Commentary

McDonald's Results Reflect Restaurant Industry's Woes

What’s happening to lunch? First the Four Seasons closes; then McDonald’s becomes the latest restaurant chain to report disappointing sales in its latest quarter.

“In the U.S., sales at restaurants open at least year increased a sluggish 1.8%, as CEO Steve Easterbrook acknowledged ‘softening industry growth’ in the quarter. McDonald's continues to rely on its all-day breakfast menu to drive traffic, with plans to expand menu options this fall,” Hadley Malcolm reports for USA Today.

Overall, it earned $1.09 billion in the second quarter, or $1.25 a share, “including a 20 cent per share knock due to $230 million in strategic charges” due to its efforts to refranchise thousands of restaurants and move its headquarters to Chicago. “Analysts expected earnings of $1.39 a share, according to S&P Global Market Intelligence,” Malcolm reports.

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As a result, its shares “tumbled 4.5%, marking its worst percentage drop in seven years and cutting about 40 points off the Dow,” according toMarketWatch’s Sue Chang and Ellie Ismailidou.

“The second-quarter report from McDonald's landed after chains such as Dunkin' Brands Group, Starbucks and Wendy's also reported disappointing results for the latest quarter in large part due to weak customer traffic,” Reuters’ Lisa Baertlein observes. McDonald's CFO Kevin Ozan told analysts on a conference call that inflation at restaurants is expected to rise 2.5% to 3.5%, while food purchased at supermarkets and consumed at home is expected to be flat to 1% percent, she reports.

“Analysts were expecting the company’s all-day breakfast gambit to lead it to 3.4% same-store sales growth in the U.S.,” Maggie McGrath reports for Forbes. “It’s not that all-day breakfast had no effect on McDonald’s sales; the company did acknowledge that all-day McMuffin availability helped make up for ‘softening industry growth’ during the quarter. It just didn’t have quite the same impact that analysts were projecting it would.”

And that’s feeding into an increasing sense of gloom among market watchers, not only about macro economic trends and the uncertainly caused by increasing turmoil around globe but also more prosaic issues such as the fact that increases in minimum wages in the U.S. have a greater impact on restaurant prices than they do on supermarkets.

“Last week, a KeyBanc analyst said pizza delivery companies were seeing a surge in business as more people ordered in instead of going to restaurants," writes Samantha Bomcamp for the Chicago Tribune, pointing out that a Stifel Nicolaus analyst turned bearish on a number of restaurant companies yesterday.

Indeed, “analyst Paul Westra downgraded 11 restaurants, including Chipotle Mexican Grill, Darden Restaurants, Panera Bread, Cheesecake Factory and BJ’s Restaurants to sell ratings, an unusual grade for the sector,” MarketWatch’s Tomi Kilgore writes. “Westra said ‘we confidently believe’ that a recent Stifel survey showing restaurant-industry sales decelerating ‘simultaneously’ across all categories ‘is a harbinger to a U.S. recession in 2017.’”

Also, “heightened competition will likely limit sales growth for companies, said Jefferies analyst Andy Barish. He noted that people's options for eating out or dining in ‘have increased tremendously,"’ particularly with the emergence of smaller chains and independent concepts,” according to the Associated Press “That has prompted chains to push more deals in the fight for customers. Wendy's has been promoting a ‘4 for $4’ meal deal, while Burger King recently said it would start a promotion for $1 hot dogs.”

Not that McDonald’s isn’t responding also.

Although all-day breakfast “can’t solve everything,” as the Washington Post’s headline tells us, it has accomplished a lot and the company will make more breakfast items available on its menu later this year.

But “some of McDonald’s less-talked-about initiatives are crucial to its future,” writes Sarah Halzack. “For starters, there’s the McPick 2 program, in which diners pay $2 for two items selected from a limited portion of the menu. It is effectively a replacement of the Dollar Menu, which was popular with value-conscious customers and which McDonald’s has been struggling to retool for years.”

It’s also “testing various new products in different markets, including Chicken McNuggets without artificial preservatives, bigger and smaller Big Macs, and Quarter Pounders made with fresh beef,” Julie Jargon reports for the Wall Street Journal. “The company is also experimenting with self-order kiosks that allow guests to customize their orders, and curbside collection that lets customers who order ahead with a mobile app pick up their food without waiting in the drive-through line.”

“Clearly, we plan to grow our business. But at the same time, we’re not trying to do that on a quarter-to-quarter-to-quarter basis,” Easterbrook said.

Speaking of the longer term, demolition began this week on Harpo Studios on Chicago’s Near West Side, where McDonald’s new two-building, 608,000-square-foot headquarters is expected to open in Spring 2018.

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