McDonald’s: Hungry for New Offerings

by Alyssa Oursler | October 19, 2012 1:23 pm

McDonald’s: Hungry for New Offerings

For McDonald’s (NYSE:MCD[1]) shareholders, 2011 was an incredible year[2].

And boy, does 2011 feel like a lifetime ago.

The Golden Arches have lost their shine in 2012, with MCD around 10% in the red since January — thanks in part to a 3% drop following Friday’s uninspiring earnings report.

McDonald’s third-quarter profits slipped 2 cents per share to $1.43, about 5 cents less than analysts expected. That came on a slight uptick in revenue, from $7.17 billion to $7.2 billion.

The big red flag waving investors away Friday, though, was same-store sales — a metric McDonald’s has struggled with all year. Global same-store sales rose just 1.9% — the first time in nine years that number dipped below 2% — and are trending negative so far for the fourth quarter.

Ouch.

In some ways, though, McDonald’s doesn’t have anyone to blame but itself.

Sure, there’s that whole global slowdown, complete with austerity measures in Europe, an uncertain recovery in the U.S. and a soft landing at best in China. Plus, a negative currency exchange, which shaved 8 cents off of earnings, isn’t helping things either. We get it: It’s a tough time to be the world’s largest fast-food chain.

But at the same time, one would think that cash-conscious customers would actually flock to the low-price chain as a cheaper eating-out alternative to options from The Cheesecake Factory (NASDAQ:CAKE[3]) to Chipotle (NYSE:CMG[4]). Really, McDonald’s is to restaurants what Wal-Mart (NYSE:WMT[5]) is to retail — and the big-box discounter’s performance is on par with the McDonald’s of last year, thanks to the same penny-pinchers.

So, what gives? One piece of the puzzle, here at home at least, is that McDonald’s hasn’t given customers new reasons to come by. Its competitors, on the other hand, have been busy trying to do just that.

YUM Brands’ (NYSE:YUM[6]) Taco Bell, to start, debuted its Doritos Loco Taco, then followed that with its premium but still pretty cheap Cantina Line. Burger King (NYSE:BKW[7]) also featured a limited-time menu with a summer of bacon sundaes, sweet potato fries and BBQ. More recently, it debuted Cinnabon Minibon rolls and a gingerbread cookie sundae for the holidays[8]. Heck, even Domino’s Pizza (NYSE:DPZ[9]) mixed things up by tossing out a pan pizza[10].

From McDonald’s, though, all we’ve gotten is talk: talk of more chicken, talk of a limited-time menu, talk of a soon-to-come McRib. Sure, there were two vegetarian restaurants in India[11] and McNoodle-testing in Austria[12].

But other than that, the only real things the fast-food chain has added were the unappealing box of chicken poppers, menu calorie counts[13] and vague promises about being nicer to the animals it turns into Happy Meals. And even that move hardly sets it apart from Burger King, Dunkin Brands (NASDAQ:DNKN[14]), Wendy’s (NASDAQ:WEN[15]), Subway and even supermarkets like Kroger (NYSE:KR[16]) and Safeway (NYSE:SWY[17]), all of which have made similar vows.

Right now, there’s the annual McDonald’s monopoly promotion, but I don’t know anyone — besides my brother, who has over 100 pieces and no prizes — who actually plays anymore. Seems that the novelty has worn off after all these years.

Last year was quite a different story. The company expanded its line of specialty coffee and smoothie drinks, which were not only loved by consumers but had the added benefits of being between-meal snacks and boasted high margins.

Heck, sales of McDonald’s mango pineapple smoothie were so good last summer that the company actually blamed its drop in July same-store sales[18] on the popular product. If I were McDonald’s, I’d stop pointing fingers at our old smoothie and try debuting another one.

The good news from all this, though, is that McDonald’s struggles have actually put the chain itself on the value menu. The blue chip now trades at 15 times forward earnings — a steal compared to competitors Burger King and Wendy’s, which each trade above 20.

And McDonald’s still boasts a global reach and a strong brand. It’s a consistent top-10 pick on Interbrand’s list of the Best Global Brands[19] — ranking seventh this year — while no other fast-food name even makes the top 50. Plus, it offers a solid dividend yielding 3.42%, nearly double the yields of YUM Brands and Wendy’s.

Throw in the potential upside of a back-on-track economy and some new items to lure in munching customers, and the stock could be ripe for a turnaround — in 2013, that is. For now, Ronald McDonald & Co. seem too busy missing the golden days of 2011 to make any progress in 2012.

As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.

Endnotes:
  1. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  2. 2011 was an incredible year: http://investorplace.com/2011/12/best-worst-dow-stocks-201/
  3. CAKE: http://studio-5.financialcontent.com/investplace/quote?Symbol=CAKE
  4. CMG: http://studio-5.financialcontent.com/investplace/quote?Symbol=CMG
  5. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  6. YUM: http://studio-5.financialcontent.com/investplace/quote?Symbol=YUM
  7. BKW: http://studio-5.financialcontent.com/investplace/quote?Symbol=BKW
  8. for the holidays: http://www.foxnews.com/leisure/2012/10/18/burger-king-announces-new-seasonal-holiday-desserts/
  9. DPZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=DPZ
  10. tossing out a pan pizza: http://investorplace.com/2012/10/dominos-pizza-right-company-wrong-time/
  11. two vegetarian restaurants in India: http://investorplace.com/2012/09/where-mcdonalds-will-be-testing-mcnoodles/
  12. McNoodle-testing in Austria: http://investorplace.com/2012/09/where-mcdonalds-will-be-testing-mcnoodles/
  13. menu calorie counts: http://investorplace.com/2012/09/mcdonalds-major-change-to-menu-boards/
  14. DNKN: http://studio-5.financialcontent.com/investplace/quote?Symbol=DNKN
  15. WEN: http://studio-5.financialcontent.com/investplace/quote?Symbol=WEN
  16. KR: http://studio-5.financialcontent.com/investplace/quote?Symbol=KR
  17. SWY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SWY
  18. drop in July same-store sales: http://investorplace.com/2012/08/whats-with-mcdonalds-poor-july-sales/
  19. Best Global Brands: http://www.rankingthebrands.com/The-Brand-Rankings.aspx?rankingID=37&year=523

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