Somebody Get McDonald’s a Coffee: Sales Lag in Weak Economy

McDonald

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It was a swing and a miss for the world’s largest hamburger restaurant on Monday morning. Shares of McDonald’s Corp. (NYSE:MCD) fell as much as 2 percent in early trading after the fast food franchiser reported third-quarter earnings that failed in impress investors.

Revenues increased 2 percent on the year to $7.32 billion, falling just shy of the average analyst estimate of $7.34 billion. Global comparable store sales increased 0.9 percent. Earnings increased 6 percent on the year to $1.52 per diluted share, actually edging out the average analyst estimate of $1.51 per share, but not enough of a beat to carry the rest of the report on its back.

Investors were looking for strong sales growth, ostensibly spurred by the roll out of products like the pumpkin spice latte. But, as President and CEO Don Thompson indicated, third-quarter efforts to drive sales growth appear to have been undermined by anemic economic conditions.

“While we are focused on strengthening our near-term performance, the current environment continues to pressure results,” said Thompson. The real killer, though, is that the company expects conditions to remain weak heading into the future.

“For the fourth quarter, the Company expects global comparable sales performance to be in-line with recent quarterly trends while restaurant margin percentages are expected to decline at a level relatively similar to first quarter results. Global comparable sales for the month of October are expected to be relatively flat,” states the earnings report.

McDonald’s current struggle with sales growth was highlighted by a recent survey conducted by Goldman Sachs. The survey revealed that customers are starting to lose interest in McDonald’s iconic low-cost offerings, and it is even the restaurant consumers are least likely to recommend to their friends and family.

The Wall Street Journal highlighted the Goldman survey earlier in October, and explained that it was based on 2,000 customers who provided their opinions on the Oak Brook, Illinois-based company along with other fast food establishments.

According to the study’s results, McDonald’s ranked last out of a list of 23 fast-food chains in terms of food quality, healthfulness, and customers’ willingness to pay more money for the food, and that is despite the hamburger maker’s many recent menu innovations, seasonal offerings, and newly publicized initiatives.

So who is McDonald’s losing out to? Chipotle Mexican Grill (NYSE:CMG), for one. The company earned itself a burrito following its own third-quarter earnings, released at the end of last week. Although earnings missed at $2.55 per share compared to expectations for $2.78 per share, same-store sales increased 6.2 percent, and revenue of $826.9 million beat expectations.

Unlike many struggling fast food restaurants, Chipotle has managed to report sales success and significant revenue growth this year as it continues to welcome new customers into its locations who wish to collect their food fast and for a low price, but not at the expense of healthy ingredients.

The burrito chain was the first major U.S. restaurant to publish which of its ingredients contain GMOs, or genetically modified organisms, and it has erected a goal to completely eliminate GMOs from its products in the future. Chipotle is also known for the freshness of its ingredients, hinting to McDonald’s that maybe fast food success has nothing to do with menu innovations, but rather the quality of ingredients.

Investing Insights: Is Chipotle Mexican Grill a Buy After a Recent Earnings Announcement?