McDonald's January Sales Aren't As Good as They Seem!

McDonald's reported its comparable-store sales on Monday. At first glance, the metrics look alright, but upon further consideration the picture looks downright gloomy!

Feb 11, 2014 at 11:23AM

Is this the beginning of the end for McDonald's (NYSE:MCD)? On Monday, Feb. 10, the world's largest restaurant chain with a market cap of $95 billion reported that its comparable-store sales rose 1.2% in January compared to the year-ago period. Despite seeing this improvement, a deeper look at the numbers suggests that the company's situation is far from pleasant.

Results were mixed
For the month, McDonald's reported that it saw some improvement in two of its three major segments. In the company's European segment, for instance, it reported that comparable-store sales rose 2%. Despite seeing a pullback in Germany, the company benefited from rising sales in the U.K. and France.

In its APMEA segment (which consists of its operations in Asia Pacific, the Middle East, and Africa), the company did even better. For the month, comparable-store sales rose a whopping 5.4%. Although this sounds impressive, the Foolish investor should be mindful that the rise came from a low base.

Due to concerns over the chicken supply in China that developed in response to bird flu fears, McDonald's reported that its comparable-store sales between January 2011 and January 2012 fell 9.5%. So, as opposed to the rise being attributable to a jump in the company's popularity in China, it can be chalked up to consumers becoming less cautious, as concerns over a potential pandemic have eased up.

Irrespective of the reasons that explain the rise in comparable-store sales that McDonald's experienced in January, it can't be argued that the company's performance in these segments was bad. The company's U.S. segment, however, is another story entirely. For the month, McDonald's reported that its comparable- store sales in the U.S. fell 3.3% due to "broad-based challenges including severe winter weather." While this is entirely possible, is it also possible that something else is brewing that could spell tough times ahead for the restaurant giant?

Competitors are eating McDonald's lunch
Over the past four years, McDonald's has seen its revenue rise 21% from $22.7 billion to $27.6 billion, while net income rose 20% from $4.6 billion to $5.5 billion. For a large company, this is a respectable gain. Nonetheless, concerns that companies like Chipotle Mexican Grill (NYSE:CMG) and Panera Bread (NASDAQ:PNRA) are posing a threat to McDonald's and rival Yum! Brands (NYSE:YUM) are escalating.

Between 2009 and 2012, both Panera and Chipotle have done really well for themselves. Capitalizing on the idea of fast-casual dining, whereby consumers can grab a meal on the go that is healthier than fast-food alternatives and not much more in terms of cost, has proven a winning strategy.

Over this time frame, Panera saw its sales jump 57% from $1.4 billion to $2.1 billion. This rise was due, in part, to a 20% rise in the number of Panera locations in operation but was also attributable to a rise in the company's comparable-store sales over time. The rise in comparable-store sales, combined with lower costs in relation to sales, allowed the company to experience a 101% rise in net income from $86.1 million to $173.4 million.

Chipotle's performance was even stronger. Between 2009 and 2012, the company's revenue jumped an impressive 80% from $1.5 billion to $2.7 billion. Just as in the case of Panera, Chipotle enjoyed a rise in its comparable-store sales over time but also benefited greatly from a 47% rise in the number of locations in operation. Meanwhile, the gourmet burrito chain saw net income skyrocket by 119% from $126.8 million to $278 million. During fiscal year 2013, Chipotle's trend continued, with both revenue and net income rising 18% to $3.2 billion and $327.4 million, respectively.

Although it's difficult to say that both of these companies are devouring McDonald's and Yum!, it appears to be the case based on the way each business performed throughout 2013. While Yum! saw its revenue rise 26% from $10.8 billion in 2009 to $13.6 billion in 2012 and its net income jump 49% from $1.1 billion to $1.6 billion, the company's performance in 2013 was discouraging.

In its first three quarters of the year, the business saw its revenue fall 6% while net income dropped 39%. This can be at least partially attributed to the company's impairment of its Little Sheep acquisition in China. However, on a comparable- store basis, Yum! saw its sales fall 3% over that time frame. This was driven largely by a 16% drop in the company's China segment but was accompanied by mild contraction in India and 1% gains in the U.S. and in other international markets.

Fortunately for McDonald's shareholders, the company did slightly better than Yum! did. For fiscal year 2013, the business saw its revenue rise 1.9% to $28.1 billion. The bad part about this, though, was the company's rise in comparable- store sales. Compared to 2012, McDonald's saw its comparable-store sales rise only 0.2% with the rest of its growth attributable to additional locations. Ideally, a healthy, growing business would see growth come from additional locations and improved comparable-store sales.

Foolish takeaway
McDonald's January metrics look reasonable at face value, but upon analyzing the data further, the company's situation looks less than ideal. Yes, comparable-store sales rose in both Europe and China. However, the rise in China is serving more as a reversion to the mean than as a barometer for true growth. In the U.S., the company's situation looks downright awful. While it is likely true that winter weather hindered the business, the fear of increased competition from Chipotle and Panera makes an investment in Yum! and McDonald's look far from beautiful.

Despite the problems facing McDonald's, some might say that the company is still one that should be held forever.  But is this true?  Is McDonald's the type of company that Warren Buffett might own or are there better opportunities out there?  As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 

Daniel Jones has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill, McDonald's, and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald's, and Panera Bread. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information

Compare Brokers