Analysis: McDonald's Disappointing 2Q Earnings Reflect Larger Economic Trends

  @AlexCKaufman on July 22 2013 10:37 AM
McDonald's
According to a recent email obtained by Bloomberg News, the world’s largest fast-food chain might be considering scaling back some of its less popular offerings. Reuters

It looks like McDonald’s Corp. (NYSE:MCD) should stick to its dollar menu.

The fast-food giant said Monday that it earned $1.4 billion in its second quarter and revenue rose to $7.08 billion, slightly missing analysts’ expected $7.10 billion as it -- yet again -- struggles to wow investors.

A key measure of sales rose by just 1 percent -- like many other companies reporting earnings this season, revenue growth did not match earnings -- and CEO Don Thompson warned that results for the rest of 2013 are likely “to remain challenged.”

McDonald’s has suffered a string of disappointing monthly sales as consumers spend less dining out, leaving rival hamburger chains to duke it out in a more competitive market. In April, the Oak Brook, Ill.-based company cautioned that first-quarter sales at established stores would be slightly negative for another consecutive period.

At the same time, Burger King and Wendy’s have swooped in to seize part of the market share.

“The battle for market share has become so critical that we’re willing to sacrifice some margin,” Chief Financial Officer Peter Bensen said in a conference call with investors in April, “if that’s what we have to do to win.”

Food-service sales fell by 1.2 percent in June, the largest decline since February 2008, and year-over-year growth in the number of people eating out at restaurants rose by a paltry 3.1 percent – the lowest annual increase since June 2010.

And McDonald’s is feeling that pinch.

But, as it promised after its lackluster first-quarter results, the golden-arched mega-chain focused in on its value menu.

For now, that has helped.

A survey by Placed Insights of customers at McDonald’s, Burger King Worldwide (NYSE:BKW) and Wendy’s (NASDAQ:WEN) found that 77 percent of those at the Golden Arches ordered off the dollar menu in April. In comparison, 40 percent of Wendy’s customers ordered from its “right price right size” menu, and 58 percent of Burger King visitors bought food from the “BK Value Menu.”

And McDonald’s is trying to grow its business in emerging markets, but unlike competitors such as Yum! Brands (NYSE:YUM) – which owns Taco Bell, Kentucky Fried Chicken and Pizza Hut – it has looked beyond China.

As Yum! sees a headwind of slower growth from China, McDonald’s announced the opening of its first location in Vietnam, slated to open its doors early next year.

But the results of those investments seem slow to pan out as the chain falls victim to economic gusts that are out of its control. As the Wall Street Journal noted in its report on Monday’s earnings, the disappointing report adds “more evidence to the story that the economy, rather than picking up, has stalled.”

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