McDonald's Falling Prey To Competition

| About: McDonald's Corporation (MCD)

Fast-food giant McDonald's (NYSE:MCD) reported weak October same-store sales numbers last Thursday. CEO Don Thompson continues to invite criticism as sales and profits have begun to fall since taking the reins from legendary CEO Jim Skinner. Global same-store sales fell 1.8% year-over-year, while global sales fell 0.8% (+0.6% ex-currency). We encourage readers to click here to see how we calculate the intrinsic value of McDonald's.

Weakness was broad-based, with US same-store sales falling 2.2% year-over-year, Europe falling 2.2%, and Asia-Pacific, Middle East and Africa falling 2.4%. While we think Europe can be explained by overwhelmingly negative macroeconomic sentiment and lower price-points, we think the US is more of a company-specific issue. Competition in the US market was fairly dormant for the past several years, with Wendy's (NYSE:WEN) and Burger King (BKW) specifically experiencing large changes in management and ownership. However, both companies have been reinvigorated with new product offerings and expanding menus. It's easy for McDonald's to blame US demand for sluggish sales, but Burger King posted 1.6% sales growth in the third quarter and performance was "trending positive" throughout October. North American same-store sales at Wendy's grew 2.7% during the third quarter, as its store reimaging program continues to resonate with customers.

Let's not forget that non-burger competition has also increased. YUM! Brands (NYSE:YUM) restaurants Taco Bell and KFC grew same-store sales 7% and 4%, respectively, during the most recent quarter. Taco Bell is the only major competitor, in our view, to McDonald's value proposition with premium items. Further, we believe that Chipotle's (NYSE:CMG) success in selling burritos may have reinvigorated the broader market for Mexican food. On the higher-end, McDonald's has to compete with customers flocking to healthier options at Panera (NASDAQ:PNRA), as well as the organic offering of Chipotle.

McDonald's is facing tough competition on every front, and we think sales weakness could persist in the near term. However, we think Europe and Asia will be stronger in 2013, and we would not be surprised to see customers return to McDonald's after trying all of the new offerings at Wendy's and Burger King. We like the firm's dividend and robust cash-flow generation, but we're still waiting for a more attractive entry-point in the mid-$70's before establishing a position in the portfolio of our Dividend Growth Newsletter. McDonald's posts a very healthy Valuentum Dividend Cushion rating, which we use to predict dividend cuts. For example, here's how you can shield your portfolio from dividend growth blow-ups.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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