McDonald's (MCD) reports its fourth quarter fiscal 2014 on Friday and I am cautious on the shares. The company is facing serious challenges across its entire business. Just last month, it reported a global comparable sales decline of 2.2% for November. The U.S. was down 4.6%, Europe was down 2% and Asia/Pacific, Middle East and Africa fell by 4%. The U.S. figure was the worst same store sales number in 13 years. There doesn't seem to be any let up in the disappointment.
The troubles seem to have begun in 2012. The year before, McDonald's reported total revenues of $27 billion, up 12.2% as the economy rebounded. But sales for 2012 only grew 2.1%. They increased 3% the next year, but 2014 was a disaster. Because of the poor same store sales, investors are bracing themselves for just $6.7 billion in revenue, down 5.5% year over year. For the year, analysts are expecting sales of $27.5 billion, down 1.9%. Total margins are expected to decline 3% to 17.8%. Profits could tumble as much as 13% to just under $5 billion.
Last month the company held an analyst meeting and acknowledged a laundry list of problems. Too many menu items, slow service, and the Dollar Menu all weighed on results.
The Dollar Menu, introduced during the past recession, put a cap on prices.
When commodity costs rose, profits got squeezed. Now that the economy has improved, consumers have stuck with the Dollar Menu and the company has been unable to get them to buy more profitable items.
McDonald's tried to raise prices on the Dollar Menu and store traffic fell. Management announced plans to launch a "Create Your Taste" menu where customers can order custom-made burgers. Custom-made burgers will be priced higher and will likely compete with chains like Five Guys and Shake Shack. In January the company will cut eight food items all together and reduce the number of Extra-Value Meals.
With more than 35,000 restaurants, it won't be until 2016 before we see results.
Earnings per share won't see much growth over the next few years. The company should earn $5.08 in 2014 and $5.56 in 2015. I can't see paying a huge multiple for McDonald's. The stock is trading around 16x next year's earnings, which seems pretty high for a company with negative revenue growth and one that's losing market share. Historically, the stock has traded between 12 and 19x earnings. With the stock stuck in the middle of the range, I'd prefer to wait for a more attractive entry point (i.e. lower stock price) or just move on to something more exciting.