McDonald's (NYSE:MCD) has normally been a safe bet to beat earnings expectations. For several quarters, it has been able to do better than what analysts were expecting. But that changed this month when it released its third-quarter results and failed to beat expectations, sparking concerns that the competition may have gained an advantage over the popular fast-food chain.
It also didn't help that the earnings miss was significant, with EPS of $2.11 falling well below the $2.21 that analysts were looking for. Sales were closer, but at $5.4 billion, they also missed expectations of $5.5 billion.
Same-store sales offer mixed results
It wasn't all bad news, however, as the company's same-store sales growth of 5.9% beat the 5.6% that was expected. Comps are especially important for a company like McDonald's that is always looking for ways to grow its top line despite dealing with a lot of saturation and heavy competition.
The problem is that it wasn't an improvement across the board. At home in the U.S., comps were up just 4.8%, and that fell short of the 5.2% that analysts were expecting. One of the reasons results were more challenging domestically was greater competition, with CFO Kevin Ozan stating on the earnings call that there "was some competitive pressure mid-August, probably through mid-September, that seem to lessen as we ended the quarter."
One example where McDonald's lost footing to its rivals this year was in the craze surrounding plant-based burgers. While competitors were adding meatless options to their menus, McDonald's didn't announce it would start testing its own version of the products until later in the quarter, when the company said it would try a PLT (plant, lettuce, and tomato) burger in Canada.
If it launches the plant-based product in the U.S., it could re-energize the restaurant and help improve its comps. But at this stage, it's still a question of if and when. With a lot of consumer demand for these types of products, McDonald's may need to have one in the U.S. market sooner rather than later if it wants to avoid another less-than-stellar performance.
Should investors be concerned?
Although McDonald's fell short of expectations, this may be too early for investors to start selling shares -- at least for now. It underperformed during a three-month period, but it's more than capable of recovering. Whether by adjusting menu items or adding new promotions, McDonald's has been an adaptable company as tastes change, and depending on which part of the world a given restaurant is in.
The company still posted a strong profit, which was down a modest 2% from a year ago, and there aren't any glaring concerns that suggest that its business is broken. The quarter may prove to be nothing more than a minor setback, and I wouldn't suggest jumping ship until there are multiple periods where McDonald's has underperformed.
However, there are certainly risks ahead, especially with Wendy's (NASDAQ:WEN) looking to launch a breakfast menu early next year, which will make things even more competitive. It'll be a big test for McDonald's to see whether it will be able to rise to the challenge or if it'll lead to more disappointing results.
As for the stock, it's certainly a bit pricey, trading at a P/E of more than 25, which is high given the questions surrounding its growth. If you're holding the stock, I'd certainly hang in there for now, especially if you're a dividend investor. But I wouldn't buy shares unless the stock dips further in price and becomes a better value buy.