A couple of months of disappointing payrolls reports are making investors nervous, and none more so than people holding shares in McDonald’s (MCD). After all, the recession never really ended for McDonald’s … and until it does, MCD stock will continue to underperform.
MCD stock is the most glaring example of what’s happening to food chains that depend on folks with average to lower income. We see the same trend playing out with Darden Restaurants (DRI). The operator of Red Lobster and Olive Garden can’t lure enough cash-strapped customers into its casual dining restaurants, and DRI stock is paying the price.
At the same time, chains that cater to customers with more disposable income are on a tear. Just take a look at Starbucks (SBUX) or Chipotle Mexican Grill (CMG), which are doing very well.
Indeed, it’s a tale of two markets in this industry. Here’s what DRI, SBUX, CMG and MCD stock have done during the past 52 weeks:
MCD is essentially unchanged and DRI stock is just a couple of percentage points above breakeven. Meanwhile, more upscale SBUX is up 32% during the past year. Chipotle has gone bonkers, rising 71%.
The problem for McDonald’s — and by extension, MCD stock — is that people who do have the money to spend on food away from home are opting for pricier, fresher offerings like those available at Chipotle. At the same time, lots of average and lower-income consumers — the people who form the bedrock of MCD’s market — are staying home.
MCD stock caught downgrades recently after the company said U.S. sales came up short last month. Sales at McDonald’s locations open at least 13 months fell 3.3% in January — a much steeper drop than analysts forecast.
McDonald’s blamed the brutally cold weather gripping much of the country, and that’s probably keeping some folks away, but drive-throughs should blunt at least some of the cold-weather impact.
Analysts say the sluggish economy is what really ails McDonald’s. That’s why MCD stock was under pressure from soft domestic sales long before the recent cold spell. Take a look at this chart of McDonald’s quarterly year-over-year revenue growth for the past five years:
Quarterly revenue growth actually flatlined for a time in 2012. It barely grew last year, and showed no signs of picking up.
Nope, this isn’t just a matter of Chipotle or Panera Bread (PNRA) stealing away market share. It’s a symptom of the uneven economic recovery, where stocks are notching all-time highs even as the labor market remains stagnant.
People who are doing comparatively well and feeling more confident nearly five years after the official end of the recession might be going to pricier chains, but the real problem for MCD stock is that so many would-be customers are still unemployed or living too close to the bone.
The economy needs to create something like 100,000 to 150,000 new jobs a month merely to keep up with population growth — and that’s just not happening consistently. The last two jobs reports were surprisingly weak. January payrolls expanded by 113,000. In December, they grew by just 75,000.
True, the unemployment rate has ticked down to 6.6%, but that’s not exactly low. Besides, it’s partly a reflection of people dropping out of the workforce. Even worse, there still are 10.2 million unemployed people in the U.S., many of whom are no doubt customers of McDonald’s.
Until hiring accelerates — perhaps sharply and certainly consistently — it’s going to be tough for McDonald’s to find higher domestic sales growth. The economy needs to pick up a head of steam before we can expect MCD stock to stop lagging by such a wide margin.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.