Is This Fast-Food Giant Feeling the Squeeze?
McDonald's is one of the most iconic brands in the world, serving 69 million customers every day at over 34,000 restaurants located in 116 countries. The company has paid (and raised) a dividend every year since 1976, and began offering quarterly dividends in 2008. With the company playing up the across-the-board increases in its most recent earnings report, you might think that it's on pretty solid ground. That is, of course, unless you've been keeping up with the headlines.
Trouble under the golden arches
McDonald's has been making the news lately, and not all of the news is good. In addition to upsetting some of its franchisees with high franchise fees and dealing with striking workers seeking higher wages, the company also recently topped a list compiled by 24/7 Wall St. of fast-food chains that are costing taxpayers the most money through government programs that workers need to make ends meet.
All of this negative media attention comes at a bad time for the company as it struggles to maintain its growth. Despite the company's claims of a "solid third quarter," the quarter that ended on Sep. 30 showed relatively lackluster growth. Global comparable-store sales grew only 0.9%, and the company's diluted earnings per share of $1.52 came in only $0.01 over estimates. While growth is always better than a loss, such small levels of growth for one of the world's most recognizable brands certainly isn't much to brag about.
Changes not enough to elevate demand
For over a year now, McDonald's has focused on incorporating limited-time offerings into its menu as a way to draw in customers. While this initiative started off strong with the popular "Chicken McBites," more recent offerings have failed to bring in customers like the company hoped.
In good company
McDonald's isn't the only fast-food company that's feeling the pinch at the moment. Burger King Worldwide , Wendy's, and Yum! Brands (parent of Taco Bell, Pizza Hut, and KFC) have all had their share of downward pressure in recent quarters.
Yum! in particular has been fighting this pressure, especially in China, where the company has been building a significant presence with 6,000 restaurants in 850 cities. Continued pressure from Chinese bird flu worries dragged same-store sales within the country down 11%, while domestic sales remained largely flat. Overall, the company saw a 15% decline in earnings per share to $0.85 per share excluding special items (or $0.33 with those items included.)
Burger King has also been under pressure as of late, experiencing a 40% year-over-year decline in revenue in its most recent quarter. This decline was expected as part of the refranchising of the company, however, and the company's $275 million in sales still beat analyst estimates by a cool $10 million. Adjusted diluted earnings per share for the quarter came in at $0.23, again beating estimates by $0.02 and showing an improvement of 32% year-over-year.
The future of fast food
The fast-food market is quickly reaching a saturation point domestically, so most companies in the sector are looking to emerging economies for growth. Yum! has been particularly aggressive in this regard, expanding quickly in China with its strongest chains. Even with its declines, China still provided 60% of the company's quarterly revenue. The company is trying to rebound in the country through initiatives that aren't found in the U.S. such as its Pizza Hut Home Service, East Dawning restaurants that combine the KFC model with traditional Chinese cuisine, and Little Sheep Mongolian hot pot restaurants (which were the expense behind the special items in the third quarter's EPS.)
Burger King is taking a different approach to the growth issue by refranchising its stores. By converting company-owned assets to franchised locations, the company is seeing massive cost savings without causing an impact on sales; while the refranchising contributed to the company's revenue decline, it has helped the company to drop expenses from $216.3 million to an impressive $22.9 million. These cost savings, along with expansion plans in developing economies, should help the company to grow its earnings in the future.
As for McDonald's, one problem with being in the no. 1 position is that it can be difficult to continue growing. The company is continuing its limited-time offerings and testing new initiatives such as a late-night menu and upcoming changes to its famous Dollar Menu (including the addition of new items at multiple price points.) It's unlikely that any of these initiatives will fuel significant growth, however, as the draw that they bring will only be temporary. That may be enough for the company, though, since it still remains a decent dividend play. So long as the lackluster growth doesn't turn into a full decline, it should be able to maintain its "dividend aristocrat" status into the future.
Two of the companies in this report are fast-food restaurants
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The article Is This Fast-Food Giant Feeling the Squeeze? originally appeared on Fool.com.John Casteele owns shares of McDonald's. The Motley Fool recommends Burger King Worldwide and McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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