Is McDonald's Witnessing a Thaw at Last?

Despite the restaurant industry compiling its first back-to-back growth in monthly comps since last November, don't expect that to herald a major turnaround for McDonald's (NYSE: MCD  ) . The fast-food chain is seeing improvement, but not so much that investors ought to warm up to it just yet.

According to the latest Black Box Intelligence and People Report, restaurants recorded same-store sales growth of 0.6%, a decline of 0.1% from the comps growth reported for March, but marking the first time in five months the industry has been able to string together two straight months of growth. Even if that is a noteworthy achievement, restaurants are still unable to get customers in the door, as traffic fell 1.1%, just slightly better than the 1.2% drop in March. That means that every single month since March 2012, comp traffic has fallen.

The industry wants to spin this news as meaning the second quarter is off to a good start. Comps are up and traffic is at least moving in the right direction. Since restaurants have recorded three consecutive quarters of negative comps, this at least presents hope that they'll be able to notch one quarter that's finally in positive territory. I'm not sure the story is all that good.

Since traffic is down, the higher same-store sales restaurants are experiencing is coming from higher pricing and a certain level of cost-cutting, not actually having more people come out to dine. That's not a healthy environment. Moreover, the industry wants to believe the positive comps are a result of the country thawing out from a particularly cold winter, but as the Black Box Intelligence report shows, the best improvement seen in the country last month was the west -- the second time in as many months -- not exactly a region prone to crippling snows.

I've disparaged those chains like McDonald's that relied on the "snow in winter" excuse rather than the broader economy to explain away their poor performance. The chain only just got back to even in terms of same-store sales in April, but it should be remembered that it sponsored a free coffee giveaway to blunt the impact caused by Taco Bell and White Castle targeting the breakfast daypart.

Source: McDonald's SEC filings.

McDonald's dominates breakfast with a 31% market share, according to the market researchers at Technomic, and the daypart accounts for 20% of its $28.1 billion in annual worldwide revenues. Investors need to see what it does next month when it doesn't have that limited-time offer running.

Last month, the fast-food giant reported that revenues in the first quarter rose just 1% systemwide to $6.7 billion (3% after removing currency fluctuations) while profits tumbled to $1.2 billion from $1.27 billion in the year-ago period. On a quarterly basis, McDonald's comps are still on a downward trajectory -- three straight quarters in a row, just like the broader industry. As its coffee business is one of the key reasons for its morning preeminence, absent a promotional environment I'm not certain it can maintain that improvement.

The restaurant industry sees this period as one of slow, steady gains, and one can say McDonald's is following suit. With its stock having bounced 10% off its recent lows, it's going to take at least another month before investors can determine whether this is a real recovery.

While this report may mean the worst is over, the spring has often been the peak of its performance. As its subsequent highs never reach the same level they did before, I'll need to see more proof that McDonald's winter freeze has really thawed and the current gains are not just some warmed-over head fake like those it's given before.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2953500, ~/Articles/ArticleHandler.aspx, 8/30/2015 12:06:29 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


Today's Market

updated 1 day ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:00 PM
MCD $96.25 Down -0.23 -0.24%
McDonald's CAPS Rating: ***