McDonalds

More Disappointing McDonald's News: Declining July Sales

More Disappointing McDonald's News: Declining July Sales

On Wednesday, McDonald’s Corporation (NYSE:MCD) reported a disappointing July sales report with stores open at least 13 months, unchanged globally. This came in lower than analysts estimates of a 2.3 percent increase. Domestic sales also dropped, 0.1. percent; this was also lower than 2.2 percent forecasts.

The U.S. decline represents the weakest performance for McDonald’s since January 2010, reported Bloomberg.

So what happened with the disappointing numbers? McDonald’s Corporation (NYSE:MCD) saw its customers taken away by its competitors, and a weak U.S. economy keeping consumers from spending money. The company rolled the dice on their extra-value menu, while its rivals, including Yum! Brands, Inc. (NYSE:YUM) and The Wendy’s Company (NASDAQ:WEN) were more inventive.

Success for Yum has been found with its Taco Bell chain. In July, restaurants open at least a year incurred double-digit revenue growth, reported USA Today. The restaurant’s new Doritos-flavored tacos are helping to drive this.

In April, Burger King Holdings, Inc. (NYSE:BKC) updated its menu and kicked off a new ad campaign. In its second-quarter earnings report last week, the company said revenue at established restaurants increased 4.4%. Here’s our take on its report.

And for Wendy’s, it’s trying to give its image a facelift by moving towards a higher-end hamburger restaurant. On Thursday, the company will report its quarterly earnings.

 Sara Senatore, a Bernstein analyst, said to USA Today, “McDonald’s may be underperforming the industry, which is not typical for them.”

But McDonald’s isn’t alone in seeing U.S. sales decline. Starbucks Corporation (NASDAQ:SBUX) and Chipotle Mexican Grill, Inc. (NYSE:CMG) have experienced the same, also partially attributed to gloom and doom felt by consumers; in July, confidence dropped to its lowest point this year.

Higher food costs are also affecting sales, as McDonald’s and its competitors will see greater costs in beef and dairy. In July, the Department of Agriculture forecast up to a 4 percent rise in 2013 for food prices.

Making matters worse for the company, McDonald’s declining sales weren’t limited to the U.S. in July. European sales were off 0.6 percent and in Asia Pacific, the Middle East, and Africa, sales declined 1.5 percent. Analysts have estimated increases of 2.4 percent and 1.4 percent, respectively.

Japan was especially hard hit, as its same-store sales fell 4.1 percent last month.

According to Bloomberg, McDonald’s has about 33,700 stores worldwide, with about 19 percent company owned and operated.

What’s next for McDonald’s?

In July, McDonald’s reported its second quarter net income declined 4 percent, thanks to a stronger U.S. dollar and high costs cutting profits.

At the time, NBG Productions analyst Brian Sozzi said via the Wall Street Journal, to stay away from the company. He wrote:

– Don’t have the wool pulled over your eyes. McDonald’s Corporation (NYSE:MCD)“reported basis” results, specifically operating income and earnings per share, are at risk of underwhelming the Street until analysts factor in more of top-line currency pressure. Additionally, on a reported basis, McDonald’s is a company logging low-single digit gains, or potentially slight declines, in operating earnings pending less blowing of currency headwinds.

– Decoding a CEO: To hear a CEO state that results were “solid” in a “slowing global economy” is to suggest that in a new leg down in global growth (which is certainly in play) performance could be “disappointing.” Not exactly confidence inspiring.

– Slowing reported-basis sales growth plus investment in everyday values and the store network is an equation for poor near-term profit trends.

– McDonald’s has effectively warned on sales for the third quarter. Hard to invest in a still richly valued, slow growing dividend-payer when it’s flat-out saying its performance is worsening.

As for McDonald’s Corporation (NYSE:MCD), it hasn’t given up. Earlier this week, it said it will appeal to its U.S. customers through variety and innovation, reported Bloomberg.

 

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