McDonald’s Gets Fried Again: Another Quarter of Sinking Profits

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McDonald’s (NYSE:MCD) shares were sitting at $99.67 at the start of trading on Tuesday morning, after gaining 0.63 percent in pre-market activity. The Oak Brook, Illinois-based company released its 2014 first-quarter earnings before the bell and reported that its profit slipped 5.2 percent in the first three months of the year on account of flattening demand and increasing competition from rivals. Profits fell to $1.2 billion, or $1.21 per share, missing expectations; analysts expected $1.24 per share. In the year-ago quarter, McDonald’s reported first-quarter profit of $1.27 billion, or $1.26 per share.

Comparable sales at U.S. restaurants open a year — considered a good indicator of a company’s health — also declined 1.7 percent for the first quarter of 2014, and McDonald’s attributed the drop to “negative comparable guest traffic amid challenging industry dynamics and severe winter weather.”  The world’s largest fast food chain performed better i markets outside the U.S., helping it earn a more optimistic global sales figure that sat up 0.5 percent for both the first quarter and the month of March, but McDonald’s still maintained Tuesday that it needs to focus on stabilizing key markets like the U.S., Germany, Australia, and Japan.

Source: McDonald’s

McDonald’s revenue gained 1.4 percent in the first quarter, coming to $6.7 billion, which was shy of the $6.71 billion Wall Street expected. The fast food chain’s costs also rose, at 2.3 percent, resulting in the more disappointing profit figure. Though investors have showed exasperation at McDonald’s quarter after quarter of discouraging reports company CEO Don Thompson said following the earnings release: “In today’s dynamic global marketplace, our goal is to ensure that we are evolving to remain a relevant and trusted brand by serving great-tasting, high-quality, affordable food and creating memorable experiences with our brand.

“By leveraging a deeper understanding of what our customers want with the power of our business model, our investments in restaurant capabilities and modernization, and our hard-earned competitive advantages, we will grow McDonald’s business and deliver enduring profitable growth over the long term.”

Thompson also noted on Tuesday that he expects comparable sales in April to be “modestly positive,” reflecting the CEO’s recognition that the marketplace is still saturated, that customers are continuing to look for healthier options, and that increasing competition from rivals such as Taco Bell (NYSE:YUM) isn’t helping.

McDonald’s has been busy this year trying to simplify its menu, get back to basics, and reel customers back into its stores. However, the company was thrown a curve ball in March, when Taco Bell decided to introduce its own breakfast menu and take on McDonald’s Egg McMuffins. McDonald’s has long run the fast food breakfast game, but Taco Bell’s Waffle Tacos have earned an impressive degree of fanfare. The Mexican fast food chain’s marketing strategy, pinned on insulting “outdated” McDonald’s, has definitely helped its popularity, too.

Then there are competitors like Chipotle (NYSE:CMG). The Denver-based company is also feeling the competitiveness of the fast food market, but it is still posting gains and impressive earnings. It released its 2014 first-quarter results last week and said that sales at established locations rose 13.4 percent. This shows that not all fast food companies are struggling — just those that consumers consider “outdated” or “unhealthy.” McDonald’s has worked to better appeal to the increasing number of health-conscious customers, but as it does, it needs to make sure it doesn’t overcomplicate its menu and divert its attention from its iconic burgers.

Thompson has a lot on his plate, because not only does the company need to offset losses in its flagship market — the U.S. — but McDonald’s is also struggling significantly in Germany, and the company is counting on the U.K., France, and Russia to overcompensate for those losses.