Should Investors be Concerned About McDonald’s Earnings Miss?

On October 22, McDonald’s NYSE: MCD reported third-quarter earnings that missed on both the top and bottom lines. It marked the first time in two years that the company’s quarterly earnings fell short of analysts’ estimates. 

The revenue miss ($5.4 billion reported vs. $5.5 billion expected) was largely in-line with expectations. However, the earnings-per-share miss ($2.11 per share vs. $2.21 expected) was a bit more concerning.

One reason that analysts cited for the EPS miss was investments that McDonald’s is making in the business. These included the installation of self-service kiosks that generally prove to increase sales. Although same-store U.S. sales grew by 4.8% for the quarter. But that again failed to meet analysts’ expectations for 5.2% growth.

As of this writing, McDonald’s stock price had dropped approximately 5% on the miss. 

McDonald’s is facing new competitive threats

McDonald’s is up 14% for the year. However those numbers are far below the gains of competitors. Restaurant Brands International NYSE: QSR, the parent company of Burger King is up 31% in 2019. Wendy’s NASDAQ: WEN is up 38% for the year. 

One reason that competitors are doing well is creative menu additions. For example, Popeye’s introduced a chicken sandwich during the summer that sold out in less than a month. Wendy’s brought back its popular spicy chicken nuggets. Burger King embraced the trend toward plant-based “meat” products with the launch of their Impossible Whopper.

To that end, McDonald’s is partnering with Beyond Meat NASDAQ: BYND to test market a burger that uses a Beyond Meat patty in select Canadian restaurants.

Beyond Meat Stock May be Facing Tough Road Ahead 

McDonald’s also found that ending one of their popular promotions (their 2 for $5 Mix and Match promotion) hurt total U.S. revenue. The company did however issue a less successful buy one, get one for $1 promotion in mid-August. 

A threat that is looming on the horizon is Wendy’s plans to offer a breakfast menu nationwide in 2020. The chain is planning to support the launch with a large advertising spend. Breakfast has been one of McDonald’s signature items for years. The company reported that breakfast sales growth had returned to levels that were consistent with the rest of the day. That will be challenged by a new competitor. 

McDonald’s is seeing strong international sales growth

McDonald’s is a global brand. And while U.S. sales missed expectations, global same-store sales growth came in strong at 5.9%. The company’s international operated segment that includes top markets such as Germany and France had same-store sales growth of 5.6%. This is significant not only because it was in-line with analysts’ expectations, but because that business makes up more than half of McDonald’s total sales. 

In the company’s smaller international licensed segment, same-store sales grew 8.1%.

One of the reasons for this international sales growth has been the company’s delivery program. MCD is projecting $4 billion in global delivery sales this year. Among the company’s many partners are UberEats, DoorDash, and GrubHub. 

The earnings miss was largely based on future investment

In the conference call following the release of the company’s earnings, McDonald’s cited that they had acquired Apprente, a silicon valley voice recognition startup. The company’s goal is to use the software to take orders at drive-thru windows. 

This followed an earlier acquisition of Dynamic Yield. The Israeli startup helps provide customized recommendations based on variables like weather and restaurant traffic. It also takes into account customer order patterns. According to CEO Steve Eastbrook, 9,500 U.S. drive-thru’s are already using Dynamic Yield, as are most drive-thru’s in Australia. Like the in-store kiosks, MCD is noticing an increase in check size when customers use it. 

Is store traffic a concern?

Obviously, it is concerning that U.S. restaurant traffic is down. This is particularly the case when you consider that this is not a new problem. McDonald’s has been trying to increase traffic for over a year. However, McDonald’s has proven to be a recession-proof stock. And, in fact, because of their value menu and promotions, McDonald’s is a familiar, comfortable brand that customers will support in any economic climate. If the economy continues to slow, McDonald’s may benefit as customers move away from higher priced “fast casual” restaurants. 

This looks like just a pause in an overall growth trend

In the last five years, McDonald’s stock has risen over 100%. The company has done a makeover of its stores nationwide and introduced technology that continues to make the company relevant. Plus, the stock continues to pay a nice dividend with a yield that is currently at 2.51%. While investors may use this earnings report as an opportunity to take profit, this does appear to be a bump in the road for an otherwise solid stock.