“I’m lovin’ it,” McDonald’s advertisements have proclaimed for years.
But it is safe to assume that McDonald’s (MCD, Financial) and its stockholders didn’t love the company’s third-quarter earnings report on Tuesday.
“Third-quarter earnings fell a worse-than-expected 30%,” reported USA Today’s Bruce Horovitz. “McDonald's reported a profit of $1.07 billion, or $1.09 a share, vs. $1.52 billion, or $1.52 a share, a year earlier.”
There are several reasons for this. Negative publicity has certainly been a big factor; there were reports this summer that tainted meat had been sold as fresh at McDonald’s outlets in China. McDonald’s pulled beef, chicken and pork from its Chinese restaurants in August, but the damage had been done in China and elsewhere.
In September, sanitation was given as the reason for temporarily closing McDonald’s restaurants in Russia. “However, experts believe that the decision comes as a result of tense U.S.-Russian political ties over Ukraine,” wrote Forbes.
While international issues appear to have contributed considerably to McDonald’s problems, Leslie Patton of Bloomberg.commay have pinpointed a more fundamental problem for budget-conscious patrons – the prices of McDonald’s menu offerings.
“While the company still offers several items for $1,” Patton wrote, “its menu is quietly getting more expensive. McDonald’s said its prices were up about 3 percent through the end of June compared with 12 months earlier. That’s more than the 2.5 percent gain in prices for food Americans purchased away from their homes in the year through August, according to the Bureau of Labor Statistics.”
At one time, McDonald’s advertising proudly promoted the fact that a hamburger, fries and a soft drink wouldn’t take a bite out of a customer’s wallet. “McDonald’s famous Dollar Menu now includes items that cost more than $1,” Patton wrote, “and other items are creeping above $5.”
Chris Nichols of Yahoo! Finance echoed that, observing, “Customer traffic is negative, a deeply disturbing trend, probably in part because of price hikes.”
McDonald’s stock closed at $92.24 per share on Tuesday, its lowest in nearly two years.
McDonald’s CEO Don Thompson sounded determined in his statement following the release of the quarterly earnings figures. “We must demonstrate to our customers and the entire McDonald's system that we understand the problems we face and are taking decisive action to fundamentally change the way we approach our business,” Thompson said.
“Starting in January,” reported Candice Choi for the Associated Press, “Thompson said McDonald's will ‘simplify’ its menu to make room for restaurants to offer options that are best-suited for their regions.” Simplification plans include offering region-specific items, like burritos in the South and Southwest.
The most prominent change mentioned, though, is the planned expansion of “Create Your Taste,” a customizable burger program currently available in southern California.
“Some analysts questioned whether the moves McDonald's has in store will be enough to fix its problems,” Choi wrote.
Six of the gurus we follow at GuruFocus traded McDonald’s stock as of June 30. Only two – Jean-Marie Eveillard (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio) – invested in the stock. The other four – Ken Fisher (Trades, Portfolio), John Hussman (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) – reduced their holdings or sold their stake in the company completely.
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