McDonald's Heading Into a Deep Freeze Again?

And down we go again! After a brief respite from persistent negative same-store sales when McDonald's (NYSE: MCD  ) achieved parity with April's comps, the fast-food chain returned to form in May with sales at stores opened at least 14 months falling 1% from the year-ago period. The spring thaw seems to have frozen solid once more.

I pointed out last month that over the past few years spring has been the high point of the burger joint's comps, and that whatever gains it makes typically fall off again afterward. More troubling is that the highs it subsequently achieves the next spring never quite reach their prior peak, and the lows seem to go deeper. Now that McDonald's has remained true to form, with comps for April peaking well below last year's high and turning south once more in May, how far will they plunge on the backside of this annual apex?

Source: McDonald's SEC filings.

The Golden Arches reported yesterday that global sales rose 0.9% in May on the strength of a strong recovery in China, but that was going up against the much easier comp from the prior year when sales were affected by a new outbreak of avian flu. Yum! Brands chicken palace KFC was also caught up by the devastating impact of the bird illness that had Chinese consumers shunning all poultry; it watched its comps plunge month after month. By the end of 2013, though, it had regained its footing and in first-quarter results reported in April, Yum! said KFC enjoyed an 11% surge in same-store sales in China.

Like McDonald's, it was being compared against extremely weak results. In the first quarter of 2013, quarterly comps plummeted 20% from the year-ago period, so having a relatively big gain this time around is not so startling. McDonald's as well can't reasonably compare its performance to an outlier to say business is booming.

Industry analysts indicate that restaurants generally aren't faring well now anyway, so there's little hope the fast-food king will recover from here. According to Black Box Intelligence and People Report, although restaurant comps rose 0.6% in May, the third consecutive month of growth, traffic tumbled another 1.5% for its seventh consecutive monthly decline. People are simply not dining out as much, but they're paying more at checkout when they do, which is fueling the rise in same-store sales.

Source: Black Box Intelligence and People Report, and Nation's Restaurant News.

McDonald's admits in its recent press release that it faces "ongoing broad-based challenges," but what's worrisome is that its falling May sales numbers reflect a failed focus that should be one of its key strengths: McCafe coffee.

The morning beverage has always been one of the bright spots in fending off encroachment by Dunkin' Brands, Starbucks, and others that have sought to steal a portion of McDonald's commanding 31% breakfast market share. But in April, McDonald's was likely only able to spike comps by running a two-week promotion giving its coffee away. With that special now behind it, and despite concentrating on the beverage, McDonald's is still returning to form, suggesting deeper problems and more that needs to be done, and quickly.

As McDonald's heads into the summer months, and with its stock trading near historic highs, investors may just want to don their winter parkas again.

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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.


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9/1/2015 4:00 PM
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