarterly report, which was released on July 26.
While sales are up at stores older than a year old for the fourth quarter in a row, overall sales failed to meet expectations. Shares dropped by 4.5 percent on the news, as investors are bearish on the company’s ongoing plans to improve sales in the U.S.
One of the problems is that McDonald’s much-hyped “all-day” breakfast offerings seem to be declining in popularity. These all-day breakfast offerings were more than mere marketing hype. For McDonald’s, it was the biggest operational change in the company since 2009, according to the Wall Street Journal. The breakfast offerings launched less than a year ago in October 2015, so for the popularity to already be declining is something worth worrying about.
Singling out McDonald’s might be a little unfair, as the entire fast food industry is going through some troubles. The dining landscape is changing, and companies such as McDonald’s are trying to adapt.
“Fast casual” companies like Panera Bread (PNRA), Chipotle (CMG), and Shake Shack (SHAK) have been winning over customers the past decade. They are willing to pay a little extra for better food and a higher-quality dining experience while forgoing fast food staples such as Burger King, McDonald’s and YUM! Brands (YUM).
New data, however, shows that all restaurants have been struggling for much of 2016. Fast food restaurants had been growing at a healthy 2 percent quarterly rate since fall 2015, but showed zero growth for March, April and May. Exacerbating the problem is that the gap between grocery store prices and fast food prices is widening, with customers aware fast food isn’t providing the same value as before.
Those are worrying signs not just for McDonald’s but the rest of the industry. All-day breakfast won’t have much of an impact if customers are completely unwilling to go out to eat as often as they once did.
One of McDonald’s strongest assets has been its international presence. The company’s golden arches are recognizable symbols throughout the world, and it has made promising gains in numerous international markets.
Sales in the company’s “high-growth unit” that includes China were up 1.6 percent for the quarter. McDonald’s is changing the way it does business in Asia, as it’s looking to sell company stores and find franchisees to take on the businesses. Pushing for franchises is a good idea that helped build the U.S. market to great popularity. It also means less risk for McDonald’s.
Even if the company achieves great success abroad, it’s important for McDonald’s to turn things around in the U.S. With 14,000-plus stores in the U.S., there are almost as many stores in this market as the rest of the world combined.
Buy, Sell or Hold?
McDonald’s is no doubt a strong company with solid financials. Its dividend yield of almost 3 percent is attractive. The company is also a good way to hedge against economic uncertainty, as fast food restaurants perform better when the economy is down.
For all of McDonald’s strengths, however, investors might not have a lot of patience while waiting to see if the company can boost sales and meet expectations. Investors might be wiser putting their money elsewhere at the moment, as it could be a long wait until McDonald’s truly gets back on track. For now, we’ll have to wait and see what McDonald’s next big move is toward increasing sales in the U.S.