Is McDonald's Destined for Failure?

Source: Wikimedia Commons

No matter how you look at it, the situation at McDonald's (NYSE: MCD  ) appears to be anything but good. The company's management team released an announcement that detailed its sales performance during the month of February. The announcement suggests that the company is having a difficult time in the U.S. and throughout its APMEA segment (which consists of the Asia/Pacific region, the Middle East, and Africa), while Europe is still a reasonable source for growth.

The U.S. and APMEA segments are suffering!

For the month, McDonald's reported that global comparable-store sales declined 0.3%. This decline came about because of poor domestic sales in combination with mixed results abroad. In the U.S., for instance, the company saw its comparable-store sales drop 1.4% as the business was confronted with "challenging industry dynamics and severe winter weather".

Year-to-date, the company's U.S. performance has been even worse with comparable-store sales down 2.4%. Although this looks bad, it's not terribly different from the 2% drop in comparable-store sales reported by Yum! Brands (NYSE: YUM  ) during its most recent quarter.

In its APMEA segment, McDonald's results were even less appealing. During the month, comparable-store sales fell 2.6% driven for the most part by weak sales in Japan and Australia. The company also experienced a drop in comparable-store sales in China, but management attributed this to a shift in the timing of the Chinese New Year.

Despite this lackluster performance in its APMEA segment for the month, McDonald's saw positive performance year-to-date with comparable-store sales up 1.6%. This stands in stark contrast to the 5.8% decline in comparable-store sales it experienced during the first two months of 2013 when stacked up against the same time-frame of the prior year. However, this data is somewhat deceptive as the company was rebounding from concerns over the avian flu in China between 2012 and 2013, so its 2012 numbers came from a low base.

Just like McDonald's, Yum! has faced significant challenges abroad. In its China segment the company reported a 4% falloff in comparable-store sales for its most recent quarter and a 13% falloff for the year. This drop in sales resulted from the same fears which have harmed McDonald's, but it has been offset by a significant increase in the number of locations in operation throughout the country.

Is Europe the future of the company's growth?

Source: McDonald's

In spite of these setbacks in the U.S. and most international markets, McDonald's has seen some good numbers in Europe, with comparable-store sales rising 0.6% for the month. This rise can be chalked up to strong growth in both France and the U.K. but it was partially offset by a weak German market.

Year-to-date, the company has seen even better growth with comparable-store sales rising 1.3%, after it experienced a 1.3% drop during the same time-frame of the prior year. Unfortunately, Yum! does not provide comparable-store sales data for Europe specifically, but the company does provide information on what it calls its YRI segment. This segment consists of, for all intents and purposes, the business's international operations with the exclusions of China and India.

During the quarter, this segment's operations grew comparable-store sales by 2% but it only reported a 1% rise for the year. Throughout Continental Europe, Yum! saw systemwide sales rise 5% for the quarter and 3% for the year. There is no way to separate this result into comparable-store sales growth and the impact of additional locations being put into operation, but the data does point toward growth in the region.

Foolish takeaway

Based on the data provided, it looks as though both McDonald's and Yum! are experiencing considerable difficulties throughout the U.S. and several international areas. In the U.S. this is likely attributable to the advent of fast-casual chains like Chipotle Mexican Grill and Panera Bread Company, whereas each company's international troubles stem from either economic or environmental issues that are difficult to single out.

Moving forward, both businesses have their work cut out for them but they are far from dead. If McDonald's and Yum! can utilize their resources and find new and innovative ways to keep up with competitors that are more in-tune with changes in consumer trends, their futures could be brighter than ever. Of course, investors need to carefully watch whether these companies' managements are able and willing to make these changes as a basis for their investment theses.

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  • Report this Comment On March 15, 2014, at 5:19 PM, WallaceNDavis wrote:

    McDonald's difficulties are "ikely attributable to the advent of fast-casual chains like Chipotle Mexican Grill"? Chipotle has been around for 21 years. McDonald's owned it for a while. But NOW it's causing problems for McDonald's? McDonald's (and other QSRs) may be losing customers but certainly not because those customers want to spend MORE at Chipotle or Panera.

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