Shares of McDonald's
The bad news for investors is that the situation is only getting worse this quarter. With worries over Spain and Greece again spooking investors, the shared currency has fallen to a new two-year low, and is unlikely to recover anytime soon. Assuming exchange rates don't improve, McDonald's will face a significantly greater shortfall in Q3 than Q2 as the chart below indicates.
While euro rates held steady from Q2 2011 until September, current rates are already significantly lower than just a few months ago.
McDonald's isn't only the restaurant cooling off after earnings. Rival Yum! Brands
Feeling the heat
The recession in Europe is just one problem multinational restaurant chains like McDonald's are facing these days. Much of the U.S. heartland has found itself in the midst of the nation's worst drought in 50 years as corn and soybean prices reach record highs, which will lead to higher dairy, beef, pork, and poultry prices that could last into next year. And those increases aren't just limited to the U.S. as they will put a drain on wheat-importing countries in the Africa and the Middle East.
While McDonald's may escape some of the additional costs since it franchises 80% of its restaurants, as opposed to Chipotle which owns all of its restaurants, Mickey D's still takes in about two thirds of its revenue from company-owned stores. With lower prices and narrower restaurant-level margins than Chipotle, McDonald's may feel the sting of the added commodity costs even more so than its burrito-slinging competitor.
Furthermore, considering the drought began in June, McDonald's and other restaurant chains won't begin feeling the brunt of it until this quarter.
On another front, the golden arches is experiencing revamped competition from an unlikely foe north of the border. Tim Hortons,
McDonald's is one of the best-known brands in the world, as visible a success story in business as any, but its shares have struggled this year. The stock is down about 10% after beating all other Dow components last year, indicating that perhaps it was due for a pullback. It's hard to doubt its franchising model long-term, which provides healthy margins due to its global rent roll, and for the buy-and-hold investor, the issues above don't constitute a reason to run from the stock. But through the next several months, shares should continue to feel the pressure from eurozone headaches and rising commodity costs. For the prospective buyer, a better price likely awaits.
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Fool contributor Jeremy Bowman owns shares of Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald's. Motley Fool newsletter services have recommended buying shares of Chipotle Mexican Grill and McDonald's. Motley Fool newsletter services have recommended creating a bear put spread position in Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
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