Between China and the U.S., McDonald’s Is Not Lovin’ It

by Dan Burrows | August 8, 2014 2:21 pm

McDonald’s (MCD[1]) stock has been close to dead money for the last couple of years, and the latest sales figures affirm that things are going to get worse before they get better.

[2]MCD stock has been under pressure from weak U.S. sales figures for a long time, which is why it needs a new food scandal in China like it needs a supply chain full of expired meat.

Oh, wait. That is the problem.

Add Asia — specifically China — to McDonald’s litany of woes. A supplier of meat to chains such as McDonald’s, Yum Brands (YUM[3]) and Burger King (BKW[4]) in China got caught shipping expired meat, as well as meat picked up off the floor.

McDonald’s severed ties to the supplier, leaving many of its restaurants in China unable to serve most of the items on their menus. The “ick” factor also hurt sales.

Although McDonald’s was prepared for a decline in July sales, it didn’t expect the numbers to be this bad. Sales at McDonald’s locations open at least 13 months tumbled more than 7% in its Asia, Africa and Middle East regions.

Throw in another 3.2% drop in U.S. comparable-store sales, and global results retreated 2.5% last month. Indeed, the decline in China was so severe it forced McDonald’s to warn that it might miss its full-year revenue forecast.

If there’s a bright spot for anyone holding MCD stock, it’s that the market was well-prepared for terrible July sales results. MCD stock was essentially flat on the news.

However, the market also compounds McDonald’s already serious problems with sales now that it can’t expect Asia to offset persistent weakness in the U.S.

McDonald’s Never-Ending Recession

McDonald’s says it has lost relevance for American consumers, and there’s a lot to that. Competitors like Burger King and Wendy’s (WEN[5]) have stepped up their games. At the same time, chains like Chipotle Mexican Grill (CMG[6]) are stealing market share by offering fresher, healthier food.

In response, McDonald’s is simplifying its menu and improving service, but perhaps its biggest problem is beyond its control. As we’ve written before, in many ways, the recession never really ended for McDonald’s[7], because it never really ended for its base of lower-income customers.

Joblessness, job insecurity and low wages are the main culprits behind McDonald’s declining U.S. sales. Too many average and lower-income consumers can’t afford to spend what discretionary dollars they have on fast food. Meanwhile, people who do have the money to spend on food away from home are opting for pricier, fresher offerings like those available at Chipotle.

If anything, MCD stock has actually held up fairly well, all things considered. It’s off a bit more than 3% for the year-to-date, despite a U.S. sales funk that goes all the way back to October 2013.

Still, there’s little hope for any kind of turnaround soon.

If McDonald’s had more control over its problems, the lack of domestic sales growth wouldn’t be almost a year old by now. The economy is to blame. As with the China food scare, anyone holding MCD stock is just going to have to wait for this long period of weakness to pass.

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

Source URL: https://investorplace.com/2014/08/mcdonalds-mcd-stock-july-sales/

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