McDonald's (MCD +0.85%) spokesclown Ronald McDonald has an updated wardrobe and a new social media presence to match. Ronald's modernization comes as the fast-food chain strains under competition from the likes of Burger King Worldwide (BKW +0.00%), Yum! Brands (YUM +0.81%), and Wendy's (WEN +3.05%). McDonald's performance suffered last year as an overcrowded menu failed to find a following, and the new first-quarter report shows continuing problems. Can McDonald's reinvent its way out of a rut?
Source: McDonald's.
The company met first-quarter revenue estimates of $6.7 billion but missed earnings-per-share estimates with a reported $1.21 compared to the expected $1.24. But the results look worse when breaking down comparable-store sales and operating income by region. And comparing those numbers to the competition further shows that McDonald's growth rates have hit a rough spot.
What were the most concerning details from the first-quarter report? And will these problems continue with or without McDonald's brand-reinvention attempts?
Regional comps improve, operating income slips
McDonald's first-quarter performance was a mixed bag when viewed according to the three reported regions: United States, Europe, and Asia/Pacific, Middle East, and Africa -- or APMEA. Comps improved for Europe and APMEA but slipped in the United States.
| Region |
Q1 2013 |
Q2 2013 |
Q3 2013 |
Q4 2013 |
Q1 2014 |
|---|---|---|---|---|---|
|
U.S. |
(1.2%) |
1% |
0.7% |
(1.4%) |
(1.7%) |
|
Europe |
(1.1%) |
(0.1%) |
0.2% |
1% |
1.4% |
|
APMEA |
(3.3%) |
(0.3%) |
(1.4%) |
(2.4%) |
0.8% |
Comparable-store sales by region. Source: Company filings.
But operating income only improved in Europe.
| Region |
Q1 2013 |
Q2 2013 |
Q3 2013 |
Q4 2013 |
Q1 2014 |
|---|---|---|---|---|---|
|
U.S. |
(3%) |
0% |
5% |
1% |
(3%) |
|
Europe |
1% |
5% |
11% |
3% |
6% |
|
APMEA |
(1%) |
(1%) |
(12%) |
(8%) |
(10%) |
Operating income growth, year over year. Source: Company filings.
The primary problem is that McDonald's has major weaknesses in each region with the exception of the U.S., which is a weakness in and of itself. McDonald's plans to focus on stabilizing performance in the "key priority markets" of the U.S., Germany, Australia, and Japan.
How does the company plan to stabilize those markets? President and CEO Don Thompson outlined a four-point plan during the first-quarter conference call:
- Improve planning process to better balance customer desires with the company's financial needs.
- Strengthen marketing initiatives.
- Restructure menu pricing for value and consistency.
- Rebalance menu offerings to focus more on core, proven products such as the Big Mac and Egg McMuffin.
The former two points are obvious strategies that any company uses to improve its performance in any market. But the latter two show the origin of McDonald's current stagnation: Regular customers still like the core products, but new products aren't bringing in fresh customers.
It's a problem that has spread across the fast-food industry as more chains have focused on limited-time-only menu promotions. But other chains have had better luck. So how well is McDonald's keeping up with the competition?
Competitor comparison
McDonald's leads the industry in revenue and market cap. But the growth numbers aren't as strong. Here's a look at the revenue growth rates of the major chains over the past five years:
McDonald's revenue (quarterly) data by YCharts.
Granted, it's easier to maintain high revenue growth when a company's starting from a lower position. But McDonald's treading water can give the other companies time to bridge more of the gap.
Comparing global comps further shows that McDonald's isn't in a strong growth position.
| Company |
Q1 2013 |
Q2 2013 |
Q3 2013 |
Q4 2013 |
|---|---|---|---|---|
|
McDonald's |
(1%) |
1% |
1% |
0.1% |
|
Burger King |
(1.4%) |
0.6% |
1% |
1.7% |
|
Yum! |
(17%) |
(18%) |
(10%) |
(4%) |
|
Wendy's |
0.8% |
0.3% |
3.2% |
3% |
Global comparable store sales. Source: Company filings.
Wendy's late-year comps improvement was thanks to the massive success of the limited-time-only Pretzel Bacon Cheeseburger, so the company's comps might not stay as strong if its newer short-term menu products fall flat with customers. Yum! Brands' performance was yanked down by the double-digit negative comps out of China, where a poultry scandal hit KFC's bottom line.
Burger King's the surprise story in that the company has slowly grown comps while few people were looking. The company last year released its own versions of McDonald's Big Mac and McRib sandwiches, and that could prove a further boost for Burger King -- and lower comps for McDonald's.
Foolish final thoughts
McDonald's is still a successful global presence, but the company's growth has stalled. And the house of Ronald seems mystified on how to change that course. Menu changes last year made things worse, and key markets are in dire need of stabilization. Will McDonald's become a penny stock? Of course not. But the company's worried about the competition -- and with good reason.
