NEW YORK, N.Y. – Tough competition in the U.S. and the weakening economy abroad was a double whammy for McDonald’s in the third-quarter, sending the burger chain’s net income down nearly 4 per cent.
McDonald’s said it was adjusting some of its plans to deal with the pressures, including stepping up advertising for its dollar menu and bringing back the popular McRib sandwich nationally in December to drive traffic into U.S. stores.
The world’s largest hamburger chain with 33,000 locations worldwide has thrived in boom and bust times by selling cheap eats and constantly updating its menu. But global economic pressures and intensifying competition are wearing at the company, which does two-thirds of its business overseas.
“When economic crisis began in 2008, few people thought the environment would still be as uncertain and fragile as it is today,” said CEO Don Thompson in a call with analysts. “It is clear however that this operating environment is the new normal. As such our near-term focus is on stabilizing and growing traffic and market share.”
Thompson said revenue in stores open at least 13 months, a key restaurant metric, is trending negative so far in October.
That news sent shares down $3.31, or 3.6 per cent, to $89.55 in trading. The stock had been down 7 per cent since the beginning of the year.
“McDonald’s is facing a lot of pressure,” said Morningstar analyst R.J. Hottovy. “They’re seeing more competition from their quick-service restaurants and fast-casual peers in the U.S. and facing austerity measures and macro-economic pressures in Europe and Asia”
Oak Brook, Ill.-based McDonald’s said Friday its net income fell to $1.46 billion, or $1.43 per share. That compares with net income of $1.51 billion, or $1.45 per share last year. Analysts expected net income of $1.47 per share, according to Fact Set.
The stronger dollar hurt net income by 8 cents per share. When the dollar is strong, international sales translate into fewer dollars back at home.
Revenue was nearly flat at $7.15 billion from $7.17 billion last year. Analysts expected revenue of $7.17 billion.
Revenue in stores open at least 13 months rose 1.9 per cent globally, including a 1.2 per cent rise in the U.S., where the company said it faced “broad competitive activity.”
McDonald’s is facing stiffer competition from newer chains like Panera Bread Co., which offers higher-end food in a fast casual atmosphere. Long-time rivals such as Wendy’s Inc. and Burger King Worldwide Inc. are also reworking their menus, renovating restaurants and launching new ad campaigns to win back customers.
McDonald’s said it will step up advertising around its dollar menu rather than its more profitable extra value menu that includes items more expensive than $1. Fast-food chains usually lose money on dollar menus, but they’re used as a traffic driver in the hopes customers will spend more once they’re at McDonald’s. It’s also bringing back the always-popular McRib sandwich in December and introducing a new item, a cheddar bacon onion sandwich that will be available in both chicken and beef varieties.
Hottovy, the Morningstar analyst, said focusing on the value menu was a good move for McDonald’s: “In this environment you have to give customers what they want, and across the globe consumers are squarely focused on value.”
In Europe, where McDonald’s does 40 per cent of its business, revenue in stores open at least 13 months rose 1.8 per cent, hurt by negative guest traffic.
In Asia/Pacific, the Middle East and Africa, the measure rose 1.4 per cent as the company promoted limited-time offers and traffic increased. In China, the measure rose 3.6 per cent. Many U.S. companies are focusing on China for growth, but there is concern of a slowdown in the country. But Thompson said the country is a “market with significant potential,” and that McDonald’s is on track to open 225 to 250 restaurants there this year, with the goal of having 2000 open by the end of 2013.
Janney Capital Markets analyst Mark Kalinowski said he expects tougher comparisons with a year ago will weigh on sales trends and lowered his estimates on McDonald’s for the current fiscal year as well as fiscal 2013 and 2014. He kept his “Neutral” rating on the stock.
“We would not be buyers in the context of tougher year-over-year comparisons in the U.S. to be lapped over October through May,” he wrote in a client note.