Get Ready for McDonald's Coming Summer Swoon

Nothing good can come out of the burger joint's coming earnings report.

Jul 18, 2014 at 1:20PM


Earnings from McDonald's (NYSE:MCD) are due out next week, and investors should prepare themselves for the worst. After a brief spring thaw in April when comparable sales barely managed to break even with last year's results, they turned south again the following month and all signs are pointing to another dismal performance.

Despite many upbeat prognostications about how things can turn around for the burger chain, I've been skeptical of the rosy outlook because consumer dining preferences have changed. Not just in their opting to eat at classier fast-casual joints, but in the foods they're eating, too. 

Earlier this year the industry was anticipating a recovery because comps across the sector improved, but I pointed out how traffic was still falling, which to me was the more serious problem. The higher comparable sales were registered because prices were rising, not due to consumers eating out more often.

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Yet analysts at Janney Capital Markets said McDonald's franchisees had a bounce in their step during the winter freeze and were looking for spring to bring with it higher sales. While that did not pan out, as we subsequently saw, the analysts are back with another forecast, and this one is downright gloomy. If even the franchisees are biting their nails, there's small hope the burger joint will surprise the market to the upside.

Nation's Restaurant News reported the franchisee survey the analyst conducted (just as it does before every earnings report), and the outlook for the restaurant chain is the worst it's ever been since it began taking the pulse of the business. On a scale of 1 to 5, with 1 being the worst and 5 being excellent, franchisees registered a sentiment of just 1.8, well below the 2.9 historical average. Moreover, while a quarter of the respondents blamed the economy for the state of affairs, more than half said the problems were internal at McDonald's itself.

The biggest problem they cited was the constant rollout of new products. Not only was it confusing to customers, but it cost the franchisees a lot of money to implement them. In doing so, McDonald's has lost its identity with the consumer.

Burger King Worldwide (NYSE:BKW) recognized a similar problem in its own operations and made a conscious effort to limit new menu items. While some still find their way into its restaurants, like its Satisfries addition, in general the burger shop keeps new items to a minimum. And now it's further differentiating itself from the competition by rolling out, market by market, a novel home delivery service, BK Delivers. Like McDonald's, Burger King and other fast-food restaurants offer more delivery service internationally; here in the U.S. it's a fairly rare occurrence. 

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The worry here for McDonald's is that the market trends aren't improving. According to Black Box Intelligence and People Report, restaurant comps turned negative in June and traffic plunged further south. Now the MillerPulse Report is out, and it's finding the same discouraging results, as same-store sales and traffic fall far below year-ago numbers.

What we have is evidence piling up that the industry as a whole is sickly, but McDonald's has a special problem in that its franchisees feel the burger chain has additional baggage it's carrying. With over 14,000 restaurants in the U.S. and more than 5,000 worldwide, this is a significant enough vibe that although McDonald's stock is only a little below its all-time record highs, it may soon be jumping from the frying pan into the fat fryer.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Apple, Burger King Worldwide, and McDonald's. The Motley Fool owns shares of Apple. 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.

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Jun 12, 2015 at 5:01PM

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