If you want to get a sense of how things are going in the global consumer economy, you could parse government data from the nations of the world, or you might choose to take a look at a company that operates in 119 countries and has more than 33,000 outlets.The company here would be McDonald's (MCD), and the story it's telling at the moment doesn't suggest we're near to declaring a victory over the recession.
While no one data point or corporation can truly reveal all there is to know about how a given economy is doing, considering McDonald's doesn't rely on surveys, seasonal adjustments, revisions and various exclusionary tactics -- with the only real exception being foreign currency translations -- it can offer at least a sense of how consumers near and far are feeling about parting with their money.
On Friday, the Oak Brook, Ill.-based restaurant chain reported a quarter that didn't impress investors, and that sent the stock down 4.5% to $88.72 in heavy trading. The decline came after McDonald's had third-quarter revenue of $7.15 billion and earnings of $1.43 a share. Revenue was essentially flat year over year, and per-share profits were down, hurt by 8 cents of forex effects. Had currency rates not been a drag, both would have been up 4%.
There's no getting around the currency issue when you operate as broadly as McDonald's does, of course. Systemwide at the end of 2011 it had nearly 7,200 restaurants in the Europe region and almost 8,900 in the Asia/Pacific, Middle East and Africa. There are times when foreign currency rates help, and times when they hurt. The latter is in effect at the moment. The following charts show comparable sales and operating income changes over the past three years for both Europe and APMEA. (McDonald's notes in its 10-Q filings that comparable sales exclude the impact of currency translation. Operating income here includes the effect of exchange rates.)
Now for the APMEA region:
Not what you would consider positive trends. In both cases, comps for the last two quarters stand out for their failure to adhere to the general trend going back to the start of 2010. This isn't a reflection of McDonald's ability or lack thereof to manage its operations. What you're seeing is the chaos that comes from Asia and Europe's dealing with considerable uncertainty, and for operating income, the currency market's severe influence on the hamburger seller's results.
For comparison, take a look at the U.S.:
Also going in the wrong direction, and are we to blame forex here? It would be a bit much to expect a company the size of McDonald's to post 15% year-over-year quarterly operating income growth in the normal course of business. But the lines above give a hint as to how hard McDonald's is working more recently to fend off the competition in the pricing realm domestically.
Traffic overall at restaurants doesn't seem to be the problem, given that it hasn't slowed in any spectacular way so far.
While 2009 was bad, that was three years ago. Guest counts haven't exactly fallen off a cliff. However, what doesn't show up in the chart are the company's comments on the most recent third quarter, in which it noted "negative guest traffic" in Europe, so the number of visitors coming through the door will require watching.
The company freely acknowledges what it's up against. "We expect near-term top- and bottom-line growth to remain pressured as we focus on driving guest traffic and market share by leveraging our strategies and competitive advantages in response to the global economic, operating and competitive challenges" McDonald's CEO Don Thompson said in a press release.
More specifically on the near term he mentioned, the fourth quarter has just started but global comp sales for October are "currently trending negative." Additionally, foreign exchange rates will continue to be a problem, McDonald's expects. On a conference call to discuss the quarter, CFO Peter Bensen said forex would probably dent fourth-quarter earnings by 1 to 2 cents, taking the full-year impact to 17 to 19 cents.
Shares of McDonald's have been very good for some time. Back in February, we noted it was the best performer on the Dow Jones Industrial Average over the past five years. This year, it's struggling, falling around 7% from the beginning of 2012 through the last close and substantially trailing both the Dow and the S&P 500.
McDonald's leaders are unquestionably positive further out, as most executives are, when asked. Thompson said on the call that the company is "well-positioned to succeed for the long term" and that the business, the brand and the finances remain strong.
There's a lot of truth to that. McDonald's isn't going away any time soon. The problem is, the global downturn might not be either, and the company is going to be somewhat at the mercy of jittery economies. Because of that, the question investors have to ask is whether McDonald's is worth it, and at what price. It's a dividend payer, currently yielding 3.3%, so there's that cushion, but for the time being stock appreciation is absent.
From 2006 through 2011, shares of McDonald's rose an average of 20.7% each year. That looks like a trend that's in danger of being broken by the time the year wraps up.
McDonald's was up for debate on CNBC. What's your take on the stock and the company's global operations?
- Investment & Company Information