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.

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 (2)

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: 2988883, ~/Articles/ArticleHandler.aspx, 10/23/2014 7:31:45 AM

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...


Advertisement