Yeah, didn't think so. While everyone else was talking up how restaurants were finally enjoying the spring thaw, I suspected McDonald's (NYSE:MCD) first-quarter earnings would show sales still stuck in a deep freeze. Unfortunately, they were.
The burger giant reported that revenues rose just 1% systemwide to $6.7 billion (3% after removing currency fluctuations), but same-store sales fell 1.7% in the U.S for its third straight quarterly decline. They only managed to inch just 0.5% higher globally.
Profits fell to $1.2 billion, or $1.21 per share, from $1.27 billion, or $1.26 per share last year, a situation McDonald's CEO, Don Thompson, says calls for a "reset initiative" but is one that won't be solved with a "silver bullet." The company serves 70 million customers every day at 35,000 restaurants around the globe, which most would agree is a strong base upon which to grow, but customers are increasingly looking less to McDonald's and more to its rivals for their dining options.
To counteract the decline, the burgermeister says it will continue building on its core menu components, including the Egg McMuffin and the Big Mac, which are responsible for about 40% of total sales, and will do so with a marketing push to better resonate with customers. Where it doesn't think it needs to improve is the breakfast daypart.
While some restaurants have suddenly discovered the waffle as a menu choice to attract customers, McDonald's says eggs, sausage, biscuits, and coffee are sufficient to keep it ahead of the competition. Because it does it fresh -- "We grab fresh eggs, we grill sausage and bake it, we bake biscuits and we toast muffins," said Thompson on the earnings call -- it's not worried about any encroachment others might try to make. Indeed, the researchers at Technomic estimate McDonald's has a 31% market share of the breakfast meal, which generates 20% of its $28 billion in annual worldwide revenue; it's just the rest of the day that it needs to shake up.
While I agree that the newfound emphasis on breakfast by rivals isn't likely to have much impact on McDonald's, I believe the burger chain is going to find difficulty in connecting with customers for the rest of its menu. Consumers are increasingly looking for healthier dining choices, something a burger with fries doesn't connote. It's why the leading fast-casual chains have been so successful: They're adding fresh, natural, higher-quality ingredients in a pleasing dining environment.
And it's not going to be as simple as making cosmetic changes to its restaurants or menu for McDonald's to close the gap. It's gone down this healthy-eating trend before with poor results, likely because the Big Mac remains a central component of its marketing. With greater competition, rising commodity costs, and higher expenses related to store remodelings, investors won't see much if any recovery in same-store sales and its financial performance will likely remain stuck in the same deep freeze regardless of what the weather is like outside.