It has been a rough ride for McDonald's (NYSE:MCD) stock lately, with shares down nearly 4% year-to-date. The fast food chain suffered recently following declining same-store sales in the U.S. and challenges in China involving an expired meat scandal. Yet, with shares of Mickey D's currently trading around the stock's 52-week low, many investors are considering buying the stock. However, investors may want to wait on the sidelines for now.
The importance of brand image
McDonald's brand image is once again under attack. This week, a man from New Brunswick, Canada claimed to find a dead mouse in his Mickey D's coffee after taking the lid off to drink the last sip. McDonald's Canada responded with a statement saying, "We are continuing to investigate this isolated incident and have reached out to the customer to obtain the product sample."
This is reminiscent of the 2005 case in which a woman claimed to find a severed fingertip in her Wendy's (NASDAQ: WEN) chili. The Wendy's incident ended up being a hoax and the woman and her husband went to jail, but not before immensely tarnishing the fast-food chain's brand. Wendy's lost $2.5 million in sales because of bad publicity at the time and was forced to layoff dozens of employees as a result.
Therefore, whether the recent McDonald's story ends up being accurate or not is of little consequence, as the PR damage is already done. In fact, it didn't take long for the news to become a trending topic on Twitter. This crisis comes at a bad time for the burger and fries giant. McDonald's business in China has suffered recently after a food safety scare in which one of McDonald's suppliers was relabeling expired meat for use in its Asian restaurants. China is McDonald's third largest market today, with about 2,000 restaurants in the region.
Publicity scandals such as these often cause consumers to think twice before grabbing a bite at their local McDonald's. This ultimately has a damaging affect on sales. McDonald's same-store sales in its Asia Pacific segment declined 9% in the latest quarter, with operating income falling 55% in the period. Management said this was "due primarily to the impact of the supplier issue on sales and profitability in China, Japan and certain other markets." And Asia wasn't the only problem. In fact, McDonald's suffered declines in all of its market segments in the third quarter.
For the period ended Sept. 30, McDonald's comparable sales in the U.S., the company's largest market, declined 3.3% due to weak guest traffic at its restaurants. Profits also took a beating, with net income falling 30% to $1.06 billion in the quarter. As if those results weren't bad enough, there could be more sales declines ahead for the fast-food company as potential customers are now weary of finding a rodent in their McDonald's beverages.
Nevertheless, one positive sign to emerge from the earnings announcement was that McDonald's chief executive, Don Thompson, finally recognized that the company has a problem. In a letter to shareholders Thompson said, "We recognize that we must demonstrate to our customers and the entire McDonald's System that we understand the problems we face and are taking decisive action to fundamentally change the way we approach our business."
Staging a turnaround
Admitting you have a problem is certainly a step in the right direction. However, revamping McDonald's brand image and getting consumers back into its restaurants will take time. After all, if McDonald's wants to turn things around it needs to regain the trust and confidence of its customers. To jump-start its turnaround efforts management is implementing a new strategy that involves new digital offerings including mobile services and Apple Pay.
The company is also tweaking menus to cater to local tastes and launching a new marketing strategy that focuses on national messaging promoting McDonald's food quality. While these initiatives are much needed, the turnaround could take a while, and it isn't clear this is the lowest the stock will go.
Tamara Rutter has no position in any stocks mentioned. The Motley Fool recommends McDonald's. 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.