McDonald’s (NYSE: MCD) stock has long been a staple for investors, but it’s looking a lot less than savory these days. It’s on the wrong side of evolving consumer tastes, its high prices are no longer consistent with the low-quality food it serves, its brand is stale, its earnings are declining, and to top it all off, the company spent the least week doing damage control on an E. coli outbreak.
McDonald’s reports third-quarter earnings on Tuesday. We’ll just have to see how happy the meal is, but I wouldn’t get too excited. Analysts’ estimates are currently pointing to a 0.6% decline in earnings despite a likely increase in revenue.
That would follow a disappointing first quarter that saw same-store sales fall 0.7% — the first such decline in four years. Revenue for the quarter totaled $6.49 billion, compared with estimates of $6.63 billion, and adjusted EPS $2.97 came in lower than the $3.07 Wall Street expected.
It was a sobering reversal for a company that fattened its bottom line by price-gouging famished diners post-pandemic. That’s no recipe for long-term success, and now the clown has become a laughing stock.
It’s routinely skewered on social media by customers suffering sticker shock. So much so that now even politicians are asking questions.
In a letter sent to McDonald’s last week a group of U.S. senators — Elizabeth Warren of Massachusetts, Bob Casey of Pennsylvania, and Ron Wyden of Oregon — demanded answers from McDonald’s President and CEO Chris Kempczinski.
“Earlier this year, McDonald’s USA President Joe Erlinger tried to blame the company’s menu price increases on inflationary pressures and input costs, but the data tells another story,” the letter said. “McDonald’s operating profit margins were 52% in the same year, the highest of the 10 largest publicly traded fast food companies.”
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It also pointed out that McDonald’s bought back $4 billion of its own stock in 2022 and over $3 billion in 2023. That’s not consistent with a company fighting off higher prices for its ingredients.
It’s all true, of course, but the market is often the toughest, most direct critic. And with fed-up diners backing away from the golden arches, McDonald’s was already scrambling to course-correct.
The restaurant rolled out a new $5 value meal offer in an attempt to reestablish itself as a value chain. Tomorrow’s earnings will tell us how that’s working out for them. But in the meantime, the company’s largest fry producer, Lamb Weston (NYSE: LW), is blaming the deal for shuttering one of its factories.
“Many of these promotional meal deals have consumers trading down from a medium fry to a small fry,” Werner said on his company’s Oct. 2 earnings call. “So while we benefit from improving traffic trends, consumers trading down in serving size acts as a partial headwind for our volumes.”
Last week’s E.coli outbreak won’t help, either. That was attributed to the Quarter Pounder, or potentially the onions on it.
And amid all of this, consumers — especially low-income consumers — are also showing signs of being cash-strapped.
A recent poll by consulting firm Revenue Management Solutions found that about 25% of people who make under $50,000 were cutting back on fast food, pointing to cost as a concern.
Weak consumer sentiment and lackluster earnings from low-cost retailers like Dollar General (NYSE: DG), Dollar Tree (NASDAQ: DLTR), and WalMart (NYSE: WMT) further corroborate that trend.
Still, not every low-cost restaurant chain is flailing the way McDonald’s is.
Cava (NYSE: CAVA) stock is up 238% this year. Its revenue rose 35% in the last quarter, while net income roughly tripled and same-store sales jumped 14%. The company also has an ambitious growth plan to expand its footprint from 341 locations currently to 1,000 by 2032.
It’s clearly not having the same problems McDonald’s is. But Cava is hip. McDonald’s is not. It’s outdated despite modernizing its restaurants and ditching Ronald McDonald who was last seen on a milk carton.
That’s why I wouldn’t be on McDonald’s stock even if it does report a strong second-quarter earnings tomorrow.
Fight on,
Jason Simpkins
Simpkins is the founder and editor of Secret Stock Files, an investment service that focuses on companies with assets — tangible resources and products that can hold and appreciate in value. He covers mining companies, energy companies, defense contractors, dividend payers, commodities, staples, legacies and more…
In 2023 he joined The Wealth Advisory team as a defense market analyst where he reviews and recommends new military and government opportunities that come across his radar, especially those that spin-off healthy, growing income streams. For more on Jason, check out his editor’s page.
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