McDonald's (NYSE:MCD) is one of the companies that usually perform well regardless of the economic conditions and geographical locations. The company performed well in the USA through the recession and it performed well in Japan right after the tsunami, which was a result of a large earthquake. The company always enjoyed significant growth despite its large size and it has always been able to see margins that are difficult to see in the restaurant business. Lately, things haven't been going that well for the company though.
In February of 2013, McDonald's U.S. sales were down by 3.3% compared to February of 2012, despite introduction of a new product called Fish McBites. Keep in mind that February of 2012 had 29 days as opposed to February 2013, which has 28 days. After accounting for this fact, the company's sales were flat on a year-to-year basis. This metric doesn't account for new store openings or closures, which means it only reflects same-store sales in the stores that were open for at least a year.
As the competition becomes harsher and people get more health conscious, many fast food restaurants are changing their menu offerings to reflect the new trends. For example, Chipotle (NYSE:CMG) offers selections that are more natural whereas Subway and Taco Bell (NYSE:YUM) offer lower calorie options. Higher food and labor costs aren't helping these companies either.
Outside of the U.S., the same-store sales were down by 1.5%. This is slightly better than a 1.63% drop the analysts were expecting. After accounting for the one extra day in February of 2012 compared to 2013, the global sales (i.e., sales in every country except for the U.S.) were up by 1.7%. Higher taxes and higher gas prices in the U.S. probably played a role in the U.S. performance of the company.
Last October was the first time in nearly 10 years when McDonald's reported a drop in sales. This development shocked many investors. Today we know that most of McDonald's issues are not specific to the company and they are felt across the entire fast food industry. McDonald's might not have full control in many aspects of the economy such as overall food prices, labor costs, taxes and people's willingness to consume fast food. The company can certainly increase the variety of products on its menu, introduce healthier products, spend more on advertising and try to get a better deal from its product suppliers to help its earnings growth.
McDonald's doesn't own all its restaurants; therefore, a comparison of store revenues may not necessarily reflect the company's overall revenue perfectly. It could be very possible that McDonald's own restaurants outperform the franchised restaurants or vice versa. The company's CEO Don Thompson acknowledged the challenging environment but he also mentioned how the company is able to use its past experiences to come up with the correct strategies in order to fuel further growth. Usually, when the economy is sluggish, labor and commodity costs are low, but this is one of the unique times in the history where the labor and commodity costs are relatively high in an economically sluggish environment.
McDonald's usually offers different menu items and services in different countries in order to meet growth goals. For example, the company's restaurants offer home delivery in many countries including China and parts of Europe. These restaurants also offer locally appreciated drinks such as teas in China. Many of McDonald's locations are open for 24 hours and they offer both breakfast and regular meals.
Analysts expect McDonald's to earn $5.80 per share in the next four quarters. For 2014, it is expected to earn $6.36 followed by $7.05 in 2015. The current growth rate might not support a share price nearing $100; however, dividend investors and those that are looking for a stable investment (i.e., low volatility) will continue to find value in this company.
The company's dividend rate should be pretty safe as it enjoys a payout ratio around 50%. As for the share price goes, I don't think there will be a lot of movement in either direction. I expect McDonald's share price to be within 8-10% of where it is right now within the next 12 months. For the conservative investors, this is not bad, but the growth investors may want to wait until the share price drops a little bit. If the share price drops below $90 like it did a few months ago, McDonald's might be a good buy for growth investors again.
Disclosure: I am long MCD, YUM. 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.